2019 (6) TMI 537 - AT - Income Tax

Disallowance of advertisement expenses - year of assessment - addition of expenses on the ground that expenses pertains to the subsequent year as the dates on the bills of the said expenses is of April and May 2008, which does not fall in previous year relevant to the assessment year under consideration - HELD THAT - There is no dispute that the assessee is following Mercantile system of accounting. Further it is not in dispute that invoices related to the advertisement expenses were received by the assessee in the month of April and May 2008, though the expenses relates to the advertisement made prior to March 2008. Considering the fact that expenses relates to the advertisement expenses are related with the assessment year under consideration, the disallowance made by AO and confirmed by learned CIT (A) are deleted. - Decided in favour of assessee. Addition of provision for warranty - HELD THAT - A provision is recognized when a enterprises has a future obligation as a result of past events, it is probable that a out flow of the recourses will be required to settle the obligation and a reliable estimation can be made for such obligation. All such factors are missing in the present case. Neither the assessee is manufacturer nor have a past history in respect of the claim of warranty. Thus, we do not find any illegality or infirmity in the order of ld. CIT (A) for our interference. - Decided against assessee. Addition of provision of Gratuity - AO disallowed the provision of gratuity holding that mere provision covered by section 40A(7) and has not been debited in Profit Loss A/c - HELD THAT - The assessee has shown the provisions of gratuity as on 31.03.2008 as a liability taken over from its Associated Enterprieses (Brother International Singapore Pvt. Ltd.). In our view, the disallowance made by AO and confirmed by CIT(A) is not correct. The disallowance was made only on the ground that it was not routed through Profit Loss A/c and was a balance-sheet item. We are conscious of the fact that balance-sheet are not sacrosanct. The assessee claimed the provision of gratuity of ₹ 13,37,283/-. During the remand proceeding assessee furnished actuarial certificate showing amount of ₹ 16,12,347/- which has been reflected in the balance-sheet. The assessee claimed provision for payment of gratuity on the basis of actuarial valuation. AO at the time of passing assessment order on 20.12.2011 has not verified, if the similar amount is claimed in next Assessment Year, therefore, this issue is restored to the file of AO to decide it afresh in accordance with law. Needless to order that before passing the order, the AO shall allow proper opportunity of hearing to the assessee. MAT computation - addition of provision of warranty and gratuity to the book profit while computing income u/s 115JB - HELD THAT - We have already confirmed the addition regarding provision for warranty and restored the addition/disallowance regarding gratuity. Therefore, the AO is directed to make consequential adjustment accordingly with regard to the disallowance of gratuity. As we have directed the AO to decide the issue of provision of gratuity afresh. Therefore, the AO shall pass the order for adjustment u/s 115JB with regard to provision of gratuity after deciding the issue afresh.

Summary

Issues Involved:
1. Disallowance of advertisement expenses.
2. Disallowance of provision for warranty.
3. Disallowance of provision for gratuity.
4. Addition of provision for warranty to book profit under section 115JB.
5. Addition of provision for gratuity to book profit under section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance of Advertisement Expenses:
The assessee argued that the advertisement expenses of ?33,65,007/- were related to the financial year 2007-08, despite the invoices being raised in April and May 2008. The Commissioner (Appeals) confirmed the disallowance on the ground that the invoices were dated in the subsequent financial year. The Tribunal noted that the assessee follows the mercantile system of accounting and the expenses pertained to the relevant assessment year. Therefore, the disallowance by the assessing officer and the Commissioner (Appeals) was deleted, allowing this ground of appeal.

2. Disallowance of Provision for Warranty:
The assessee contended that the provision for warranty, calculated as a percentage of turnover, was a standard business practice and relied on the Supreme Court decision in Rotork Control India Pvt Ltd vs. CIT. The revenue argued that the assessee, being a trader and not a manufacturer, had no basis for such a provision. The Tribunal held that the provision did not meet the criteria of a present obligation arising from a past event and noted the lack of historical data or evidence to support the provision. Consequently, the Tribunal upheld the disallowance, dismissing this ground of appeal.

3. Disallowance of Provision for Gratuity:
The assessee argued that the provision for gratuity was shown in Schedule-11 of the Profit & Loss Account, but the AO disallowed it as it was not routed through the Profit & Loss Account and treated as a balance-sheet item. The Commissioner (Appeals) confirmed this view. The Tribunal noted that the provision for gratuity was based on actuarial valuation and should be considered. Therefore, the Tribunal restored the issue to the AO for fresh consideration, directing the AO to verify if a similar amount was claimed in the next assessment year and to allow proper opportunity for hearing. This ground of appeal was allowed for statistical purposes.

4. Addition of Provision for Warranty to Book Profit under Section 115JB:
The assessee argued that this addition was consequential to the outcome of the provision for warranty. Since the Tribunal confirmed the disallowance of the provision for warranty, the addition to book profit under section 115JB was upheld. This ground of appeal was dismissed.

5. Addition of Provision for Gratuity to Book Profit under Section 115JB:
The assessee contended that this addition was also consequential. The Tribunal, having restored the issue of provision for gratuity to the AO for fresh consideration, directed the AO to make consequential adjustments under section 115JB accordingly. This ground of appeal was allowed for statistical purposes.

Appeal for AY 2009-10:
The grounds of appeal for AY 2009-10 were similar to those for AY 2008-09. The Tribunal followed the principle of consistency:
- Ground No.1 (similar to Ground No.2 of AY 2008-09) was dismissed.
- Ground No.2 was consequential to Ground No.1 and did not require specific adjudication.
- Ground No.3 (similar to Ground No.5 of AY 2008-09) was dismissed as the issue of provision for gratuity was already directed for fresh consideration.

Conclusion:
The appeal for AY 2008-09 was partly allowed, while the appeal for AY 2009-10 was dismissed. The Tribunal's order was pronounced on May 22, 2019.