Arevat & D Instrument Transformer India, V. DCIT Coy. Circle 1 (1),

ITA 143/DEL/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57998 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 27-02-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 09-01-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: L V SRINIVASAN
• Keywords: Business expenditure; Additional evidence; Corroborative evidences; Set aside
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO.143(DEL)/2007 ASSESSMENT YEAR: 2001-02 M/S.AREVA T&D INSTRUMENT TRANSFORMERS INDIA PVT. LTD. (FORMERLY KNOWN AS ALSTOM INSTRUMENT TRANSFORMERS PVT. LT. 27 TH KM BELLARY ROAD, DODDAJALA POST, BANGALORE. PAN AAACA8622R. VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE I(1), NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI L. V.SRINIVASAN RESPONDENT BY : SHRI SHAJI P. JACOB, IRS, COMMISSIONER OF INCOME-TAX DATE OF HEARING : 27 TH FEBRUARY, 2012 DATE OF PRONOUNCEMENT : 2 ND MARCH, 2012 O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2001-02. THE APPEAL IS DIRECTED AGAINST THE - - ITA 143(DEL)/2007 2 ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX(APPE ALS)-IV AT NEW DELHI ON 3 RD OCTOBER, 2006 AND ARISES OUT OF THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE IN COME-TAX ACT, 1961. 2. SHRI L.V.SRINIVASAN, INDIA TAX DIRECTOR OF THE ASSESSEE COMPANY RAISED A PRELIMINARY ISSUE ON THE MATTER OF THE AFFIDAVIT FILED BY HIM FOR ADMISSION OF EVIDENC ES TO BE CONSIDERED IN THESE APPELLATE PROCEEDINGS. THE ISS UES RAISED IN THE GROUNDS OF APPEAL FILED BY THE ASSESSEE RELATE TO VARIOUS DISALLOWANCES AND ADDITIONS MADE BY THE ASSESSING A UTHORITY AS CONFIRMED BY THE COMMISSIONER OF INCOME-TAX(APPEALS ). ONE OF THE MAIN REASONS FOR SUCH DISALLOWANCES AND ADDITIO NS IS THAT THE ASSESSEE DID NOT PRODUCE THE NECESSARY EVIDENCE S BEFORE THE LOWER AUTHORITIES. IT IS ON THIS REASONING OF THE LOWER AUTHORITIES THAT THE ASSESSEE WANTS TO EXPLAIN ITS STAND IN THE LIGHT OF EVIDENCES SOUGHT TO BE PRODUCED BEFORE THE TRIBUNAL IN THE LIGHT OF THE AFFIDAVIT MENTIONED ABOVE. 3. THE LEARNED REPRESENTATIVE INVITED OUR ATTENTIO N TO THE AVERMENTS MADE IN THE AFFIDAVIT. AS STATED THER EIN, THE ASSESSEE COMPANY AREVA T&D INSTRUMENT TRANSFORMERS INDIA - - ITA 143(DEL)/2007 3 PRIVATE LIMITED (AITPL), INCORPORATED ON 28 TH AUGUST, 2000, HAD TAKEN OVER THE BUSINESS OF AREVA T&D INDIA LIMITED (ATDIL) BY WAY OF MERGER AND ATDIL IS NOW MANAGING THE AFFAIRS OF THE EARLIER ASSESSMENT YEARS AS WELL. BECAUSE OF LACK OF EXPERIENCE AND AWARENESS OF THE CONCERNED EMPLOYEES OF AITPL, NECESSARY EVIDENCES CONCERNING INCURRING OF EXPENDI TURES AND LIABILITIES WERE NOT PRODUCED BEFORE THE ASSESSING AUTHORITY. IT IS NOT THE CASE THAT THE EXPENSES AND LIABILITIES WERE INCURRED WITHOUT EVIDENCES, BUT THE EVIDENCES COULD NOT BE P RODUCED BEFORE THE CONCERNED AUTHORITIES. NOW THE ASSESSEE COMPANY HAS GATHERED ALL THE NECESSARY PAPERS TO SUPPORT TH E CLAIMS OF DEDUCTIONS MADE FOR THE IMPUGNED ASSESSMENT YEAR 20 01-02, FOR WHICH VERIFICATION OF THOSE PAPERS AND EVIDENCE S ARE VERY ESSENTIAL. AS THOSE EVIDENCES COULD NOT BE PRODUCE D BEFORE THE LOWER AUTHORITIES IN THE PAST FOR REASONS BEYOND TH E CONTROL OF THE ASSESSEE, THOSE EVIDENCES MAY BE ADMITTED BY THE TR IBUNAL AS PART OF THE RECORD OF THE CASE AND THE ISSUES MAY B E ADJUDICATED IN THE LIGHT OF THOSE EVIDENCES. 