Joint Commssioner of Income tax,LTU, Bangalore V. Hewlett packard India Sales Pvt Ltd, Bangalore

ITA 1136/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95313 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-10-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 05-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K P KUMAR SR SHRI I P
• Keywords: Depreciation; Corroborative evidences
• Section: 143(3); 37

Judgement Text

ITA.1136 & 1134/BANG/2014 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T.A NO.1136/BANG/2014 (ASSESSMENT YEAR : 2002-03) JOINT COMMISSIONER OF INCOME-TAX (LTU), BANGALORE ..APPELLANT V. M/S. HEWLETT PACKARD INDIA SALES P. LTD, (ERSTWHILE HEWLETT PACKARD INDIA P. LTD), 24, SALARPURIA ARENA, HOSUR MAIN ROAD, BANGALORE ..RESPONDENT PAN : AAACC9862F I.T.A NO.1134/BANG/2014 (ASSESSMENT YEAR : 2002-03) (BY THE ASSESSEE) ASSESSEE BY : SHRI. K. P. KUMAR, SR. COUNSEL REVENUE BY : SHRI. I. P. S. BINDRA, CIT-DR-I HEARD ON : 13.10.2015 PRONOUNCED ON : 30.10.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY REVENUE AND ASSESSEE RE SPECTIVELY, DIRECTED AGAINST AN ORDER DT.30.06.2014 OF CIT (A)- LTU, BENGALURU. ITA.1136 & 1134/BANG/2014 PAGE - 2 02. APPEAL OF THE REVENUE IS TAKEN UP FIRST FOR DIS POSAL. REVENUE HAS ALTOGETHER RAISED FOUR GROUNDS. VIDE GROUND NU MBER 1 GRIEVANCE RAISED IS THAT DISALLOWANCE OF EXPENDITU RE INCURRED BY THE ASSESSEE ON REPAIRS, MAINTENANCE AND MISCELLANEOUS EXPENDITURE WAS SCALED DOWN TO 15%. 03. FACTS APROPOS ARE THAT ASSESSEE MANUFACTURING A ND TRADING COMPUTER EQUIPMENT AND ACCESSORIES HAD CLAIMED REPA IRS AND MAINTENANCE EXPENDITURE OF RS.3,09,46,505/-, BREAK- UP OF WHICH WAS AS UNDER : MACHINERY RS. 40,64,233 OTHERS RS.2,68,82,282 RS.3,09,46,505 ASSESSEE HAS ALSO CLAIMED MISCELLANEOUS EXPENDITURE OF RS.1,34,54,426/-. IT SEEMS DURING THE COURSE OF AS SESSMENT PROCEEDINGS, ASSESSEE WAS UNABLE TO PRODUCE EVIDENC E IN SUPPORT OF THE ABOVE CLAIM. HE DISALLOWED THE ABOVE CLAIM OF EXPENDITURE TOTALLING TO RS.4,44,00,931/-. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE CIT (A). 04. ARGUMENT OF THE ASSESSEE BEFORE THE CIT (A) WAS THAT IT HAD ALL SUPPORTING EVIDENCE FOR THE CLAIM OF MAINTENANC E AND ITA.1136 & 1134/BANG/2014 PAGE - 3 MISCELLANEOUS EXPENDITURE. CIT (A) SOUGHT A REMAND REPORT FROM THE AO. IN SUCH REMAND REPORT, AO STATED THAT ASSE SSEE HAD PRODUCED THE LEDGER ACCOUNTS AND CERTAIN BILLS / IN VOICES IN SUPPORT OF THE TRANSACTIONS. AS PER THE AO, EVERY ENTRY IN THE LEDGER REFLECTED TRANSACTIONS ARISING OUT OF A BUNCH OF BI LLS / INVOICES. AO TESTED ONE OF SUCH ENTRIES AND FOUND THAT IN RELATI ON TO A CLAIM FOR PLANT AND MACHINERY REPAIRS, ASSESSEE COULD PRODUCE BILLS ONLY TO THE EXTENT OF RS.1,56,122/-, WHEREAS THE RELEVANT E NTRY WAS FOR RS.2,01,524/-. SIMILARLY FOR OTHER REPAIRS ALSO, T HERE WAS AN ENTRY FOR RS.2,49,166/-, BUT THE PRIMARY DOCUMENTS WERE A VAILABLE ONLY FOR RS.2,48,142/-. FURTHER, AS PER THE AO, THERE WERE A NUMBER OF BILLS / INVOICES WHICH RELATED TO THE PRECEDING ACC OUNTING YEAR. CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE AND THE REMAND REPORT OF THE AO HELD THAT THERE WERE SOME G APS IN EVIDENCE PRODUCED BY THE ASSESSEE IN SUPPORT OF THE EXPENDITURE RECORDED IN ITS BOOKS OF ACCOUNTS. CONSIDERING TH E GAPS TO BE RANGING BETWEEN 1 TO 23% OF THE TEST CHECKED ITEMS, CIT (A) HELD THAT A DISALLOWANCE OF 15% WOULD SUFFICE. HE ORDER ED ACCORDINGLY. 