M/S. HEALTHWARE PRIVATE LIMITED V. THE ASSISTANT COMMISSIONER OF INCOME TAX

ITTA/604/2015

AI Insights

The case involves M/s. Healthware Private Limited, which appealed against the order of the Income Tax Appellate Tribunal, Hyderabad, concerning the reassessment of income and disallowance of a warranty provision for the assessment year 2003-2004. The primary legal issues were whether the Tribunal was correct in upholding the reassessment order on a mere change of opinion and whether the provision made for warranty expenses, though to be quantified at a future date, could be disallowed. The High Court of Telangana dismissed the appeal, agreeing with the Tribunal's decision that the reassessment was valid and the warranty provision was rightly disallowed as it represented a contingent liability.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 753144 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 03-11-2022
• Assessment Year: misc
• Other Referred Cases: M/s. Healthware Private Limited v. The Assistant Commissioner of Income Tax, Bharat Earth Movers Vs. Commissioner of Income Tax, M/s. Grundfos Pumps India Limited Vs. The Deputy Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: K CHOUDARY
• Assessee Lawyers: ROHAN ALOOR
• Keywords: Change of opinion; Income Tax; Provision for warranty; Reassessment
• Section: 148; 143(3); 260A

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD THURSDAY,THE THIRD DAY OF NOVEMBER TWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEAL NO: 604 OF 2015 Appeal Under Section 260A of the lncome Tax Act, 1961 against the order dated 07 -02-2008 in ITA No. 365 / Hyd / 2006 Assessment Year 2003- 2004 on the file of the lncome Tax Appellate Tribunal , Hyderabad Bench \"B\" Hyderabad preferred against the order dated 20-02-2006 in ITA No. 308/ACIT 2 (2) / CIT (A) - lll/ 05-06 on the file of the Commissioner of lncome Tax ( Appeals ) lll , Hyderabad preferred against the order of the Asst. Commissioner of lncome Tax , Circle 2 (2) , Hyderabad dated 30-'t 2-2005 in PAN / GIR No. AABCH 2124NH-063. Between: M/S. Healthware Private Limited, 8-2-62311 , Banjara hills, Hyderabad,Represented by its Managing Director Mr. K. Ram Narayan S/o. K.V.Subramanyam, aged 54 years, Hyderabad. ...APPELLANT AND The Assistant Commissioner of lncome Tax, Circle -2(2) Hyderabad. ...RESPONDENT Counsel for the Appellant: SRI ROHAN ALOOR FOR SRI CH.PUSHYAM KIRAN Counsel for the Respondent: Ms. K. MAMATA CHOUDARY SENIOR SC FOR INCOME TAX DEPARTMENT The Court delivered the following: Judgment I i H N'B H AND THE HON'BLE SRIJUSTICE C.V.BHASKAR REDDY I.T.T.A.No.604 of 2015 IUDG!4E [, /P,r ri.e Hon'bllt,c t )t'ur lu'n t It7,t Btnyar) Fleard Iv[-. Rohan A]oor, leamed counsel for the appellant and lv[s. K.]r4amata C]roudary leamed Senior Standing Counsel for the Income Tax Depanment appearing for the respondent. 2. This appeal has been preferred by the assessee under Section 260A of the Income Tax Acq 1961 (briefly 'the Act' hereinafter) assailing the order darcd 07.02.2008 passed by the Income Tax Appellate Tribrrnal, Hlerabad Bench'B', Hyderabad ft riefly'the Tribunal' he rei n,r lte r) in I.T.ANo.3 65 / H1d/ 2006 f or the assessment yar 2003 - a4. 3. Uhile admitting the appeal on 06.01.2016, no substantial questions of lav u'ere framed. 4. !(e find from the ,rcmo of appeal that the following questions have been proposecl as sr\"rbstantial quesrions of law: 1. lWhether on the f,rcrs and in the circumstances of the case, the Appelli-ue Trit'unal u,as right in law in upholding I the order of reassessmenr wrder Section 148 of rhe Assessing Officer on a mere change of opinion? 2. Xhether in view of the accounting policy followed by the appellant, the liability having been incurred by the appellant, (though to be quantified at a future date) during the par of account, a provision made on scientific basis could be disallowed in the han& of dre appellant? 5. kamed counsel for the appellant fairly submits that the questions raised in this appeal stand covered bya recent decision of this Coun in M/s. Healthware Private Limited v. The Assistant Commissioncr of Incorne Taxl. 6. In view of the above and following the aforesaid judgment, the present appeal is dismissed. No costs. Miscellaneou applications pending, if any, shall stand closed. //TRUE COPY// To t. The lncome Tax Appellate Tribunal ' Hyderabad Bench \"8\" Hyderabad 2. The Commissioner of lncome Tax ( Appeals ) lll ' Hyderabad 3. The Assistant Commissioner of lncome Tax , Circle 2 (2) , Hyderabad +. One CC to SRl. ROHAN ALOOR, Advocate [OPUC] s. One CC to lr/s. K. MAMATA CHOUDARY , SC for lT'Dept (OPUC) 6. Two CD Copies (along with a copy of the Judgment in ITTA No'443 of 2005 dated 26-10-2022). -A=- Sd/.B.S.CHIRANJEEVI JOINT REGISTRAR (iry SECTION OFFICER ti2i: HIGH COURT DATED:0311112022 JUDGMENT ITTA.No.604 of 2015 () (J 'l- IHE €lA 2 3 ,tAt{ ?i]?l r- , t, ',.