HEALTHWARE PRIVATE LTD. V. THE ASST. COMMISSIONER OF INCOME TAX

ITTA/443/2005

AI Insights

The case involves M/s. Healthware Private Ltd., which appealed against the order of the Income Tax Appellate Tribunal, Hyderabad, concerning the reassessment of income for the assessment year 2001-02. The primary issues were the legality of the reassessment under Section 148 of the Income Tax Act, 1961, and the disallowance of a provision for warranty expenses. The Tribunal and the High Court found that the reassessment was valid and that the warranty provision was a contingent liability, thus not deductible.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 692515 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 26-10-2022
• Assessment Year: misc
• Other Referred Cases: Elegant Chemicals Enterprises Private Limited, 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: B NARASIMHA SARMA
• Assessee Lawyers: NAGA DEEPAK
• Keywords: Change of opinion; Contingent Liability; Income Tax; Provision for warranty; Reassessment
• Section: 147; 148; 143(3); 143(1); 260A

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY ,THE TWENTY SIXTH DAY OF OCTOBER TWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN ANID THE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIB UNAL APPEAL NO: 443 OF 2005 lncome Tax Appeal Under Section 260_4 of the lncome Tax Act, 1961 against the order of the Income Tax Appeilate Tribunal, Hyueraoaa \"A\" Bench, in t.T.A. No. 179 t Hydt2}04 dated 29_07-2005 for the Assessment Year 2001-02 prererred against the order of the commissioner of rncome Tax ( Appears ) - li Hyderabad dated 28-0i- 2004 in lrA No. 3s5 / crr (A) -[ / 03-04 preferred igainst the order of the Assistant commissioner of rncome Tax , circre 1 (4), Hyderao\"a a\"i\"a 29-09- 2003 in PANi GtR No. H-63 Between: M/s. Healthware Private Ltd., 8-2-62311, Represented by its Managing Director Mr. Subramanyam, aged 52 years. Banjara Hills, Hyderabad K. Ram Narayan, S/o. K.V. ,..APPELLANT/APPE LLANT AND The Asst. Commissioner of lncome tax, Central Circle _ .l(4) Hyderabad. ITTAMP. NO: 484 OF 2005 ...RESPONDENT Petition under Section 'r 5r cpc praying that in the circumstanc,es stated in the affidavit filed in support of the petiiion, the High court may be pleased to suspend the order dated 2g-7-2005 passed by the rncome Tax Appellate Tribunal, Hyderabad'A' Bench, in lrA No. 17gi1ydt2oo4 for the Assessment year 2oo1-02 and direct the Respondent not tt press for the payment of disputed taxes and interest in a sum ot Rs.27,24,i76l- pending disposal of appeal Counsel for the Appeltant: SRI NAPA DEEPAK FOR SRI S. RAVI Counsel for the Respondent: SRI B. NARASIMHA SARMA SC for l.T. DEPARTMENT The Court delivered the following: Judgment CE I No. 443 c.v. of2 DY for the tanding ehalf of oo5 DGMENT: lper the Hon,bte the ChteIJustc. r.rrat tshusoa) Heard Mr. Naga Deepak, learned counsel appellant and Mr. B.Narasimha Sarma, learned S counsel for Income Ta: the respondent. r Department appearing on b 2. This appeal under Sectio n 260A Act, 1961 (briefly .the Act,hereinafter) i the order d.ated 29.02.2005 passed bv of the Income Tax s directed against the lncome Tax Hl derabad assessmen t s ubstantial the memo of proposed as Appellate Tribunal, Hyclerabad Bench ,A, (?ribunal) in I.T.A.No. 179/Hyd/2OO4 for rhe year 2OOt-2002. 3. While admitting rhe appeal, no guestions of law $,s1s formulated. However, in appeal, the following tr,r,o questions have been substantial questions of law: 4IlD 2 \" 1 . Whether on tLte facts and in the ctrcumstances of the case' tLLe Appellate T?ibunal was ight in law in upholding tte order of reassessment under Section 148 of th-e Assessing Of cer on a mere chnnge of opinion? 2. Whetlar in uietu of the accounting policg follott-ted bg the appellant, the liabilitg luuing been incurred by the appellant, (tltough to be quantified at a future date) during the gear of account, a prouision made on scientific basis could be disallotued in the hands of the appellant?