Dy. Commissioner of Income Tax , Circle-2(2), Hyderabad V. HBL Power Systems Limited , Hyderabad

ITA 1386/Hyd/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4187 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2016-2017
• Appeal Filed On: 05-09-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y.V.S.T. SAI
• Section: 37; 143(3); 14A; 20

Judgement Text

आयकर अपील य अ धकरण, हैदराबाद पीठ म IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”, HYDERABAD BEFORE SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER & SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER आ.अपी.सं / ITA No. 1386/Hyd/2019 ( नधा रण वष / Assessment Year: 2016-17) Dy. Commissioner of Income Tax, Circle-2(2), Hyderabad Vs. M/s.HBL Power Systems Limited, Hyderabad [PAN No. AAACH8421K] अपीलाथ / Appellant यथ / Respondent नधा रती वारा/Assessee by: Shri P.V.S.S.Prasad, AR राज व वारा/Revenue by: Shri Y.V.S.T.Sai, CIT-DR स ु नवाई क तार ख/Date of hearing: 02-06-2022 घोषणा क तार ख/Pronouncement on: 23-06-2022 आदे श / ORDER PER K. NARASIMHA CHARY, JM: Challenging the order dated 15-05-2019, passed by the Learned Commissioner of Income Tax (Appeals)-2, Hyderabad (“Ld. CIT(A)”) in the case of M/s.HBL Power Systems Limited, (“the assessee”) for the AY.2016- 17, Revenue preferred this appeal. ITA No.1386/Hyd/2019 Page 2 of 8 2. Relevant facts are that the assessee is engaged in the business of manufacturing of different types of batteries and electronics used in Telecom, Railways, Automobiles and Defence industrial companies. The products of the assessee are sold with warranty obligation for a fixed period from the completion of sales and in the year of sale, entire sale consideration being recognised as revenue. Under contractual obligation, the assessee has to replace the defective parts/products and to render services to make the products functional free of cost during the warranty period. The assessee has been following mercantile system of accounting recognizing all the expenses in the books on accrual basis and the sale consideration as revenue in the year of sale. According to the assessee, the corresponding warranty obligation expenses are to be incurred during the currency of warranty period are required to be accounted for as per matching principle to reach the profit for the period. 3. For the AY.2016-17, the assessee filed the return of income on 30- 11-2016 declaring an income of Rs.47,78,86,820/-. Subsequently, the assessee made a fresh claim for warranty expenditure vide letter dt.13-08- 2018 to the tune of Rs.662.21 Lakhs as against Rs.111.55 Lakhs originally claimed with a request to allow a short claim made in the return towards warranty provision deductible u/s.37 of the Income tax Act, 1961 (“the Act”). 4. Assessment under section 143(3) of the Act was complete by order dt.09-10-2018 by making an addition of Rs. 70,34,086/-, by making disallowance in gross receipts and Rs. 12,79,876/- by making disallowance under section 14A of the Act. ITA No.1386/Hyd/2019 Page 3 of 8 5. Learned Assessing Officer, however, did not consider the request of the assessee to allow the claim of warranty expenditure of Rs. 662.21 Lakhs, on the ground that it was a new claim not to be found in return of income and also that no reason was assigned for change of practice during the year under consideration. Learned Assessing Officer accordingly, determined income of the assessee at Rs. 48,62,00,784/-. 6. Aggrieved by the said action of the Learned Assessing Officer, assessee preferred appeal before the Ld. CIT(A) and pleaded that their claim for warranty expenditure of Rs. 662.21 Lakhs may be considered in view of the decisions of the Hon'ble Apex Court in the case of Goetze (India) Ltd. Vs. CIT 284 ITR 323 (SC) and also Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC). 7. Ld. CIT(A) examined the working given for making the provision for warranty of Rs. 6,62,20,850/- and as a matter of fact, returned a finding that such working was consistently followed by the assessee for about ten years, and the assessee was earlier disallowing the provision for warranty and claiming the expenses on actual basis in the earlier years. Ld. CIT(A) further observed that the assessee was filing the computation of income on similar basis for the earlier years. Ld. CIT(A) further observed that the Learned Assessing Officer did not find any defect in the method of calculating the provision which is consistently followed and provided in the books on scientific method. Further, the Ld. CIT(A) examined the details as to the disallowance of the provision and offering it to the tax in the earlier years. Having satisfied with the method followed by the assessee consistently quite for a long time, Ld. CIT(A) gave a finding that a sum of Rs. 5,50,65,882/- being the reversal of provision was already offered to tax in the earlier years out of the cumulative provision of the sum of Rs. ITA No.1386/Hyd/2019 Page 4 of 8 8,54,24,082/- and, therefore, the claim of the assessee has to be allowed. Accordingly, Ld. CIT(A) allowed the assessee’s plea and deleted the addition made on this account. 8. Aggrieved by such a finding of the Ld. CIT(A), Revenue preferred this appeal with a delay of 27 days. Revenue attributed the reason for delay in filing the appeal to the delay in receiving the order of the Ld. CIT(A) in the Office of the Principal Commissioner of Income Tax, Hyderabad on 11-06- 2009 and securing the relevant records to prefer the appeal. There is no reason as to why this explanation of the Revenue cannot be accepted. Revenue does not stand to gain by allowing the appeal to be barred by limitation. The highest that would happen by condoning the delay is that a cause could be decided on merits. As a matter of fact, Ld. Counsel for the assessee fairly concedes to condone the delay. Recording the same, we condone the delay and proceed to hear the matter on merits. 