05. NOW BEFORE US, LD. DR SUBMITTED THAT ASSESSEE C OULD NOT JUSTIFY THE ENTRIES IN THE LEDGER. SUPPORTING BILL S NEVER TALLIED WITH THE AMOUNT SHOWN IN THE LEDGER ENTRIES. ASSESSEE H AD ALSO ITA.1136 & 1134/BANG/2014 PAGE - 4 ACCOUNTED FOR BILLS AND INVOICES RELATING TO PRECED ING ACCOUNTING YEAR. THUS AS PER THE LD. DR ASSESSEE WAS UNABLE T O DISCHARGE THE ONUS RESTING ON IT TO PROVE THE EXPENDITURE. LD. D R SUBMITTED THAT DISALLOWANCE MADE BY THE AO HAD TO BE REINSTATED. 06. PER CONTRA, LD. AR SUPPORTED THE ORDERS OF CIT (A). 07. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. REMAND REPORT FURNISHED BY THE AO TO THE CIT (A), I S REPRODUCED HERE UNDER : 2. IN THIS CASE THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) R.W.S 147 ON 31.12.2007. THE ADDITIONS/ DISALLOWANCES MADE WERE INTER ALIA, REPAIR CHARGES [PLANT & MACHINERY AND OTHERS] AND MISCELLANEOUS EXPENSES. IN THE LETTER REFERRED TO ABOVE, A REPORT WAS CALLED FOR, ON THE EVIDENCES FURNISHED BY THE ASSESSEE IN THIS REGARD. THE DISALLOWANCES IN QUESTION WERE REPAIR CHARGES OF PLANT & MACHINERY AND OTHERS AND ALSO MISCELLANEOUS EXPENSES. AS THE DISALLOWANCE WAS FOR THE REASON THAT THE ASSESSEE DID NOT PRODUCE NECESSARY EVIDENCE, THE ASSESSEE WAS GIVEN AN OPPORTUNITY OF PRODUCING THE SAME AND BEING HEARD. ON VERIFICATION, FOLLOWING FACTS EMERGE. REPAIR CHARGES: 3. PLANT AND MACHINERY: AS MENTIONED ABOVE, ENTIRE AMOUNT OF EXPENDITURE UNDER THIS HEAD AMOUNTING TO RS.40,64,233/- WAS DISALLOWED. AS THE NUMBER OF ITEMS TOTALING TO THIS: AMOUNT WAS SUBSTANTIAL, THE EVIDENCE, WAS VERIFIED ON A TEST CHECK BASIS. PERU SAL OF THE RECORDS ALSO SHOWED THAT IN THE LEDGER, LEDG ER, EACH LINE ENTRY IN TURN RELATES TO A BUNCH OF BILLS/INVOICES INVOLVING SEVERAL TRANSACTIONS. ITA.1136 & 1134/BANG/2014 PAGE - 5 THEREFORE THE ASSESSEE WAS AGAIN ASKED TO MATCH THE LINE ENTRIES IN THE LEDGER WITH BILLS / INVOICES ON A TEST CHECK BASIS [THIS PATTERN IS APPLICABLE TO THE REMAINING EXPENSES COVERED IN THIS REPORT ALSO]. TH E ENTRY ON 14.05.2001 FOR RS.2,01,524/- UNDER THE HEA D 'SUPRA COMPUTERS/LABOUR CH/APROL' WAS SELECTED. COPIES OF BILLS / INVOICES IN RESPECT OF THIS ENTRY WERE FILED ON 14.03.2011. IN ITS LETTER DATED 09.03.2011 , THE ASSESSEE ADMITS THAT IT IS ABLE TO FURNISH THE COPIES OF BILLS ONLY TO THE EXTENT OF RS. 1,56,122/ -. DURING THE COURSE OF THE HEARING, IT WAS ARGUED FOR THE ASSESSEE THAT IT IS DUE TO THE EFFLUX OF TIME T HAT IT IS NOT POSSIBLE TO FURNISH COPIES OF ALL THE BILLS/INVOICES. THUS TO THE EXTENT OF VERIFICATION MADE AND SUBJECT TO THE DIFFERENCE AS MENTIONED ABOVE, T HE ASSESSEES CLAIM APPEARS TO BE IN ORDER. 