\" 4. From the above, it is seen that Iirst question assails reopening of assessment under Section 148 of the Act by the Assessing Officer on the ground that such reopening was on the basis of mere chalrge of opinion' 5. The second question proposed is that the liability on account of the warrantee having been incurred by the appellant based on the accounting policy followed by the appellant, though to be quantilied at a later date, whether the same could have been disaliowed by the Assessing Officer and affirmed by the lower appellate authorities' ( I I i 3 6. We deal with the first question at the outset. 7. Assessing Officer passed the assessment order for the assessment year under consideration on 29.O9.2OO3 under Section 1a3(3) r/w Section l4g of the Act. It may be mentioned that appellant is a company assessed to tax under the Act. It is engaged in ttre business of purchase of sale of medical equipments and related services. For the assessment year under consideration, appellant had filed its return of income on 3 1 . l O.2OO 1 disclosing total income of Rs.79,07,060.00. In this connection, intimation under sub-section (l) of Section 143 was issued to the appellant by the Assessing Oflicer on 22.O3.2OO2. Later on it was found that appellant had debited an amount of Rs.49,18,400.0O to the profit and loss account being a provision for warrarty. Observing that it was only a provision and not an allowable deduction, a view was taken that the aforesaid arrount was an income chargeable to tax but had escaped assessment. Thereafter, notice under Section 148 of the Act was issued. Following reassessment 4 proceedings, assessment order dated 29.09.2003 was passed by the Assessing Officer under Section 143(3) r/w Section 148 of 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 sarne was done on the basis of a mere change of opinion. 9. None the less, before the Commissioner of Income Tax (Appeals) - II, Hyderabad (briefly 'CIT(A)'hereinafter), appellant raised the ground that Assessing Officer had erred in assuming jurisdiction under Section 148 of the Act on mere change of opinion. First appellate authorit5r i.e., the CIT(A) noticed that the assessment was reopened within 4 years from the end of the financial year relevant to the assessment order under consideration. On that basis, Iirst appellate authority declined to entertain the above ground of the appellant. - 5 10. Before the Tribunal, this was taken up as an additional ground by the appellant. However, Tribunal rejected the same in the following manner: 18. We haue carefullg considered. the iual submissions and perused. tle record. As regards additional ground urged bg tte assessee taith regard to tLLe ualiditg of . reassessment proceedings, the case of th.e learned counsel is that there is no rea.son to belieue that income has escaped assessmenf since compete d.etails pertaining to tte cloim of deduction in the form of prouision for utarrantg were alreadg on record, and lrcnce it is a mere change of opinion. In our considered opinion the contention of the learned counsel is misconceiued. Section 147 of the Income Tax Act had undergone d.rastic chnnges w.e.f. 1-4-89 and as per Explanation _ 2 to Section 147 of the income chargeable to tax has been under assessed or excessiue allowance under this Act has been computed., it ulould. be deemed to be a case where income cLnrgeable to tax has been escaped assessment. In fact in the instant case thougLt tLrc material was on record, the AO lwd no occasion to exantine the coffectness of the clcLim since the return of income was processed und.er Section 1a3(l) of 6 the Act. As rightlg contended bg the learned DR merelg because the AO has not exercised the pouer of issuing a notice under Section H3(2) of the Act to conuert a case into scrating he is not debarred from reopening the assessment under Section 147 of the Act. Identical zssue has come up before the ITAT - B - Bench Hgderabad in the case of Elegant Clemicals Dnterpises Piuate Limited uLerein ute haue taken a uieu that it is not necessary for the AO to exhaust a remedg of issuing a notbe under Section H3(2) of the Act before taking recourse to Section 147 of tle Act. Sincc the rehtnt tuas processed under Section 143(1) utithout m.aking inuestigation, it cannot be said that the AO has exercised his mind and nou.t sought to change his opinion on the issue of allouabilitg of deduction. Suffice to sag that in the light of the amended prouisions of Section 147 of tlte Act tlp AO has