2023 (8) TMI 369 - AT - Income Tax

Revision u/s 263 - Various grounds of revision - Directions issued by the CIT to verify the tranactios - Difference in stock reporting - HELD THAT - With reference to the assessee s tax audit report in Form 3CD reflecting the quantitative details as to consumption, production, and yield, it was shown to us by Sh. Nair that there is no inconsistency in, nor any excess, stock. There is, on the contrary, loss in manufacturing, which, at 1%, was normal and minimal. Further, while the raw materials, i.e., copper and PVC, are measured by weight (in kg.), the finished product, viz. stabilizers, pumps, water heaters, electrical fans, Digital UPS, are in individualized units, i.e., in numbers. The assessee s reply stands perused for the purpose. It s case is clearly borne out by it s return of income for the year, of which Form 3CD is a part. We find no substance in the Revenue s claim, nor any case for revision; the ld. Pr. CIT in his final observation only reiterates what stands stated by the assessee. Claim for Additional Depreciation - Depreciation had been correctly claimed at 50% of the normal depreciation for the assets put to use for less than 180 days. The confusion arose as, due to large number of additions in the second half of the year, these were stated as made and, accordingly, put to use, on one date (31/3/2016). The matter stands looked into by the AO. Now, the difference in depreciation, if any, for AY 2015-16, could in our view be rectified, pursuing a remedial course, only for that year, even if by way of rectification u/s. 154. The depreciation claimed and allowed for that year would be irrespective of the extent unabsorbed entitled to be carry-forward for this year, forming part of the current year s depreciation, reducing the open written down value (WDV) thereby. No issue therefore, in our view, arises for being considered by the AO. The Revenue has no case, with the ld. Pr. CIT having himself not made any adverse comment in the matter. Non-consideration of expenses disallowed, u/s. 115-JB - Non consideration of certain claims of expenditure for computation of book-profit., assessee in reply, admits to the said deficiency, though claims that it would be of no consequence as the tax liability u/s. 115JB, even after considering all the adjustments referred to while that under the normal provisions of the Act , and toward which Shri Nair would take use through the relevant working. As assessee s stand is that the impugned order, even if erroneous on that account, is not prejudicial and, therefore, not liable to be subject to revision on that score. We agree, both in principle as well as on facts. This is as even if the assessee agitates the said additions/disallowance made in regular assessment, the tax liability u/s. 115JB would be lower than that on the returned income. Again, we observe no adverse remark by the Pr. CIT in the matter (para 6.1). Non-charge of interest to MSME units - CIT, while recording this clarification by the assessee, states it to have not clarified the position (para 6.2). What, pray, we wonder, does that mean, and what further clarification the Revenue seeks we are unable to understand. Once the expenditure has not been claimed, the question of it s disallowance for the relevant year cannot arise, so that there is no prejudice per the impugned order to the Revenue. Sure, there is non-observance of the said Act, but that is outside the domain of the Act. No case for revision is made out. Provision for warranty expenses - The basis for the provision of warranty, claimed to be on empirical evidence, generated by past data, would have to be examined by him, even if on a test-check basis, arriving at a satisfaction before accepting the same, as explained in Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT - The invocation of s. 263 in its respect is thus valid. Claim in respect of employee stock option scheme - As the time of expenditure assumes relevance only where it is, firstly, regarded as so; and only seek to highlight the different issues arising for determination. They may accordingly not be construed as our final findings, though shall be taken into account, and the assessee required to meet the same, by the assessing authority, before whom the matter is at large. The assessee has also relied on the decision in Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT We may though clarify that the same has to in any case satisfy the test of s. 37(1) Ram Bahadur Thakur Ltd. v. CIT 2003 (1) TMI 66 - KERALA HIGH COURT , and that the same cannot be compromised on the ground of consistency refer CIT v. British Paints India Ltd 1990 (12) TMI 2 - SUPREME COURT , qua which there is though no finding by the AO. Why, such a contention could be raised only where there is a finding in assessment in an earlier year, even as the principle of res judicata is not applicable to the proceedings under the Act. AO shall decide on merits in accordance with law, issuing definite findings of fact, per a speaking order after hearing the assessee. We decide accordingly. Non-verification of huge claims for expenditure - As nothing on record to indicate any enquiry, much less verification, made by the AO in the matter, which was also the admitted position before us. The same would per se render the order erroneous and prejudicial to the interests of the Revenue. It is well settled that once the AO assumes jurisdiction to assess or reassess, he is duty bound to assess the total income for the relevant assessment year. Each of the expenditure referred to by the ld. Pr. CIT is material in relation to the returned income of Rs. 16314 lacs, with the AO having not made an iota of enquiry on the relevant aspects. Explanation 2(a) is clearly attracted under the circumstances. We find no reason to interfere. Assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Difference in stock reporting
2. Claim for Additional Depreciation
3. Non-consideration of expenses disallowed, u/s. 115-JB
4. Non-charge of interest to MSME units
5. Provision for warranty expenses
6. Claim in respect of 'employee stock option scheme'
7. Non-verification of huge claims for expenditure

