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2022 (7) TMI 548 - AT - Income TaxProvision for liabilities for performance guarantees /warrantees - Disallowing considering it as contingent liability - HELD THAT - Admittedly the guarantee/warranty is provided to the customer as per the scheme designed by the company. Accordingly, the guarantee/warranty is subject to various terms and conditions provided in the scheme. Such scheme is always made available to the buyers. If there arises any defect any product supplied to the customer, it (the customer) can always approach the company either for the replacement of the product or repair of the product, as the case may be. Indeed, the sales made by the assessee is the income in the hands of the assessee but the same is subject to liability which may arise to it by virtue of the guarantee/warranty provided by it to the customers. Thus when the assessee is making sales of its product with the guarantee/warranty, the question arises whether the assessee is required make the provision for the guarantee /warranty against the sales made by it. The answer stands in positive. It is for the reason that there is correlation between the sales and the guarantee/warranty extended by the assessee. Once a revenue has been recognized in the books of accounts on account of sales, the corresponding liability which may arise to the assessee on account of guarantee/warranty against such sale should also be recognized in the books of accounts. As per M/S. ROTORK CONTROLS INDIA (P) LTD. case 2009 (5) TMI 16 - SUPREME COURT , there remains no ambiguity to the fact that the assessee has to provide the provision for the guarantee and warranty as the case may be in the books of accounts corresponding to the sales made by it. Basis of calculating the provision to be provided against the sales made with warranty /guarantee - We note that the revenue has not allowed the provision made by the assessee in the year under consideration on the reasoning that the provisions made by the assessee in the earlier years was not adjusted against any expenses. Accordingly, it was doubted that the provision for the warranty is not required. However, we are not in agreement with the view taken by the authorities below. It is for the reason that the liability arising upon the assessee against the sales made by it cannot be taken at nil value merely it has not been crystallized in the earlier years. As per the purchase agreement, the assessee was exposed to such liabilities on account of warranty/guarantee provided by it. As the provisions made in one year was reversed in the next year by offering the same as income. Therefore, it is not the case of the assessee that it has been claiming deduction on account of the provisions made against the sales of each year consistently without giving effect of the opening balance of the provision for the guarantee/warranty. In view of the above and after considering the facts in totality, we do not find any infirmity in the claim made by the assessee in its books of accounts for the provisions against the sales made in the year under consideration. Thus we reverse the order of the authorities below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Addition u/s 68 of share application money and the loans as well as commission expenses - HELD THAT - The provision of section 68 of the Act fastens the liability on the assessee to provide the identity of the lenders, establish the genuineness of the transactions and creditworthiness of the parties. These liabilities on the assessee were imposed to justify the cash credit entries under section 68 in PRECISION FINANCE PVT. LIMITED 1993 (6) TMI 17 - CALCUTTA HIGH COURT There remains no doubt that the transaction of the advance received by the assessee from the party was not genuine. In our considered view, once the assessee is able to prove that the money received by it was returned in the account of the same party, then there remains no doubt to draw an inference that the advances received by the assessee were unexplained cash credit. Therefore in our considered view, the assessee has discharged its onus imposed under section 68 of the Act. In view of the above, we do not find any infirmity in the order of Ld. CIT (A). Once the addition made by the AO has been treated by us, holding the loan transaction and share application transaction between the assessee and M/s RNG Finlease Pvt. Ltd, as genuine, the corresponding addition made by the AO for ₹ 9,05,000.00 on account of bogus transactions is not sustainable. Accordingly, we direct the AO to delete the same. It is not out of the place to mention that learned CIT-A has deleted the addition made by the AO after elaborate discussion which has been reproduced somewhere in the preceding paragraph. The learned DR at the time of hearing has not brought anything on record contrary to the finding of the learned CIT-A. Hence, the ground of appeal of the Revenue is hereby dismissed. Disallowance of the proportionate interest expenses - HELD THAT - Admittedly, the own fund of the assessee exceeds the amount of loan and advance given to the parties and therefore it is presumed that the interest free loans and advances were provided out of the share capital and reserve and surplus fund of the assessee. Thus, no disallowance of interest expense is warranted. Accordingly, we do not find any infirmity in the order of the Ld. CIT(A). Hence, the ground of appeal of the Revenue is hereby dismissed. LTCG - capital gain tax on the transfer of Agricultural land - AO not satisfied with the reasons given by the assessee on the ground that the assessee has realized its 6 years later for correcting the registration document. As per the Assessing Officer the assessee is doing so in order to avoid the capital gain tax on the transfer of land - HELD THAT - Capital gain was calculated in the hands of the assessee considering that the assessee has adopted colorable device to avoid the payment of tax by virtue of provision of section 50C - Directors in their individual hands have paid more Long Term Capital Gain tax than the capital gain computed in the hands of the assessee. This fact has already been reproduced in the order of the Ld. CIT(A) and the same was not controverted by the Ld. DR appearing on behalf of the Revenue. Accordingly, we can conclude that the allegation made by the Assessing Officer that the assessee has adopted colorable device to avoid the tax under the head Capital Gain is devoid of any merit. Furthermore, the assessee and the Directors are closely connected people and therefore there is no loss to the revenue merely on the reasoning that the income has been offered in the hands of the Director in place of the company. Thus, we don t find any infirmity in the order of the Ld. CIT(A). Hence, the ground of appeal of the Revenue is hereby dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Admittedly, there was no exempt income received by the assessee and therefore the question of making the disallowance of interest expenses does not arise. See CORRTECH ENERGY PVT. LTD. 2014 (3) TMI 856 - GUJARAT HIGH COURT Revision u/s 263 - As per the Ld. PCIT the assessee has made investment in the shares amounting to Rs. 14,17,95,000/- which was capable of generating tax free income, thus, the disallowance was made under the provision of section 14A r.w.Rule 8D(ii) of Income Tax Rules being 1% of the average investment - HELD THAT - Admittedly, the assessee has preferred an appeal before the Ld. CIT(A) against the disallowance made by the Assessing Officer under the provision of section 14A r.w. Rule 8D of Income tax Rules. This fact can be verified from the grounds raised by the assessee before the Ld.CIT(A) - Thus we hold that the proceedings initiated by the Ld. PCIT u/s 263 of the Act are not sustainable, as the issue is pending before the ld. CIT-A. In holding so we rely on the judgment of Hon ble Allahabad High Court in the case of CIT vs. Vam Resorts Hotel Pvt. Ltd 2019 (8) TMI 1418 - ALLAHABAD HIGH COURT - we hold that the order passed by the ld. CIT under section 263 of the Act is not sustainable. Appeal filled by assessee allowed.
