Mrs. Uma Surendra Shinde, Ahmednagar V. Dy. CIT, Ahmednagar Circle, Ahmednagar

ITA 1119/PUN/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1096 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 2 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 10-08-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 23-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIL KUMAR CHAWARE
• Keywords: Business income; Opportunity of being heard; Bad and doubtful debts
• Section: 194C; 37

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , . . , # BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO.1119/PN/2013 % % / ASSESSMENT YEAR : 2008-09 MRS. UMA SURENDRA SHINDE, PROP. WWW.CHANAKYANETSTUDY.COM 3957, GURUPRASAD MUDRA MANDIR, NEAR CITY POLICE STATION, AHMEDNAGAR PAN :AAABW0039R . / APPELLANT V/S DCIT, AHMEDNAGAR CIRCLE, AHMEDNAGAR . / RESPONDENT / APPELLANT BY : NONE (WRITTEN SUBMISSION) / RESPONDENT BY : SHRI ANIL KUMAR CHAWARE / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 28-03-2013 OF THE CIT(A)-I, PUNE RELATING TO THE ASSESSMENT YEAR 2008-09. 2. NONE APPEARED ON BEHALF OF THE ASSESSEE. HOWEVER, A WRITTEN SUBMISSION HAS BEEN FILED WITH A REQUEST TO CONSIDER THE S AME. THEREFORE, THE MATTER IS BEING DECIDED ON THE BASIS OF WRIT TEN SUBMISSION FILED AND AFTER HEARING THE LD. DEPARTMENTAL REPRESENTATIVE. / DATE OF HEARING :10.08.2016 / DATE OF PRONOUNCEMENT:12.08.2016 2 ITA NO.1119/PN/2013 3. ALTHOUGH A NUMBER OF GROUNDS HAVE BEEN RAISED BY TH E ASSESSEE THEY ALL RELATE TO THE ORDER OF THE CIT(A) IN CON FIRMING DISALLOWANCE OF RS.60 LAKHS MADE BY THE AO FOR VIOLATION OF PROVISIONS OF SECTION 40(A)(IA) OF THE I.T. ACT. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A N INDIVIDUAL AND PROPRIETOR OF WWW.CHANAKYANETSTUDY.COM. SHE FILED HER RETURN OF INCOME ON 30-09-2008 DECLARING TOTAL INCOME OF RS.12,73,063/-. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS THE AO NOTED THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF DE VELOPMENT AND SALE OF EDUCATIONAL SOFTWARE FOR STANDARD 1 TO 12 IN MARATHI AS WELL AS IN ENGLISH MEDIUM. FROM THE DETAILS FILED, HE NOTICED THAT ASSESSEE HAS MADE PROVISION OF RS.60 LAKHS AS LABOU R CHARGES PAYABLE. ON BEING QUESTIONED BY THE AO DURING ASSESSMEN T PROCEEDINGS IT WAS EXPLAINED THAT THE PROVISION WAS MADE FOR UPGRADATION OF SOFTWARES. IT WAS FURTHER STATED THAT IT IS OBLIGATORY TO CARRY SUCH UPGRADATION AND IT IS A PRECONDITION OF SALE . IT WAS STATED THAT SINCE IT WAS COMPULSORY, THE ASSESSEE MADE THE JOURNAL ENTRIES AS AMOUNT PAYABLE FOR JOB WORK CHARGES. THE AO OBSERVED FROM THE COPY OF ACCOUNT EXTRACT OF THE JOB WORK CHARG ES PAYABLE THAT NO TDS HAS BEEN MADE OUT OF THIS PROVISION. HE THE REFORE WAS OF THE OPINION THAT ON FAILURE TO DEDUCT THE TAX ON THE E XPENDITURE WHICH ARE HIT BY THE PROVISIONS OF CHAPTER XVII-B OF INC OME-TAX ACT, NO EXPENDITURE DEBITED WILL BE ALLOWED U/S.40(A)(IA) OF THE ACT. 