3.1 OTHER REPAIRS: THE AMOUNT DISALLOWED UNDER THIS HEAD IS RS.2,68,82,282/- AS IN THE CASE OF PLANT AND MACHINERY, THERE WAS A - SMALL GAP IN THE BILLS / INVOICES PRODUCED. IN RESPECT OF ELECTRICITY MAINTENANCE CHARGES DATED 20.04.2001 AMOUNTING TO RS.2,49,166/- THE ASSESSEE COULD PRODUCE BILLS / INVOICES TO THE EXTENT OF RS.2,48,142/-. SIMILARLY , WITH REGARD TO NATRAJ / CORRUGATED BOXES DATED 25.06.2001 AMOUNTING TO RS.2,01,958/-, COPIES OF BILLS / INVOICES PRODUCED WERE FOR RS.1,88,043/-. EVEN HERE THE TIME GAP IS STATED TO BE THE REASON F OR THE DIFFERENCE. THEREFORE TO THE EXTENT OF VERIFIC ATION MADE AND SUBJECT TO THE DIFFERENCE AS MENTIONED ABOVE, THE ASSESSEES CLAIM APPEARS TO BE IN ORDER. 3.2 MISCELLANEOUS EXPENSES : RS.1,34,54,426/- WAS DISALLOWED UNDER THIS HEAD. THE DETAILS OF FOREIGN CURRENCY TT CHARGES & COMMISSION DATED 28.06.2001 WERE CALLED FOR. AGAINST THE AMOUNT DEBITED, RS.2,02,20 0/- , THE ASSESSEE PRODUCED COPIES OF BILLS/INVOICES AMOUNTING TO RS.1,99,250/- EXPLANATION FOR THE ITA.1136 & 1134/BANG/2014 PAGE - 6 DIFFERENCE WAS SAME AS IN THE CASE OF OTHER EXPENSE S. THEREFORE TO THE EXTENT OF VERIFICATION MADE AND SUBJECT TO THE DIFFERENCE AS MENTIONED ABOVE, THE ASSESSEE'S CLAIM APPEARS TO BE IN ORDER. 4. ANOTHER IMPORTANT FACT THAT NEEDS TO BE MENTIONED HERE IS THAT COPIES OF THE BILLS/INVOICES FILED BY THE A G SESSEE CONTAIN SEVERAL BILLS/INVOICES, WHICH RELATE TO THE PREVIOUS ACCOUNTING YEAR, I.E., 2000-01 (ASSESSMENT YEAR 2001- 02). THE ASSESSEE'S EXPLANATION WAS THAT IN VIEW OF THE FACT THAT INDIVIDUAL VALUE OF THESE BILLS/INVOICES IS NO GREA T AND CONSIDERING THE LARGE NUMBER OF SUCH BILLS/INVOICES, THEY ARE BUNCHED TOGETHER AND THE EXPENDITURES ARE BOOKED ON A LATER, CONVENIENT DATE. AS THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING, THESE EXPENDITURES SHOULD HAVE BEEN BOOKED IN THE EARLIER YEAR ITSELF. THE ASSESSEE ARGUES THAT THIS IS THE PRACTICE CONSISTEN TLY FOLLOWED BY IT. 5. CONSIDERING THE FACTS OF THE CASE AS NARRATED ABOVE, ESPECIALLY IN PARA 4, THE ASS6SSEE'S APPEAL MAY KINDLY BE DECIDED ON MERITS. 08. WHAT WE FIND FROM THE REMAND REPORT IS THAT AO WITH REGARD TO THE REPAIR CHARGES STATED THAT ASSESSEES CLAIM APPEARE D TO BE IN ORDER EXCEPT FOR THE DIFFERENCES MENTIONED BY HIM AT PARA 3 OF T HE REMAND REPORT. SAME OPINION HAS BEEN GIVEN BY HIM WITH RESPECT TO OTHER REPAIRS ALSO. VERY SAME VIEW HAS BEEN TAKEN BY HIM WITH REGARD TO THE MISCELLANEOUS EXPENDITURE ALSO. ONLY MAJOR LACUNA THAT HAS BEEN POINTED OUT BY THE AO IS THAT SOME OF THE BILLS / INVOICES RELATE TO PRECEDI NG ASSESSMENT YEAR. CIT ITA.1136 & 1134/BANG/2014 PAGE - 7 (A) WORKED OUT THE PERCENTAGE OF DIFFERENCE BETWEEN FIGURES SHOWN IN THE LEDGER ENTRIES AND THE SUPPORTING BILLS AND FOUND T HAT DIFFERENCE VARIED BETWEEN 1 TO 23%. HE THEREFORE CONSIDERED THAT AN ADDITION OF 15% WOULD BE SUFFICIENT TO ADDRESS THE DEFICIENCIES POINTED O UT BY THE AO. IN THE FACE OF THE REMAND REPORT OF THE AO, REPRODUCED BY US A BOVE, AND THE QUANTUM OF VARIATION POINTED OUT THEREIN, WE ARE OF THE OPI NION THAT THE DISALLOWANCE OF 15% SUSTAINED BY THE CIT (A) WAS REASONABLE. WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT (A) IN THIS REGARD. GROUND 1 OF THE REVENUE STANDS DISMISSED. 09. VIDE ITS GROUND 2 GRIEVANCE OF THE REVENUE IS T HAT CIT (A) DIRECTED ALLOWANCE OF DEPRECIATION ON ASSETS GIVEN BY ASSESS EE UNDER FINANCE LEASE. AO HAD DENIED THE CLAIM OF DEPRECIATION ON ASSETS W HICH WERE LEASED OUT BY THE ASSESSEE ON FINANCIAL LEASE. 