-;j,, D!SMISSING THE ITTA WITHOUT COSTS { A- 19 lr> C THE HON'BLE THE CIIIEF JUSTICE UJJAL BHUYAN AND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY ITTA.No.443 of 2OOS JUDGMENT: (Per the Hotl'ble tIe Chi{ Justice Ujjal Bhuganl Heard Mr. Naga Deepak, learned counsel for the appellant and Mr. B.Narasimha Sarma, learned Standing counsel for Income Tax Department appearing on behalf of the respondent. 2. This appeal under Section 260A of the Income Tax Act, 196 1 (briefly 'the Act' hereinafter) is directed against the order dated 29.07.2005 passed by the Income Tax Appellate Tribunal, Hyderabad Bench 'A', Hvderabad (Tribunal) ln I.T.A.No.l79 /Hyd/2004 for the assessment ,vear 2O0 l-2OO2. 3. While admitting the appeal, no substantial questions o[ law were formulated. However, in the memo of appeal, the following two questions have been proposed as substantial questions of law: l \"1. Whether on the facts and in tle circumstances of the case, the Appellate Tribunal u.tas rtght in law in upholding tlrc order of reassessment under Section 148 of the Assessing Offtcer on a mere ch.ange of opinion? 2. Whether in uieu of the accounting policg follouted by the appellant, the liabilitg tnuing been incurred by the appellant, (though to be quantified at a future date) duing tle gear of account, a prouision made on scientific basis could be disallouted in the lnnds of the appellant?\" 4. From the above, it is seen that first question assails reopening o[ erssessment under Section 148 of the Act by the Assessing Officer on the ground that such reopening ias on the basis of mere change of opinion. 5. Thr sccond cluestion proposed is that the liability on account of the sarrirntee having been incurred by the appellant based on the accounting policy followed by the appellant, thougl-r 1o be quantified at a later date, whether the samc , ould hitvt' lrce r-r disallowed by the Assessing Officer and affirmed b.r, rhe lor.r,er appellate authorities. 3 6. We deal with the first question at the outset. 7. Assessing Ofhcer passed the assessment order for the assessment year under consideration on 29.O9.2OO3 under Section 1a3(3) r/w Section 148 of the Act. It may be mentioned that appellant is a company assessed to tax under the Act. It is engaged in the business of purchase of sale of medical equipments and related seryices. For the assessment year under consideration, appellant had filed its return of income on 31.10.2001 disclosing total income of Rs.79,O7,O6O.OO. In this connection, intimation under sub-section (1) of Section 143 was issued to the appellant by tlre Assessing Officer on 27.O3.2OO2. Later on it '\" 'as found that appellant had debited an amount of Rs.49, 1B,4OO.OO to the profit and loss account being a provision for u,arranty. Observing that it was only a provision and not an allowable deduction, a view was taken that the aforesaid amount was an income chargeable to tax but had escaped assessment. Thereafter, notice under Section 148 of the Act was issued. Following reassessment l proceedings, assessmenl order dated 29.O9.2003 was passed by the Assessing Officer under Section 143(3) r/w Section 148 o1' the Act. 8. From a perusal of the assessment order, we do not find that appellant had questioned the competence of the Assessing Officer in initiating reassessment proceedings on the ground that the same !'as done on the basis of a mere change of opinion. 9. Nont: the less, belore the Commissioner of Income Tax (Appeals) - II, Hyderubad (briefly 'CIT(A)'hereinafter), appellant raised the grourrd that Assessing Officer had erred in assuming jurisdiction under Section 148 of the Act on mere change of opinion. First appellate authority i.e., the CIT(A) noticed that the assessment was reopened within 4 years from the cnd of the financial year relevalt to the assessment order undcr consideration. On that basis, first appellate authorit-t' declined to entertain the above ground of the appellant ) 10. Before the Tribunal, this was taken up as an additional ground by the appellant. However, Tribunal rejected the same in the following rnanner: 18. We haue carefullg considered the riual submissions and perused the record. As regards additional ground urged bg the assessee tuith regard to the ualiditg of reassessment proceedings, the case of tle learned counsel is that there is no reason to belieue tLwt income has escaped assessment since compete details pertaining to the claim of deduction in tlrc form of proutsion for warrantg were alreadg on record and hence it is a mere change of opinion. In our considered optnion th.e contention of ttte learned counsel is nisconceiued. Section 147 of the Income Tax Act had undergone drastic chnnges u.).e.f. l-4-89 and as per Explanation - 2 to Section 147 of the income chargeable to tox has been under assessed or excessiue allouance under this Act has been computed, it would be deemed to be a case tahere