5. ON BEING QUESTIONED BY THE AO IT WAS SUBMITTED BY TH E ASSESSEE THAT SIMILAR ADDITION WAS MADE IN A.Y. 2006-07 WHIC H IS CONTESTED BEFORE THE CIT(A). THE AO NOTED THAT THE CIT (A) VIDE HIS ORDER DATED 22-10-2010 FOR A.Y. 2006-07 HAD CONSIDERED THE FACTS 3 ITA NO.1119/PN/2013 OF THE CASE AT LENGTH AND HAS UPHELD THE DISALLOWANCE MAD E BY THE AO. THEREFORE, THE AO FOLLOWING THE ORDER OF THE CIT(A) FOR A .Y. 2006-07 UNDER IDENTICAL FACTS AND CIRCUMSTANCES DISALLOWED THE PROVISION OF RS.60 LAKHS MADE BY THE ASSESSEE AS LABOUR C HARGES PAYABLE. 6. IN APPEAL THE LD.CIT(A) FOLLOWING HIS ORDER FOR A.Y. 2006-0 7 UPHELD THE ACTION OF THE AO. 7. SO FAR AS THE ARGUMENT OF THE ASSESSEE THAT ITAT IN ASSESSEES OWN CASE FOR A.Y. 2006-07 HAS SET ASIDE THE ISSUE TO THE AO TO ALLOW THE REASONABLE AMOUNT OF ESTIMATED LIABILITY WHIC H HAS SUBSEQUENTLY BEEN PAID BY THE ASSESSEE KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK C ONTROLS INDIA PVT. LTD. REPORTED IN 314 ITR 63 IS CONCERNED SHE HELD THAT THE ASSESSEE HAD CLAIMED AND HAS BEEN ALLOWED THE LIABILITY TOWARDS JOB WORK CHARGES IN CURRENT AS WELL AS SUBSEQU ENT YEARS ON ACTUAL BASIS. THEREFORE, THE QUESTION OF ESTIMATION OF LIAB ILITY DURING THE YEAR DOES NOT ARISE. DISTINGUISHING THE DECISION OF THE TRIBUNAL AND OBSERVING THAT IN THE AUDITED ACCOUNTS FOR A .Y. 2008- 09 THE ASSESSEE HAS SHOWN ACTUAL JOB WORK CHARGES PA ID DURING THE YEAR AT RS.60,94,134/- WHICH HAS BEEN ALLOWED BY THE AO AND HE HAS DISALLOWED THE FURTHER CLAIM OF RS.60 LAKHS MADE ON ACCOUNT OF PROVISION FOR UPGRADATION, THE CIT(A) UPHELD THE ACTION OF THE AO. 8. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 4 ITA NO.1119/PN/2013 9. THE ASSESSEE IN ITS WRITTEN SUBMISSION HAS STATED THA T AS PER THE AO ASSESSEE HAS VIOLATED PROVISIONS OF SECTION 40(A)(IA) FOR NON DEDUCTION OF TAX AT SOURCE FROM THE SAID PROVISION FOR LAB OUR CHARGES FOR UPGRADATION. HOWEVER, ACCORDING TO THE ASSE SSEE TDS PROVISIONS ARE NOT APPLICABLE TO THE ASSESSEE BEING AN IND IVIDUAL AND THE ACCOUNTS FOR IMMEDIATELY PRECEDING FINANCIAL YEAR WERE NOT LIABLE FOR AUDIT U/S.44AB AS PER EXPLANATION (L)(B) TO PROVISION S OF SECTION 194C. IT HAS BEEN MENTIONED IN THE SAID SUBMISSIO N THAT THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 HAS ALLOWED THE CLAIM SUBJECT TO VERIFICATION BY THE AO AS TO ACTUAL E XPENDITURE REQUIRED TO BE INCURRED IN SUBSEQUENT YEARS. THEREFORE, THE AO MAY BE DIRECTED TO ALLOW THE EXPENDITURE INCURRED FOR UPG RADATION IN SUBSEQUENT YEARS. THE ASSESSEE IN HIS WRITTEN SUBMISS ION HAS FURTHER STATED THAT THE CIT(A) HAS MISUNDERSTOOD THE FAC TS AND HAS MENTIONED THAT ASSESSEE HAS CLAIMED DEDUCTION IN THE YEA R OF PROVISION AND AGAIN IN THE YEAR OF ACTUAL INCURRING OF THE EXPENDITURE. HOWEVER, THIS OBSERVATION OF THE CIT(A) IS WIT HOUT ANY BASIS SINCE UPGRADATION PROVISION IS DEBITED TO THE P ROFIT AND LOSS ACCOUNT ON MATCHING PRINCIPLE BASIS, I.E. RS.60 LAKHS