10. FACTS APROPOS ARE THAT ASSESSEE HAD GIVEN CERTA IN ASSETS ON FINANCE LEASE AND FOLLOWING ACCOUNTING STANDARD 19 OF ICAI DID NOT CAPITALISE THE VALUE OF SUCH ASSETS IN ITS BOOKS. HOWEVER, THE IN TEREST COMPONENT RECEIVED FROM LESSEES WERE CREDITED TO THE PROFIT A ND LOSS ACCOUNT. NEVERTHELESS WHILE FILING ITS RETURN, ASSESSEE RELY ING ON CBDT CIRCULAR NO.2, DT.09.02.2001, CLAIMED DEPRECIATION. IN OTHE R WORDS, ASSESSEE CAPITALISED THE ASSETS GIVEN ON LEASE FOR TAX PURPO SES. AO WAS OF THE ITA.1136 & 1134/BANG/2014 PAGE - 8 OPINION THAT THE LEASE BEING FINANCIAL IN NATURE, D EPRECIATION COULD NOT BE ALLOWED TO THE ASSESSEE. AS PER THE AO, AFTER TERM INATION OF THE LEASE, OWNERSHIP OF THE ASSETS GOT TRANSFERRED TO THE LESS EE. HOWEVER, ASSESSEE POINTED OUT THE CLAUSES IN THE LEASE AGREEMENT EXEC UTED BETWEEN THE ASSESSEE AND THE LESSEE, WHEREIN IT WAS PROVIDED TH AT ON TERMINATION OF THE LEASE, LESSEE WAS TO DELIVER THE EQUIPMENT TO THE LESSOR IN GOOD CONDITION. CLAIM OF THE ASSESSEE WAS THAT TITLE OF THE ASSET D ID NOT PASS ON TO THE ASSESSEE, AND IT REMAINED WITH THE ASSESSEE. AS P ER THE ASSESSEE, THE TRANSACTIONS WERE CLASSIFIED AS FINANCIAL LEASE ONL Y TO ADHERE TO AS-19 (SUPRA). HOWEVER, AO WAS NOT IMPRESSED. ACCORDING TO HIM, OWNER OF THE ASSET WAS ENTITLED TO DEPRECIATION ONLY IF THE ASSE T WAS USED IN THE BUSINESS. AS PER THE AO, THERE WERE CERTAIN FEATURES IN THE A GREEMENT WHICH SHOWED THAT THE TRANSACTIONS WERE ONLY FINANCIAL LEASE. A CCORDING TO HIM, THE PERIOD OF THE LEASE WAS ALMOST ON PAR WITH THE LIFE OF THE ASSET. AT THE END OF THE LEASE PERIOD THERE WAS AN OPTION WITH THE LE SSEE TO CONTINUE THE LEASE WITH A NOMINAL RENT. THUS ACCORDING TO THE AO THES E WERE PURE FINANCIAL TRANSACTIONS AND ASSESSEE COULD NOT CLAIM DEPRECIAT ION. DISALLOWANCE OF RS.25,59,14,816/- WAS MADE. 11. ASSESSEES APPEAL BEFORE THE CIT (A) WAS SUCCES SFUL. CIT (A) HELD THAT WHERE THE LESSOR CONTINUED TO BE THE OWNER, IT WAS ENTITLED TO ITA.1136 & 1134/BANG/2014 PAGE - 9 DEPRECIATION. RELIANCE WAS PLACED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF I.C.D.S LTD V. CIT [(2013) 350 ITR 5 27]. 12. LD. DR STRONGLY ASSAILING THE ORDER OF CIT (A) SUBMITTED THAT AT THE END OF THE LEASE, ASSETS WERE TRANSFERRED TO THE LE SSEE. HENCE ASSESSEE COULD NOT HAVE CLAIMED DEPRECIATION ON ASSETS WHICH WERE NOT IN ITS BUSINESS. 13. PER CONTRA, LD. AR SUPPORTED THE ORDER OF CIT ( A). 14. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. AO HIMSELF HAS STATED IN THE ASSESSMENT ORDER THAT THO UGH ASSESSEE TERMED THE LEASE AS FINANCIAL LEASE, THE TERMS OF THE LEASE DI D NOT PROVIDE FOR TRANSFER OF OWNERSHIP TO THE LESSEE AUTOMATICALLY AT THE END OF THE LEASE. ONLY REASON WHY THE LEASE WAS CONSIDERED TO BE FINANCIAL IN NAT URE WAS THAT THE LEASE PERIOD WAS MORE OR LESS ON PAR WITH THE LIFE OF THE ASSETS WHICH WERE LEASED OUT AND THE RENEWAL OF THE LEASE WAS AT THE OPTION OF THE LESSEE FOR A NOMINAL RENT. HOWEVER, IN OUR OPINION NONE OF THES E CAN SUBSTITUTE THE CLAUSE IN THE LEASE AGREEMENT WHICH SPECIFIED THAT THE OWNERSHIP