BHARAT FRITZ WERNER LTD V. THE JOINT COMMISSIONER OF INCOME-TAX (OSD)

ITA/576/2016

AI Insights

The case involves Bharat Fritz Werner Ltd., which appealed against the decision of the Income Tax Appellate Tribunal (ITAT) that upheld the disallowance of a provision made for erection and commissioning of machinery sold. The provision was created to account for installation services that were not completed by the end of the financial year. The ITAT and the Commissioner of Income Tax (Appeals) had earlier disallowed the provision, stating it was estimated and not based on actual incurred expenses. The High Court found that the tribunal and the Commissioner of Income Tax (Appeals) did not adequately consider the evidence provided by the assessee, which demonstrated that the provision was based on a scientific method and had a historical basis.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 692171 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-12-2020
• Assessment Year: misc
• Other Referred Cases: Bharat Earth Movers vs. CIT, Calcutta Co. Ltd. vs. Commissioner of Income-Tax, Rotorn Controls India Pvt. Ltd vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Accrued liability; Assessment Year 2009-10; Deduction; Income Tax; Scientific Basis; Provision for Erection and Commissioning
• Section: 260A

Judgement Text

"1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 4TH DAY OF DECEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.576 OF 2016 BETWEEN: BHARAT FRITZ WERNER LTD., OFF TUMKUR ROAD YESHWANTHPUR P.O. BANGALORE-560022 REP. HEREIN BY ITS CHIEF FINANCIAL OFFICER MR. SUJOY DASGUPTA. ... APPELLANT (BY SRI. T. SURYANARAYANA, ADV.,) AND: 1. THE JOINT COMMISSIONER OF INCOME-TAX (OSD) CIRCLE-11(2) BMTC BUILDING, 80 FEET ROAD 6TH BLOCK, KORAMANGALA BENGALURU-560095. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-11(2) BMTC BUILDING, 80 FEET ROAD 6TH BLOCK, KORAMANGALA BENGALURU-560095. 2 3. THE COMMISSIONER OF INCOME-TAX BMTC BUILDING, 80 FEET ROAD 6TH BLOCK, KORAMANGALA BENGALURU-560095. ... RESPONDENTS (BY SRI. K.V. ARAVIND, ADV.) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 03.06.2016 PASSED IN ITA NO.225/BANG/2014 FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, 'C' BENCH, BENGALURU, PRONOUNCED ON 03-06-2016 IN ITA NO.225/BANG/2014 (ANNEXURE-D) & ETC. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a bench of this Court vide order dated 06.12.2017 on the following substantial question of law: (i) The Tribunal, in holding that the Appellant had failed to demonstrate either 3 before the lower authorities or before it that the liability had accrued during the year, arrived at a finding that was contrary to the material placed on record and thus perverse? (ii) The tribunal in holding that substantial provisions were reversed in subsequent years, gave a finding that was perverse inasmuch as it was contrary to the material on record before it and consequently committed a grave error in observing that this would prove that the liability had not been estimated with reasonable accuracy? (iii) The tribunal committed an error in holding that the principles enunciated in the decisions of the Hon'ble Supreme Court in Bharat Earth Movers (245 ITR 42) and Calcutta Co. Ltd. (37 ITR 1) were not applicable to the present case? And (iv) The tribunal thus failed to appreciate that the method followed by the appellant as on a scientific basis, besides being fair and reasonable and that therefore the provisioned amount represented an accrued liability which 4 was accordingly allowable as a deduction while computing its income chargeable to tax under the Act for the Assessment Year 2009- 10? 2. Facts leading to filing of this appeal briefly stated are that assessee is engaged in the business of manufacture and sale of machine tools. After the sale of machine tools, the assessee is required to install the machinery which is sold by it. No separate invoices were raised by the assessee as the value of service of installation is already included in the sale price of the machine. The installation and commissioning of the machines is done within two to three months from the date of sale of the machinery. However, with respect to some sales it was not possible to install and commission the machinery by the end of the year. In order to meet such an eventuality, the assessee created a provision for erection and commissioning. The provision was made between 0.5% to 2% of the sales depending upon the type of machines sold for which erection and 5 commissioning was not done before the end of the financial year. In the next year, the provisions were reversed and a fresh provision was created. Thus, for the Assessment Year 2009-10, the machineries, which were sold but for which erection and commissioning was not done as on 31.03.2009, a provision was created while reversing the provision created for the previous year. 3. The assessee filed return of income for Assessment Year 2009-10, in which deduction of an amount of Rs.28,10,905/- was claimed and while doing so, it had added back the provision for a sum of Rs.40,73,440/- made in the preceding year. Thus, the net amount under the head in fact, was an addition of Rs.12,62,535/- to the income and not a claim for deduction per se. The Assessing Officer by an order dated 23.12.2011 