IN TH E F.Y. 2007-08 RELEVANT TO A.Y. 2008-09 CREDITED TO UPGRADA TION PROVISION ACCOUNT ON LIABILITY SIDE. IN THE YEAR OF INCURRING EXPENDITURE, I.E. EXECUTING THE UPGRADATION, THE SAME IS NO T DEBITED TO PROFIT AND LOSS ACCOUNT BUT TO UPGRADATION PR OVISION ACCOUNT. THE AO HAS VERIFIED THIS ASPECT OF DOUBLE DEDUCT ION APPREHENDED BY THE CIT(A) WHILE GIVING EFFECT TO THE ORDER FOR A.Y. 2006-07. IT HAS FURTHER BEEN MENTIONED THAT THE PERI OD OF UPGRADATION AS MENTIONED IN THE GUARANTEE BOND SHOULD N OT BE RESTRICTED. IT BEING AN ORDER FROM THE GOVERNMENT, AS A MATTER OF 5 ITA NO.1119/PN/2013 BUSINESS EXPEDIENCY, THE ASSESSEE HAS TO CARRY UPGRADA TION AS AND WHEN DIRECTED BY MAHARASHTRA PRATHAMIK SHIKSHAN PARISH AD (MPSP). IF NOT CARRIED, ASSESSEE MAY NOT GET ORDERS FOR SU BSEQUENT YEARS. 10. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED TH AT THE CIT(A) HAS PASSED A SPEAKING ORDER BY DISTINGUISHING THE D ECISION OF THE TRIBUNAL AND HAS HELD THAT WHEN THE ASSESSEE HAS ALREADY CLAIMED AND BEEN ALLOWED EXPENDITURE ON UPGRADATION OF S OFTWARE ON ACTUAL BASIS IT CANNOT BE ALLOWED DEDUCTION IN RESPECT OF A CONTINGENT LIABILITY OR PROVISION. HE ACCORDINGLY SUBMITTED T HAT THE ORDER OF THE CIT(A) BEING BASED ON PROPER APPRECIATION OF FACTS THE SAME SHOULD BE UPHELD AND THE GROUNDS RAISED BY THE AS SESSEE SHOULD BE DISMISSED. 11. WE HAVE CONSIDERED THE ARGUMENTS MADE BY THE LD. D R, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE WRITTEN SUBMISSION FILED ON BEHALF OF THE ASSESSEE. WE FIND THE ASSES SEE IN THE INSTANT CASE IS ENGAGED IN THE BUSINESS OF DEVELOP MENT AND SALE OF EDUCATIONAL SOFTWARE FOR STANDARD 1 TO 12 IN MARAT HI AS WELL AS IN ENGLISH MEDIUM. THE ASSESSEE HAS MADE PROVISION OF RS.60 LAKHS AS LABOUR CHARGES PAYABLE. SINCE NO TAX HAS BEEN DEDUCTED FROM SUCH PROVISION THE AO, INVOKING THE PROVIS IONS OF SECTION 40(A)(IA), DISALLOWED THE AMOUNT AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. WHILE DOING SO, HE ALSO RELIED ON THE ORDER OF THE CIT(A) FOR A.Y. 2006-07. WE FIND THE LD.CIT (A) DISTINGUISHING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 HELD THAT ASSESSEE HAS ALREADY CLAIMED A ND BEEN 6 ITA NO.1119/PN/2013 ALLOWED EXPENDITURE ON UPGRADATION OF SOFTWARE ON ACTUAL B ASIS. THEREFORE, IT CANNOT BE ALLOWED DEDUCTION IN RESPECT OF A CONTINGENT LIABILITY OR PROVISION. IT IS THE SUBMISSION OF THE ASSESSEE IN THE WRITTEN SUBMISSION THAT THE ORDER OF THE CIT(A) ON THIS ISSUE IS MISPLACED DUE TO MISUNDERSTANDING OF THE FACT. IT HAS BEEN MENTIONED THAT UPGRADATION PROVISION HAS BEEN DEBIT ED TO PROFIT AND LOSS ACCOUNT ON MATCHING PRINCIPLE, I.E. RS. 60 LAKHS IN F.Y. 2007-08 RELEVANT TO A.Y. 2008-09 CREDITED TO UPGRADA TION PROVISION ACCOUNT ON LIABILITY SIDE. IN THE YEAR OF INCURRING EXPENDITURE, I.E. EXECUTING THE UPGRADATION, THE SAME IS NOT DEBITED TO PROFIT AND LOSS ACCOUNT BUT TO UPGRADATION PR OVISION ACCOUNT. WE FIND THE TRIBUNAL