TMI Blog2012 (10) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... he principles of best judgment. The CIT(A)on the other hand, concluded that the action of the AO to make estimated trading addition without pointing out any defects in the books of accounts, is totally unjustifiable and therefore, deleted the addition - The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression - in favour of assessee. Disallowance of capitalization of advertisement expenses - AO allowed only 1/5th claim treating the expenditure as deferred revenue - Held that:- The benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the assessees have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account. The expenditure which is treated as deferred revenue in the books, almost in all cases comprises of items, the benefits derived wherefrom are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember, 2011 of the ld. CIT(A)-VI, New Delhi, raise the following grounds: I.T.A. No.83/Del./2011[Revenue] 1. In the facts and circumstances of the case, the ld. CIT(A) has erred in law and on facts in directing to delete addition of ₹ 23,42,178/- on account of provisions of warranty expenses ignoring that: a) the liability is only contingent and uncertain which may or may not be discharged. b) The method for calculation of provisions for warranty is not based on actuarial valuation or any scientific method which are acceptable methods as per the decision of various courts. c) The assessee could not prove the actual incurrence of liability under the warranty clause on the basis of fixed percentage of turnover. 2. In the facts and circumstances of the case, the ld. CIT(A) has erred in law and on facts in directing to delete addition of ₹ 15,85,398/- on account of low gross profit rate ignoring that the assessee failed to substantiate its claim of abnormal increase in selling and administrative expenses by non submission of documentary evidence. 3. In the facts and circumstances of the case, the learned CIT(A) has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Group India (P) Ltd. Vs. ACIT (2008) 20 SOT 305 (Mum); CIT Vs. Sony India (P) Ltd. (2007) 160 Taxman 397 (Del); CIT Vs. M/s Vinitec Corporation Pvt. Ltd. (2005) 196 CTR 369 (Delhi); Bharat Earth Movers Vs. CIT, 112 Taxman 61 (SC); and Commissioner of Inland Revenue Vs. Mitsubishi Motors New Zealand Ltd. (1995) 222 ITR 697( Privy Council). The assessee pointed out that in the assessment year 2003-04, the ITAT vide order dated 7th April, 2009 quashed the proceedings u/s 263 of the Act. Since the assessee was following mercantile system of accounting, the assessee pleaded that their claim may be allowed. However, the AO did not accept the submissions while relying upon findings of the AO in the assessment order for the AY 2005-06 ,wherein decisions in Indian Molasses Co. Pvt. Ltd. vs. CIT,37 ITR 66(SC);Standard Mills Co. Ltd. vs. CIT,229 ITR 366(Bom.); CIT vs. Motor Industries Co. Ltd.,229 ITR 137(Kar) and CIT vs. Rotork Control India Ltd.,293 ITR 311(Mad.) were referred to and ,concluded that provision for warranty, not being ascertained ,is not allowable. 3. On appeal, the ld. CIT(A) allowed the claim while relying upon the decisions of the CIT(A) and the ITAT in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole; iv) In the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction u/s 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation; v) On facts, the assessee has been manufacturing and selling Valve Actuators in large numbers since 1983-84 onwards. Statistical data indicates that every year some Actuators are found to be defective. The data over the years also indica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has gone down as compared to the immediately preceding year from 39.73% to 37.47%. Before the Assessing Officer the appellant had explained that though turnover has increased by 40% but the expenses have increased at a higher rate. As per the information reproduced in the assessment order, total cost of goods sold has increased by 46%; other operating expenses have gone up by 48% and tax expenses are increased by 306.62%. However, the Assessing Officer rejected the assessee s submissions on the ground that no evidence is filed to show the reason for increase in expenses. It is not the case of the Assessing Officer that the justification given by the appellant is wrong nor any defect or discrepancy is pointed out by examining the details and books of accounts. In such circumstances, the estimated addition by applying the GP rate of 39.50% is not justified. The same is, therefore, directed to be deleted. 8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the findings in the impugned order. 9. We have heard both the parties and gone thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. In Pandit Bros. v. CIT(1954) 26 ITR 159 (P H) Shankar Rice Co. vs. ITO,72 ITD 139(ASR)(SB), it was concluded that rejection of book results without pointing out any defects in books of accounts, could not be sustained. The Hon ble Gujarat High Court in the case of CIT Vs. Amitbhai Gunwantbhai, 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the AO to make any addition on estimate basis or on pure guess work. Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Court in Madras Industrial Investment Corporation Limited Vs. CIT ,225 ITR 802(SC),resulting in disallowance ₹ 15,86,400/-. 