2021 (4) TMI 1186 - AT - Income Tax

Addition of provisions for liquidated damages - HELD THAT - Since, the matter stands adjudicated and allowed for several years prior, in the absence of any material change, we hereby hold that the addition made by the AO cannot be sustained. Advance and deposits written off - HELD THAT - We are in agreements with the fundamentals argued that it is a generally accepted principle that losses, other than capital losses, which arise out of and are incidental to the business of assessee must be necessarily deducted in the ascertainment of profits of the business u/s 28 - Section 28 of the Act provides for taxation of profits and gains of any business or profession. From the charging provisions of the Act, it is discernible that the words income or profits and gains should be understood as including losses also, so that, in one sense profits and gains represent plus income whereas losses represent minus income . In other words, loss is negative profit. Both positive and negative profits are of revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Therefore, the trading loss of a business is deductible in computing profits earned by the business even though there is no specific provision for allowance thereof. As decided in MYSORE SUGAR COMPANY LIMITED 1962 (5) TMI 3 - SUPREME COURT while computing the assessable profits and gains , an appellant is entitled to claim incurred for the purpose of its business but not covered under any specific clause. On going through the facts and circumstances of the instant case, keeping in view the judgments of Hon ble Supreme Court since the amount has been incurred during the regular course of business, the same is allowed to be claimed under expenses for the year.

Summary

Issues Involved:
1. Provision for Liquidated Damages
2. Provision for Warranty
3. Advances & Deposits Written Off

Detailed Analysis:

Provision for Liquidated Damages:

The revenue challenged the allowance of the provision for liquidated damages by the CIT(A), arguing that the provision was not scientifically substantiated and was contingent upon future events. The assessee countered that the provision was based on contractual obligations and past experiences, making it a deductible expense under the mercantile system of accounting. The Tribunal noted that this issue had already been adjudicated in favor of the assessee in previous years, including AY 2008-09. The Tribunal confirmed that the provision for liquidated damages was based on a reasonable estimation and past experiences, aligning with the matching concept of accounting. Consequently, the addition made by the AO was not sustained.

Provision for Warranty:

The revenue contended that the provision for warranty was not maintained using a scientific and consistent method, thus making it a contingent liability and not deductible. The assessee argued that the provision was based on past historical data and anticipated future expenses, aligning with the matching principle. The Tribunal referred to the Supreme Court's ruling in Rotork Controls India (P) Ltd. Vs CIT, which supports the allowance of such provisions when based on a reasonable estimation of future obligations. The Tribunal upheld the CIT(A)'s decision, allowing the provision for warranty, as it was based on past experience and contractual obligations, and had been consistently followed in previous years.

Advances & Deposits Written Off:

The assessee claimed deductions for advances and deposits written off, arguing that these were business expenses under Section 28 of the Act. The CIT(A) partially allowed the claim, excluding employee advances and security deposits as capital in nature. The Tribunal, however, emphasized that losses incidental to business operations should be deductible, provided they are real, revenue in nature, and not prohibited by the Act. The Tribunal cited several Supreme Court judgments supporting the deduction of business-related losses. It concluded that the advances and deposits written off were incurred during the regular course of business and thus allowed them as deductible expenses.

Conclusion:

The Tribunal dismissed the revenue's appeals and allowed the assessee's cross-objections, confirming the CIT(A)'s decisions on all issues. The provisions for liquidated damages and warranty were upheld as deductible, and the advances and deposits written off were allowed as business expenses. The order was pronounced on 07/04/2021.