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TMI Blog2024 (2) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... orities below and direct the AO to delete the addition made by him. - Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D - CIT(A) deleted the addition - HELD THAT:- looking into the assessee s facts, wherein it is not disputed that no dividend income was earned by the assessee and the decision of Hon ble ITAT, Rajkot Bench in assessee s own case for A.Y. 2011-12 [ 2022 (7) TMI 548 - ITAT RAJKOT] we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. Decided against revenue. - SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER For the Appellant : Shri Mehul Ranpura, A.R. For the Respondent : Shri Ashish Kumar Pandey, Sr. DR ORDER PER SIDDHARTHA NAUTIYAL, JM: This appeal has been filed by the Revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short Ld. CIT(A) ), National Faceless Appeal Centre (in short NFAC ), Delhi in DIN Order No. ITBA/NFAC/S/250/2022-23/1046206173(1), vide order dated 07.10.2022 passed for Assessment Year 2014-15. 2. The Revenue has taken the following grounds of appeals:- 1. The Ld. CIT(A) has erred in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd electrical devices. Considering the complexity involved in manufacturing, the production is very limited though the value of the machines sold is on the higher side. During the year under consideration, the assessee had manufactured only 78 machines, and the value of each machine was above Rs. 75 lakhs. The assessee submitted that as per normal practice of trade and pre-conditions of sale with the customers, the assessee is liable for providing guarantee for a period of 12 months from the date of sales for any defects / damage, maintenance etc. found in the machine at the time of delivery and also during the working period. In view of the above, in order to meet such after sales services and expenses such as repairs, maintenance and replacement etc., the assessee was required to make a fair estimate of such expenses and consequently, required to make a provision for performance guarantee expenses, which has a direct nexus with the execution of purchase order and sales. The assessee, therefore, considering the business expediency, has consistently made provision for such performance guarantee expenses @ 10% of sales, right from the inception of it s business, which is evident fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is allowed. 14.7 In the result the appeal filed by the assessee is allowed... 5.3.1. As the said issue is covered in the favour of the appellant company by the decision of the Ld. CIT(A)-1, Rajkot in appeal No. CIT(A)-1/0089715-16 in appellant's own case on the same issue for A.Y. 2012-13; and Hon'ble ITAT, Rajkot Bench, Rajkot in the appellant's own case for A.Y.2011-12, vide order dated 08.07.2022; therefore, maintaining judicial discipline, the said performance guarantee claim of Rs. 2,43,58,1817-for the instant year is allowed. Appeal on ground No. 3 is allowed. 5. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A), deleting the additions made by Assessing Officer on this issue. 6. Before us, the Ld. D.R. placed reliance on the observations made by Assessing Officer in the assessment order. 7. In response, the Counsel for the assessee submitted that the issue is directly covered in favour of the assessee by decision of Rajkot Bench for A.Y. 2011-12 in assessee s own case vide order dated 08.07.2022 and also by decision of Ld. CIT(A) for A.Y. 2012-13, where similar additions have been deleted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfils accrual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case. 14.3 From the above judgment, there remains no ambiguity to the fact that the assessee has to provide the provision for the guarantee and warranty as the case may be in the books of accounts corresponding to the sales made by it. 14.4 The next question arises what should be the basis of calculating the provision to be provided against the sales made with warranty /guarantee. The amount of provision must be adjudged in the light of accepted commercial practice and trading principles. In the regard, we have referred the copies of the purchase agreement placed in the paper book and note that the assessee stands as the guarantor/warrantor at the rate of 10 percent for a period of 365 days. Based on this clause, the assessee accordingly has adopted the rate of the provision at the rate of 10% which was also accepted by the revenue in the earlier years in the assessment framed under section 143(3) of the Act. However, we note that the revenue has not allowed the provision made by the assessee in the year under consideration on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y without giving effect of the opening balance of the provision for the guarantee/warranty. In view of the above and after considering the facts in totality, we do not find any infirmity in the claim made by the assessee in its books of accounts for the provisions against the sales made in the year under consideration. Thus we reverse the order of the authorities below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 14.7 In the result the appeal filed by the assessee is allowed. 9. In view of the decision of ITAT Rajkot Bench in assessee s own case for A.Y. 2011-12, and looking into the facts of the assessee s case, we find no infirmity in the order of the Ld. CIT(A) so as to call for any interference on this issue. 10. In the result, Ground No.1 of the Department s appeal is dismissed. Ground No.2:- Ld. CIT(A) erred in deleting addition made on account of disallowance under Section 14A r.w.r. 8D of Rs. 6,98,717/-. 11. The brief facts in relation to this ground of appeal are that during the course of assessment, the Ld. AO disallowed interest expenses amounting to Rs. 6,98,717/- by invoking provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2022-2023 and subsequent assessment years. It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not form part of the total income. This amendment will take effect from 1 st April, 2022. In Amendment of section 14A. In section 14A of the Income-tax Act-(a) in subsection (1), for the words For the purposes of, the words Notwithstanding anything to the contrary contained in this Act, for the purposes of shall be substituted; (b) after the proviso, the following Explanation shall be inserted, namely: Explanation.-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming part of the total income.] However, the Ld. Court referring to the Memorandum introducing the changes as well as the decision of the Supreme Court in the case of Sodexo Forex International [(2005) 12 SCC 717] where it was held that for the removal of doubts cannot be held to be retrospective even where such language is used, held that the explanation cannot be applied retrospectively and it is only prospective in application. The Hon'ble Delhi High court in the above case (Supra) held as under: 8. Consequently, this Court is of the view that the amendment of Section 14A, which is for removal of doubts cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. 9. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer by observing as under: I have perused the assessment order and the written submission of the ld.AR of the appellant. It is seen that the appellant had not earned any exempt income. The Assessing Officer holds that, the appellant has made investment which is likely to yield exempt income. As per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. Here, in order to make disallowance, there should be existence of exempt income and expenditure attributable to such earning. Therefore, the very purpose of this section is to discourage diversion of expenditure to earn exempt income. Since there is no exempt income, no disallowance can be made only on the apprehension that there are likely chances of earning exempt income. Therefore, the disallowance made is directed to be deleted. 42. Being aggrieved by the order of the Ld. CIT(A) the Revenue is in appeal before us. 43. Both the Ld. DR and Ld. AR relied upon the order of the authorities below as favourable to them. 44. We have heard the rival contentions of both the parties and perused the material ..... X X X X Extracts X X X X X X X X Extracts X X X X
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