9. Learned DR submitted that the Ld. CIT(A) is not justified in allowing the excess provision of the warranty over and above the amount actually spent and claimed in the P&L A/c during the year. It is further submitted on behalf of the Revenue that such allowance of excess claim is not in accordance with the accountancy principles followed by the assessee regularly. Further, it is submitted that inasmuch as the assessee did not claim the provision to the tune of Rs. 6,62,20,850/- which is not to be found in the original return of income filed by the assessee, which was never properly revised under the provisions of the Act. 10. Per contra, Learned AR placed reliance on the decisions of the Hon'ble Apex Court in the case of Goetze (India) Ltd. Vs. CIT 284 ITR 323 (SC) and also Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC) ITA No.1386/Hyd/2019 Page 5 of 8 and submitted that when the assessee is entitled to a lawful claim, he cannot be denied the same on technical grounds. He further submitted that under the contract of warranty, the assessee is oblized to incur certain expenditure for repairing or replacing the products sold and to render certain services, and, therefore, in discharge of such an obligation and in consonance with the accounting method followed by them, the assessee created the provision on scientific basis and is only by mistake while filing the original return of income, the assessee failed to consider the reversal of provision to the tune of Rs. 5,50,65,882/- which was offered to tax in the earlier years, out of the cumulative provisions and, therefore, the Ld. CIT(A) is right in his approach in appreciating the facts and granting relief to the assessee. He, therefore, prayed that no interference need be made in this case. 11. We have gone through the record in the light of the submissions made on either side. It could be seen from the record that the working for the provision of warranty to the tune of Rs. 6,62,20,850/- was provided before the Ld. CIT(A) and forms part of the order. Ld. CIT(A), as a matter of fact on examination of this working, found that the same working was followed by the assessee for more than ten years. Further, a chart with details as to the provision, disallowance and the tax offered was also furnished before the Ld. CIT(A) and it also forms part of the order of the Ld. CIT(A). The explanation offered by the assessee before the Ld. CIT(A) for working the current year and subsequent year warranty provision is also dealt with by the Ld. CIT(A) in his order. On examination of all these details, in the light of the books of account of the assessee, Ld. CIT(A) reached a conclusion that the provision of warranty to the tune of Rs. 6,62,20,850/- was provided on scientific basis and, therefore, is an ITA No.1386/Hyd/2019 Page 6 of 8 allowable expenditure during the year where as the sum of Rs. 5,50,65,882/- being the reversal of provision was not to be deducted from the provision of warranty as the sale was already disallowed in the earlier years by the assessee itself. On this basis, Ld. CIT(A) reached a conclusion that the assessee gets a further deduction of Rs. 5,50,65,882/- over and above the deduction claimed in the original return of income to the tune of Rs. 111.55 Lakhs. 12. No error in the working furnished by the assessee for the provision of warranty to the tune of Rs. 6,62,20,850/- as provided at page Nos.16 and 17, or in the details in the chart to be found at page No.18 or in the explanation by way of facts and figures to be found at page Nos. 19 and 20 of the Ld. CIT(A)’s order is brought to our notice. Further, in Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC) (supra), the Hon'ble Apex Court categorically held that where there is an obligation under the contract of warranty, the probability that an outflow will be required in settlement, is determined by considering the obligation as a whole and inasmuch as such an obligations arises from the past events, they have to be recognized as provisions, because of the past events resulting in an outflow of resources subsequently, and, therefore, a reliable estimate can be made of the amount of such obligation. 13. In the case on hand, there is no dispute that under the contract of warranty, the assessee is expected to incur certain expenditure during the year and, therefore, the assessee made a reasonable estimate on scientific basis. Further there is no dispute that the assessee resorted to the reversal of the provision in the earlier assessment years in respect of Rs. 5,50,65,882/- and offered the same to the tax. Further there is nothing contrary to the findings of the Ld. CIT(A) that the assessee has been ITA No.1386/Hyd/2019 Page 7 of 8 consistently following the same method of accounting working to estimate the provision for more than ten years. In these circumstances, there is nothing unreasonable in the findings of the Ld. CIT(A) to the effect that the assessee is entitled to include this sum of Rs.5,50,65,882/- to the provision over and above the provision shown in the original return of income to the tune of Rs. 111.55 Lakhs. 14. Considering the facts and circumstances as a whole, we are of the opinion that the Ld. CIT(A) is perfectly justified in accepting the contentions of the assessee that their request in the letter dt.13-08-2018 in respect of the claim for warranty expenditure to the tune of Rs. 6,62,20,850/- as against Rs. 111.55 Lakhs claimed in the original return of income and to allow the short claim towards warranty provision under section 37 of the Act. With this view of the matter, we uphold the findings of the Ld. CIT(A) and consequently, find the grounds of appeal as devoid of merits. 15. In the result, the appeal of Revenue is dismissed. Order pronounced in the open court on this the 23 rd day of June, 2022 Sd/- Sd/- (RAMA KANTA PANDA) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER TNMM Hyderabad, Dated: 23-06-2022 ITA No.1386/Hyd/2019 Page 8 of 8 Copy forwarded to: 1. Dy.Commissioner of Income Tax, Circle-2(2), Hyderabad. 2. M/s.HBL Power Systems Limited, #8-2-601, 10 Banjara Hills, Hyderabad. 3. The CIT(Appeals)-2, Hyderabad. 4. The Pr.CIT-2, Hyderabad. 5. DR, ITAT, Hyderabad. 6. GUARD FILE TRUE COPY ASSISTANT REGISTRAR ITAT, HYDERABAD