2020 (3) TMI 870 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - CIT(A) has already upheld the disallowance to the extent of exempt income earned by the assessee in the present year i.e., ₹ 14,000/- and as per the Tribunal order cited by learned AR of the assessee having rendered in the case of Sivan Securities 2019 (6) TMI 1109 - ITAT BANGALORE and also the judgment of Hon ble Delhi High Court rendered in the case of CIT v. Joint Investment Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT the disallowance under section 14A cannot the exceed the exempt income earned in the relevant year and hence, respectfully following the judicial precedence, we decline to interfere in the order of CIT(A) on this issue and accordingly revised grounds 2 to 5 raised by the Revenue are rejected. Disallowance made by the AO in respect of large increase in Tailoring and maintenance expenses - HELD THAT - Assessee has explained about increase under the business promotion head because several new special schemes of customers / dealers were conducted and this increase in expenditure is ₹ 529.32 lakhs. The AO has made part disallowance to the extent of dip in gross-profits rate by 3.9%. This finding is also given by CIT(A) that the AO has not disputed the fact that the payments were actually made / incurred in the normal course of business of the assessee. Hence, on this issue, we find no infirmity in the order of CIT(A) and therefore, we decline to interfere. Disallowance made by the AO out of provision of warranty expenditure - Revenue submitted that the disallowance made by the AO has been deleted by CIT(A) without any valid basis and therefore, on this issue also, the order of CIT(A) should be reversed - HELD THAT - As decided in M/S. ROTORK CONTROLS INDIA (P) LTD. 2009 (5) TMI 16 - SUPREME COURT a liability is a present obligation arising from past events. Similarly, in para 13 of the same judgment, it is observed by Hon ble Apex Court that a past event that leads to a present obligation is called an obligating event and the obligating event is an event that creates an obligation which results in an outflow of resources. In the same para 13, it is observed that for a liability to quality for recognition, there must be not only present obligation but also the probability of outflow of resources to settle that obligation. In the facts of the present case, it is seen that from the past history, there is no likelihood that the obligation of warranty will result into an outflow of resources. Hence, respectfully following this judgment of Hon ble Apex Court and in view of the facts of the present case, we reverse the order of CIT(A) on this issue and restore that of the AO. - Decided in favour of revenue

Summary

Issues:
1. Disallowance under section 14A r.w.r. 8D(ii)
2. Deletion of disallowance in respect of large increase in Tailoring and maintenance expenses
3. Deletion of disallowance out of provision of warranty expenditure

Issue 1: Disallowance under section 14A r.w.r. 8D(ii)
The appeal was filed by the Revenue against the order of the CIT(A) for the Assessment Year 2014-15. The Revenue contested the part deletion of disallowance made by the AO under section 14A r.w.r. 8D(ii). The Revenue argued that the disallowance should not have been deleted as there was no nexus established between the investment activity and interest-bearing borrowed funds. The AR of the assessee supported the order of CIT(A) and cited relevant case laws to limit the disallowance to the extent of exempt income earned by the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the disallowance under section 14A cannot exceed the exempt income earned in the relevant year, in line with judicial precedents.

Issue 2: Deletion of disallowance in respect of large increase in Tailoring and maintenance expenses
The Revenue's appeal also challenged the deletion of disallowance made by the AO regarding a significant increase in Tailoring and maintenance expenses. The Revenue argued that the deletion by the CIT(A) lacked a valid basis. The AR of the assessee supported the CIT(A)'s decision. The Tribunal examined the details provided by the CIT(A) and found that the increase in business promotion expenses was justified due to new special schemes conducted by the assessee, leading to a substantial increase in expenditure. The Tribunal concluded that there was no infirmity in the CIT(A)'s order and declined to interfere, rejecting the Revenue's grounds.

Issue 3: Deletion of disallowance out of provision of warranty expenditure
The Revenue contested the deletion of disallowance made by the AO concerning the provision of warranty expenditure. The Revenue argued that the deletion lacked a valid basis. The AR of the assessee presented a comparative chart showing the trend of warranty provisions made by the assessee in previous years. The Tribunal analyzed the chart and found that the provision made each year was reversed in the succeeding year without any actual expenditure against it. Citing a judgment of the Hon'ble Apex Court, the Tribunal held that there was no likelihood of the warranty obligation resulting in an outflow of resources based on past history. Therefore, the Tribunal reversed the CIT(A)'s order and restored that of the AO, allowing the Revenue's appeal on these grounds.

In conclusion, the Tribunal partly allowed the Revenue's appeal, upholding the disallowance under section 14A to the extent of exempt income earned by the assessee but reversing the deletion of disallowance in respect of provision of warranty expenditure.