IN ASSESSEES OWN CASE VIDE ITA NO.1481/PN/2010 ORDER DATED 19-03-2013 HAS RESTORED THE ISSUE TO THE FILE OF THE AO WITH CERTAIN DIRECTIONS. THE RELEVANT OBSERVATION OF THE TRIBUNAL FROM PARA 7 ONWARDS READ AS UNDER : 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HA VE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE IN THE INSTANT CASE IS ENGAG ED IN THE BUSINESS OF DEVELOPMENT AND SALE OF EDUCATION SOFTWARE TO VARIOUS SCHOOLS IN MAHARASTRA. THERE IS ALSO NO DISPUTE TO THE F ACT THAT AS PER THE TENDER CONDITIONS THE CDS/SOFTWARES SHALL BE UNDER T WO YEAR WARRANTY ALONG WITH UPGRADATION AND/OR MODIFICATION S IN CONTENTS AS DIRECTED BY MAHARASTRA PRATHAMIK SHIKSHAN PARISHAD, A FACT SUBMITTED BY THE ASSESSEE BEFORE THE REVENUE AUTHORITIES AND NOT CONTROVERTED BY THE REVENUE. ACCORDING TO THE ASSESSE E SINCE THE WHOLE SALE PROCEEDS ARE ACCOUNTED DURING THE IMPUGNED ASSESSMENT YEAR AND SINCE THE SAME IS SUBJECT TO LIABILITY FOR TWO YEAR WARRANTY, THEREFORE, THE PROVISIONS MADE FOR SUCH LIABILITY IS AN ALLOWABLE EXPENDITURE. IT IS ALSO THE SUBMISSION OF THE LEARNED C OUNSEL FOR THE ASSESSEE THAT SINCE THE NAMES OF THE PARTIES ARE NOT KNOW N, THEREFORE, THE ASSESSEE HAS NOT MADE ANY TDS AS PER THE PROVISIONS OF SECTION 194C R.W.S. 40(A)(IA). IT IS THE CASE OF THE REVENUE THAT IF THE NAMES OF THE PARTIES TO WHOM SUCH AMOUNT IS PAYABLE IS NOT KNO WN, THEN IT IS A CONTINGENT LIABILITY AND THEREFORE THE SAME IS NOT AN ALLOWABLE EXPENDITURE. IN CASE THE SAME IS AN ACCRUED LIABILITY THEN IN VIEW OF VIOLATION OF PROVISIONS OF SECTION 194C DISALLOWANCE OF THE SAME HAS TO BE MADE U/S.40(A)(IA). 7 ITA NO.1119/PN/2013 8. IN THE INSTANT CASE, AS HAS ALREADY BEEN MENTIONED E ARLIER, THE ASSESSEE HAS ACCOUNTED FOR THE ENTIRE SALE PROCEEDS DURING THE IMPUGNED ASSESSMENT YEAR WITH A CONDITION FOR TWO YEAR WARRANTY FOR UPGRADATION AND/OR MODIFICATIONS OF CONTENTS OF THE CDS/SOFTWARES AS DIRECTED BY THE MAHARASTRA PRATHAMIK SHIKSHAN PARISHA D. ACCORDINGLY, THE ASSESSEE HAS MADE PROVISION OF `43,50,00 0 AND IN SUBSEQUENT YEARS THE ASSESSEE HAS MADE PAYMENT FOR THE SAME AMOUNTING TO `9,60,703 IN A.Y. 2007-08 AND `7,71,79 5 IN A.Y. 2008-09. 8.1 THE HONBLE SUPREME COURT IN THE CASE OF CALCUTT A CO. LTD. (SUPRA) HAS HELD AS UNDER : APART, HOWEVER, FROM THE QUESTION WHETHER SECTION 10(2)(XV) OF THE INCOME TAX ACT WOULD APPLY, TO THE FACTS OF THE PRE SENT CASE, THE CASE IS, IN OUR OPINION, WELL WITHIN THE PURVIEW OF SECTION 10( 1) OF THE INCOME TAX ACT. THE APPELLANT HERE IS BEING ASSESSED IN RESPEC T OF THE PROFITS AND GAINS OF ITS BUSINESS AND THE PROFITS AND GAINS OF THE BUSINESS CANNOT BE DETERMINED UNLESS AND UNTIL THE EXPENSES OR THE OBL IGATIONS WHICH HAVE BEEN INCURRED ARE SET OFF AGAINST THE RECEIPTS. THE EXPRESSION ' PROFITS AND GAINS ' HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENS E AND THERE CAN BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXP ENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPTS I S DEDUCTED THEREFROM WHETHER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE D ISCHARGED AT SOME FUTURE DATE. AS WAS OBSERVED BY LORD HERSCHELL IN R USSEL V. TOWN AND COUNTY BANK LTD.: ' THE DUTY IS TO BE CHARGED UPON ' A SUM NOT LESS T HAN THE FULL AMOUNT OF THE BALANCE OF THE PROFITS OR GAINS OF THE TRADE, M ANUFACTURE, ADVENTURE, OR CONCERN; AND IT APPEARS TO ME THAT THAT LANGUAGE I MPLIES THAT FOR THE PURPOSE OF ARRIVING AT THE BALANCE OF PROFITS ALL T HAT EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPTS M UST BE DEDUCTED, OTHERWISE YOU DO NOT ARRIVE AT THE BALANCE OF PROFI TS, INDEED, YOU DO NOT ASCERTAIN, AND CANNOT ASCERTAIN, WHETHER THERE IS S UCH A THING AS PROFIT OR NOT. THE PROFIT OF A TRADE OR BUSINESS IS THE SURPL US BY WHICH THE RECEIPTS FROM THE TRADE OR BUSINESS EXCEED THE EXPENDITURE N ECESSARY FOR THE PURPOSE OF EARNING THOSE RECEIPTS. THAT SEEMS TO ME TO BE THE MEANING OF THE WORD ' PROFITS ' IN RELATION TO ANY TRADE OR BU SINESS. UNLESS AND UNTIL YOU HAVE ASCERTAINED THAT THERE IS SUCH A BALANCE, NOTHING EXISTS TO WHICH THE NAME ' PROFITS ' CAN PROPERLY BE APPLIED.' A SIMILAR OPINION WAS EXPRESSED IN GRESHAM LIFE ASS URANCE SOCIETY V. STYLES: ' WHEN WE SPEAK OF THE PROFITS AND GAINS OF A TRADE R WE MEAN THAT WHICH HE HAD MADE BY HIS TRADING. WHETHER THERE BE SUCH A THING AS PROFIT OR GAIN CAN ONLY BE ASCERTAINED BY SETTING AGAINST THE RECEIPTS THE EXPENDITURE OR OBLIGATIONS TO WHICH THEY HAVE GIVEN RISE. ' THESE ARE NO DOUBT OBSERVATIONS FROM THE ENGLISH CA SES DEALING WITH ENGLISH STATUTES OF INCOME TAX, BUT THE GENERAL PRI NCIPLES WHICH CAN BE DEDUCED THEREFROM ARE, NEVERTHELESS, APPLICABLE HER E AND IT WAS STATED BY LORD MACMILLAN IN PONDICHERRY RAILWAY CO. LTD. V. C OMMISSIONER OF INCOME TAX : ' ENGLISH AUTHORITIES CAN ONLY BE UTILISED WITH CAU TION IN THE CONSIDERATION OF INDIAN INCOME TAX CASES OWING TO THE DIFFERENCES IN THE RELEVANT 8 ITA NO.1119/PN/2013 LEGISLATION, BUT THE PRINCIPLE LAID DOWN BY LORD CH ANCELLOR HALSBURY IN GRESHAM LIFE ASSURANCE SOCIETY V. STYLES, IS OF GEN ERAL APPLICATION UNAFFECTED BY THE SPECIALTIES OF THE ENGLISH TAX SY STEM. 'THE THING TO BE TAXED', SAID HIS LORDSHIP, ' IS THE AMOUNT OF PROFI TS OR GAINS'. THE WORD PROFITS', I THINK, IS TO BE UNDERSTOOD IN ITS NATU RAL AND PROPER SENSE IN A SENSE WHICH NO COMMERCIAL MAN WOULD MISUNDERSTAND.' IT MAY BE USEFUL TO OBSERVE AT THIS STAGE THAT PRIO R TO THE AMENDMENT OF THE INDIAN INCOME TAX ACT, 1939, BAD AND DOUBTFUL DEBTS WERE NOT TREATED AS DEDUCTIBLE ALLOWANCE FOR THE PURPOSE OF COMPUTATION OF PROFITS OR GAINS OF A BUSINESS. THE PRIVY COUNCIL IN INCOME TAX COMMISS IONER V. CHITNAVIS OBSERVED : ' ALTHOUGH THE ACT NOWHERE IN TERMS AUTHORISES THE DEDUCTION OF BAD DEBTS OF A BUSINESS, SUCH A DEDUCTION IS NECESSARILY ALLO WABLE. WHAT ARE CHARGEABLE TO INCOME TAX IN RESPECT OF A BUSINESS A RE THE PROFITS AND