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2020 (9) TMI 565 - AT - Income TaxRevision u/s 263 - AO without making inquiries or verification with respect to the claim of deduction towards gratuity which is not debited to the P L Account of the assessee and the amount debited towards provision for warranty while arriving at the book profit of the assessee company under the provisions of section 115JB - HELD THAT - In the case of the assessee the assessee itself has recaste its P L Account and Balance sheet in accordance with the provisions of the Companies Act. All the material facts have to be taken into account in order to arrive at the correct profit earned by the entity during the relevant financial year. Hence, in the case of the assessee it had rightly redrawn the P L Account disclosing the actual loss accrued to it during the relevant AY by way of making provision towards gratuity, bad debts and warranty which is in accordance with the provisions of the Companies Act. It is not a method adopted by the assessee to understate the book profit of the company in order to avoid tax as per the MAT provisions of the Act. In fact, it epics the correct state of affairs of the assessee company based on the qualified audit report of the Statutory Auditors of the assessee company. Since these facts were brought to the notice of the Ld. AO subsequent to the filing of the return of income it appears that the Ld. AO had accepted the same while passing orders U/s. 143(3) this action of the Ld. AO has not resulted in any error in so far as it is prejudicial to the interest of the Revenue - quash the orders passed by the Ld. CIT invoking his powers u/s.263 - Decided in favour of assessee.
Issues:
1. Whether the order passed by the Ld. CIT under section 263 of the Income Tax Act was erroneous and prejudicial to the interest of the Revenue. 2. Whether the assessee correctly accounted for gratuity and provision for warranty in accordance with the Companies Act, 1956 and section 115JB of the Income Tax Act. Analysis: 1. The appeal was filed against the Ld.CIT's order under section 263 of the Act. The crux of the issue was the Ld.CIT's invocation of powers based on the AO's alleged failure to inquire about gratuity deductions. The assessee argued that the gratuity provision was in compliance with Accounting Standard-15 and the Companies Act. The Ld.CIT contended that the AO failed to compute the book profit under section 115JB, leading to the order being prejudicial to Revenue's interest. However, the Tribunal found that the assessee had correctly accounted for gratuity and other provisions as per the Companies Act, and the AO had accepted these facts post-return filing. Therefore, the Ld.CIT's order under section 263 was quashed. 2. The Ld.CIT also raised concerns about the provision for doubtful debts and warranty. The assessee argued that these were accounted for correctly under section 115JB. The Ld.CIT disagreed, stating that the book profit was not computed as per the Companies Act. However, the Tribunal found that the assessee's accounting was in line with statutory requirements, and the AO had accepted the revised statements. Therefore, the Ld.CIT's order was deemed erroneous, and subsequent orders were quashed. 3. The Tribunal highlighted the importance of accurate financial reporting in accordance with the Companies Act. It noted that the assessee's actions were not an attempt to evade tax but a genuine reflection of its financial position. The Tribunal referred to precedents and upheld the assessee's compliance with accounting standards. The Tribunal found no error in the AO's acceptance of the revised statements and concluded that the Ld.CIT's order under section 263 was unwarranted. 4. As a result of quashing the Ld.CIT's order, subsequent orders were also rendered infructuous. The Tribunal allowed one appeal and dismissed another. The delay in pronouncing the order was attributed to the Covid-19 pandemic, with reference to a relevant Tribunal decision.
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