11. On appeal, the ld. CIT(A) while relying upon decision dated 29th September, 2009 the ITAT in the assessee s own case in the AY 2003-04 in I.T.A. no. 2974/Del./2009 allowed the claim of the assessee in the following terms:- 5.3 I have carefully considered the submissions of learned AR and have gone through the assessment order. I find that the issue is covered by the decision of Hon ble ITAT in appellant s own case for assessment year 2003-04 wherein the revenue s appeal on this issue has been dismissed. Respectfully, following the decision of Hon ble Tribunal, the Assessing Officer is directed to delete the addition. 12 The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the findings in the impugned order. 13. We have heard both the parties and gone through the facts of the case. Indisputably, the expenditure of ₹ 19,83,000/- was incurred on advertisement of the products through electroni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the classification between the capital and revenue and the same does not recognise of any concept of deferred revenue expenditure. In the instant case, even in the AY 2003-04, a similar claim of expenses has been allowed. In a number of judgments viz. Amar Raja Batteries Ltd. v. Asstt. CIT [2004] 91 ITD 280 (Hyd.), Jt. CIT v. Modi Olivetti Ltd. [2005] 4 SOT 859 (Delhi), Asstt. CIT v. Medicamen Biotech Ltd. [2005] 1 SOT 347 (Delhi), Hero Honda Motors Ltd. v. Jt. CIT [2005] 3 SOT 572 (Delhi); Charak Pharmaceuticals v. Jt. CIT [2005] 4 SOT 393 (Mum.), it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vs. ACIT, wherein it has been held that the amount treated as deferred revenue by the assessee is to be taxed in the year when such services are rendered or recognized as income of the assessee. It was observed by Hon ble ITAT as under: There is nothing like device to defer payment of taxes due but as per the recognized method of accounting of matching revenue with cost, the income accrues only in the subsequent year when such services are provided. This is in form of a provision for warranty claims which is also recognized by Hon ble Delhi High Court in the case of CIT Vs. Vintec Corporation P. Ltd., 278 ITR 337 wherein it was held that provision for warranties embedded in the sale price is an ascertained liability and to that extent, revenue need not be recognized. We accordingly hold that the amount treated as deferred revenue by the assessee is not to be brought to tax in the year under consideration but to be taxed in the year when such services are rendered or recognized as income by the assessee. Respectfully following the decision of Hon ble ITAT on identical facts, the Assessing Officer is directed to delete the addition. 16. The Revenue is now in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 173 311 (Chennai) and Shri Rama Multi tech Ltd. Vs. ACIT (2004) 92 TTJ 567 (Ahm),the assessee pleaded that their claim was allowable as revenue. However, the AO did not accept the submissions of the assessee on the ground that expenditure incurred on stamp duty for taking store on lease was capital in nature. Inter alia, the AO relied upon decision in CIT Vs. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC). 19. On appeal, the ld. CIT(A) upheld the disallowance, holding as under:- 4.3 I have carefully considered the submissions of learned AR and have gone through the assessment order. I find that the similar issue stands decided by Hon ble Mumbai ITAT in the case of Universal Capsules (P) Ltd. Vs. DCIT 76 ITD 403 wherein in view of the decision of Hon ble Supreme Court in Gobind Sugar Mills Ltd. Vs. CIT 232 ITR 319, it was held that the expenditure on stamp duty and registration charges incurred to secure lease on factory premises were not allowable as revenue expenditure. I further find that in the case of Gobind Sugar Mills Ltd., supra, it has been held by the Hon ble Supreme Court that the expenditure incurred by the assessee for the acquisition of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained something more. It had obtained a right of property under the Transfer of Property Act and such an interest was a capital asset. Hon ble Apex Court upheld the findings of the High Court, holding that the assessee incurred the expenditure for the purpose of obtaining a capital asset and therefore ,was capital in nature. The ld. AR ,without distinguishing the said decision simply relied upon the decision of Hon ble HP High Court in Gopal Associates (supra).As is apparent from a mere glance at the said decision in Gopal Associates (supra), the observations and findings of the Hon ble Apex Court in the decision relied upon by the ld. CIT (A) ,were not brought to the notice of Hon ble HP High Court. In fact, Hon ble Calcutta High Court in Mather And Platt (India) Limited. Vs. CIT,168 ITR 533(Cal.) in the context of expenditure incurred in obtaining lease of premises held that the assessee incurred the said expenditure with a view to bringing into existence an asset or an advantage for the enduring benefit of its business. Following the view taken in Gobind Sugar Mills Ltd. [1979] 117 ITR 747(Cal.), Hon ble High Court held that the expenditure incidental to the acquisition of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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