4. SHRI SRINIVASAN FURTHER CONTENDED THAT IF THE T RIBUNAL IS PLEASED TO ADMIT EVIDENCES ON RECORD, IT WOULD B E FAIR IF THE - - ITA 143(DEL)/2007 4 MATTER IS SENT BACK TO THE ASSESSING AUTHORITY SO T HAT THE ASSESSEE CAN EXPLAIN THE VIRTUE OF EXPENSES AND DED UCTIONS CLAIMED BY THE ASSESSEE COMPANY BEFORE THE ASSESSIN G AUTHORITY. HE FURTHER SUBMITTED THAT IF THE TRIBUN AL IS NOT INCLINED TO ADMIT THE EVIDENCES ON RECORD, THE ISSUES AGITAT ED IN THE GROUNDS OF APPEAL MAY BE ADJUDICATED IN THE LIGHT O F HIS ARGUMENTS. 5. SHRI SHAJI P JACOB, THE LEARNED COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVENUE, ON THE OTHER HAND, CONTENDED THAT THE MATTER IS RELATED TO THE FINANCI AL YEAR 2000-01 AND THE ASSESSEE IS PRAYING FOR ADMISSION OF EVIDEN CES FOR THE FIRST TIME AFTER ELEVEN YEARS, WHICH TIME LAG IS TO O INORDINATE AND THE ADMISSION OF EVIDENCES AT THIS TIME WILL BE VER Y PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE LEARNED COMMISSI ONER OF INCOME-TAX EXPLAINED THAT THE MERGER WAS MADE BETWE EN TWO COMPANIES WHO ARE RUNNING THE BUSINESS WITH THE HEL P OF PROFESSIONAL EXPERTS AND IT IS NOT AT ALL CONVINCIN G THAT THE ERSTWHILE COMPANY COULD NOT PRODUCE THE DETAILS BEF ORE THE LOWER AUTHORITIES BECAUSE OF LACK OF AWARENESS ON THE PAR T OF ITS EMPLOYEES. THIS IS NOT A SUFFICIENT REASON AT ALL. A PERUSAL OF - - ITA 143(DEL)/2007 5 THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS ) MAKES IT VERY CLEAR THAT THE ASSESSEE WAS GIVEN SUFFICIENT O PPORTUNITIES TO PRODUCE THE NECESSARY RECORDS AND EVIDENCES AND IT IS ONLY IN THE ABSENCE OF THOSE SUPPORTING EVIDENCES THAT HE H AD TO CONFIRM THE DISALLOWANCES AND ADDITIONS MADE BY THE ASSESSING AUTHORITY. 6. THE LEARNED COMMISSIONER OF INCOME-TAX EXPLAINE D THAT THE INORDINATE DELAY OF ABOUT ELEVEN YEARS IN PRESENTING THE PARTICULARS OF AN ASSESSMENT RELATING TO THE ASSESS MENT YEAR 2001-02 IS IMPROBABLE TO BE EXPLAINED, EVEN IF NOT IMPOSSIBLE. EVEN IF AN EXTREME STEP IS TAKEN TO ADMIT THOSE EVI DENCES, SUCH AN ACTION WOULD PAVE THE WAY FOR SERIOUS CONSEQUENC ES, FOR WHICH NO REMEDIES ARE AVAILABLE UNDER THE PROVISION S OF INCOME- TAX LAW. IF THE ADDITIONS AND DISALLOWANCES MADE I N THE HANDS OF THE ASSESSEE WERE ATTEMPTED TO BE EXPLAINED IN THE LIGHT OF THE SO-CALLED EVIDENCES NOW SOUGHT TO BE PRODUCED, ANY CONSEQUENTIAL ADDITIONS NECESSARY TO BE MADE IN THE HANDS OF OTHER ASSESSEES CANNOT BE ADVERTED TO NOW, FOR THE REASON OF LIMITATION. THEREFORE, IT IS TO BE UNDERSTOOD THAT THE ASSESSMENT IN THE PRESENT CASE CANNOT BE COMPLETED IN DISREGAR D OF THE - - ITA 143(DEL)/2007 6 CONSEQUENCES OF ADJUSTMENTS THAT WOULD BE MADE IN T HE ASSESSMENT OF THE ASSESSEE, BECAUSE THE REVENUE WOU LD BE IN AN UNENVIABLE POSITION AND UNABLE TO TAKE ANY ACTIO N IN THE LIGHT OF ANY CONSEQUENTIAL EVENTS ON THE GROUND OF LIMITA TION. IT MEANS THAT THE CALLOUSNESS OF THE ASSESSEE HAS IN F ACT DEFEATED THE RULE OF LAW. IN THESE CIRCUMSTANCES HE SUBMITT ED THAT THE PETITION PRAYING FOR ADMISSION OF EVIDENCES MAY BE REJECTED. 