inter alia disallowed the provision for erection and commissioning on the ground that the provisioning was done on an estimated basis and the 6 assessee had failed to show that the expenditure was worked out scientifically on an actual basis. The assessee thereupon approached the Commissioner of Income Tax (Appeals) by filing an appeal. The Commissioner of Income Tax (Appeals) by an order dated 23.10.2013 upheld the disallowance in respect of the provision made by the assessee, however, other disallowances made by the Assessing Officer were deleted. The assessee as well as the revenue filed appeals before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by order dated 03.06.2016 inter alia upheld the disallowance for the provision for erection and provisioning made by the Assessing Officer and dismissed the appeal preferred by the assessee as well as the revenue. In the aforesaid factual background, the assessee has approached this court. 4. Learned counsel for the assessee submitted that the provision made in the case of the assessee is 7 scientific and was between 0.5% to 2% of the sales depending upon the type of machinery sold. It is further submitted that when the actual expenditure is incurred for installation in subsequent years, the assessee debits the respective heads in its profit and loss account while previously created provision is reverse / return back. It is also argued that a fresh liability towards erection and commissioning for the succeeding year is provided for at the end of each financial year. It is also pointed out that while making claim for financial year 2008-09 the assessee had added back the provision made in the preceding year amounting to Rs.40,73,440 and created fresh provision for an amount of RS.28,10,905/- towards installation charges. It is also argued that in other words it is in fact an addition to an income of Rs.12,62,535/- and not a claim for deduction. It is also argued that if provision created is compared with actual expenses there is hardly any difference which demonstrates that the creation of provision is scientific and the assessee 8 has been following the aforesaid method of provisioning consistently for nearly ten years and has a historical basis. 5. It is also pointed that before the Commissioner of Income Tax (Appeals) the assessee had produced a comparative statement showing the sales for which deduction is pending, the corresponding provisioning, the actual expenses incurred in the next years for financial years 200-06 to 2011-12 as well as ledger account extracts of the provision for erection and commissioning, which evidences reversals as on the last day of the financial year and therefore, the finding recorded by the tribunal that the assessee has failed to demonstrate that the liability had accrued during the year is perverse and contrary to the decisions of the Supreme Court in 'CALCUTTA CO. LTD. VS. COMMISSIONER OF INCOME-TAX', (1959) 37 ITR 1 (SC) 'BHARAT EARTH MOVERS VS. CIT', (2000) 112 TAXMAN 61 (SC), and 'ROTORN CONTROLS 9 INDIA PVT. LTD VS. CIT', (2009) 180 TAXMAN 422 (SC). On the other hand, learned counsel for the revenue has submitted that the assessee has not established that liability to commissioning and erection has accrued and findings of fact in this regard have been recorded by all the authorities under the Act and therefore, no substantial question of law is involved in this appeal. It is further submitted that additional evidence referred to cannot be relied on without adjudication of the factual aspect of the matter. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Before the Commissioner of Income Tax (Appeals), the assessee had produced a comparative statement showing the sales in which erection is pending, the corresponding provisioning, the actual expenses incurred in the next year for financial years 2005-06 to 2011-12 and ledger account extracts of the provisions for erection and commissioning, which 10 evidences reversals as on the last day of financial year. However, the Commissioner of Income Tax (Appeals) has not taken note of the aforesaid material produced by the assessee. The tribunal has held that the assessee has failed to demonstrate either before the Commissioner of Income Tax (Appeals) or before the tribunal that liability has accrued during the year and the fact that the substantial provision was reversed in subsequent years. The aforesaid finding is contrary to the material available on record. Therefore, in the facts of the case, the material produced by the assessee before the Commissioner of Income Tax (Appeals) as well as the tribunal needs factual adjudication in the light of law laid down by Supreme Court. Therefore, we quash the order passed by the Commissioner of Income Tax (Appeals) as well as the tribunal insofar as it pertains to disallowance of the provision and remit the matter to the Commissioner of Income Tax (Appeals) to adjudicate the aforesaid issue afresh in the light of 11 materials produced by the assessee and in view of law laid down in CALCUTTA CO. LTD, BHARAT EARTH MOVERS and ROTORN CONTROLS INDIA PVT. LTD supra. In view of preceding analysis, it is not necessary for us to answer the substantial questions of law framed in this appeal. In the result, the appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss "