2016 (1) TMI 1172 - HC - Income Tax

Provision in respect of a percentage of sale to account for various expenses transferred to a separate account - allowable expenditure - Held that - ITAT being a last fact finding authority has held that all these ingredients which goes to the recognition of provision are satisfied and as such there is no need to remit the matter back to the Assessing Officer. In such circumstances we do not see any ground made out by the revenue to remand the matter back to the Assessing Officer. The claim of expenditure being consistent with the method of accounting followed and the provision has been made on concluded transactions the order of the Assessing Officer is held to be incorrect. We do not see any reason to differ from this view which is in accordance with Section 145 of the Act. Disallowance of loss - assessee was making various inter unit transfers it was necessary to examine the entries which were not recorded properly in the first instance - Held that - We do not see any flaw in the order passed by the ITAT for the reason that the Assessing Officer himself while deciding the issue in question has accepted the auditor s certificate for the assessment year 2003-04 and has categorically held that such a certificate of the Chartered Accountant would have been suffice to accept the claim of the assessee towards the adjustment entries for prior period expenses. In such view of the matter the assessee has cured the defects pointed out by the Assessing Officer by filing the necessary auditor s report before the CIT which was properly considered and held that it was a genuine error in the book entry and the same is confirmed by the ITAT which in our opinion is justifiable. We are not inclined to interfere with the factual findings given by the authorities regarding the genuiness of the adjustments in the book entry. It is settled law that the no income can arise by mere book entries (vide Kedarnath Jute Manufacturing Co. Ltd. vs CIT (Central) Calcutta - 1971 (8) TMI 10 - SUPREME Court ).

Summary

Issues Involved:
1. Allowability of provision for sale expenditure.
2. Allowability of provision for warranty.
3. Exclusion of exchange gain fluctuation in computing deduction u/s.10A.
4. Exclusion of sale proceeds not realized within the RBI-prescribed time.
5. Allocation of royalty payment.
6. Allocation of trading expenses.
7. Exclusion from export turnover of foreign currency expenditure.
8. Deduction u/s.10A for STPs at Golden Enclave.
9. Adjustment of prior period expenses.

Issue-wise Detailed Analysis:

Re. Question No.1: Allowability of provision for sale expenditure
The revenue argued that the provision for sale expenditure is a contingent liability and not allowable unless it meets the criteria set by the Supreme Court in Rotork Controls India (P) Ltd. vs Commissioner of Income Tax. The criteria include a present obligation from past events, probable outflow of resources, and a reliable estimate of the obligation. The court noted that the ITAT had already considered these criteria and found that the provision was consistent with accounting standards and based on past experience. Therefore, the court upheld the ITAT's decision, finding no reason to remand the matter back to the Assessing Officer (AO).

Re. Question No.2: Allowability of provision for warranty
Similar to Question No.1, the court noted that this issue was covered by the Supreme Court's judgment in Rotork Controls and previous decisions in the assessee's own case. The court found no need to remand the matter back to the AO, as the provision for warranty had been appropriately accounted for.

Re. Question No.3: Exclusion of exchange gain fluctuation in computing deduction u/s.10A
Both parties agreed that this issue was covered against the revenue by a previous judgment of the court. Hence, the court answered this question in favor of the assessee.

Re. Question No.4: Exclusion of sale proceeds not realized within the RBI-prescribed time
The court noted that this issue was directly covered by a previous judgment and answered it in favor of the assessee.

Re. Question No.5: Allocation of royalty payment
The revenue argued that the ITAT had not conducted a detailed inquiry into the allocation of royalty payments. The court agreed to remand this issue back to the AO for fresh consideration, requiring an examination of pre-existing agreements with M/s Wipro Limited.

Re. Question No.6: Allocation of trading expenses
The court found that the AO had not disturbed the method of accounting but had removed the value of franchise sales from total sales due to the differing nature of franchise and direct sales. The court held that the CIT and ITAT had misunderstood the AO's methodology and remanded the issue back to the AO for reassessment, ensuring that the method aligns with accepted accounting principles.

Re. Question No.7: Exclusion from export turnover of foreign currency expenditure
Both parties agreed that this issue was covered by a previous judgment in Tata Elexsi Ltd.'s case. The court answered this question in favor of the assessee.

Re. Question No.8: Deduction u/s.10A for STPs at Golden Enclave
The court noted that this issue was covered against the revenue by a previous judgment and answered it in favor of the assessee.

Re. Question No.9: Adjustment of prior period expenses
The AO had disallowed the loss claimed due to unsubstantiated entries. However, the CIT accepted the auditor's certificate provided by the assessee, which was upheld by the ITAT. The court found no flaw in the ITAT's decision, noting that the AO had accepted similar certificates in other assessment years. The court emphasized that no income can arise from mere book entries and upheld the ITAT's decision in favor of the assessee.

Conclusion:
The appeal was partly allowed, with specific issues remanded back to the AO for reassessment, while other issues were decided in favor of the assessee based on previous judgments and established accounting principles.