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2012 (10) TMI 1101 - AT - Income TaxDifference between the payment of net present value against the future liability of credited by the assessee under the capital reserve account in its books of account - capital receipt or revenue receipt - Payment of net present value of the future liability - Whether can be classified as remission or cessation of the liability so as to attract the provision of section 41(1)(a) of the Income Tax Act 1961 or not ? - Held that - No addition can be made. See Sulzer India Ltd case 2012 (9) TMI 1120 - ITAT MUMBAI Whether provision of warranty claim without its quantification and its absence of statistical data related to actual warranty expense is an allowable expenditure u/s.37(1)? - Held that - We find the finding given by the CIT(A) that assessee has sold the products manufactured by it with warranty has not been disputed by the revenue. The further finding of the learned CIT(A) that the assessee has in the past paid warranty claim to its customers and claimed the same as expenditure on actual basis also remains uncontroverted. The observation of the learned CIT(A) that because of the introduction of AS29 the assessee changed its method of recognising expenditure on warranty claim from actual basis to accrual basis and accordingly made provision of warranty claims on the basis of past experience/records also could not be controverted by the learned DR. Accordingly the order of the CIT(A) allowing the provision for warranty claim is upheld Interest on share application money disallowed by the AO u/s.37(1) - Held that - Interest on share application money is allowable on the principles of commercial expediency.
Issues Involved:
1. Classification of the difference between the payment of net present value against future liability as capital receipt or revenue receipt. 2. Applicability of Section 41(1)(a) of the Income Tax Act, 1961, for the remission or cessation of liability. 3. Classification of the difference in payment of net present value of future liability as business income. 4. Allowability of provision for warranty claims under Section 37(1) of the Income Tax Act, 1961. 5. Allowability of interest on share application money pending allotment under Section 37(1) of the Income Tax Act, 1961. Detailed Analysis: 1. Classification of the Difference Between the Payment of Net Present Value Against Future Liability: The primary issue was whether the difference between the net present value and the principal value of the sales tax deferral loan, credited under the capital reserve account, is a capital receipt or revenue receipt. The assessee argued that the waiver of the sales tax deferral loan was a capital receipt and transferred Rs. 138.78 lakhs to the capital reserve. The AO disagreed, treating it as a revenue receipt, arguing that the sales tax liability was a trading receipt and hence, the benefit received should be considered as income. The CIT(A), however, sided with the assessee, referencing the Special Bench of the Tribunal's decision in the case of Sulzer India Ltd., which classified such differences as capital receipts. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal. 2. Applicability of Section 41(1)(a) of the Income Tax Act, 1961: The AO contended that the remission of the sales tax deferral loan liability should be treated as income under Section 41(1)(a) of the Income Tax Act, 1961. The assessee countered that no allowance or deduction had been made in respect of the loan, and thus, Section 41(1) was not applicable. The CIT(A) agreed with the assessee, referencing the Tribunal's decision in Sulzer India Ltd., which held that the difference between the net present value and the future liability was not a remission or cessation of liability under Section 41(1)(a). The Tribunal confirmed this view, dismissing the revenue's appeal. 3. Classification of the Difference in Payment of Net Present Value of Future Liability as Business Income: The AO classified the difference between the net present value and the future liability as business income, arguing that the benefit received was a trading receipt. The assessee argued that the benefit was capital in nature and not taxable under Section 28(iv) of the Income Tax Act. The CIT(A) supported the assessee's stance, citing the Tribunal's decision in Sulzer India Ltd., which held that such benefits are capital receipts. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal. 4. Allowability of Provision for Warranty Claims: The AO disallowed the provision for warranty claims, treating it as a contingent liability. The assessee argued that the warranty claims were based on past experience and were an integral part of the sales, thus should be allowed as an expenditure. The CIT(A) accepted the assessee's argument, referencing various decisions, including the Supreme Court's decision in Rotork Controls India Pvt. Ltd., which allowed such provisions as business expenditure. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal. 5. Allowability of Interest on Share Application Money Pending Allotment: The AO disallowed the interest on share application money pending allotment, arguing it was not an allowable expenditure. The assessee argued that the interest was paid for commercial expediency and should be allowed under Section 37(1) of the Income Tax Act. The CIT(A) agreed with the assessee, referencing the Tribunal's decision in Western India Forging Ltd., which allowed such interest as a business expenditure. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal. Conclusion: The Tribunal dismissed both the appeals filed by the revenue and upheld the CIT(A)'s decisions on all issues. The COs filed by the assessee were also dismissed as they were in support of the CIT(A)'s orders. The judgments consistently referenced previous decisions and legal principles, ensuring thorough consideration of the issues involved.
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