OF THE ASSETS CONTINUED TO BE WITH THE ASSESSEE. INSURANC E FOR THE LEASED PRODUCTS WERE BORNE BY THE ASSESSEE. ASSESSEE WAS THE OWNER AND HELD THE TITLE OF THE ASSETS. GIVING AN EQUIPMENT ON LEASE BY ITSELF CAN BE CONSIDERED AS A BUSINESS. WE ARE OF THE OPINION THAT BY VIRTUE OF THE DECISION OF HONBLE APEX COURT IN I. C. D. S (SUPRA), ASSESSEE HAVING C APITALISED THE ASSETS IN ITA.1136 & 1134/BANG/2014 PAGE - 10 ITS BOOKS WAS ELIGIBLE FOR CLAIMING DEPRECIATION TH EREON. WE DO NOT FIND ANY REASON TO INTERFERE. GROUND.2 OF THE REVENUE S TANDS DISMISSED. 15. VIDE ITS GROUND 3, GRIEVANCE IS THAT CIT (A) DI RECTED THE AO TO ALLOW THE WARRANTY PROVISIONING DONE BY THE ASSESSEE. 16. FACTS APROPOS ARE THAT ASSESSEE HAD DEBITED A S UM OF RS.74,54,02,531/- TOWARDS WARRANTY EXPENDITURE. AO FOUND THAT THE SAID SUM CONSISTED OF A PROVISION OF RS. 23,72,84,914/-. AO PUT THE ASSESSEE ON NOTICE WHY THIS SHOULD NOT BE CONSIDERED AS AN UNAS CERTAINED LIABILITY. ASSESSEE EXPLAINED THAT THE PRODUCTS SOLD BY IT CAR RIED A WARRANTY OF ONE TO THREE YEARS AND THERE WAS A NECESSITY TO MAKE A PRO VISION IN THE BOOKS TO MEET THE LIABILITY ARISING OUT OF SUCH WARRANTY. A S PER THE ASSESSEE, THE PROVISIONS WERE MADE ON A SCIENTIFIC BASIS, CONSID ERING THE ACTUAL WARRANTY EXPENSES INCURRED BY IT. AO WAS HOWEVER NOT IMPRES SED. ACCORDING TO HIM, THERE WAS A SUDDEN JUMP IN THE WARRANTY PROVIS IONING FROM 0.85 CRORES TO 23.75 CRORES. FOR THIS, ASSESSEE STATE D THAT IT WAS FOLLOWING A NEW METHODOLOGY FOR COMPUTING WARRANTY COSTS. A S PER THE ASSESSEE, EARLIER, ONLY STANDARD COST OF PARTS CONSUMED WERE CONSIDERED FOR ASCERTAINING THE WARRANTY, WHEREAS FOR THE IMPUGNED ASSESSMENT YEAR IT HAD ALSO CONSIDERED OTHER RELATED COSTS LIKE CUSTOMS DU TY FOR CALCULATION. AO AFTER VERIFYING THE CLAIM OF THE ASSESSEE WAS OF TH E OPINION THAT ASSESSEES ITA.1136 & 1134/BANG/2014 PAGE - 11 SALES WERE MORE OR LESS IDENTICAL FOR FINANCIAL YEA RS 2000-01 AND 2001-02. AS PER THE AO ASSESSEE COULD NOT SHOW HOW THERE WOU LD BE A DRASTIC INCREASE IN PROVISIONING WHEN SALES VOLUMES WERE SI MILAR. ACCORDING TO THE AO THIS BY ITSELF SHOWED THAT THERE WAS NO SCIE NTIFIC BASIS IN ESTIMATING THE WARRANTY PROVISIONING. IN ANY CASE, AS PER THE AO, WARRANTY PROVISIONING WAS NOT ALLOWABLE SINCE IT WAS IN THE NATURE OF CONTINGENT LIABILITY. DISALLOWANCE OF RS.23,72,84,914/- WAS M ADE. 17. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE CIT (A). ARGUMENT OF THE ASSESSEE BEFORE THE CIT (A) WAS THAT BY VIRT UE OF JUDGMENT OF HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD [314 ITR 62], CLAIM HAD TO BE ALLOWED. AS PER THE ASSESSEE, IT WAS ALSO A PARTY IN THE ABOVE CASE BEFORE THE HONBLE APEX COURT AND WAS TA GGED ALONG WITH ROTORK CONTROLS INDIA P. LTD . CIT (A) WAS OF THE OPINION THAT BY VIRTUE OF THE JUDGMENT OF HONBLE APEX COURT IN ROTORK CONTRO LS INDIA P. LTD ASSESSEE HAD TO SUCCEED. HE DIRECTED THE AO TO ALL OW THE CLAIM. 