reason to beLieue that tte income assessable to tax has escaped assessmerut. We tLerefore reject the additional ground urged bg th.e assessee. ' 1 1. Tribunal noted that as per Explanation (2) to Section 147 of the Act, if the income chargeable to tax was under-assessed or excessive allowance was computed' r1 \" t,' 7 would be deemed to a case where income chargeable to tax had escaped assessment. Though the materia_ls in the form of profit and loss account was on record, Assessing Officer 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 Oificer had not exercised the power of issuing notice under Section 143(21 of the Act to make it a case of scrutin.y assessment, he would not be debarred from re_opening the assessment under Section 142 of the Act. Therefore, when the return was processed under Section 1a3(l) of the Act u,ithout making due scrutiny, it could not be said that the Assessing Olficer had apptied his mind arrd taken a particular view; thus issuance of notice under Section 148 would tantamount to a change of opinion. Accordingl_v, Tribunal rejected the above ground urged by the appellant. 12. We agree with the view taken by the Tribunal on this aspect. We are lortified in our view when we refer to Explanation (1) to Section t4T of the Act, as it existed at 8 the relevant point ol time as per which production before the Assessing Officer the account books or other evidence from which materia-l evidence with due diligence could have been discovered by the Assessing Officer w,ould not necessarily amount to disclosure within meaning of Section 147 ofthe Act. 13. That being the position we ans . ''er the lirst question against the appellant and in favour ol the revenue 14. This brings us to the second question relating to provision for warrant5r which incidentally was the reason for re-opening of assessment. We may mention that appellant had debited an amount of Rs.49,18,400.00 to the profit and loss account being provision for warranty. This was disallowed i.e., not allowed as a deduction by the Assessing Officer in the assessment order dated 29.O9.2013 on the ground that appellant had not incurred any amount / expenditure on account of warranty during the assessment year under consideration. [t u,as further ( t 9 / held that the amount of Rs'49'18'4OO'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 ttre total income of the appellant while determining the income of the aPPellant under the Act' 15. CIT(A) also considered this aspect of the matter' Concurring with the view taken by the Assessing Officer' the first appellate authority held that claim of warranty expenses were not actually incurred while making the provision against the claim of warranty' The claim is not carried out as r't'ell, as it was not certain' Therefore Assessing Oftrcer was justified in holding ttrat uncertain Iiability to pay damages at future rates would represent merely a contingent liability and could be allowed ' i I t I I I I I l0 16. In further appeal before the Tribunal, the above view taken by the CIT(A) was alfirmed. After alalysing various decisions, Tribunal culled out the following principles which a.re required to be taken into consideration for determining as to whether a liability could be construed to be contingent or uncertain: (i) If the business liability has definitely arisen in the accounting year, the deduction should be allowed although liability may have to be quantified and discharged at a future date; (ii) It should be capable of being estimated with reasonable certainty though the actual quantification may not be possible; (iii) The quantification 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 . Therealter, Tribunal negatived the claim of the appellant as under: 1l 2O. In th.e instant case, it is not in di.spute tLwt this is the first year in uhich the assessee Lns undertaken to prouide uanrantg and thus it cannot be said that tLre quantification is based upon tlrc past expertence of the assessee, No doubt the assessee claimed that it i,s based upon tlp past expeience of the lalding companA but there is nothing on reard to suggest as to what is the percentage of expenditure incured bg tlrc holding companA upon sale of similar products utith u:anrantg. 