The Indian Steel & Wire Products Ltd., Kolkata V. DCIT, CIR-3, KOLKATA, Kolkata

ITA 1033/KOL/2016

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4707 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ROBIN CHOWDHURY
• Assessee Lawyers: S M SURANA
• Keywords: Business expenditure; Bad and doubtful debts
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : KOLKATA [BEFORE HONBLE SHRI S.S. GODARA, JM & SHRI M.BAL AGANESH, AM ] I.T.A NO. 1033/KOL/20 16 ASSESSMENT YEAR : 2006-0 7 THE INDIAN STEEL & WIRE PRODUCTS LTD. -VS- DC IT, CIRCLE-3, KOLKATA [PAN: AABCT 1067 C ] (APPELLANT) (RESPONDEN T) FOR THE APPELLANT : SHRI S.M. SU RANA, ADVOCATE FOR THE REVENUE : SHRI ROBIN CHOWDHURY, ADDL. CIT SR. DR DATE OF HEARING : 04.10.2018 DATE OF PRONOUNCEMENT : 26.10.2018 ORDER PER M.BALAGANESH, AM 1. THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-1, KOLKATA [IN SHORT THE LD CIT(A)] IN APPEAL NO. 428/CIT(A)-1/C-3/2008-09 DATED 07.03.2016 AGAINST THE ORDER PASSED BY THE DCIT, CIRCLE-3, KOLKATA [ IN SHORT THE LD AO] UNDER SECT ION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 26.12.2008 FOR TH E ASSESSMENT YEAR 2006-07. 2. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE MADE IN TH E SUM OF RS. 1,55,70,590/- TREATING THE SAME AS PRIOR PERIOD EXPENSES, IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2 ITA NO.1033/KOL/2016 THE INDIAN STEEL & WIRE PRODUCTS LTD. A.YR. 2006-07 2 3. BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 ON 25.11.2006 DECLARING TOT AL INCOME OF RS. NIL AFTER SETTING OFF BROUGHT FORWARD LOSS OF EARLIER YEARS AND CLAIM ING CARRY FORWARD LOSS OF RS. 48,57,72,211/-. THE ASSESSEE IS ENGAGED IN THE BUSI NESS OF MANUFACTURING OF WIRE RODS, WIRES, STEEL BASED ROLLS AND CASTINGS. THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION CLAIMED AN AMOUNT OF R.S 1,55,70,590/ - IN RESPECT OF SHORT PROVISION MADE TOWARDS SPARE PARTS IN LAST YEAR PAYABLE TO T ATA IRON & STEEL COMPANY LTD. (IN SHORT TISCO) UNDER THE HEAD PRIOR PERIOD ITEMS. THE ASSESSEE RECEIVED THE MATERIALS FROM TISCO ON 31.03.2005 RELEVANT TO ASSESSMENT YEA R 2005-06 AND THE SAID ITEMS WERE DULY REFLECTED IN THE CLOSING STOCK AS ON 31.0 3.2005 BY THE ASSESSEE. HENCE PROCUREMENT OF THESE STORES FROM TISCO HAD BEEN DUL Y ACCOUNTED FOR AS BALANCE SHEET ITEM IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AS ON 31.03.2005 RELEVANT TO ASSESSMENT YEAR 2005-06 ITSELF. THE ASSESSEE CONSUMED THE SAI D MATERIALS FROM THE INVENTORY ACCOUNT IN JULY 2005 AND ERRONEOUSLY DEBITED PRIOR PERIOD EXPENSES INSTEAD OF CONSUMPTION OF STORES. THE ASSESSEE WAS UNDER THE B ONA