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TMI Blog2015 (9) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the learned Commissioner of Income Tax (Appeals) is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified. It is submitted that it be so done now. 2. The learned CIT(Appeals) erred in not allowing the incentives paid to dealers of Rs. 57,66,297 considering the same to be prior period expenses. It is submitted it be so held now. 2.1. Learned CIT(Appeals) has erred in not appreciating that in case of change in the method of accounting there is bound to be some distortion during the year when the change is adopted. It is submitted it be so held now. 3. Learned CIT(Appeals) erred in upholding the disallowance made u/s.37 in respect to payment of additional remuneration to Managing Director of Rs. 4,95,192 on the ground that the expenditure has not accrued during the year under consideration. It is submitted it be so held now. 3.1 Learned CIT(A) erred in appreciating that the appellant had applied for the approval of the Central Government during the concerned year itself and the approval was granted in the subsequent year which would related back to the date of application. It is submitted it be so held now. 4. Learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the ld. CIT(A). He placed reliance of the assessment order. 4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld. CIT(A) has given finding on fact by observing as under:- "6.3 I have considered the facts placed before me in this regard, Interestingly, the appellant on one hand claims that it has changed the method of accounting for these expenses from cash to mercantile during the year; but still has admittedly 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. The agreements with the distributors show that the distributors are entitled to 1% of the sales as incentive on contractual basis. Therefore, I agree that as the payments are not gratuitous but contractual and therefore accrue with the sales. Similarly, the payments of last year's sales would have accrued in that year only. The appellant was asked vide order sheet entry dated 24/2/2012 that why the prior period expenses which accrued in earlier year should not be disallowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld.counsel for the assessee submitted that the amount was subsequently rectified by the Ministry of Company Affairs. 5.1. On the contrary, ld. Sr. DR submitted that approval was admittedly received subsequent to the financial year relevant to the assessment year under appeal. Therefore, the authorities below were justified in making the disallowance and confirming the same. 6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The contention before the AO was 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. Thus, ground Nos.3 & 3.1 are dismissed. 7. Ground No.4 is against upholding the disallowance made in respect of advance written off of R.2,09,151/- u/s.37 of the Act. The ld.counsel for the assessee submitted that the ld. CTI(A) was not justified in confirming the disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010) 323 ITR 397(SC). In the said case, the Hon'ble Apex Court has held as under:- "4. This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the AO has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the AO has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the AO. Hence, the matter is remitted to the AO for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off." 8.3. We find that the ld. CIT(A) has rejected the plea of the assessee by holding that the judgement of the Hon'ble Apex Court is not applicable as the assessee failed to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant carefully. It is important to understand that warranty expenses constitute integral part of business when someone is engaged in the business of complex technological instruments. Appellant being engaged in the same is no exception. It needs to provide for such expenses in accordance with generally accepted accounting principles. Obviously appellant would employ its best practices to avoid or reduce production of defective articles but that does not completely eliminate this possibility. In view of such facts, it is required to provide certain amount in books of accounts for the purpose of meeting such liability. 5.4 Coming to the observation of AO wherein he held the same to be of contingent nature, I believe that it is important here to understand the meaning of contingent. Contingent is something which is dependent on some other thing. Here this liability will arise only if certain batteries come out to be defective. Over the experience of the appellant, it has observed that every year certain claims are received by it for defective batteries and in view of such experience, it has started providing certain amount in its books for meeting such liability which I believ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT-II Vs. Inductotherm (India) Pvt. Ltd. in Tax Appeal No. 2087 of 2010 followed the decision of apex court as mentioned above and dismissed the appeal of the revenue. 5.8 In view of above discussion, AO is directed to allow the claim of the assessee and delete the addition made in this regard. This ground of appellant is allowed." 10.1. The ld.counsel for the assessee relied upon the judgement of Hon'ble Jurisdictional High Court rendered in the case of CIT-II vs. Inductotherm (India) Pvt. Ltd. in Tax Appeal No.2087 of 2010. The ld. Sr. DR could not distinguish the facts. In view of the judgement of the Hon'ble High Court of Gujarat rendered in the case of CIT vs. Inductotherm (India) Pvt. Ltd.[supra], we do not see any reason to interfere with the order of the ld. CIT(A), same is hereby upheld. Thus, ground No.1 of Revenue's appeal is rejected. 11. Ground No.2 is against deletion of addition of Rs. 65,52,000/- made on account of disallowance of penalty expenditure for breach of contract. The ld. Sr. DR argued that the ld. CIT(A) was not justified in deleting the addition. He submitted that the assessee-company was not the party to the contract, therefore, there was no rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disallowances signals that AO is talking about the residuary section 37. In relation to the same I believe here that AO has adopted contradictory stand while passing assessment order in relation to amount disclosed in Tax Audit Report. While disallowing the provision for warranty expenses, AO gave a strong observation that the same was of contingent nature depending upon the fact disclosed in the Tax Audit Report but while dealing with payment of penalty, he has not considered the amount shown in Tax Audit Report in this regard. This payment has not been paid for any offence which is prohibited by law and the same has been paid in normal business course incidental to carrying on the business as damages for breach of commercial contract. Hence I find that the conditions of the residuary section stands fulfilled. 7.4 Importantly here this payment has been subjected to TP Regulations TPO has, after detailed scrutiny accepted the same to be at arm's length price and not proposed any adjustment to the same. Here the case of the appellant was referred to TPO for computation of arm's length price and when the order has been passed by the TPO without proposing any adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X
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