27. On the other hand, report of the standing committee dated 13.02.200 1, u;hich is uery much auailable before tle end of the occounting releuant to the assessment Aear under consideration, slrotus tlnt tLE perfonnance of the units installed in India are good, indicating tlLat the prouision made towards uarrantA liability is excessiue. Th.ere is also huge gap bettueen the prouision and the actual expenditure, which is euidenced from the fact that in tLre subsequent Aears tte assessee has offered it to reuenue. In fact the tuarrantg costs of Rs.49,18,400/- which is claimed to be an ascertained liability pertains to the tuarrantg period commencing ofter the end of the ) ) i I i I i I I j I I i I I I I I I l I I I I I E I I g g E i H I 12 accounting Aear releuant to fhe assess ment gear under consideration. Tlwe is nothing on reard to suggest that before th,e end of the corrcerned accounting gear the assessee-compang has installed the product. In the Aear under consideration the assessee has undertaken to giue u.tarrantg to the products sold onlg w.e.f. 01.01.2001. In otler utords, in this year the assessee decided to prouide for u.tarrantg onlg on tLte sales made ift th.e last quarter of the gear. Thus looking at from anA angle, the quantification of the liability has not been proued to be based on dnA scientiJic @nalysis. Under these circumstances tlrc case laut relied upon bg he learned counsel for tlrc assessee are d-istinguishable on facts. On the corutrary the decision of th-e Apex Court in tLe case of BLmrat Earth Mouers, far from supporting the stand of the assessee, helps the plea of tle reuenue inasmuch as the material on record suggests that the assessee could not estimate the liability tuith reasonable certainty which is euidenced from the fact that 90% of the prouision tuas uritten back in the next gear. Under these circumstances, we afJirm tte order of the learned CIT(A) and dismiss the appeal filed by tlte assessee. ,' I 19' we have carefulry gone through the decisions so cited by the learned counsel for the appellant. 2O. Having regard to the facts and circumstances of the case, we are of the vier.r, that the above decisions would not be applicable. As has been held by the Supreme Court in Bhq.rat Earth Mouers (cited supra) the law is settled that if a business liability has arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a ruture date. What should be certain is the incurr.ing of the liability. It { l3 18. Learned counsel for the appellant has referred to a decision of the Supreme Court in the case of Bhqrat Earth Mouers Vs. Commdss ioner of Income Tax,reported in [2ooo] 24s rrR 428 (sc) and also to a decision of the Madras High Court in the case of M/s.Grundfos pumpas Indla Limited Vs. The Deputg Commissioner of Income Tax rn T.C.A.No.7OOS of 2OO8, decided on OB.O9.2Ol8. t4 should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. Il these requirements are satisfied, the liability is not a contingent one. The liability would be in-praesenti though it may have to be discharged at a future date. 21. In the present case, no liability had arisen in the assessment year under consideration. AII that the assessee had done was to make a provision for warrant5i that might accrue in future. There was no certaint5r of incurring the expenditure. 22. In such circumstances, we see no reason to answer the second question in favour of the appellant. Consequently this question is also answered against the appellant and in favour of the revenue. 23. Therefore, in the light of the discussions made above, the appeal is dismissed. j I I I I l il :l: l I I l l Miscellaneous applications pending, if any, shall //TRUE COPY// J '( .t oti oFFtcER SECTI To 1. The lncome Tax Appellate Tribunal, Hyderabad \"A\" Bench, z. The Commissioner of lncome Tax ( Appeals ) - ll, Hyderabad 3. The Assistant Commissioner of lncome Tax , Circle 1 (4), Hyderabad 4. One CC to SRl. S. RAVI, Advocate [OPUC] s. One CC to SRl. B NARASIMHA SARMA, SC for l.T. Dept., [OPUC] 6. Two CD Copies a-- l5 stand closed. However, there shali be no order as to costs. Sd/-K.SRINIVASA RAO JOINT REGISTRAR HIGH COURT DATED:2611012022 JUDGMENT lTTA.No.443 ot 2005 DISMISSING THE ITTA WITHOUT COSTS IF.E s 14 ri- 2 5 JAN ?[N ..,, o i ) * crts 0 nY /,1 t rt / I "