FIDE BELIEF THAT THOUGH THE GOODS HAD REACHED THE ASSESSEE ON 31.03.2005 ITSELF AND THE BILL FOR THE SAME WAS RAISED BY TISCO ON 31.03.2005 BUT THE BILLS WERE RECEIVED BY THE ASSESSEE IN JULY 2005. ACCORDINGLY, THE ASSESSEE THOUGHT THAT THE SAID ITE M WHEN CONSUMED, SHOULD BE CHARGED OFF TO PROFIT AND LOSS ACCOUNT AS A PRIOR PERIOD IT EM. THE LD. AO DISALLOWED THE SAME THAT THE SAID EXPENDITURE IS NOT PERTAINING TO THE YEAR UNDER CONSIDERATION WHICH WAS UPHELD BY THE LD. CIT(A). AGGRIEVED, THE ASSESSEE I S IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. AT THE OUTS ET, WE FIND THAT THERE IS NO DISPUTE THAT THE ASSESSEE HAD INCLUDED THE RECEIPT OF GOODS IN ITS CLOSING STOCK AS ON 31.03.2005 ITSELF, RELEVANT TO ASSESSMENT YEAR 2005-06 IN RESP ECT OF STORES RECEIVED FROM TISCO. IN OTHER WORDS, THE ASSESSEE BY REFLECTING THE RECEIPT OF STORES FROM TISCO IN ITS CLOSING STOCK AS ON 31.03.2005 HAD OFFERED TO TAX IN ASSESS MENT YEAR 2005-06. SINCE THE 3 ITA NO.1033/KOL/2016 THE INDIAN STEEL & WIRE PRODUCTS LTD. A.YR. 2006-07 3 ASSESSEE IS IN THE PRACTICE OF CHARGING OFF TO PROF IT AND LOSS ACCOUNT ON CONSUMPTION OF THE RESPECTIVE STORES, WHICH HAPPENED IN JULY 2005 IN THE INSTANT CASE AND THAT THE BILLS FOR THE SAME FROM TISCO THOUGH DATED 31.03.2005 WER E ALSO RECEIVED ONLY IN JULY 2005, THE ASSESSEE INSTEAD OF DEBITING THE REGULAR CONSUMPTION OF STORES AND SPARES, HAD DEBITED PRIOR PERIOD EXPENDITURE BASED ON THE DATE OF BILL. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAD CLAIMED THE VERY SAME EXPENDITURE AS DEDUCTION IN ASSESSMENT YEAR 2005-06 ALSO. IN ANY CASE, THERE IS NO CHANGE IN TAX RATES OF THE ASSESSEE COMPANY IN BOTH THE YEARS. THERE IS NO DISPUTE ABO UT THE NATURE OF EXPENDITURE AND GENUINITY OF THE EXPENDITURE BY THE REVENUE. HENCE, THE SAME CANNOT BE DISALLOWED IGNORING THE BONA FIDE CONTENTIONS OF THE ASSESSEE. IN THIS REGARD, WE WOULD LIKE TO PLACE RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COUR T IN THE CASE OF CIT VS. JAGATJIT INDUSTRIES LTD. REPORTED IN 339 ITR 382 (DEL); CIT VS. MODIPAN LTD. REPORTED IN 334 ITR 102 (DEL). WE ALSO FIND THAT THE CO-ORDINATE BE NCH OF THIS TRIBUNAL HAD ALSO HELD THIS ISSUE IN FAVOUR OF THE ASSESSEE IN THE CASE OF HINDUSTHAN GUM AND CHEMICAL INDUSTRIES LTD. VS. ITO REPORTED IN 23 SOT 143. IN VIEW OF THE AFORESAID FACTS AND RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENT RELIE D UPON HEREINABOVE, WE HAVE NO HESITATION IN DIRECTING THE LD. AO TO GRANT DEDUCTI ON FOR CONSUMPTION OF STORES AND SPARES IN THE SUM OF RS. 1,55,70,590/- IN ASSESSMEN T YEAR 2006-07. ACCORDINGLY, GROUND NO. 1 RAISED BY THE ASSESSEE IS ALLOWED. 