7. WE CONSIDERED THIS MATTER VERY SERIOUSLY. EVEN THOUGH THE MERGER WAS MADE IN THE ASSESSMENT YEAR 2 001-02, THE PARTICIPANT COMPANIES WERE CARRYING ON THE BUSI NESS SINCE LONG IN THE PAST. THEREFORE, DE FACTO SPEAKING, IT IS NOT PROPER TO ARGUE THAT THE IMPUGNED ASSESSMENT YEAR IS THE FIRS T ASSESSMENT YEAR OF THE ASSESSEE COMPANY AND THAT WA S THE REASON FOR THE LAPSES ON THE PART OF ITS EMPLOYEES. DE HORS, THE ASSESSEE COMPANY WAS CARRYING ON ITS BUSINESS SINCE LONG IN THE PAST, AS ALREADY STATED. THE COMPANY IS A BIG CORPORATE, WHICH ALWAYS ENSURES THE SERVICES OF COMPETENT PERS ONNEL IN DIFFERENT MATTERS OF BUSINESS AND ADMINISTRATION. THE ACCOUNTS OF THE ASSESSEE COMPANY WERE AUDITED AND IT IS AFTE R THE AUDIT OF THE ACCOUNTS AND APPROVAL OF THE ACCOUNTS BY ITS DI RECTORS THAT - - ITA 143(DEL)/2007 7 THE RETURN WAS FILED BY THE ASSESSEE. IT SHOWS THA T AT THE TIME OF FILING OF THE RETURN OF INCOME THE ASSESSEE HAD IN ITS CUSTODY ALL THE NECESSARY DOCUMENTS AND EVIDENCES IN SUPPORT OF ITS STATEMENT OF ACCOUNTS. IT IS WELL WITHIN THE REACH OF THE ASSESSEE COMPANY TO PRODUCE THOSE EVIDENCES BEFORE THE ASSES SING AUTHORITY OR BEFORE THE COMMISSIONER OF INCOME-TAX( APPEALS) AT THE TIME OF THE RESPECTIVE PROCEEDINGS. THIS POSIT ION CANNOT BE CASUALLY EXPLAINED BY STATING THAT THESE LAPSES HAP PENED BECAUSE OF LACK OF AWARENESS OF THE EMPLOYEES OF TH E COMPANY. WE CAN ACCEPT ONLY PLAUSIBLE EXPLANATIONS. 8. AN ASSESSEE IS USUALLY BOUND TO KEEP ITS ACCOUN TS AND RECORDS FOR SIX YEARS AND IN SUCH CIRCUMSTANCES IN THE PRESENT CASE ALMOST ALL THE RECORDS OF THE ASSESSEE COMPANY AS WELL AS THE OTHER TRANSACTING PARTIES MAY NOT BE AV AILABLE AT ALL. THEREFORE, THE AVAILABILITY OF THE CRUCIAL EVIDENCE S EVEN AFTER ADMISSION OF THE PETITION FILED BY THE ASSESSEE, IS DOUBTFUL. THE VERY INORDINATE DELAY CAUSED IN FILING EVIDENCES HA S IN FACT DAMAGED THE LOCUS STANDI OF THE ASSESSEE COMPANY BE YOND REDEMPTION. IN THESE CIRCUMSTANCES IT IS NOT POSSI BLE FOR THE TRIBUNAL TO HOLD THAT THE REASONS EXPLAINED BY THE ASSESSEE - - ITA 143(DEL)/2007 8 COMPANY FOR THE DELAY ARE REASONABLE. THEREFORE, B Y COMPULSION OF THE FACTS AND CIRCUMSTANCES OF THE CA SE, WE DISMISS THE PETITION FILED BY THE ASSESSEE COMPANY FOR ADMISSION OF EVIDENCES. 9. CONSEQUENTLY, NOW WE HAVE TO PROCEED TO DISPOSE OF THE ISSUES RAISED IN THE GROUNDS OF APPEAL FILED BY THE ASSESSEE COMPANY. 10. THE FIRST ISSUE IS THE DISALLOWANCE OF COMMISS ION EXPENSES OF ` 6,70,444/-. IT IS THE CASE OF THE ASSESSEE THAT TH E DISALLOWANCE WAS MADE WITHOUT GIVING AMPLE OPPORTUN ITY TO FURNISH ADDITIONAL EVIDENCE IN SUPPORT OF THE EXPEN SES. THE ASSESSEE FEELS THAT THE COMMISSIONER OF INCOME-TAX( APPEALS) OUGHT TO HAVE ACCEPTED THE ADDITIONAL EVIDENCES PRO DUCED BY THE ASSESSEE. THE ASSESSEE HAD DEBITED ` 7,31,815/- AS COMMISSION EXPENSES IN ITS PROFIT AND LOSS ACCOUNT. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING AUT HORITY HAD DIRECTED THE ASSESSEE COMPANY TO PROCURE CONFIRMATI ONS FROM ALL THE PARTIES, WHO IN FACT DID RECEIVE THE COMMISSION . THE ASSESSEE COULD FILE CONFIRMATIONS FROM TWO PARTIES, IN WHICH CASES THE COMMISSION EXPENSES WERE ALLOWED BY THE A SSESSING - - ITA 143(DEL)/2007 9 AUTHORITY AS DEDUCTION. IN THE CASE OF THE REMAINI NG PARTIES, CONFIRMATIONS WERE NOT PRODUCED AND NECESSARY DETAI LS WERE NOT FURNISHED. BEFORE THE COMMISSIONER OF INCOME-TAX(A PPEALS) THE ASSESSEE HAD SOUGHT FOR THE ADMISSION OF ADDITIONAL EVIDENCE. BUT THE COMMISSIONER OF INCOME-TAX(APPEALS) REJECTE D THE PRAYER ON THE GROUND THAT SUFFICIENT OPPORTUNITY WA S GIVEN TO THE ASSESSEE. WE FIND THAT THE STAND TAKEN BY THE COMM ISSIONER OF INCOME-TAX(APPEALS) IS JUSTIFIED. EVEN THOUGH THE ASSESSEE HAD MADE A PRAYER FOR ADMISSION OF ADDITIONAL EVIDENCE, THE ASSESSEE HAD ALREADY STATED ON RECORD THAT BECAUSE OF PASSAGE OF TIME IT WAS NOT POSSIBLE FOR THEM TO PROCURE CON FIRMATION AGAINST COMMISSION EXPENSES. WHEN THAT FACT IS ALR EADY ON RECORD, THE SUBSEQUENT PRAYER FOR PRODUCING ADDITIO NAL EVIDENCE DOES NOT CARRY CONVICTION. WE FIND THAT THE DISALL OWANCE OF ` 6,70,444/- IS JUSTIFIED. THIS ISSUE IS DECIDED AG AINST THE ASSESSEE. 11. THE NEXT ISSUE RAISED BY THE ASSESSEE IS ON TH E DISALLOWANCE OF THE PROVISION MADE FOR WARRANTIES. IT IS THE CASE OF THE ASSESSEE THAT THE PROVISION MADE BY THE ASSE SSEE WAS GOT SUBSTANTIALLY USED UP IN SUBSEQUENT YEARS TO DI SCHARGE ITS - - ITA 143(DEL)/2007 10 WARRANTY LIABILITIES AND THE REMAINDER PORTION IN T HE PROVISION WERE REVERSED AND CREDITED IN THE PROFIT AND LOSS A CCOUNT, THUS OFFERING FOR TAXATION IN THE SUBSEQUENT ASSESSMENT YEARS. IT IS THE CASE OF THE ASSESSEE COMPANY THAT THE COMMISSIO NER OF INCOME-TAX(APPEALS) WAS NOT CORRECT IN DISREGARDING THE SUBMISSION OF THE ASSESSEE THAT ` 17,87,054/- PERTAINED TO AMOUNTS ACTUALLY INCURRED BY THE ASSESSEE IN THE RE LEVANT PREVIOUS YEAR ITSELF. 12. THE LEARNED REPRESENTATIVE SHRI SRINIVASAN PLA CED HEAVY RELIANCE ON THE JUDGMENT OF THE HONBLE SUPRE ME COURT RENDERED IN THE CASE OF M/S. ROTORK CONTROLS INDIA( P) LTD. VS. COMMISSIONER OF INCOME-TAX, 2009-TIOL-64-SC-IT, WHE REIN THE HONBLE APEX COURT HAS UPHELD THE RULE OF REVERSAL IN PROVIDING AND ADJUSTING WARRANTY PROVISIONS. THE HONBLE APE X COURT HELD THAT WHEREVER AN ASSESSEE IS CONSISTENTLY FOLLOWING THE PRACTICE OF MAKING WARRANTIES AND EXCESS IF ANY IN THE PROVI SION IS AVAILABLE IT IS AGAIN BROUGHT BACK TO THE PROFIT AN D LOSS ACCOUNT IN ENSUING ASSESSMENT YEAR THEREBY ANY EXCESS PORTION IS ALWAYS BROUGHT TO TAX IMMEDIATELY IN THE NEXT YEAR, THE ME CHANISM DEPLOYED BY THE ASSESSEE IS ACCEPTABLE IN THE EYE O F LAW AND IN - - ITA 143(DEL)/2007 11 SUCH CIRCUMSTANCES THE PROVISION