Issues Involved:
1. Disallowance of provision for liabilities for performance guarantees/warranties. 2. Addition on account of unexplained cash credits under Section 68. 3. Disallowance of proportionate interest expenses. 4. Addition on account of Long Term Capital Gain (LTCG). 5. Disallowance under Section 14A in relation to exempt income. 6. Validity of the revision order under Section 263 of the Income Tax Act. Detailed Analysis: 1. Disallowance of Provision for Liabilities for Performance Guarantees/Warranties: - Assessee's Argument: The assessee, a manufacturer of Gasifier Machines, consistently created a provision for warranty at 10% of sales, which was accepted in previous years. The provision was based on past experience and was reversed if not utilized. - Assessing Officer's (AO) Stand: The AO disallowed the provision, considering it a contingent liability since no expenses were claimed against the provisions in earlier years. - CIT(A) and Tribunal's Decision: The CIT(A) upheld the AO's decision, stating the provision lacked a scientific basis and was contingent. However, the Tribunal reversed this, citing the Supreme Court's decision in Rotork Controls India (P.) Ltd., which supports provisioning based on historical trends and matching concepts. The Tribunal directed the AO to delete the addition. 2. Addition on Account of Unexplained Cash Credits Under Section 68: - Assessee's Argument: The assessee received loans and share application money from M/s RNG Fin Lease Pvt. Ltd. and provided necessary documents to prove the identity, creditworthiness, and genuineness of the transactions. - AO's Stand: The AO added the amounts as unexplained cash credits, doubting the genuineness due to the non-production of directors and connections with another case involving RNG Fin Lease Pvt. Ltd. - CIT(A) and Tribunal's Decision: The CIT(A) deleted the addition, noting the assessee provided sufficient evidence and the AO failed to conclusively prove the transactions were bogus. The Tribunal upheld this, emphasizing the AO's failure to establish the lack of genuineness and creditworthiness. 3. Disallowance of Proportionate Interest Expenses: - AO's Stand: The AO disallowed interest expenses, attributing them to interest-free advances given by the assessee. - CIT(A) and Tribunal's Decision: The CIT(A) deleted the disallowance, noting the assessee had sufficient non-interest-bearing funds, and the AO failed to establish a nexus between borrowed funds and advances. The Tribunal upheld this decision. 4. Addition on Account of Long Term Capital Gain (LTCG): - Assessee's Argument: The assessee transferred agricultural land to its directors at the original purchase price, arguing it was a rectification of an error and not a taxable transfer. - AO's Stand: The AO treated the transfer as a taxable event, calculating capital gains based on stamp value. - CIT(A) and Tribunal's Decision: The CIT(A) deleted the addition, noting the directors paid higher capital gains tax upon subsequent sale, and the transfer was a bona fide rectification. The Tribunal upheld this, confirming no tax avoidance scheme was involved. 5. Disallowance Under Section 14A in Relation to Exempt Income: - AO's Stand: The AO disallowed expenses under Section 14A, assuming the assessee incurred expenses to earn exempt income. - CIT(A) and Tribunal's Decision: The CIT(A) deleted the disallowance, stating no exempt income was earned, thus no disallowance was warranted. The Tribunal upheld this, referencing the Gujarat High Court's decision in Corrtech Energy Pvt. Ltd. 6. Validity of the Revision Order Under Section 263: - PCIT's Stand: The PCIT found the AO's disallowance under Section 14A insufficient and revised the assessment. - Assessee's Argument: The assessee contended the issue was already under appeal, making the revision invalid. - Tribunal's Decision: The Tribunal quashed the revision order, citing the pending appeal and referencing the Allahabad High Court's decision in Vam Resorts & Hotel Pvt. Ltd., which bars revision when an appeal is pending. Conclusion: - Appeals by the Revenue: Dismissed. - Appeals by the Assessee: Allowed.
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