2019 (12) TMI 619 - AT - Income Tax

Disallowance of Provision for Warranty - Disallowance of provision for stock obsolescence - HELD THAT - CIT(A) was constrained to confirm the disallowances for want of details only. Hence, in the interest of natural justice, we are of the view that the assessee should be provided with one more opportunity to furnish the relevant details. Accordingly, we set aside the order passed by Ld CIT(A) in respect of both the above said issues and restore them to the file of the AO for examining them afresh by considering the details furnished by the assessee and for deciding both the issues in the light of decision rendered by the Tribunal in the assessee s own case in AY 2008-09. The assessee is also directed to furnish the details in support of the claims made to the satisfaction of the assessing officer. Whether the recovery of administrative expenses would form part of operating income for the purpose of computing operating profit margin? - To examine the correctness of the findings of the TPO, we examined the Annual Report and it is noticed by us from Schedule 13 to the P L Account that the above amount has been shown as 'Administrative expenses recovered' which clearly indicates that the administrative expenses recovered are nothing but the reimbursement of the expenses incurred by the assessee for the above company and therefore, if such income is excluded from the operating revenue, corresponding expenses have to be excluded from the operating cost. Hence, we are in agreement with the submission of the assessee that the administrative expenses recovered to be considered as operating revenue, considering the fact that the TPO has not reduced corresponding expenses from the operating cost. The Assessing Officer is directed accordingly. The finding of the DRP is based on settled position of law and do not require any interference. Decided in favour of the assessee

Summary

Issues Involved:
1. Disallowance of Provision for Warranty
2. Disallowance of Provision for Stock Obsolescence
3. Recovery of Administrative Expenses as part of Operating Income

Issue 1: Disallowance of Provision for Warranty

The appeal concerned the disallowance of provision for warranty and stock obsolescence for the assessment year 2009-10. The assessee contended that the issues were previously decided in their favor for the AY 2008-09. The Tribunal noted that the provision for warranty was based on historical data and technical evaluation, meeting the criteria for a reliable estimate. Referring to past court judgments, the Tribunal allowed the provision for warranty, stating that it was based on past experience and actual data. The Tribunal set aside the Madras High Court's judgment and allowed the appeal in favor of the assessee. The AO's acceptance of the provision for warranty based on past sales further supported the decision.

Issue 2: Disallowance of Provision for Stock Obsolescence

Regarding the provision for stock obsolescence, the Tribunal emphasized the accounting principle of valuing inventory at cost or net realizable value, whichever is lower. The assessee's provision for stock obsolescence was questioned, as it was debited to the Profit & Loss account without reducing the value due to obsolescence. However, the Tribunal found no reason to interfere with the CIT(A)'s order, provided the opening stock of the subsequent year was correctly valued after considering the provision made for the current year. The Tribunal upheld the principle that the claim of the assessee was allowable, as per the decision of the coordinate bench.

Issue 3: Recovery of Administrative Expenses as Operating Income

The appeal by the revenue questioned whether the recovery of administrative expenses should be considered part of the operating income for computing the operating profit margin. The Tribunal referred to a previous decision for AY 2010-11, where the DRP directed that administrative expenses recovered should be considered as operating revenue. The Tribunal agreed with this decision and found no fault with the CIT(A)'s order on this issue. Consequently, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed.

In conclusion, the Tribunal allowed the assessee's appeal on the issues of provision for warranty and stock obsolescence, setting aside the CIT(A)'s order for further examination based on provided details. The recovery of administrative expenses was deemed part of operating income, in line with the previous decision for AY 2010-11.