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2018 (5) TMI 1599 - AT - Income TaxValuation of stock - Disallowance of addition made by AO u/s 145A - inclusion of taxes in the value of stock - assessee has adopted exclusive method of accounting - disallowance of Provision of Warranty against the supply of the goods - Held that - AO erred in including the element of taxes only in the closing stock of inventories - provisions of Section 145A requires to include the amount of tax in the value of purchase sale and inventory - assessee has been following its method of valuation for the inventory purchase and sale consistently for the last several years and no defect in the method of accounting for the inventories was recorded by the AO in his assessment order - appeal filed by the Revenue is dismissed Expenses towards provision for guarantee - whether the same is un-accrued/un-ascertain/contingent liability - Held that - the provision is created on scientific basis can be claimed as deduction against the profit determined under the head business and profession - the assessee was eligible to create the provision of 16, 08, 926/- being 10% of purchase order. However the assessee has created provision of 30, 00, 000/- - issue is restored to AO for fresh adjudication - allowed for statistical purposes.
Issues Involved:
1. Deletion of addition made by AO under Section 145A of the Income Tax Act. 2. Deletion of disallowance made by AO towards Provision of Warranty. Issue-wise Detailed Analysis: 1. Deletion of Addition under Section 145A: The first issue pertains to the deletion of an addition of ?30,29,969/- made by the AO under Section 145A of the Income Tax Act. The assessee, a partnership firm engaged in manufacturing energy-saving devices, did not include VAT/Excise in its closing stock valuation. The AO contended that the assessee should have included these taxes as per Section 145A, leading to an addition of ?30,29,969/-. The assessee argued that it consistently followed the exclusive method of accounting as per the Institute of Chartered Accountants of India's guidance, which excludes VAT/Excise from the valuation. The CIT(A) deleted the addition, referencing the Supreme Court's decision in CIT Indo Nippon Chemicals Co. Ltd., which supports consistent accounting methods and the parity between inclusive and exclusive methods resulting in the same profit. The Tribunal upheld the CIT(A)'s decision, noting that the AO's partial application of Section 145A (only to closing stock) was incorrect. The Tribunal emphasized that the method of accounting should be consistently applied to purchases, sales, and inventory. Since the taxable profit remains unaffected by the accounting method, the Tribunal dismissed the Revenue's appeal. 2. Deletion of Disallowance towards Provision of Warranty: The second issue involves the deletion of a ?30,00,000/- disallowance made by the AO for a provision of warranty. The assessee created this provision for unfinished installation charges of boilers supplied to GSML, where GSML retained 10% of the payment as per the agreement. The AO disallowed this provision, viewing it as an unaccrued and contingent liability. However, the CIT(A) deleted the disallowance, accepting the assessee's argument that the retention money had not accrued and was contingent on satisfactory contract completion. The CIT(A) directed the AO to tax this amount in the year it is actually received. The Tribunal supported the CIT(A)'s decision, noting that provisions created on a scientific basis are deductible. The Tribunal highlighted that the retention money, being contingent on contract performance, had not accrued to the assessee. However, the Tribunal directed the AO to verify and allow the provision up to 10% of the purchase order value (?16,08,926/-) and to tax any excess provision in the appropriate year. Conclusion: The Tribunal dismissed the Revenue's appeal regarding the addition under Section 145A, affirming the CIT(A)'s decision. For the provision of warranty, the Tribunal partly allowed the appeal for statistical purposes, directing the AO to verify and appropriately adjust the provision amount. The final judgment was pronounced in open court on 24/05/2018.
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