SHOULD BE ALLOWED AS DEDUCTION IN COMPUTING ITS INCOME. THE ASSESSEE AL SO HAS POINTED OUT THAT THE HONBLE APEX COURT HAS HELD TH AT IF WARRANTY IS AN INTEGRAL PART OF THE SALE PRICE OF THE GOODS AND THE WARRANTY IS ATTACHED TO THE SALE PRICE OF THE PRODUCT, OBLIG ATIONS ARISING FROM PAST EVENTS KNOWN AS OBLIGATING EVENTS HAVE TO BE RECOGNIZED AS PROVISIONS. HE CONTENDED THAT THE CO MMISSIONER OF INCOME-TAX(APPEALS) WENT WRONG IN STATING THAT T HE ASSESSEE HAS MADE EXCESSIVE PROVISION WITHOUT ANY BASIS. 13. THE LEARNED COMMISSIONER OF INCOME-TAX, APPEARING FOR THE REVENUE, ON THE OTHER HAND, CONTE NDED THAT THE PRESENT CASE DOES NOT FALL WITHIN THE LIMITS OF THE DECISION RELIED ON BY THE ASSESSEE COMPANY. THE LEARNED COM MISSIONER OF INCOME-TAX SUBMITTED THAT THE DISPUTE IS NOT WIT H REFERENCE TO THE REVERSAL ENTRIES STATED TO BE PASSED BY THE ASS ESSEE COMPANY. THE CRUCIAL ISSUE IS WHETHER THE QUANTUM OF THE PROVISION FOR WARRANTY DEDUCTED BY THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT WAS ARRIVED AT ON ANY REASONABLE BASIS OR NOT. THE LEARNED COMMISSIONER OF INCOME-TAX EXPLAINED THAT ANY AMOUNT CANNOT BE SET ASIDE AS A PROVISION FOR WARR ANTY. THE - - ITA 143(DEL)/2007 12 BASIS OF THE PROVISION MUST BE DEMONSTRATED. THE A SSESSEE MAY USE SCIENTIFIC METHOD OR TRIAL AND ERROR METHOD OR A METHOD CHURNED OUT OF PAST EXPERIENCE. IF THE QUANTUM OF PROVISION MADE IS NOT SUPPORTED BY ANY SUCH REASONABLE EXERCI SE, THE SAID PROVISION CANNOT BE ACCEPTED AS A LEGITIMATE CLAIM IN COMPUTING THE INCOME OF AN ASSESSEE. THE LEARNED COMMISSIONE R OF INCOME-TAX RELIED ON THE VERY SAME JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF M/S.ROTORK CONTROLS IN DIA (P) LTD., WHERE THE COURT HAS HELD AS UNDER:- PROVISION IS A LIABILITY THAT CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVIS ION IS RECOGNIZED WHEN AN ENTERPRISE HAS A PRESENT OBLIGATION RESULTING FROM A PAST EVENT; MAY REQUIRE OUTFLOW OF RESOURCES TO SETTLE THE OBLIGATION AND A RELIABLE ESTIMATE MAY BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE PARAMETERS ARE NOT SATISFIED, NO PROVISION FOR WARRANTY IS TO BE ALLOWED AS DEDUCTIO N UNDER SECTION 37 OF THE IT ACT, 1961. - - ITA 143(DEL)/2007 13 14. THE LEARNED COMMISSIONER OF INCOME-TAX ARGUED THAT THE PROVISION WAS NOT MADE BY THE ASSESSEE ON THE BASIS OF ANY DEGREE OF ESTIMATION. NOT ONLY THAT, THE ASSES SEE HAS NOT DEMONSTRATED THE NATURE OF ITS FUTURE OBLIGATION RE SULTING FROM PAST TRANSACTIONS. WHEN THESE BASIC CONDITIONS ARE NOT SATISFIED, IT IS NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE PROVISION FOR WARRANTY IS AN INEVITABLE DEDUCTI ON. HE ALSO EXPLAINED THAT THE COMMISSIONER OF INCOME-TAX(APPEA LS) HAS DISCUSSED THE MATTER IN DETAIL AND HAS DEMONSTRATED IN HIS ORDER THAT COMPARED TO THE AMOUNT OF PROVISION MADE BY TH E ASSESSEE, THE ACTUAL EXPENSES INCURRED BY THE ASSESSEE COMPAN Y TOWARDS WARRANTY OBLIGATION WERE SUBSTANTIALLY LOW. THE AS SESSEE IS CARRYING ON THE BUSINESS SINCE LONG IN THE PAST. T HEREFORE, THE