The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) remands the issue back to the Commissioner of Income Tax (Appeals) [CIT(A)] which failed to address the key issue of on adjustment of the actual expenditure against the provisions for the earlier years or the current year and issued an order without proper examination.
The income tax assessing officer reopened the assessee’s assessment for the assessment year 2011-12 on the ground that the assessee has incurred Rs. 5,49,96,134 for the repair and rectification of transformers.
The amount adjusted against previous provisions was Rs. 53,08,754 leaving Rs. 3,96,87,384 plus the current year’s provision of Rs. 3,97,33,809 debited to the profit and loss account. The AO disallowed the excess claim of expenditure of Rs. 3,96,87,384 towards rectification expenses and added it to the total income.
Aggrieved by this reassessment order, the assessee appealed before the CIT(A). The assessee explained that the rectification expenses are based on scientific and past experience. The assessee relied on the Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT (2009) which supported the provisions for warranty expenses are allowable as a deduction when it is based on historical and empirical data. The CIT(A) allowed the appeal and granted partial relief. Aggrieved by this order, the revenue appealed before the ITAT, and the assessee filed a cross objection to support the order issued by the CIT(A).
The appellant-department’s counsel represented by Mookambikeyan submitted that the approach of the CIT(A) is wrong and restricted the set off of the actual expenditure to the extent of the provisions made for the year under consideration.
The counsel further argued that the income tax appellate commissioner held the provision was made based on historical and scientific and allowed to be debited in a profit and loss account without examining properly. The CIT(A) has failed to address the key issue i.e. “Whether the expenditure is required to be restricted to the provision for that year or it was required to be adjusted against the available provisions.”
The CIT(A) submitted that the provision was made based on the scientific basis and it was made considering the warranty period of 18 to 60 months. If the provisions spread over various years are exhausted in one year, no provision would be available in subsequent years. The CIT(A) submitted that the issue is covered in the assesses favor by the Tribunal’s earlier decision.
The bench of Laliet Kumar (Judicial Member) and Manjunatha (Accountant Member) observed both sides’ arguments. The Tribunal noted that the CIT(A) failed to address the issue of whether the actual expenditure can be adjusted against the available provision or if it is to be restricted to the provision made for that year. The tribunal pointed out that the decision of the tribunal was on different facts and was not applicable in this case.
The tribunal observed that the CIT(A) passed the order without examining the historical/empirical data of expenditure incurred by the assessee for the rectification/repair of transformers and had approved the provisions made during the year. The tribunal directed the CIT(A) to reexamine this issue. The tribunal allowed the appeal filed by the revenue and the assessee for statistical purposes
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