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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 ..... rder 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 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 ₹ 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 CIT(Appeals) erred in upholding the disallowance made in respect of advance written off of ₹ 2,09,151 u/s.37 on the ground that appellant failed to substantiate nexus between advance given and business of assessee. It is submitted it be so held now. Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal. 2.1. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar; 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 disallowed and accordingly, the income be enhanced. This was an enhancement notice and the AR was specifically told about my proposal to enhance the income. The appellant has itself not disputed [actually it has asserted that the expenses are claimed on cash basis although accrued in earlier year(as discussed in earlier paragraph)] and even till 20/03/2012 had neither disputed these facts nor submitted the agreements with dealers for earlier years. Therefore, I hold the following on the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 disallowance. The ld.counsel for the assessee submitted that the advances were given to the suppliers of the assesseecompany in normal course of business. However, the same could not be recovered due to various reasons. Therefore, the amount is allowable expenditure. He submitted that both the authorities below have grossly erred in making the disallowance and confirming the same. 8. We have heard the rival submissions, perused the material ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 substantiate nexus between the advance given and business of the assessee. However, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant 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 believe is commercially expedient and any rational business person would do that. The fact that warranty provision is not a contingent liability and an accrued liability has been held by the Hon'ble SC vides its decision in case of Rotork Control. Apex court held the following in this regard: The warranty became an integral part of the sale pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 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 ₹ 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 reason to make payment to group concern but only reimbursement of penalty amount. 11.1. On the contrary, ld.counsel for the assessee submitted that the argument of the Revenue is fundamentally incorrect. He drew our attention towards contract between Daramic, Inc. and its Affiliates ( Daramic ) and Excide Corporation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservation 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, the same should be followed by the AO. Vide Transfer pricing proceedings TPO categorically sought the information with regard to this international transaction and reply to same effect was also filed before the TPO, that is to say the transaction was categorically dealt with by the TPO during the course of ..... 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