Summary:

Issue 1: Difference in stock reporting
The Principal Commissioner of Income Tax (Pr. CIT) noted discrepancies in stock reporting, particularly in the quantitative details of raw materials like Copper and PVC. However, the assessee demonstrated that there were no inconsistencies or excess stock, as evidenced by their tax audit report and return of income. The Tribunal found no substance in the Revenue's claim and no case for revision.

Issue 2: Claim for Additional Depreciation
The Pr. CIT questioned the additional depreciation claimed on assets used for less than 180 days during AY 2015-16. The assessee provided all relevant details, consistent with the Apex Court's decision in Brakes India Pvt. Ltd., showing that depreciation was correctly claimed. The Tribunal found no issue for further consideration by the AO and no adverse comment from the Pr. CIT.

Issue 3: Non-consideration of expenses disallowed, u/s. 115-JB
The Pr. CIT observed that certain disallowances were not considered for book-profit computation under Section 115JB. The assessee admitted this but argued that it would not affect the tax liability, which was higher under normal provisions. The Tribunal agreed, noting that the tax liability under Section 115JB would still be lower than that on the returned income, and found no adverse remark from the Pr. CIT.

Issue 4: Non-charge of interest to MSME units
The Pr. CIT noted that mandatory interest for delayed payments to MSME units was not charged. The assessee clarified that no such interest was debited in their accounts, thus no disallowance was required. The Tribunal found no case for revision as the expenditure was not claimed.

Issue 5: Provision for warranty expenses
The Pr. CIT raised doubts about the provision for warranty expenses, questioning its scientific basis and consistency with historical trends. The Tribunal found that the AO had not examined this expenditure, and the Pr. CIT's observations were valid. The Tribunal upheld the revision, emphasizing the need for verification of the provision's basis.

Issue 6: Claim in respect of 'employee stock option scheme'
The Pr. CIT observed inconsistencies in the accounting and amortization of ESOP expenses. The Tribunal noted that there was no enquiry by the AO in this matter, validating the Revenue's charge of non-verification. The Tribunal upheld the revision, directing the AO to fully investigate the correctness of the ESOP expenditure claim.

Issue 7: Non-verification of huge claims for expenditure
The Pr. CIT highlighted that the AO did not verify significant expenses like salaries, packing materials, repairs, and others. The assessee claimed that details were submitted during assessment, but there was no record of any enquiry by the AO. The Tribunal found the order erroneous and prejudicial to the interests of the Revenue, upholding the revision.

Conclusion:
The Tribunal upheld the revision for issues 5, 6, and 7, corresponding to grounds 6, 7, and 8, and revoked it on other grounds. The assessee's appeal was partly allowed.