5. THE LAST ISSUE TO BE DECIDED IN THIS APPEAL IS A S TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE MADE TOWARDS PROVISI ON FOR WARRANTY IN THE SUM OF RS. 93,45,000/-, IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 6. BRIEF FACTS OF THIS ISSUE IS THAT THE JMCO IS A DIVISION OF ASSESSEE COMPANY MANUFACTURING ROLL WHICH IS SOLD TO STEEL PLANT LIK E BOKARO STEEL PLANT, VILLAI STEEL PLANT, 4 ITA NO.1033/KOL/2016 THE INDIAN STEEL & WIRE PRODUCTS LTD. A.YR. 2006-07 4 IISCO STEEL PLANT AND OTHER PUBLIC/PRIVATE SECTORS. AS PER ROLL INDUSTRIES MANUFACTURING SYSTEM, 5 YEARS WARRANTY IS ALLOWED TO THE CUSTOMER S TOWARDS LIFE OF A ROLL USED IN THE STEEL PLANTS. AS PER COMPANIES POLICY, WARRANTY CL AIM IS PROVIDED EVERY YEAR BASED ON DELIVERY OF ROLLS AND MAKE ADJUSTMENT EVERY YEAR ON THE BASIS OF SETTLEMENT OF THE CLAIM. THE COMPANYS POLICY IS TO CLAIM THE PROVISION FOR WARRANTY AS A DEDUCTION EVERY YEAR. THE ASSESSEE SUPPLIES ROLLS AND CASTINGS TO VARIOUS CUSTOMERS UNDER GUARANTEE TOWARDS PERFORMANCE AND WORKMANSHIP. IN CASE, THE MATERIAL FALLS WITHIN THE GUARANTEE PERIOD , THE PRODUCT IS JOINTLY INSPECTED BY ITS QUALITY AS SURANCE TEAM AND THE CUSTOMER AND IF ANY MANUFACTURING DEFECT IS OBSERVED FROM THE PRODU CT AND IS NOT AS PER THE GUARANTEE CLAUSE, THE REPLACEMENT ROLL IS THEN GIVEN TO THE C USTOMERS FREE OF CHARGE. THE SAME IS GIVEN UNDER EXCISE INVOICE WHERE EXCISE DUTY IS PAY ABLE AND IT IS AN EXPENSE BORNE BY THE COMPANY. THUS, A PROVISION MADE TOWARDS WARRAN TY IS BASED ON PERCENTAGE OF SALES AS PER THE COMPANYS POLICY ON PAST 5 YEARS SALE D ETAILS. THE LD. AO HOWEVER DID NOT AGREE TO THIS CONTENTION AND PROCEEDED TO MAKE DISA LLOWANCE OF RS. 93,45,000/- TOWARDS PROVISION FOR WARRANTY IN THE ASSESSMENT. THE LD. C IT(A) GRANTED PARTIAL RELIEF TO THE ASSESSEE BY OBSERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE MATERIAL BEFORE ME . IT IS FOUND THAT THE AOS FINDING ON THE ISSUE IN QUESTION WERE BASED ON THE NOTES OF ACCOUNTS AN AMOUNT OF RS.93,45,000/- REMAINED AS UNPAID LIABILITY AND WAS ALREADY OFFERED BY THE ASSESSEE AND WAS ADDED BACK TO THE APPELLANTS INCOME. THE APPELLANTS AR HAS STATED THROUGH THE WRITTEN SUBMISSION THAT IT HAD MADE A PROVISION FOR DOUBTFUL DEBTS ON THE GROUND THAT IT MAY BE PAYABLE IN THE FUTURE THROUGH THE WA RRANTY CLAUSE AGAINST THE MATERIALS SUPPLIED TO THE CUSTOMER OR TO THE PARTIES AND THE AO HAD DISALLOWED RS. 48,48,000/- UNDER THE SAME HEAD 'WARRANTY -CLAIM' IN THE PRECED ING YEAR A.Y. 2005-06. THEREFORE THE APPELLANT'S A/R HAS MAINLY CONTENDED THAT THE D ISALLOWANCE