18. NOW BEFORE US STRONGLY ASSAILING THE ORDER OF C IT (A), LD. DR SUBMITTED THAT JUDGMENT OF HONBLE APEX COURT IN TH E CASE OF ROTORK CONTROLS INDIA P. LTD HAD ONLY LAID DOWN THE CONDIT IONS UNDER WHICH THE WARRANTY PROVISIONING CAN BE ALLOWED. ACCORDING TO HIM, THE FIRST AND FOREMOST CONDITION WAS THAT PROVISIONING SHOULD HAV E BEEN DONE ON A ITA.1136 & 1134/BANG/2014 PAGE - 12 SCIENTIFIC BASIS. THOUGH THE ASSESSEE WAS REITERAT ING THAT IT WAS DONE ON A SCIENTIFIC BASIS, IT HAD NEVER FURNISHED THE PARTIC ULARS BEFORE THE AO. THEREFORE ACCORDING TO HIM THE MATTER REQUIRED A FR ESH LOOK BY THE AO. 19. PER CONTRA, LD. AR STRONGLY SUPPORTING THE ORDE R OF CIT (A) SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROC EEDINGS, ASSESSEE HAD GIVEN A DETAILED WORK OUT OF THE PROVISIONING DONE. ACCORDING TO HIM, THE COST OF SPARE PARTS AND COST OF LABOUR INVOLVED IN THE WARRANTY WAS SCIENTIFICALLY ESTIMATED, BASED ON HISTORICAL AND TECHNICAL DATA. WHEN ASSESSEE HAD FURNISHED ALL SCIENTIFIC DETAILS, AS PER THE LD. AR THERE WAS NO REASON WHY THE REVENUE SHOULD BE GIVEN ANOTHER INNI NGS. 20. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. HONBLE APEX COURT IN THE JUDGMENT IN THE CASE OF ROTORK CO NTROLS INDIA P. LTD (SUPRA) HAD HELD AS UNDER AT PARA 13 OF ITS JUDGMEN T : 13. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATIO N IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVE NT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOUR CES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERP RISE THAT ARE RECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATIO N. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G., PRODUCT WARRANTI ES OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMINED BY CONSIDERING THE SAID O BLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM, THE PROVIS ION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NO T ENTITLED TO ITA.1136 & 1134/BANG/2014 PAGE - 13 DEDUCTION UNDER SECTION 37 OF THE SAID ACT. HOWEVER , WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION. IN THE PRESENT CASE, THE APPELLANT HAS BEEN MANUFACTURING AND SELLING VALVE ACTUATORS. THE Y ARE IN THE BUSINESS FROM THE ASSESSMENT YEARS 1983-84 ONWARDS. VALVE ACTUATORS ARE SOPHISTICATED GOODS. OVER THE YEARS T HE APPELLANT HAS BEEN MANUFACTURING VALVE ACTUATORS IN A LARGE N UMBERS. THE STATISTICAL DATA INDICATES THAT EVERY YEAR SOME OF THESE MANUFACTURED ACTUATORS ARE FOUND TO BE DEFECTIVE. T HE STATISTICAL DATA OVER THE YEARS ALSO INDICATES THAT BEING SOPHI STICATED ITEM NO CUSTOMER IS PREPARED TO BUY VALVE ACTUATOR WITHO UT A WARRANTY. THEREFORE, THE WARRANTY BECAME INTEGRAL P ART OF THE SALE PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS , THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. TH ESE ASPECTS ARE IMPORTANT. AS STATED ABOVE, OBLIGATIONS ARISING FRO M PAST EVENTS HAVE TO BE RECOGNIZED AS PROVISIONS. THESE PAST EVE NTS ARE KNOWN AS OBLIGATING EVENTS. IN THE PRESENT CASE, THEREFOR E, THE WARRANTY PROVISION NEEDS TO BE RECOGNIZED BECAUSE THE APPELL ANT IS AN ENTERPRISE HAVING A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES. LASTLY, A REL IABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IN SHO RT, ALL THE THREE CONDITIONS FOR RECOGNITION OF A PROVISION ARE SATISFIED IN THIS CASE. 21. THREE IMPORTANT ASPECTS WHICH ARE TO BE SATISF IED FOR A SCIENTIFIC