2015 (9) TMI 275 - AT - Income Tax

Disallowance of incentive - change in the method of accounting - Held that - The assessee changed the method of account for these expenses from cash to mercantile during the year under appeal, but still the assessee has claimed some of the expenses on cash basis and some of them on mercantile basis during the year itself. According to section 145 Hybrid System of accounting is not at all allowable now. Therefore, the finding of the ld. CIT(A) is hereby upheld - Decided against assessee. Disallowance in respect of payment of additional remuneration to Managing Director - expenditure has not accrued during the year under appeal - assessee submitted that the amount was subsequently rectified by the Ministry of Company Affairs - Held that - The requisite approval by the Central Government (Ministry of Company Affairs) was received on 17/05/2007. The assessee has not placed any material on record suggesting that the approval so made by the Ministry of Company affairs was with retrospective effect. Therefore, we do not see any reason to interfere with the order of the ld. CIT(A), same is hereby upheld - Decided against assessee. Disallowance made in respect of advance written off u/s.37 - Held that - The assessee has placed details with regard to the parties to whom the advances have been given, the authorities below have not made any inquiry from such parties, therefore, we are of the considered view that the disallowance made cannot be sustained in view of the judgement of the Hon ble Apex Court rendered in the case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT - Decided in favour of assessee. Addition made on the provision for warranty - CIT(A) deleted the addition - Held that - In view of the judgement of the Hon ble High Court of Gujarat rendered in the case of CIT vs. Inductotherm (India) Pvt. Ltd. 2015 (9) TMI 218 - GUJARAT HIGH COURT as held it is important here to mention that even if AO s contention is accepted that it is not possible to exactly determine the amount of liability and if no claims are lodged with the assessee, nothing would be required to be paid, then also I believe in that case the assessee would write back the whole amount of provision to its profit and loss account and there is section 41 in the statute to take care of such amounts if the same is granted as deductible here we do not see any reason to interfere with the order of the ld. CIT(A), same is hereby upheld. - Decided against revenue. Addition made on account of disallowance of penalty expenditure for breach of contract - CIT(A) deleted the addition - Held that - There is no dispute with regard to the fact that the payments are at Arm s Length Price (ALP) as held by the TPO. It is an undisputed fact that the contract included the Affiliates . It is also an undisputed fact that the expenditure is related to the business of the assessee. Therefore, we do not see any reason to interfere with the findings of the ld. CIT(A) on this issue, same are hereby upheld. -Decided against revenue.

Summary

Issues Involved:

1. Disallowance of incentive to dealers.
2. Disallowance of additional remuneration to Managing Director.
3. Disallowance of advance written off.
4. Deletion of addition on provision for warranty.
5. Deletion of addition on penalty for breach of contract.

Issue-wise Detailed Analysis:

1. Disallowance of Incentive to Dealers:

The assessee appealed against the disallowance of Rs. 57,66,297 as incentives paid to dealers, which the CIT(A) considered prior period expenses. The assessee argued that the change from cash to mercantile accounting caused distortions. The CIT(A) observed that the assessee used a hybrid accounting system, which is not permissible under Section 145. The CIT(A) upheld the disallowance, stating that only the mercantile system is allowed and the expenses for the current year's sales accrued contractually. The Tribunal found no contrary material from the assessee and upheld the CIT(A)'s decision, dismissing the assessee's grounds.

2. Disallowance of Additional Remuneration to Managing Director:

The assessee contested the disallowance of Rs. 4,95,192 paid as additional remuneration to the Managing Director, arguing the expenditure was genuine and related to the year under appeal. The CIT(A) disallowed it on the ground that the approval from the Ministry of Company Affairs was received in the subsequent year. The Tribunal upheld the CIT(A)'s decision, noting the absence of evidence that the approval was retrospective, and dismissed the assessee's grounds.

3. Disallowance of Advance Written Off:

The assessee challenged the disallowance of Rs. 2,09,151 written off as advances, arguing they were business-related and unrecoverable. The AO noted the lack of evidence showing the advances became bad or efforts to recover them. The CIT(A) upheld the disallowance, stating the assessee failed to substantiate the business nexus. The Tribunal found the authorities did not inquire with the parties involved and referenced the Apex Court's decision in TRF Ltd., which allows bad debt write-offs if recorded in the accounts. The Tribunal allowed the assessee's ground, reversing the disallowance.

4. Deletion of Addition on Provision for Warranty:

The Revenue appealed against the deletion of Rs. 2,11,10,925 added for warranty provisions. The CIT(A) found the provision was based on past experience and methodically calculated, thus not contingent but an accrued liability, referencing the Supreme Court's decision in Rotork Control. The Tribunal upheld the CIT(A)'s decision, noting compliance with the Gujarat High Court's ruling in Inductotherm (India) Pvt. Ltd., and dismissed the Revenue's ground.

5. Deletion of Addition on Penalty for Breach of Contract:

The Revenue contested the deletion of Rs. 65,52,000 disallowed as penalty for breach of contract, arguing the payment was not business-related. The CIT(A) noted the payment was made by the parent company and recovered from the assessee, and was not for an offense prohibited by law. The penalty was part of a contract involving affiliates, and the TPO had accepted it as at arm's length. The Tribunal upheld the CIT(A)'s findings, confirming the payment was business-related and at arm's length, and dismissed the Revenue's ground.

Conclusion:

The Tribunal partly allowed the assessee's appeal by reversing the disallowance of advance written off, while dismissing the grounds related to incentives and additional remuneration. The Revenue's appeal was dismissed entirely, upholding the deletions of additions for warranty provisions and penalty for breach of contract.