GAINS OF A YEAR; AND IN ASSESSING THE AMOUNT OF THE PROFI TS AND GAINS OF A YEAR ACCOUNT MUST NECESSARILY BE TAKEN OF ALL LOSSES INC URRED, OTHERWISE YOU WOULD NOT ARRIVE AT THE TRUE PROFITS AND GAINS.' THE HIGH COURT IN DISALLOWING THE CLAIM OF THE APPE LLANT IN THE PRESENT CASE ONLY CONSIDERED THE PROVISIONS OF SECTION 10(2 )(XV) OF THE ACT AND CAME TO THE CONCLUSION THAT ON A STRICT INTERPRETAT ION OF THOSE PROVISIONS THE SUM OF RS.24,809 WAS NOT AN ALLOWABLE DEDUCTION . ITS ATTENTION WAS DRAWN BY THE LEARNED COUNSEL FOR THE APPELLANT TO T HE PROVISIONS OF SECTION 10(I) OF THE ACT ALSO BUT IT NEGATIVED THIS ARGUMEN T OBSERVING THAT UNDER THE INDIAN ACT, THE PROFITS MUST BE DETERMINED BY T HE METHOD OF MAKING THE STATUTORY DEDUCTIONS FROM THE RECEIPTS AND ANY DEDU CTION FROM THE BUSINESS RECEIPTS, IF IT WAS TO BE ALLOWED, MUST BE BROUGHT UNDER ONE OR THE OTHER OF THE DEDUCTIONS MENTIONED IN SECTION 10(2) AND THAT THERE WAS NO SCOPE FOR ANY PRELIMINARY DEDUCTION UNDER GENERAL P RINCIPLES. IT WAS, HOWEVER, HELD BY THIS COURT IN BADRIDAS DAGA V. COM MISSIONER OF INCOME TAX : ' IT IS TO BE NOTED THAT WHILE SECTION 10(I) IMPOSE S A CHARGE ON THE PROFITS OR GAINS OF A TRADE, IT DOES NOT PROVIDE HOW THOSE PROFITS ARE TO BE COMPUTED. SECTION 10(2) ENUMERATES VARIOUS ITEMS WH ICH ARE ADMISSIBLE AS DEDUCTIONS, BUT IT IS WELL SETTLED THAT THEY ARE NOT EXHAUSTIVE OF ALL ALLOWANCES WHICH COULD BE MADE IN ASCERTAINING PROF ITS TAXABLE UNDER SECTION 10(I). ' VENKATARAMA AIYAR, J., WHO DELIVERED THE JUDGMENT O F THE COURT THEN PROCEEDED TO DISCUSS THE CASES OF COMMISSIONER OF I NCOME TAX V. CHITNAVIS, GRESHAM LIFE ASSURANCE SOCIETY V. STYLES AND PONDICHERRY RAILWAY CO. V. INCOME TAX COMMISSIONER, AND OBSERVE D : ' THE RESULT IS THAT WHEN A CLAIM IS MADE FOR A DED UCTION FOR WHICH THERE IS NO SPECIFIC PROVISION IN SECTION 10(2), WHETHER IT IS ADMISSIBLE OR NOT WILL DEPEND ON WHETHER, HAVING REGARD TO ACCEPTED COMMER CIAL PRACTICE AND TRADING PRINCIPLES, IT CAN BE SAID TO ARISE OUT OF THE CARRYING ON OF THE BUSINESS AND TO BE INCIDENTAL TO IT. IF THAT IS EST ABLISHED, THEN THE DEDUCTION MUST BE ALLOWED, PROVIDED OF COURSE THERE IS NO PRO HIBITION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. TURNING NOW TO THE FACTS OF THE PRESENT CASE, WE FI ND THAT THE SUM OF RS.24,809 REPRESENTED THE ESTIMATED EXPENDITURE WHI CH HAD TO BE INCURRED BY THE APPELLANT IN DISCHARGING A LIABILITY WHICH I T HAD ALREADY UNDERTAKEN 9 ITA NO.1119/PN/2013 UNDER THE TERMS OF THE DEEDS OF SALE OF THE LANDS I N QUESTION AND WAS AN ACCRUED LIABILITY WHICH ACCORDING TO THE MERCANTILE SYSTEM OF ACCOUNTING THE APPELLANT WAS ENTITLED TO DEBIT IN ITS BOOKS OF ACCOUNT FOR THE ACCOUNTING YEAR AS AGAINST THE RECEIPTS OF RS.43,69 2-II-9 WHICH REPRESENTED THE SALE PROCEEDS OF THE SAID LANDS. EV EN UNDER SECTION 10(2) OF THE INCOME TAX ACT, IT MIGHT POSSIBLY BE URGED T HAT THE WORD ' EXPENDED ' WAS CAPABLE OF BEING