2025 (1) TMI 163 - AT - Income Tax

Disallowance u/s. 37 - disallowance of provision for Bad debts written back and disallowance of warranty provision - HELD THAT - Assessee has rightly computed the disallowable item under the excess of provision for bad debts and excess of provision of warranty. However, due to absence of respective columns in the income-tax return to demonstrate the adding back of the provisions made in the profit and loss account and then claiming of actual expenses incurred during the year, the assessee has netted off both the amounts and has only stated the amount as the amount disallowable during the year. Even though these details were filed before the AO it seems that he has overlooked the submissions filed by the assessee. Considering the details of actual break up of warranty supplied during the year and the customer-wise break up of bad and doubtful debts written back during the year which are majorly the limited companies and mainly include Tata Motors Ltd. and Ashok Leyland Ltd. etc., find that the claim of the assessee was justified and CPC erred in making the alleged adjustments. Therefore set-aside the finding of the CIT(A) and delete the disallowances made u/s. 37 and allow the effective Grounds raised by the assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the disallowance of Rs. 36,60,197 under Section 37 of the Income Tax Act for the provision of bad debts written back was justified.
Whether the disallowance of Rs. 12,32,732 under Section 37 of the Income Tax Act for warranty expenses was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Rs. 36,60,197 under Section 37 for Bad Debts

Relevant legal framework and precedents: Section 37 of the Income Tax Act pertains to the allowability of expenses incurred wholly and exclusively for the purposes of business or profession. The provision for bad debts, if written off, can be claimed as a deduction.
Court's interpretation and reasoning: The court examined whether the provision for bad debts written back was correctly disallowed by the CIT(A) based on the discrepancy between the auditor's report and the income-tax return.
Key evidence and findings: The appellant demonstrated that the provision for doubtful debts had been added back to the net profit and only the actual amount of bad debts written off during the year was claimed as a deduction.
Application of law to facts: The court found that the appellant had correctly computed the disallowable items by adding back the provision for bad debts and claiming the actual bad debts written off.
Treatment of competing arguments: The court noted that the CIT(A) failed to consider the appellant's submissions and the actual expenses incurred, leading to an erroneous adjustment by the CPC.
Conclusions: The court set aside the CIT(A)'s findings and deleted the disallowance of Rs. 36,60,197 under Section 37.

Issue 2: Disallowance of Rs. 12,32,732 under Section 37 for Warranty Expenses

Relevant legal framework and precedents: Similar to bad debts, warranty expenses are allowable under Section 37 if they are actual expenses incurred during the year.
Court's interpretation and reasoning: The court evaluated whether the warranty expenses were actual settlements with customers and should have been allowed as deductions.
Key evidence and findings: The appellant provided evidence of actual warranty expenses incurred during the year, which were initially added back to the net profit and then claimed as deductions.
Application of law to facts: The court determined that the appellant had appropriately claimed the actual warranty expenses, which were not contingent liabilities.
Treatment of competing arguments: The court found that the CIT(A) erroneously upheld the CPC's adjustments without considering the appellant's detailed submissions and evidence.
Conclusions: The court set aside the CIT(A)'s findings and deleted the disallowance of Rs. 12,32,732 under Section 37.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "I therefore set-aside the finding of the ld.CIT(A) and delete the disallowances made u/s. 37 of the Act at Rs. 36,60,197/- and Rs. 12,32,732/- and allow the effective Grounds of appeal No.2 and 3 raised by the assessee."
Core principles established: The judgment reinforces the principle that actual expenses incurred, even if initially provisioned, should be allowed as deductions under Section 37 when they are substantiated with evidence.
Final determinations on each issue: The appeal was allowed, and the disallowances of Rs. 36,60,197 and Rs. 12,32,732 were deleted, affirming the appellant's computation and claims.

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