OF RS. 48,48,000/- PERTAINING TO THE PREVIOUS YEAR, NEEDS TO BE DEDUCT ED. THE APPELLANT HAS ALSO RELIED UPON THE JUDGMENT IN THE CASE OF ROTORK CONTROLS IN DIA (P) LTD VS. CIT WHEREIN THE A.O. HAS DISALLOWED THE PROVISION OF WARRANTY CLAIM THAT WAS A CONTINGENT LIABILITY. IT WAS HELD BY THE HONORABLE SUPREME COURT HELD THAT 'WARR ANTY BECAME THE INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUATOR(S), IN OTHER W ORDS, WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT AND THE RELIABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH WARRANTY WAS ALLOWABLE US THE BUSINESS EXPENDITURE U/S 37(1) ' . 5 ITA NO.1033/KOL/2016 THE INDIAN STEEL & WIRE PRODUCTS LTD. A.YR. 2006-07 5 AFTER CAREFUL CONSIDERATION OF THE SUBMISSION, IT I S FOUND THAT THERE IS SUFFICIENT FORCE IN THE CONTENTION OF THE APPELLANT. HOWEVER IT IS FOUN D THAT ALTHOUGH PROVISION FOR WARRANTY WAS HELD TO BE AN ALLOWABLE EXPENDITURE U/ S 37(1) BUT IN THE INSTANT CASE THE APPELLANT HAS ADMITTEDLY SHOWN AN AMOUNT OF RS 93,4 5,000/- AS UNPAID LIABILITY OUT OF WHICH AN AMOUNT OF RS. 48,48,000/- WAS ALREADY SUBJ ECTED TO TAX BY THE A.O. IN A.Y. 2005-06. CONSIDERING THE TOTALITY OF FACTS OF THE C ASE THE A.O IS DIRECTED TO DELETE THE DISALLOWANCE TO THE EXTENT OF RS. 48,48,000/- OUT O F THE TOTAL DISALLOWANCE OF RS. 93,45,000/-. THIS GROUND IS PARTLY ALLOWED. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THE ASSESSEE DURING THE YEAR HAS DEBITED A SUM OF RS. 116.55 LACS TOWARDS FOR WARRAN TY CLAIMS IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE HAD DISCLOSED FOLLOWING NOTE IN THE NOTES ON ACCOUNT FORMING PART OF THE FINANCIAL STATEMENT: DURING THE CURRENT YEAR, THE COMPANY HAS CHANGED I TS ACCOUNTING POLICY FOR WARRANTY ON PERFORMANCE ON ROLLS. CLAIMS FOR WARRANTIES EARL IER ACCOUNTED WHEN CLAIMS WERE ACCEPTED AND SETTLED HAS NOW BEEN PROVIDED FOR AS A PERCENTAGE OF PRIOR YEARSCLAIMS TO TURNOVER. ACCORDINGLY, PROFIT FOR THE YEAR IS LOWER BY RS. 93.45 LAKHS. (PREVIOUS YEAR : NIL) WE FIND THAT THE LD. AO HAD RESORTED TO DISALLOW TH E PROVISION FOR WARRANTY IN THE SUM OF RS. 93,45,000/- BASED ON THE AFORESAID NOTE REFL ECTED IN THE NOTES ON ACCOUNT OF THE ASSESSEE. BUT WE FIND FROM THE LEDGER ACCOUNT OF PR OVISION FOR WARRANTY CLAIMS (LIABILITY ACCOUNT) ENCLOSED IN PAGE 96 OF THE PAPER BOOK THAT THE ASSESSEE REVERSES THE PROVISION ON SETTLEMENT OF THE CLAIMS BY CREDITING TO PROFIT AND LOSS ACCOUNT AND MAKE A FRESH PROVISION YEAR ON YEAR IN RESPECT OF PROBABLE AND POSSIBLE CLAIMS THAT COULD ARISE BASED ON A SCIENTIFIC CALCULATION AND PAST EXPERIENCE OF THE ASSESSEE. WE FIND THAT