INTERPRETED AS ' EXPENDABLE ' OR ' TO BE EXPENDED ' AT LEAST IN A CASE WHERE A LIABILITY TO INCUR THE S AID EXPENSES HAD BEEN ACTUALLY INCURRED BY THE ASSESSEE WHO ADOPTED THE M ERCANTILE SYSTEM OF ACCOUNTING AND THE DEBIT OF RS.24,809 WAS THUS A PR OPER DEBIT IN THE PRESENT CASE. WE NEED NOT HOW EVER BASE OUR DECISIO N ON ANY SUCH CONSIDERATION. WE ARE DEFINITELY OF OPINION THAT TH E SUM OF RS.24,809 REPRESENTED THE ESTIMATED AMOUNT WHICH WOULD HAVE T O BE EXPENDED BY THE APPELLANT IN THE COURSE OF CARRYING ON ITS BUSINESS AND WAS INCIDENTAL TO THE SAME AND HAVING REGARD TO THE ACCEPTED COMMERCI AL PRACTICE AND TRADING PRINCIPLES WAS A DEDUCTION WHICH, IF THERE WAS NO SPECIFIC PROVISION FOR IT UNDER SECTION 10(2) OF THE ACT, WA S CERTAINLY ALLOWABLE DEDUCTION, IN ARRIVING AT THE PROFITS AND GAINS OF THE BUSINESS OF THE APPELLANT UNDER SECTION 10(I) OF THE ACT, THERE BEI NG NO PROHIBITION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. IT IS TO BE NOTED THAT THE APPELLANT HAD LED EVIDEN CE BEFORE THE INCOME TAX AUTHORITIES IN REGARD TO THIS ESTIMATED EXPENDITURE OF RS.24,809 AND NO EXCEPTION WAS TAKEN TO THE SAME IN REGARD TO THE QU ANTUM, THOUGH THE PERMISSIBILITY OF SUCH A DEDUCTION WAS QUESTIONED B Y THEM RELYING UPON THE PROVISIONS OF SECTION 10(2) OF THE ACT. IT, THEREFORE, FOLLOWS THAT THE CONCLUSION REACHED BY THE HIGH COURT IN REGARD TO THE DISALLOWANCE OF RS.24,809 WAS WRONG A ND IT SHOULD HAVE ANSWERED THE REFERRED QUESTION IN THE AFFIRMATIVE. 9. THE HONBLE SUPREME COURT IN THE CASE OF ROTORK I NDIA PVT. LTD. VS. CIT REPORTED IN 314 ITR 63 HAS HELD AS UNDER : HELD, REVERSING THE DECISION OF THE HIGH COURT, TH AT THE VALUE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHI STICATED GOODS AND STATISTICAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND EFFECTIVE; THAT VALUE ACTUATOR BEING A SOPHISTICATE D ITEM NO CUSTOMER WAS PREPARED TO BUY A VALUE ACTUATOR WITHOUT A WARRANTY . THEREFORE, THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE; IN OTHER WORDS, THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PR ODUCT. IN THIS CASE THE WARRANTY PROVISIONS HAD TO BE RECOGNISED BECAUSE TH E ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESUL TING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF THE OBLIGATION. THEREFORE, THE ASSESSEE HAD INCURRED A LIABILITY DURING THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UND ER SECTION 37 OF THE INCOME-TAX ACT, 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE T HE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIP LE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WOU LD DEPEND ON THE NATURE OF THE BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING AD OPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. 