WARRANTY PROVISIONING ARE (I) PROVISIONING SHOULD B E FOR PRESENT OBLIGATION, ARISING OUT OF PAST OBLIGATING EVENTS, (II) IT SHOU LD INVOLVE FUTURE OUTFLOW OF RESOURCES AND (III) A RELIABLE ESTIMATE OF OBLIGATI ON CAN BE MADE. 22. IN THE CASE BEFORE US, IT IS AN ADMITTED POSITI ON THAT THE WARRANTY PROVISIONING FOR THE RELEVANT PREVIOUS YEAR WAS MUC H HIGHER THAN THAT OF THE PRECEDING YEAR, THOUGH THE SALES OF THE ASSESS EE WERE MORE OR LESS OF ITA.1136 & 1134/BANG/2014 PAGE - 14 THE SAME SCALE. ASSESSEE ITSELF IN ITS LETTER DT.1 2.01.2005 TO THE AO HAD STATED THAT THERE WAS CHANGE IN METHODOLOGY IN COMP UTING THE WARRANTY COST. RELEVANT PART OF THIS LETTER IS REPRODUCED H ERE UNDER : TO SUMMARISE, THE VARIANCE IN THE WARRANTY PROVISIO N IN THE CURRENT YEAR, AS COMPARED TO THE PREVIOUS YEAR IS O N ACCOUNT OF THE FOLLOWING: A) CHANGE IN METHODOLOGY OF COMPUTATION OF WARRANTY CO ST (AS EXPLAINED IN PARAGRAPH 5.4 ABOVE) B) STATISTICAL /SCIENTIFIC METHOD OF COMPUTATION, AS E XPLAINED IN PARAGRAPH 5.2 ABOVE FOR THE REASONS STATED IN OUR EARLIER SUBMISSIONS, AND RELYING ON THE SPECIFIC JUDICIAL PRECEDENCE ON THIS ISSUE, WE WISH TO REITERATE THAT THE PROVISION FOR WARRANTY EXPENSES COMPUTED, BASED ON STATISTICAL INFORMATION /SCIENTIFIC BASIS INDICATED IN THE EARLIER PARAGRAPHS, SHOULD BE ALLOWED AS A DEDUCTIB LE EXPENDITURE WHILE COMPUTING THE PROFITS AND GAINS D ERIVED BY THE ASSESSEE FROM ITS BUSINESS IN THE YEAR IN WHICH THE PRODUCTS WERE SOLD. 23. NONE OF THE LOWER AUTHORITIES HAVE VERIFIED WHE THER THE CHANGE IN METHODOLOGY WAS BASED ON A SCIENTIFIC PRINCIPLE AND WHETHER THE COMPUTATION DONE BY THE ASSESSEE WAS IN ACCORDANCE WITH THE LAW LAID ITA.1136 & 1134/BANG/2014 PAGE - 15 DOWN BY THE HONBLE APEX COURT IN THE CASE OF ROTOR K CONTROLS INDIA P. LTD (SUPRA), WHERE ASSESSEE WAS ALSO A PARTY. WE A RE OF THE OPINION THAT THIS ISSUE REQUIRES A FRESH LOOK BY THE AO. WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMIT THE ISSUE BACK TO THE F ILE OF THE AO FOR CONSIDERATION IN ACCORDANCE WITH LAW DECLARED BY TH E HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD (SUPRA) . GROUND 3 OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPO SE. 24. VIDE ITS GROUND 4, GRIEVANCE OF THE REVENUE IS THAT CIT (A) HELD ASSESSEE TO BE NOT LIABLE FOR DEFAULT IN DEPOSITING THE TAX DEDUCTED AT SOURCE. 25. FACTS APROPOS ARE THAT AO FROM THE AUDIT REPORT IN FORM 3CD FILED BY THE ASSESSEE NOTED THAT TAX DEDUCTED BY THE ASSE SSEE ON SUMS PAID TO NON-RESIDENTS WERE NOT REMITTED TO THE GOVERNMENT T ILL THE DATE OF THE TAX AUDIT. ASSESSEE WAS REQUIRED TO EXPLAIN WHY SECTIO N 40(A)(I) OF THE ACT SHOULD NOT BE APPLIED TO IT. IN REPLY ASSESSEE STA TED THAT THE TDS WERE DEPOSITED TO GOVERNMENT ACCOUNT ON 28.11.2002 AFTER THE DATE OF TAX AUDIT. AO RELYING ON SECTION 40(A)(I) OF THE ACT HELD THAT ASSESSEE COULD CLAIM SUCH DEDUCTION ONLY IN THE YEAR IN WHICH THE DEDUCT ED TAX WAS PAID. HE HELD THAT SECTION 40(A)(I) WAS APPLICABLE ON THE PA YMENTS MADE TO NON- RESIDENTS AND MADE A DISALLOWANCE OF RS.5,26,17,446 /-. IN ITS APPEAL BEFORE THE CIT (A) ARGUMENT OF THE ASSESSEE WAS THAT SECTI ON 40(A)(I) WAS ITA.1136 & 