2012 (11) TMI 539 - AT - Income Tax

Disallowance of interest Assessee has granted interest free loan to a company - AO disallow the proportionate interest on the said amount of loan - Assessee contended that the amount advanced to its sister concern is on account of business expediency - Held that - After examine the fact whether the sister concern has been supplying raw material to the assessee and the advance was made at free of interest in the course of business transaction needs to be verify. Issue remand back to AO Disallowance u/s 43B Delay in deposit of Employees Provident Funds Held that - Following the decision in case of AIMIL Limited (2009 (12) TMI 38 - DELHI HIGH COURT) that the employees contribution is not deposited by the due date prescribed under the relevant Acts and is deposited thereafter, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in those Acts. In so far as the Income-tax Act, 1961, is concerned, the assessee can get the benefit of deduction of the payment, if the actual payment is made before the return is filed. In favour of assessee Disallowance of provision for warranty charges - Provisions towards warranty expenses at 10% of the total sales turnover - The Department has the objection that the liability in respect of warranty is contingent in nature Held that - It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessed to discharge its obligations under that clause for the period of warranty. Once an assessed is maintaining his accounts on the mercantile system, a liability is accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business. Therefore contention of revenue not accepted that the warranty provision is contingent liability. Appeal decides in favour of assessee

Issues Involved:
1. Disallowance of interest on funds diverted.
2. Disallowance under Section 40(a)(ia).
3. Disallowance of provision for warranty charges.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest on Funds Diverted:
The primary issue was whether the disallowance of Rs. 9,69,009 as interest on funds diverted was justified. The assessee contended that the investments and inter-corporate advances were made from its own funds, not borrowed ones. However, the Assessing Officer (AO) observed that the assessee failed to provide evidence supporting this claim. The CIT(A) upheld the AO's decision, noting that the "own funds" included provisions for warranty, which could not be claimed as diverted funds. The CIT(A) also noted the lack of commercial expediency as the assessee could not demonstrate the business purpose of the funds given to M/s. Sree Rayalaseema Industries Ltd.

The Tribunal reviewed the arguments and highlighted that the onus was on the assessee to prove the use of borrowed funds for business purposes. It emphasized that funds in a business entity are pooled together, and the interest paid on borrowings should be disallowed to the extent that funds are diverted to sister concerns without interest. The Tribunal remitted the issue back to the AO to verify if the sister concern supplied raw materials to the assessee and if the advances were made in the course of business transactions.

2. Disallowance under Section 40(a)(ia):
The next issue was the disallowance of Rs. 2,09,772 under Section 40(a)(ia). The Tribunal referred to the Delhi High Court judgment in CIT v. Aimil Ltd. (321 ITR 508), which held that if contributions to provident fund and ESI are deposited before the return filing date, no disallowance should be made. The Tribunal also cited CIT vs. Gem Plus Jewellery India Ltd. (330 ITR 175) and decided the issue in favor of the assessee, noting no contrary judgment was presented by the DR.

3. Disallowance of Provision for Warranty Charges:
The final issue was the disallowance of Rs. 2,54,96,766 for warranty charges. The assessee argued that the provision was based on a reasonable estimate of 10% of sales, supported by actual expenses in subsequent years. The CIT(A) had disallowed the provision, doubting its scientific basis and historical data.

The Tribunal reviewed the case law, including the Supreme Court's decision in Rotork Controls India P. Ltd. v. CIT (314 ITR 62), which recognized the deduction of warranty provisions if they are reliably estimated. It also referred to Bharat Earth Movers v. CIT (245 ITR 428) and Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. (222 ITR 697), which supported the deduction of provisions for warranty obligations. The Tribunal concluded that the liability was not contingent but definite and directed the AO to verify the actual expenditure incurred on warranty and allow the deduction accordingly.

Conclusion:
The appeal was partly allowed. The Tribunal remitted the issue of interest disallowance back to the AO for verification, decided the disallowance under Section 40(a)(ia) in favor of the assessee, and directed the AO to verify and allow the provision for warranty charges based on actual expenditure.

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