ASSESSEE SHOULD BE IN A POSITION TO CONVINCE THE AU THORITIES THAT IN THE LIGHT OF THE PATTERN OF PAST ASSESSMENT YEAR S, THIS MUCH AMOUNT OF PROVISION IS REASONABLE. IN THE PRESENT CASE THE ASSESSEE COMPANY ADOPTS AN ARBITRARY FIGURE OF 2 PE R CENT OF THE SALES PRICE AS THE AMOUNT NECESSARY FOR WARRANTY OB LIGATIONS. THE ASSESSEE HAS FIXED THE 2 PER CENT LIABILITY IN AN ARBITRARY MANNER. IN THESE CIRCUMSTANCES, THE COMMISSIONER O F INCOME- - - ITA 143(DEL)/2007 14 TAX(APPEALS) IS JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE TOWARDS PROVISION FOR WARRANTY. 15. WE CONSIDERED THE ISSUE VERY CAREFULLY. IN FA CT, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F M/S. ROTORK CONTROLS INDIA (P) LTD. IS A PROFOUND DISCUSSION ON THE SUBJECT OF WARRANTY LIABILITY. THE HONBLE APEX COURT HAS LAI D DOWN THE GOVERNING PRINCIPLES ON THAT SUBJECT. THE FIRST TH ING IS THAT EVEN THOUGH A PROVISION CAN BE MADE ONLY ON AN ESTIMATE BASIS, THE ESTIMATE MUST HAVE SOME FOOTING EITHER ON AN INTELL IGENT CALCULATION OR ON AN EARLIER PATTERN OR ON AN ANALY SIS OF PAST EXPERIENCE. THEREFORE, THE QUANTIFICATION OF THE P ROVISION HAS TO BE JUSTIFIED IN A REASONABLE MANNER IN THE LIGHT OF THE CIRCUMSTANCES PREVALENT IN THE BUSINESS CARRIED ON BY THE ASSESSEE. IN THE PRESENT CASE, THIS EXERCISE HAS NOT BEEN DONE BY THE ASSESSEE. AS RIGHTLY POINTED OUT BY THE COM MISSIONER OF INCOME-TAX(APPEALS), COMPARED TO THE EARLIER EXPENS ES, THE PROVISION MADE BY THE ASSESSEE COMPANY IN THE IMPUG NED ASSESSMENT YEAR IS ASTRONOMICALLY HIGH, WHICH HAS N EVER BEEN EXPLAINED BY THE ASSESSEE COMPANY. THE ASSESSEE CO MPANY HAS NOT FURNISHED THE DETAILS OF THE WARRANTY OBLIG ATIONS SATISFIED - - ITA 143(DEL)/2007 15 BY THE ASSESSEE IN THE PAST AND THE EXPENSES INCURR ED FOR SUCH SATISFACTION. THEREFORE NOTHING WAS AVAILABLE BEFO RE THE LOWER AUTHORITIES TO FORM AN OPINION REGARDING THE QUANTU M OF WARRANTY OBLIGATIONS THAT THE ASSESSEE SHOULD HAVE PROVIDED FOR. SECONDLY, THE ASSESSEE COMPANY HAS NOT FURNISHED TH E DESCRIPTIVE DETAILS OF THE OBLIGATIONS DISCHARGED B Y IT IN THE PAST. THE RULE OF REVERSAL COMES INTO PLAY ONLY AFTER THE SE OPENING CONDITIONS ARE SATISFIED. THE NATURE OF THE BUSINE SS CARRIED ON BY THE ASSESSEE SHOULD DEMAND A PROVISION FOR WARRA NTY. THE WARRANTY MUST BE INCLUDED IN THE SALE PRICE. THE Q UANTUM MUST BE REASONABLY ESTIMATED. THE SUPPORTING PARTICULAR S MUST BE DEMONSTRATED. ONCE THESE THRESHOLD CONDITIONS ARE SATISFIED, THEN COMES THE QUESTION WHETHER THE ASSESSEE IS MAN AGING THE PROVISION IN A BONA FIDE MANNER OR NOT. IT IS AT T HAT STAGE THAT THE RULE OF REVERSAL COMES INTO PLAY. WHERE THE ASSESS EE IS OFFERING THE EXCESS OF THE PROVISION FOR TAXATION I N THE SUBSEQUENT YEAR BY WAY OF PASSING REVERSAL ENTRIES, THE METHOD ADOPTED BY THE ASSESSEE MUST BE UPHELD AS JUST AND PROPER. THEREFORE, THE RULE OF REVERSAL IS NOT THE ONLY LIM B WHICH GOVERNS THE QUESTION OF PROVISION FOR WARRANTY. EV EN IF THE - - ITA 143(DEL)/2007 16 ASSESSEE HAS SATISFIED THE RULE OF REVERSAL, THE AS SESSEE HAS NOT SATISFIED THE OPENING CONDITIONS. 16. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THE LOWER AUTHORITIES ARE JUSTIFIED IN DISALLO WING THE CLAIM OF THE ASSESSEE TOWARDS PROVISION FOR WARRANTY. THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 17. THE NEXT ISSUE RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE DISALLOWANCE OF PROVISION FOR CONTRACT LOSSES A MOUNTING TO ` 88,21,951/- BY IGNORING THE SUBMISSIONS MADE BY TH E ASSESSEE AS PER THE REQUIREMENT OF ACCOUNTING STANDARD 7, WH ICH REQUIRES THAT FORESEEABLE LOSSES ON CONTRACTS MUST BE RECOGN IZED AND PROVIDED FOR IN THE BOOKS OF ACCOUNTS. IT IS THE C ASE OF THE ASSESSEE THAT THE COMMISSIONER OF INCOME-TAX(APPEAL S) HAS ERRED IN DISREGARDING THE DETAILED SUBMISSIONS MADE BY THE ASSESSEE DEMONSTRATING THE UTILIZATION OF THIS PROV ISION IN THE IMMEDIATELY SUCCEEDING ASSESSMENT YEAR AND THE REVE RSAL OF THE UNUSED PORTION FOR TAXATION. 18. THE LEARNED COMMISSIONER OF INCOME-TAX PRODUCE D A COPY OF THE ORDER OF THE INCOME-TAX APPELLATE TRI BUNAL, - - ITA 143(DEL)/2007 17 A-BENCH, CHENNAI, DATED 16-5-2007 PASSED IN THE CAS E OF M/S.ALSTOM LTD. IN ITA NO.2035(MDS)/2005, WHEREIN T HE TRIBUNAL HAS CONFIRMED THE DISALLOWANCE. HE EXPLAINED THAT THE ISSUE IS THUS COVERED BY AN EARLIER DECISION OF THE CO-ORDIN ATE BENCH IN ASSESSEES OWN CASE. THE LEARNED REPRESENTATIVE AP PEARING FOR THE ASSESSEE CONTENDED THAT THE SAID JUDGMENT IS NO T APPLICABLE IN THE PRESENT CASE, AS HERE THE ASSESSEE HAS FURNI SHED THE DETAILS REGARDING THE FORESEEN LOSSES AND HAS DEMON STRATED THAT THE PROVISION HAS BEEN MADE STRICTLY IN TERMS OF AC COUNTING STANDARD 7. 19. WE CONSIDERED THIS MATTER. IN PARAGRAPH 4 OF ITS ORDER MENTIONED ABOVE, THE TRIBUNAL HAS HELD AS UND ER:- 4. WE HAVE CONSIDERED THE ENTIRE CONSPECTUS OF THE ARGUMENTS PLACED BEFORE US. THERE IS ABSOLUTEL Y NOTHING ON RECORD TO INDICATE THAT HOW THE LIABILIT Y WAS CRYSTALLIZED. HOW THE LOSSES WERE ESTIMATED? WHAT IS THE BASIS OF MAKING SUCH PROVISION? THE ASSESSE E DID NOT OFFER THE CONTRACT RECEIPTS FOR TAXATION. IT IS NOT CLEAR FROM THE RECORDS AS TO HOW THE ANTICIPATE D LOSSES WERE WORKED OUT. WHETHER THE ASSESSEE TOOK - - ITA 143(DEL)/2007 18 INTO CONSIDERATION ANTICIPATED PROFITS ALSO AND ON WHAT BASIS LOSSES WERE CONSIDERED TO BE FORESEEABLE? THE METHOD ADOPTED BY THE ASSESSEE APPEARS TO BE A SELF SERVING METHOD. WE DO NOT FIN D ANY REASON TO ALLOW THE FUTURE EXPENDITURE. WE HAV E GONE THROUGH THE RESAONINGS ADDUCED IN THE IMPUGNED ORDER. IN OUR OPINION THE COMMISSIONER(APPEALS) TOOK A CORRECT VIEW IN THE MATTER AND HIS ORDER CALLS FOR NO INTERFERENCE ON T HIS COUNT. 20. IN THE LIGHT OF THE ABOVE OBSERVATION OF THE E ARLIER BENCH, WE HAVE TO CONSIDER ANOTHER CRUCIAL POINT AG ITATED BY THE LEARNED COMMISSIONER OF INCOME-TAX. THE LEARNED COMMISSIONER OF INCOME-TAX HAS ARGUED THAT AS FAR A S THE CONTRACTS OF THE ASSESSEE ARE CONCERNED, IT HAS NOT OFFERED ANY INCOME AT ALL. WHEN THE ASSESSEE IS NOT OFFERING A NY INCOME FROM SUCH ACTIVITIES, THE MONEY SPENT ON THE CONTRA CTS ARE TO BE TREATED AS WORK-IN-PROGRESS TO BE CARRIED FORWARD F ROM YEAR TO - - ITA 143(DEL)/2007 19 YEAR TILL THE FINAL DISCLOSURE OF PROFIT OR LOSS DE PENDING UPON THE REVENUE RECOGNITION METHOD FOLLOWED BY THE ASSESSEE . 