income chargeable to tax has been escaped assessrnent. In fact in the instant case though the mateial u)as on record, the AO had no occasion to examine the correctness of the claim since the return of inconte LDas processed under Section H3(1) of 6 tle Act. As rightlg contended bg the leanrcd DR merelg because the AO h,,s not exercised the pouJer of issuing a notice under Section 1a3(2) of the Act to conuert a case into scrutiny he is not debarre.d from reopening tte assessment under Section 147 of the AcL ldentical issue has come up before tte ITAT - B - Bench Hyderabad in the case of Elegant Chemicals Enterpises Piuate Limited u.therein u.te Ltaue taken a uiew that it is not necessary for the AO to exhaust a remedg of issuing a notice under Section 143(2) of the Act before taking recourse to Section 147 of the Act. Since the retunt was processed under Section 143(1) uithout making inuestigation, it cannot be said that the AO has exercised his mind and nou-t sought to change his opinion on the issue of allowabilitg of deductiort Suffice to sag that in the light of the amended prouisions of Section 147 of the Act the AO has reason to beLieue that th.e income assessable to tax has escaped assessment. We therefore reject the additional ground urged bg lhe assessee- 1 1 . Tribunal notecl that as per Explanation (2) to Section 147 of the Act, if the income chargeable to tax was under-assessed or excessive allo'\"r,ance uras computed, it 1 would be deemed to a case where income chargeable to tax had escaped assessment. Though the materials in the form of profit and loss account was on record, Assessing Offrcer had no occasion to examine the correctness of the claim since only intimation was issued under sub-section (1) of Section 143 of the Act. Tribunal concurred with the stand taken by the revenue that merely because the Assessing Officer had not exercised the power of issuing notice under Section A3(21 of the Act to make it a case of scrutiny assessment, he would not be debarred from re-opening the assessment under Section 147 of the Act. Therefore, when the return was processed under Section 143(1) of the Act without making due scrutin,r,, it could not be said that the Assessing Oflicer had applied his mind arrd taken a particular vis r; thus issuance of notice under Section 148 would tantamount to a change of opinion. Accordingly, Tribunal rejected the above ground urged by the appellant. 12. We agree rvith the vierv taken by the Tribunal on this aspect. We are fortified in our vier.t' when we refer to Explanation (1) to Section I47 of the Act, as it existed at li the relevant point of time as per which production before the Assessing Officer the account books or other evidence from which material evidence with due diligence could have been discovered by the Assessing Officer lr,ould not necessarily amount to disclosure within meaning ol Section 147 of the Act. 13. That being the position we answer the first question against the appellant and in favour o[ the revenue. 14. This brings us to the second question relating to provision for warran$r which incidentall5r u,as the reason for re-opening of assessment. We ma,v mcntion that appellant had debited an amount of Rs.49, lB,4O0.O0 to the profit and loss account being provision for rvarranty. This was disallowed i.e., not allowed as a deduction by the Assessing Oflicer in the assessment order dated 29.O9.2013 on the ground that appellant had not incurred any amount / expenditure on account of u,arrantv during the assessment year under consideration. [t s'as further 9 15. CIT(A) also considered this aspect of the matter. Concurring with the view taken b,v the Assessing Officer, the first appellate authoritv held that claim of warranty expenses were not actually incurred while making the provision against the claim of u'arrant-y. The claim is not carried out as well, as it rt'as not certain. Therefore Assessing Oflicer was justified in holding that uncertain liability to pay damages at future rates would represent merely a contingent liability and could be allou'ed. held that the amount of Rs.49,18,4O0.OO which was debited by the appellant being the provision for warranty was nothing but a contingent liability. The same was not an expenditure incurred by the appellant in the assessment year under consideration. Therefore, Assessing Officer held that the subject amount was not allowable as a deduction and accordingly added the same to the total income of the appellant vvhile determining the income of the appellant under the Act. l0 16. In further appeal before the Tribunal, the above view taken b1' the CIT(A) was affirmed. After analysing varlous decisions, Tribunal culled out the following principles r.r,hich are required to be taken into consideration for determining as to whether a liability could be construed to be contingent or uncertaln: (i) If the business liability has