THE ASSESSEE 6 ITA NO.1033/KOL/2016 THE INDIAN STEEL & WIRE PRODUCTS LTD. A.YR. 2006-07 6 HAD ALSO GIVEN A BREAKUP OF ENTIRE PROVISION OF WAR RANTY CLAIMS (LIABILITY ACCOUNT) IN THE FORM OF AFFIDAVIT ENCLOSED IN PAGES 97 AND 98 OF TH E PAPER BOOK AS UNDER: OPENING BALANCE OF PROVISION OF WARRANTY CLAIMS R S. 48.48 LACS ADD FRESH PROVISION DURING THE YEAR RS. 116.55 LACS ------------------- TOTAL RS. 165.03 LACS LESS SETTLED/PAID DURING THE YEAR RS. 81.76 LACS CLOSING BALANCE AS ON 31.03.2006 RS. 83.27 L ACS. IT WAS PLEADED THAT THE PROVISION HAS BEEN MADE ON A SCIENTIFIC BASIS BASED ON PAST EXPERIENCE YEAR ON YEAR AND ACCORDINGLY ALLOWABLE A S DEDUCTION. WE FIND THAT THE LD. AR ALSO PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS LTD. REPORTED IN 314 ITR 62 (SC) IN SUPPOR T OF HIS CONTENTIONS BUT WE FIND THERE IS LOT OF CONFUSION IN THE FIGURES ADOPTED BY THE ASSESSEE AS WELL AS BY THE LD. AO. IT IS THE ASSESSEE WHO HAS MENTIONED THE FIGURE OF RS. 93,45,000/- IN ITS NOTES ON ACCOUNT STATING THAT THE PROFIT IN THE YEAR IS LESS BY THE SAID FIGURE. IN THE AFFIDAVIT FILED BY THE ASSESSEE ENCLOSED IN PAGES 97 AND 98 OF THE PAPER B OOK IT IS PLEADED THAT IT IS NOT KNOWN WHERE THE LD. AO HAD ARRIVED THE FIGURE OF RS. 93,4 5,000/-. MOREOVER, IN THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE BEFORE US THE ASSESSE E HAS DISPUTED ONLY A SUM OF RS. 68.07 LACS. THE DISALLOWANCE MADE BY THE LD. AO WAS RS. 93,45,000/- AND THE RELIEF GRANTED BY THE LD. CIT(A) WAS RS. 48,48,000/-. IN V IEW OF MORE ERRORS IN THE FIGURE OF DISPUTE TO BE ADJUDICATED, AND IN THE ABSENCE OF CL ARIFICATION BY THE LD. AR IN THIS REGARD AT THE TIME OF HEARING, WE DEEM IT FIT AND APPROPRI ATE TO REMAND THE ENTIRE ISSUE OF PROVISION FOR WARRANTY CLAIMS TO THE FILE OF THE LD . AO FOR DE NOVO ADJUDICATION. THE LD. AO IS DIRECTED TO LOOK INTO THIS ISSUE AFRESH IN AC CORDANCE WITH LAW UNINFLUENCED BY EARLIER DECISION TAKEN IN THIS REGARD. ACCORDINGLY, GROUND NO. 2 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 7 ITA NO.1033/KOL/2016 THE INDIAN STEEL & WIRE PRODUCTS LTD. A.YR. 2006-07 7 8. GROUND NO. 3 RAISED BY THE ASSESSEE IS GENERAL I N NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 26.10.2018 SD/- SD/- [S.S. GODARA] [ M .BALAGANESH ] JUDICIAL MEMBER ACCOUNTANT MEM BER DATED : 26.10.2018 SB, SR. PS COPY OF THE ORDER FORWARDED TO: 1. THE INDIAN STEEL & WIRE PRODUCTS LTD., 7, RED CR OSS PLACE, KOLKATA-700001. 2. DCIT, CIRCLE-3, KOLKATA, P-7, CHOWRINGHEE SQUARE , KOLKATA-700069. 3..C.I.T(A).- 4. C.I.T.- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT , KOLKATA BENCHES