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PRINCIPAL COMMISSIONER OF INCOME TAX Versus DR GARMENTS (INDIA) PVT LTD

2016 (9) TMI 863 - GUJARAT HIGH COURT

Addition on account of disallowance of quality claim expenses - failure to furnish evidence - ITAT allowed the claim - Held that:- Commissioner as well as the Tribunal concurrently held that there was sufficient evidence on record to establish that the assessee had, in fact, suffered a loss of ₹ 2.90 crores on account of quality claim. The assessee pointed out that some of the exports suffered from total rejection or objection of inferior quality. Instead of re-importing such goods and sel .....

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d observed. In fact, the assessee had charged such sum to the profit and loss account thereby deducting the expenditure for all practical purpose. - In the present case the liability was not only certain, it was also discharged presently and not differed for a later date. The assessee had received debit notes from the buyers and accepting such liability, had debited a sum of ₹ 2.90 crores in the P & L account. - Decided against revenue - TAX APPEAL NO. 647 of 2016 With TAX APPEAL NO. 6 .....

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der of the CIT(A) though the assessee failed to furnish evidence regarding justification of such claim and thereby deleting the addition of ₹ 2,90,20,000/- made by the AO on account of disallowance of quality claim expenses? 3. The issue pertains to the assessee's claim of deduction of ₹ 2.90 crores towards quality claim expenses. The assessee was in the business of manufacturing ready-made garments and exporting them. For the assessment year 2009-10, the assessee had filed retur .....

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ted to the profit and loss account. In the course of export business, there are rejections and the buyer does not pay the consideration either in part or in full. 4. The Assessing Officer, however, was of the view that the quantification of such claim was not on the basis of any evidence on record. The same was made only on estimation basis. He was also of the opinion that a mere provision for such expenditure would not be allowable deduction. He, therefore, rejected the claim and added said sum .....

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the assessee had exported such readymade garments, some of which were found to be defective or of inferior quality. It was not feasible to re-import such garment and to sale them in India. The assessee, therefore, had to sale such defective garments through retail chain in UK by offering huge discounts. These buyers had claimed allowances by using debit notes on the assessee. Thus, the claim was based on specific material on record. The assessee had also maintained complete item wise and code wi .....

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It is not the claim of the AO that the readymade materials supplied by the appellant were not defective or of inferior quality. It is an admitted fact that the readymade materials supplied were found defective by the foreign buyers who in turn raised the debit notes on the appellant towards quality claim. The reasons for disallowance of claim as cited by the AO are that the appellant has not written off debts and has not reduced sales in the books and that the claim is towards provision for unce .....

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t to the buyers as evident from documentary evidences and correspondence placed in the paper book filed by the appellant. It is also seen that the claim amount was determined by an inventory Management System through technical and scientific process. Said claim has not been found bogus or non-genuine by A.O. Under the circumstances, I fail to understand how the said claim can be said to be a claim towards provision for bad debts. I also agree with the arguments of the Ld. AR of the appellant tha .....

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ality claim expenditure of ₹ 2,90,20,000/- has been debited and this accounting is proper. Other method could be to reduce sales of ₹ 20,28,66,289/- by quality claim expenditure of ₹ 2,90,20,000/- and take net sales figures at ₹ 17,38,46,289/-. Net result would be same. 2 alternative ways of accounts presented by AR also shows that it is only different way of accounting but net effect will be same and it would not affect net income any way. As far as balance sheet is conc .....

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e, addition made by the AO on the basis of directions issued by the Ld. JCIT is found devoid of merit. On the identical facts, I have held the similar claim of deduction for expenditure towards quality claim as having been made during the normal course of business of the appellant in its own case for AY 2008- 09. In view of this discussion and in view consistency, the disallowance of ₹ 2,90,20,000/- made by the AO is directed to be deleted. This ground of appeal is allowed. 7. The Revenue .....

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missible. The Tribunal referred to the decision of Supreme Court in case of Bharat Earth Movers Ltd. vs. CIT reported in (2000) 245 ITR 428 (SC). 8. From the material on record, it can be seen that the Commissioner as well as the Tribunal concurrently held that there was sufficient evidence on record to establish that the assessee had, in fact, suffered a loss of ₹ 2.90 crores on account of quality claim. The assessee pointed out that some of the exports suffered from total rejection or ob .....

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