1134/BANG/2014 PAGE - 16 AMENDED W.E.F.01.04.2004. AS PER THE ASSESSEE, PRI OR TO THAT DATE THE REQUIREMENT FOR BOTH DEDUCTION AND DEPOSIT OF TAX D EDUCTED WAS NOT THERE. ACCORDING TO THE ASSESSEE, PRIOR TO 01.04.2004 IT W AS SUFFICIENT IF THE DEDUCTION WAS EFFECTED BEFORE THE DUE DATE. CIT (A ) APPRECIATED THESE CONTENTIONS. RELYING ON THE JUDGMENT OF HONBLE DE LHI HIGH COURT IN THE CASE OF CIT V. ORACLE SOFTWARE INDIA LTD [293 ITR 3 53], HE HELD THAT ASSESSEE HAVING DEDUCTED THE TAX THOUGH IT HAD NOT REMITTED IT BEFORE THE DATE OF THE AUDIT COULD NOT BE SUBJECTED TO THE RIG ORS OF SECTION 40(A)(I) OF THE ACT. 26. NOW BEFORE US, LD. DR STRONGLY ASSAILING THE OR DER OF CIT (A) SUBMITTED THAT UNLESS THE DEDUCTED TAX AS REMITTED PRIOR TO THE TIME PRESCRIBED IN SUB-SECTION (1) OF SECTION 200 OF THE ACT, ASSESSEE COULD NOT CLAIM DEDUCTION OF THE AMOUNT ON WHICH SUCH TAX WAS DEDUCTED, WHILE COMPUTING ITS INCOME UNDER THE HEAD PROFIT AND GAI NS OF INCOME OR PROFESSION. 27. LD. AR SUPPORTED THE ORDER OF CIT (A). 28. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THE IMPUGNED ASSESSMENT YEAR BEING 2002-03, THE LAW AS IT STOOD PRIOR TO THE SUBSTITUTION OF THE SAID SUB-SECTION THROUGH FINANC E (NO.2) ACT, 2004 ITA.1136 & 1134/BANG/2014 PAGE - 17 APPLIED. THE SAID PROVISION AS IT APPLIED AT THE R ELEVANT POINT OF TIME READ AS UNDER : (A) IN THE CASE OF ANY ASSESSEE-- (I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISSU ED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), RO YALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER TH IS ACT WHICH IS PAYABLE OUTSIDE INDIA, ON WHICH TAX HAS NOT BEEN PA ID OR DEDUCTED UNDER CHAPTER XVIIB: PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN PAID OR DEDUCTED UNDER CHAPTER XVII-B IN ANY SUBSEQUENT YEAR, SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING TH E INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID OR DE DUCTED. 29. HONBLE DELHI HIGH COURT IN THE CASE OF ORACLE SOFTWARE INDIA LTD (SUPRA) HAD HELD THAT ONCE TAX WAS DEDUCTED AT SOUR CE WITHIN THE RELEVANT PREVIOUS YEAR, DISALLOWANCE U/S.40(A)(I) OF THE ACT COULD NOT BE MADE ON THE GROUND THAT THE REMITTANCE THEREOF WAS MADE IN THE NEXT FINANCIAL YEAR. WE ARE OF THE OPINION THAT CIT (A) WAS JUSTIFIED IN RELYING ON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF ORACLE S OFTWARE INDIA LTD (SUPRA) AND GIVING RELIEF TO THE ASSESSEE. GROUND 4 OF THE REVENUE STANDS DISMISSED. 30. NOW WE TAKE UP APPEAL OF THE ASSESSEE. ASSESSE E HAS ALTOGETHER RAISED ELEVEN GROUNDS OF WHICH GROUNDS 1 AND 2 ARE GENERAL IN NATURE NEEDING NO SPECIFIC ADJUDICATION. LD. COUNSEL FOR THE ASSESSEE SUBMITTED ITA.1136 & 1134/BANG/2014 PAGE - 18 THAT HE WAS NOT PRESSING ANY OF THE OTHER GROUNDS R AISED BY THE ASSESSEE. ACCORDINGLY APPEAL OF THE ASSESSEE IS DISMISSED. 31. TO SUMMARISE THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE, WHEREAS THAT OF THE ASSESSEE S TANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30TH DAY OF O CTOBER, 2015. SD/- SD/- (SMT. ASHA VIJAYARAGHAVAN) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTA NT MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR