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2018 (3) TMI 525 - AT - Income TaxAllowing the claim of pre-operative expenses - Held that - The assessee having found that it had committed an error by wrongly capitalizing the employee cost for February and March, 2009 in the books of accounts and also not claiming deduction for the same in the original return of income, later on proceeded to file a revised return for assessment year 2009-10 and claimed the same as deduction and correspondingly debiting prior period expenses for the very same amount in assessment year 2010-11 in the books and fairly disallowing the same voluntarily in the memo of income filed for the assessment year 2010-11. We hold that the Ld. CIT(A) had rightly deleted the disallowance of ₹ 3,01,21,223/- for the assessment year 2009-10. Accordingly ground no. 1 raised by the Revenue is dismissed. Disallowance on account of leave encashment - Held that - Similarly the assessee had also made provision for leave encashment in the earlier years and had also made payments during the year on account of such pre-existing liability i.e. payments made during the year on account of earlier year provisions. We find that the ld. AO and the Ld. CIT(A) had not looked into this issue in the proper perspective by linking the same with the tax audit report filed by the assessee wherein all these details are duly mentioned. Hence, we deem it fit and appropriate to remand this issue to the file of the ld. AO for de novo adjudication and decided the same in accordance with the law. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, ground no. 2 raised by the revenue is allowed for statistical purposes. Disallowance towards provision for warranty - Held that - We find that the provision has been made during this year based on the transaction carried out in the last preceding three years on a scientific basis and this method has been consistently followed by the assessee in the past. In view of these facts and findings and respectfully following the decision of this Tribunal in the assessee s own case for the earlier years, we hold that the Ld. CIT(A) had rightly deleted this disallowance and granted relief to the assessee. Disallowance towards provision for non-moving inventory - Held that - Consistent treatment given by the assessee from year to year with regard to treatment of provision for non-moving inventory in the return of income, we hold that the Ld. CIT(A) had rightly deleted the disallowance made in this regard by the ld. AO . Accordingly, ground no. 5 raised by the revenue is dismissed. Addition on account of valuation of closing stock - Held that - We find from the said workings that there are innumerable number of items comprising both low and high value items. Hence, the action of the ld. AO in averaging all the items put together cannot be accepted. The assessee also indeed filed complete details with regard to material code, product description, quantity, unit of measurement, corresponding price and value thereon in the said workings. In view of these facts and findings of the Ld. CIT(A) that the books of accounts of the assessee had not been rejected by the ld. AO, and in view of the fact that this method of valuation has been consistently employed by the assessee from year to year, there is no case to make any addition towards closing stock in the facts of the instant case. CIT(A) had rightly deleted this addition appreciating this fact and contentions of the assessee. Provision of written back - Held that - From the computation of income for the assessment year 2007-08 the assessee had voluntarily disallowed the provision for sales incentives payable to its employees amounting to ₹ 40 lacs. during the assessment year 2007-08. There is no dispute that out of such sum of ₹ 40 lacs, a sum of ₹ 20,02,667/- representing the provision for sales incentives is no longer required to be paid. Accordingly, the assessee credited the same in its profit and loss account by reflecting as excess provision written back and claimed the same as deduction in the return of income for the assessment year 2009-10. If the action of the is to be sustained , then this sum of ₹ 20,02,667/- would get invited with double addition. Hence, in the interest of justice, it has to be rightly allowed as deduction in the year of write back, which has been rightly done by the Ld. CIT(A).
Issues Involved:
1. Justification of allowing the claim of pre-operative expenses. 2. Deletion of disallowance on account of leave encashment. 3. Deletion of disallowance towards provision for warranty. 4. Deletion of disallowance towards provision for non-moving inventory. 5. Deletion of addition on account of valuation of closing stock. 6. Allowability of deduction for the amount of provision written back. Detailed Analysis: 1. Justification of Allowing the Claim of Pre-Operative Expenses: The primary issue was whether the CIT(A) was justified in allowing the claim of pre-operative expenses amounting to ?3,01,21,223/-. The assessee, engaged in manufacturing, initially capitalized the employee costs for February and March 2009 to capital work-in-progress and did not claim it in the original return. Upon realizing the error, the assessee filed a revised return claiming these costs as revenue expenditure. The CIT(A) accepted the assessee's explanation and deleted the disallowance. The Tribunal upheld this decision, noting that the costs pertained to the old business unit and were correctly claimed in the revised return. 2. Deletion of Disallowance on Account of Leave Encashment: The issue revolved around the provision for leave encashment. The assessee made provisions and payments during the year, including those from earlier years. The AO and CIT(A) did not properly link these with the tax audit report. The Tribunal remanded the matter back to the AO for fresh adjudication, emphasizing the need for a proper examination of the tax audit report and the assessee's submissions. 3. Deletion of Disallowance Towards Provision for Warranty: The assessee debited ?52,15,220/- for warranty provisions, which the AO disallowed, citing a lack of scientific basis. The CIT(A) found that the provision was made based on past experience and scientific methods, consistent with prior years. The Tribunal upheld the CIT(A)'s decision, referencing earlier Tribunal orders and the Supreme Court's ruling in CIT vs. Rotork Control India Ltd., which supported the assessee's method of provision for warranty. 4. Deletion of Disallowance Towards Provision for Non-Moving Inventory: The assessee made a provision of ?18,93,809/- for non-moving inventory, which the AO disallowed as uncrystallized and unascertained. The CIT(A) noted that the assessee consistently followed a method of accounting for non-moving inventory, and the AO had incorrectly added the provision amount. The Tribunal upheld the CIT(A)'s decision, recognizing the consistent treatment and proper accounting method employed by the assessee. 5. Deletion of Addition on Account of Valuation of Closing Stock: The AO questioned the valuation of closing stock of wires, cables, and drives, which the assessee valued at ?639.80 per unit, lower than the opening stock and purchase price. The CIT(A) found that the assessee provided detailed workings and maintained consistent valuation methods. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not reject the books of accounts and the valuation method was consistently followed. 6. Allowability of Deduction for the Amount of Provision Written Back: The assessee wrote back ?20,02,667/- as excess provision for sales incentives, initially created and disallowed in the assessment year 2007-08. The AO disallowed this write-back, but the CIT(A) allowed it, recognizing that denying the deduction would result in double taxation. The Tribunal upheld the CIT(A)'s decision, ensuring the avoidance of double addition. Conclusion: The Tribunal dismissed several grounds raised by the revenue, upheld the CIT(A)'s decisions on various disallowances, and remanded one issue for fresh adjudication. The appeal was partly allowed for statistical purposes, and the cross-objection by the assessee was dismissed as not pressed.
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