definitely arisen in the accounting year, the deduction should be allovvecl although liability may have to be quantified and discharged at a future date; (ii) It should be capable of being estimated u.ith reasonable certainty though the actual quantification may not be possible; (iii) Ttre quantilication should be based upon the 'prudence'. (iv) The notification issued prescribing accounting standards in exercise of powers under Section 145(2) of the Act, should also be taken into consideration 17. T'hereafter, Tribunal negatived the claim ol the appellant zrs under: II 2O. In the instant case, it is not in dispute that this is the first year in uhich the assessee has undertaken to prouide uarrantA and thas it cannot be said that tte quantification ts based upon tte past expeience of the assessee. No doubt the assessee claimed that it is based upon tLte past expeience of the holdirug companA but there is nothing on record to suggest as to uhat is the percentage of expenditure incurred bg the holdtng companA upon sale of similar products with warrantg. 21. On tLe other hand, report of the standing committee dated 13.O2.2OO1, uthich is uery much auailable before the end of the accounting releuant to the c.ssessment Aear unl-er consideration, shorus that the performance of the units installed in India are good, indicating that the prouision made towards warrantg liabilttg is excessiue. There is also huge gap betueen the prouision and the actual expenditure, which is eutdenced from the fact that iru the subsequent Aears fhe assessee has offered it to reuenue. In fact the u.tarrantg costs o.f Rs.49,18,4OO/- uhich is clainted to be an ascertained liabiltty peftains to the tuarranty period commencing after the end of the t) account tg Aear releuant to the assessment gear under consideration. Tlrcre is nothing on record to suggest that before the end of tle concemed accounting year the assessee-companA has installed the product. In thp gear under consideration the assessee has undertaken to giue warrantg to the products sold onlg u.e.f. O1-O1.2O01. In otler utords, in this gear the assessee decided to prouide for u.tarrantg only on tte sales made in the last quarter of the gear. Thus looking at from dnA angle, the quantification of the liabilitg has not been proued to be based on ang scientific analysis. Under these circumstances tle case lau.t relied upott by he leamed counsel for the assessee are distinguishable on facts. On the contrary the decisio,t of the Apex Court irt tte case of Bharat Earth Mouers, far from supporting the stand of the ctssessee, trclps the plea of tLrc reuenue inasntLch as th.e mateial on record suggests that the assessee could not estimate the liability tuith reasonable certaintg u.thich is euidenced fronr the: fact that 9O% of the prouision utas writtert back in the nert gear. Under these circunt stances, we affirm the order of the learned CIT(A) and dismiss the appeal jiled bg the assessee. l) 18. Learned counsel for the appellant has referred to a decision of the Supreme Court in the case of Bharat Darth Moaers Vs. Cornmissioner of Income ?ax, reported in [2OOO] 245 ITR 428 (SC) and also to a decision of the Madras High Court in the case of M/s.Grundfos Pumpas Indiq Limited Vs. The Deputg Commissioner of Income Tax in T.C.A,No.7OO3 of 2OO8, decided oo 03.09.2O18. 19. We have carefully gone through the decisions so cited by the learned counsel for the appellant. 20. Having regard to the facts and circumstances of the case, we are of the view that the above decisions u'ould not be applicable. As has been held by the Supreme Conrt in Bharat Earth Mooers (cited supra) the lau' is settled that if a business liability has arisen in the accou nting 5rear, the deduction should be allou,ed although the tiabilitl' may have to be quantified and discharged at a future date. What should be certain is the incurring of the liabitit- .. It l4 should also be capable of being estimated with reasonable certainty thougl'r the actual quantification may not be possible. [f thr:se requirements are satisfied, the liability is not a contingent one. The liability would be in-praesenti though it mav have to be discharged at a future date. 21. In the present case, no liability had arisen in the assessment year under consideration. All that the assessee had done ',t'as to make a provision for warranty that might accrue in future. There u,as no certainiy of incurring the expenditure 22. h'r such circurnstances, we see no reason to allsrer the second qucstion in favour of the appellant. Consequentll, this question is also answered against the appellant arnd in favour of the revenue. 23. Therefore, in the light of the discussions made above. the appeal is dismissed. 15 Miscellaneous applications pending, if any, shall stand closed. However, there shall be no order as to costs. UJJAL BHIIYAN, CJ C.V.BIIASKAR REDDY, J 26.10.2022 ] ,I RM "