21. THEREFORE, IN THESE CIRCUMSTANCES WE DO NOT FI ND ANY REASON TO INTERFERE WITH THE ORDER OF THE COMMI SSIONER OF INCOME-TAX(APPEALS) ON THIS POINT. THIS GROUND IS THUS DISMISSED. 22. THE NEXT ISSUE IS THAT THE COMMISSIONER OF INC OME- TAX(APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWAN CE OF A NORMAL BUSINESS EXPENDITURE INCURRED ON RATES AND T AXES AS CAPITAL IN NATURE. THIS DISALLOWANCE WAS ALSO MADE FOR WANT OF EVIDENCES. FOR REASONS ALREADY STATED, NO EVIDENCE S CAN BE APPRECIATED AT THIS STAGE. THIS GROUND IS REJECTE D. 23. THE NEXT ISSUE IS THAT THE COMMISSIONER OF INC OME- TAX(APPEALS) HAS ERRED IN CONFIRMING THE ADDITION O F CERTAIN LIABILITIES AMOUNTING TO ` 1,64,10,846/- REFLECTED IN THE BALANCE SHEET TO THE TAXABLE INCOME DISREGARDING THE SUBMIS SIONS OF THE ASSESSEE THAT THEY WERE NOT EVEN DEBITED TO THE PRO FIT AND LOSS ACCOUNT AND THEY WERE NEVER CLAIMED BY THE ASSESSEE . AS FAR AS THE LIABILITIES ARE CONCERNED, THE ADDITION MAY OCCUR UNDER DIFFERENT CIRCUMSTANCES. IT IS NOT THAT ONLY THOSE ITEMS DEBITED IN - - ITA 143(DEL)/2007 20 THE PROFIT AND LOSS ACCOUNT BY THE ASSESSEE ALONE C OULD BE DISALLOWED AND ADDED BACK TO THE INCOME. IF THE AS SESSEE IS NOT PROVING THE GENUINENESS OF THE LIABILITIES, THE AUT HORITIES HAVE THE OPTION TO ADD THEM BACK TO THE INCOME OF THE ASSESS EE UNDER THE APPROPRIATE ENABLING PROVISION AVAILABLE IN THE ACT . A LIABILITY IN THE BALANCE SHEET ALWAYS REPRESENTS EITHER A CORRES PONDING ASSET OR AN EXPENDITURE INCURRED OR A LOSS SUFFERED . THEREFORE, VERIFICATION REGARDING THE GENUINENESS OF THOSE LIA BILITIES HAVE TO BE MADE IRRESPECTIVE OF THE FACT WHETHER THOSE LIAB ILITIES WERE CLAIMED BY THE ASSESSEE AS DEDUCTION OR NOT. IN TH E PRESENT CASE, THE DETAILS AND PARTICULARS GOVERNING THOSE L IABILITIES WERE NOT AVAILABLE TO THE LOWER AUTHORITIES. IT IS FOR THE SAID REASON THAT THEY WERE ADDED BACK TO THE INCOME OF THE ASSE SSEE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ADDITION I S TO BE UPHELD. THIS GROUND IS REJECTED. 24. THE LAST ISSUE TO BE CONSIDERED IN THE PRESENT APPEAL IS THE DISALLOWANCE OF LIABILITIES DEBITED I N THE PROFIT AND LOSS ACCOUNT AMOUNTING TO ` 44,31,401/- DISALLOWED BY THE ASSESSING AUTHORITY AND ADDED TO THE INCOME OF THE ASSESSEE. FOR THE REASONS ALREADY EXPLAINED, THAT IS, LACK OF EVIDENCE, WE - - ITA 143(DEL)/2007 21 CONFIRM THIS DISALLOWANCE. THIS ISSUE IS DECIDED A GAINST THE ASSESSEE. 25. IN RESULT, THIS APPEAL FILED BY THE ASSESSEE I S DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 2 ND OF MARCH, 2012 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (DR.O. K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 2 ND MARCH , 2012. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.