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Facts
The assessee, engaged in selling cosmetics, claimed a provision for sales returns based on past trends. The Assessing Officer (AO) added this provision to the total income under Section 154, treating it as a debatable issue that could not be rectified. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the provision for sales return is a debatable issue and cannot be adjudicated under Section 154 of the Act. The assessee's method of accounting, providing for potential losses based on historical data, is in consonance with well-settled accounting principles.
Key Issues
Whether the provision for sales return, based on historical trends, is a debatable issue not amenable to rectification under Section 154, and if the assessee's accounting method for such provisions is valid.
Sections Cited
143(3), 154, 145
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Income Tax Appellate Tribunal, DELHI ‘G’ BENCH,
Before: MS. MADHUMITA ROY, & SHRI NAVEEN CHANDRA
This appeal by the assessee is preferred against the order of ld.
CIT(A)-3, New Delhi dated 04.03.2020 for A.Y 2015-16.
Page 1 of 9 appeal is barred by 1751 days. The assessee explained vide its letter dated 26.03.2025 that the CIT(A) passed a consolidated order dated 4.03.2020 for appeal against the AO’s order u/s 143(3) and order u/s
The appeal against the CIT(A) order dated 4.03.2020 was decided by the ITAT on 14.02.2025 wherein it gave liberty to challenge the order u/s 154 separately which was immediately filed on 17.03.2025. We find that the delay in filing the appeal is therefore, adequately explained and hence the same is condoned.
The grounds raised by the assessee is two-fold:
(i) addition on account of provision for sales return of Rs. 6,00,12,038/-, and (ii) treating the said provision as a subject matter of rectification u/s 154 of the Act.
Briefly stated, the facts of the case are that the assessee filed its revised return of income for the year under consideration on 31.03.2017 declaring a total loss of Rs 3,60,48,027/- The said ROI was selected for scrutiny and assessment proceedings were concluded vide assessment order dated 18.12.2017 under section 143(3) of the Income-tax Act, 1961 [the Act, for short] assessing the total income u/s 143(3) at Rs 99,60,767/- making disallowances aggregating to Rs 4,60,08,794/-.
Page 2 of 9 respect of provision for sales returns amounting to Rs 6,00,12,038/- created during the A.Y under consideration and finding the explanation as not sufficient, the Assessing Officer passed an order under section 154 read with section 143(3) of the Act, adding the provision created for sales return amounting to Rs 6,00,12,038 to the total income of the assessee, thereby computing the total income of the appellant at Rs 6,99,72,798/. The AO’s order was confirmed by the CIT(A) and hence, the assessee is before us.
The ld counsel of the assessee submitted that the assessee sells Aramis, Clinique, Tomford, MAC Cosmetics, Estee Lauder, etc. products in India. Such products typically have an expiry period of 36 months from the date of manufacture. As per an arrangement with its distributors, if the distributors are unable to sell the products procured from the appellant within the expiry period, the appellant is liable to accept such unexpired goods from the distributors. Thus, the assessee had a liability to accept the expired products from its distributors incurred during the course of its regular business and provided for such liability by computing the same on a scientific basis during the captioned year, based on historic and current trend of actual sales return during the Page 3 of 9 for sales return is computed on a scientific basis, based on past trends.
Further the ld. counsel for the assessee contended that the Assessing Officer has passed order u/s 154 of the Act by adding the amount on account of provision of sales return which is a debatable issue and the same cannot be adjudicated u/s 154 of the Act. It was also contended that the actual sales returns in subsequent years were also in line with or more than the aforesaid provision for sales return created.
Further, the proposition that provisions for warranty which have been reasonably estimated based on historical trends are considered as ascertained liabilities and not a contingent liability, and hence, should be allowable as a deduction, has been accepted under various judicial precedents.
The ld. counsel for the assessee argued that the said judicial precedents could be applied in the case of the assessee considering the provision for sales return of expired unusable goods as similar to warranty costs, which includes, inter-alia, replacement of defective goods. The ld. counsel for the assessee placed reliance on the decision of the co-ordinate bench in Bayer Bioscope in ITA No. 5388/M/2009
Page 4 of 9 in the case of Hero Cycles 94 Taxmann 271 order dated 28.08.1997.
On the other hand, the ld. DR relied upon the orders of the authorities below.
We have heard the rival submissions and have perused the relevant material on record. We find that the co-ordinate bench in the case of Bayer Bioscope [supra] has extensively dealt with the issue of taxability of provisions of sales return where the AO has to examine the method of accounting followed regularly by the assessee and the mandatory accounting standard to be followed. The sales which have been returned in the subsequent years are issues which requires deliberations and enquiries in the facts of the case. The ITAT in Bayer Bioscope [supra] at Para 16 of its order relied on the decision of the Mumbai Bench of the which has held as under:
"16. Section 145 of the Income Tax Act, as it stands now, inter alia lays down that business income has to be computed "in accordance with the cash or mercantile system of accounting as regularly employed by the assessee". The only rider to this statutory requirement regarding method of accounting is that "the Central Government may notify, in the official gazette from time to time, accounting standards" and the applicable accounting standards will have to be followed by the assessee in the method Page 5 of 9 [A.Y. 2015-16] ELCA Cosmetics Pvt Ltd of accounting followed. One of these mandatory accounting standard, notified vide notification no. 9949 dated 25th January 1996, inter alia provides that "provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information". This approach requires all anticipated losses to be taken into account in computation of income taxable under the head 'profits and gains from business and profession'. Unlike in the pre amended section, as it stood before 1.4.1997, which provided that "in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine", there is no enabling provision now which permits the Assessing Officer to tinker with the profits computed in accordance with the method of accounting so employed under section 145 and as long as the mandatory accounting standards are duly followed. It is not even Assessing Officer's case that the mandatory accounting standards have not been followed. This analysis of Section 145, read with applicable accounting standards, apart, even on first principles, deduction in respect of anticipated losses, as a measure of prudent accounting principles, cannot be declined. It is only elementary that the accountancy principle of conservatism, which has been duly recognized by the Courts, mandates that anticipated losses are to be provided for in the computation of income but it does not permit
Page 6 of 9 [A.Y. 2015-16] ELCA Cosmetics Pvt Ltd anticipated profits to be taken into account till the profits actually arise. Even an anticipated loss, even if it may not have crystallized in the relevant previous year, is to be allowed as a deduction in the computation of business profits. There is no dispute that sales have been returned in the subsequent year and this fact is known before the date of finalization of accounts. Therefore, there is no point in first taking into account income on sales, which never reached finality, and then accounting for loss on sales return in the subsequent year i.e. in which sales return did take place. In our considered view, the approach of the assessee is in consonance with the well settled accountancy principles and the Assessing Officer was not justified in rejecting the same. The disallowance for provision for sales return is, accordingly, deleted."
Respectfully following the same, we are of the considered opinion that provision for sales return and its determination of whether the same is income or not in the instant year, is a debatable issue which cannot be encompassed under the provisions of section 154 of the Act. There are catena of judicial pronouncements which hold that the AO has no power to add any amount to the income u/s 154 of the Act on issues which requires deliberations and enquiries with respect to its facts and law and is debatable. The hon’ble Supreme Court in the case of Hero Cycles P Ltd (1997) 94 Taxman 271(SC) has held that the point which is not examined on facts and in law can not be dealt with as mistake
Page 7 of 9 delete the said addition. Grounds raised by the assessee are allowed. is allowed.
The order is pronounced in the open court on 19.08.2025.