10 ITA NO.1119/PN/2013 A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS R ECOGNISED WHEN (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PR OVISION CAN BE RECOGNISED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BRING MANUFACTUR ED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARRANTY IN RESPECT O F SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. 10. FROM THE DETAILS FURNISHED BY THE ASSESSEE WE FIND TH AT ALTHOUGH THE ASSESSEE HAS SUBMITTED THE LIST OF JOB WORK O PERATORS TO WHOM PAYMENTS WERE MADE IN TWO SUBSEQUENT FINANCIAL YE ARS FOR MODIFICATION, HOWEVER, THE ASSESSING OFFICER HAS MISSED TO NOTE SUCH PAYMENTS MADE IN SUBSEQUENT YEARS. FURTHER, THE SUBMISSIO N OF THE ASSESSEE THAT MOST OF THE JOB OPERATORS WERE PAID LESS THAN `50,000/- FOR WHICH NO TDS IS REQUIRED HAS ALSO NOT BEEN CONSIDER ED. WE, THEREFORE, RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO VERIFY THE PAYMENTS MADE IN SUBSEQUENT Y EARS TO VARIOUS JOB WORKERS. SINCE THE ASSESSEE HAS MADE A PROVISION FOR SUCH WARRANTY ON ESTIMATE BASIS WHICH IS HIGHER THAN THE ACT UAL PAYMENTS IN THE TWO SUBSEQUENT YEARS, THEREFORE, THE ASSESSING OFFI CER SHALL DECIDE THE REASONABLE AMOUNT OF ESTIMATED LIABILITY W HICH HAS SUBSEQUENTLY BEEN PAID BY THE ASSESSEE AND DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW KEEPING IN MIND THE DECI SIONS OF HONBLE SUPREME COURT CITED ABOVE. NEEDLESS TO SAY THE ASSESSING OFFICER SHALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. WE HOLD AND DIRECT ACCORDINGLY. THE GROUNDS RAISED BY THE ASSE SSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 12. FROM THE WRITTEN SUBMISSION FILED BY THE ASSESSEE, WE FIND THE AO AFTER VERIFICATION OF THE ASPECT OF DOUBLE DEDUCTION APPREHENDED BY THE CIT(A) HAD GIVEN EFFECT TO THE ORDER FOR A.Y. 2006-07 AND HAS ALLOWED THE CLAIM. FURTHER, IT IS ALSO THE SUBMISSION OF THE ASSESSEE THAT THERE IS NO QUESTION OF A NY DOUBLE DEDUCTION, I.E. IN THE YEAR OF PROVISION AND AGAIN IN THE YEA R OF ACTUAL INCURRING OF EXPENDITURE. UNDER THE AFOREMENTIONED CIRCUMSTANCES AND FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE D ECISION OF 11 ITA NO.1119/PN/2013 THE TRIBUNAL FOR A.Y. 2006-07. HE WILL ALSO KEEP IN MIND TH E APPREHENSION OF THE CIT(A) THAT THE ASSESSEE HAS CLAIMED DOUBLE DEDUCTION. HE WILL VERIFY THE SUBMISSION OF THE ASSESSEE THA T THERE NO SUCH DOUBLE DEDUCTION, I.E. IN THE YEAR OF PROVISION AND A GAIN IN THE YEAR OF ACTUAL INCURRING OF EXPENDITURE AND THE CIT (A) HAS MISUNDERSTOOD THE FACTS. THE AO SHALL DECIDE THE ISSUE A FRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLO WED FOR STATISTICAL PURPOSES. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 12-08-2016. SD/- SD/- ( SUSHMA CHOWLA ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; DATED : 12 TH AUGUST , 2016. LRH'K ' (*+ ,+ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. % ( ) - THE CIT(A)-I, PUNE 4. % S / THE CIT-I, PUNE 5. ( ++, , , , IQ.KS / DR, ITAT, A PUNE; 6. 0 / GUARD FILE. / BY ORDER , ( + //TRUE COPY// 23 + , / SR. PRIVATE SECRETARY ,, IQ.KS / ITAT, PUNE