ACIT, CHENNAI V. M/s. Toshniwal Hyvac Private Limited, CHENNAI

ITA 1556/CHNY/2011

• Counselvise Citation: 155621714 RSA 2011
• Duration Of Justice: 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2004-2005
• Appeal Filed On: 12-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P MADHANA SEKARAN
• Assessee Lawyers: R VIJAYARAGHAVAN

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NO.1556/MDS/2011 (ASSESSMENT YEAR : 2004-05 ) THE ASST. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE III(2) CHENNAI VS M/S TOSHNIWAL HYVAC PRIVATE LTD 4D/6 INDUSTRIAL ESTATE AMBATTUR, CHENNAI 600 058 [PAN AABCT0062D ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.MADHANASEKARAN, JCIT RESPONDENT BY : SHRI R.VIJAYARAGHAVAN, ADVOCATE DATE OF HEARING : 01-12-2011 DATE OF PRONOUNCEMENT : 15-12-2011 O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE, FOR ASSESSMENT YEA R 2004-05, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) III, CHENNAI, DATED 10-6- 2011. THE SOLE ISSUE INVOLVED IN THIS APPEAL IS RE GARDING ALLOWANCE OF CLAIM OF PROVISION FOR UNEXPIRED PERFORMANCE BANK G UARANTEE AMOUNTING TO ` 19,14,795/-. ITA 1556/11 :- 2 -: 2. BRIEFLY STATED, THE FACTS OF THE ISSUE BEFORE US AR E THAT THE ASSESSEE MADE A CLAIM OF PROVISION FOR UNEXPIRED PE RFORMANCE BANK GUARANTEE WHICH WAS DISALLOWED BY THE ASSESSING OFF ICER BY OBSERVING AS UNDER: 'THE ASSESSEE IN ITS LETTER DT. 24-8-2009 HAS STATE D THAT 'IN LINE WITH THE ABOVE SYSTEM OF REGULARLY AND CONSIST ENTLY EMPLOYED BY THE COMPANY, AN AMOUNT OF ` 19, 14,795/ - WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT TOWARDS PROVISION FOR UNEXPIRED PERFORMANCE GUARANTEE FOR T HE ABOVE A. Y 2004-05 AND ` 5,97,819/- WAS OFFERED AS INCOME ON EXPIRED PERFORMANCE BANK GUARANTEES. THIS PROVISION IS MADE YEAR AFTER YEAR TO COVER THE 10% DUE FROM CUSTOMERS ON THE SATISFACTORY PERFORMANCE OF T HE EQUIPMENT SUPPLIED. FOR THE A. Y 1995-06 & 1997-98, THE ASSESSING OFFICER DISALLOWED THE PROVISION AMOUNT D EBITED TO PROFIT AND LOSS ACCOUNT TOWARDS UNEXPIRED PERFOR MANCE BANK GUARANTEES ISSUED AND IT WAS ALLOWED AND DECID ED BY I. T.A. T IN ITA NO. 378/MDS/2003 AND ON ITA NO. 698/MDS/2000 IN OUR FAVOUR'. HOWEVER, THE AO DID NOT ACCEPT THE EXPLANATION OF T HE ASSESSEE BY STATING AS UNDER: ' THE DECISION OF THE HON 'BLE ITAT HAS BEEN RENDER ED IN THE ASSESSEE'S CASE THAT THE ASSESSEE HAS MADE A PROVISION FOR WARRANTY. THE ASSESSEE ITSELF HAS ADM ITTED FOR THIS ASSESSMENT YEAR THAT THE PROVISION HAS BEEN MA DE TOWARDS ACCRUAL OF INCOME AND NOT FOR PROVISION OF WARRANTY. ACCORDINGLY, THE ASSESSEE'S CLAIM OF ` 19,14,795/ - IS DISALLOWED AND ADDED BACK. ' 3. THE ASSESSEE-COMPANY IS MANUFACTURING LIQUID FLOW M ETER. THE ARRANGEMENT FOR SALE OF THESE METERS WAS MADE A S PER THE REQUIREMENT OF THE PURCHASER AND TO BE PROVIDED WIT H PERFORMANCE BANK GUARANTEE FOR A PERIOD RANGING FROM 12 TO36 MO NTHS. THE ITA 1556/11 :- 3 -: COMPANY IS REQUIRED TO PLACE DEPOSITS BY MEANS OF BANK GUARANTEE FOR 10% OF THE ORDER VALUE WITH THE CUSTOMER AS PER THE TERMS OF THE ORDER. THE CUSTOMER, ON THE BASIS OF THE BANK GUAR ANTEE WOULD RELEASE 10% OF THE SALE VALUE. THE BANK GUARANTEE WILL BE RELEASED ONLY AFTER THE EXPIRY OF THE WARRANTY PERIOD AND PE RFORMANCE SATISFACTION OF THE PRODUCT TO THE EXTENT OF PERFOR MANCE BANK GUARANTEES ISSUED DURING THE YEAR BY DEBITING THE P ROFIT & LOSS ACCOUNT AND TREATING IT AS EXPENDITURE. THE COMPAN Y WAS ALSO OFFERING AS INCOME THIS AMOUNT WHICH REPRESENTED TH E VALUE OF EXPIRED BANK GUARANTEES FOR WHICH THE PROVISION WAS MADE IN THE EARLIER YEARS. THE METHOD OF ACCOUNTING FOLLOWING BY THE COMPANY I S REGULAR AND CONSISTENT. FOR ASSESSMENT YEAR 2004-05, AN AMOUNT OF ` 19,14,795/- WAS DEBITED IN THE PROFIT & LOSS ACCOUNT TOWARDS PR OVISO FOR UNEXPIRED PERFORMANCE BANK GUARANTEE AND ` 5,97,819/- WAS OFFERED AS INCOME ON EXPIRED PERFORMANCE BANK GUARANTEE. INSTEAD OF REDUCING 10% OF THE AMOUNT FROM THE SALE VALUE, THE ASSESSEE DEBITE D THIS AMOUNT SEPARATELY UNDER THE HEAD ADMINISTRATIVE EXPENSES AS PROVISION FOR UNEXPIRED PERFORMANCE GUARANTEE AND RECOGNIZED ONL Y 90% OF THE VALUE AS INCOME. THE BALANCE 10% VALUE IS RECOGNIZ ED ONLY AFTER THE EXPIRY OF THE GUARANTEE ISSUED. IN OTHER WORDS, 10 % INCOME WAS ACCRUED TO THE ASSESSEE ONLY AFTER THE EXPIRY OF TH E GUARANTEE ISSUED. ITA 1556/11 :- 4 -: THUS, THE ASSESSEE HAS NOT MADE A PROVISION TOWARDS ACCRUAL OF INCOME. BUT IT IS A PROVISION MADE FOR WARRANTEE. HOWEVER, THE LD. CIT(A) HAS DELETED THIS ADDITION AFTER FOLLOWING TH E ITAT DECISION IN ASSESSEES OWN CASE IN I.T.A.NO. 378/MDS/2003 FOR A SSESSMENT YEAR 2005-06, ORDER DATED 20.6.2003 AND IN I.T.A.NO. 698 /MDS/2000 FOR ASSESSMENT YEAR 1997-98, ORDER DATED 21.7.2008. ST ILL THE REVENUE IS AGGRIEVED. 4. IN THE GROUNDS TAKEN, THE DEPARTMENT HAS TRIED TO DISTINGUISH THE FACTS OF THIS YEAR AS CONTRAST TO T HE FACTS IN EARLIER YEARS. 5. WE HAVE COGITATED THE RELEVANT ARGUMENTS AND FACTS AS ADVANCED BY THE RESPECTIVE ARS AND HAVE FOUND THAT THE ISSUE IN QUESTION STANDS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE AS STATED ABOVE. WE HAVE GONE THROUGH THE COPIES OF THE TRIBUNALS ORDERS PLACED BEFORE US FO R OUR PERUSAL. IN THE ORDER DATED 20.6. 2003, FOR ASSESSMENT YEAR 1995-96 , THE TRIBUNAL HAS HELD AS UNDER: 'THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNA L IN KEVIN ENTERPRISES(SUPRA) WAS WITH REGARD TO IDENTICAL SIT UATION REQUIRING TO PROVIDE 10% OF THE SALE VALUE AS BANK GUARANTEE FOR SATISFACTORY PERFORMANCE OF THE EQUIPMENT SUPPLIED BY THE ASSESSEE. THE QUESTION CONSIDERED BY THE TRIBUNAL W AS ITA 1556/11 :- 5 -: WHETHER IT COULD BE PROVIDED TO HOLD THAT 10% OF TH E SALE VALUE COVERED BY THE PERFORMANCE BANK GUARANTEE ISSUED BY MEANS OF BANK GUARANTEE COULD ARISE ONLY AFTER THE COMPLE TION OF THE PERIOD SATISFACTORILY. THE TRIBUNAL FOUND THAT THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE BY ACCOUNTING O F 10% ON THE BASIS OF COMPLETION METHOD AND SATISFACTORY CER TIFICATE ISSUED BY THE CUSTOMER WAS A VALID METHOD OF ACCOUN TING. THE BOMBAY BENCH OF THE TRIBUNAL IN CORROSION CONTROL SERVICES(BOMBAY)(P) LTD. (SUPRA) FOUND THAT MONEY R ETAINED WOULD ACCRUE TO THE ASSESSEE AS INCOME ONLY WHEN TH E RETENTION PERIOD IS OVER. ON THIS POINT, WE MAY REFER THE DECISION OF THE SUPREME COURT IN CIT VS. HINDUSTAN HOUSING A ND LAND DEVELOPMENT TRUST LTD (1986) 161 ITR 524. THIS DECI SION IS WITH REGARD TO THE CHALLENGE OF ADDITIONAL COMPENSA TION THAT WAS GRANTED TO THE ASSESSEE BY THE STATE GOVERNMENT. TH E SUPREME COURT HAD ALLOWED THE PAYMENT OF COMPENSATI ON TO THE ASSESSEE ON THE BASIS OF THE ASSESSEE PROVIDING A BANK GUARANTEE. CONSIDERING THAT ENHANCED COMPENSATION W AS CHALLENGED BY THE STATE GOVERNMENT AND THE ASSESSEE WAS PERMITTED TO WITHDRAW THE ENHANCED COMPENSATION BY PROVIDING THE BANK GUARANTEE TO THE GOVT., THE SUPREME COURT CAME TO THE CONCLUSION THAT THE MONEY THAT THE ASSESSEE REC EIVED WAS ONLY INCHOATE RIGHT BUT THE INCOME ON ACCOUNT OF AD DITIONAL COMPENSATION DID NOT ACCRUE AT ALL. WE ARE ONLY DRA WING A PARALLEL WITH REFERENCE TO THE ASSESSEE BEING ALLOW ED TO BE PAID 10% OF THE SALE VALUE ON THE BASIS THAT IT PROVIDES A BANK GUARANTEE OR EQUIVALENT AMOUNT WHICH WAS REMAINED V ALID FOR A PERIOD OF 12 MONTHS OR MORE WHICH WAS THE PERIOD OF SATISFACTORY PERFORMANCE. IN CASE OF FAILURE OF THE OPERATION DURING THE PERFORMANCE PERIOD, THE CUSTOMER WOULD B E ENTITLED TO INVOKE THE GUARANTEE. THE ASSESSEE MAY HAVE TO M AKE CERTAIN SERVICES OR ATTEND TO THE OPERATIONS OF THE MACHINES. THESE ARE SOME OF THE INSTANCES THAT MAY OCCUR DURI NG THE WARRANTY PERIOD OR PERFORMANCE PERIOD. THEREFORE, T HE AMOUNT THAT THE ASSESSEE GOT WAS DIRECTLY LINKED TO THE EQ UIVALENT AMOUNT PROVIDED IN THE SHAPE OF BANK GUARANTEE. IT IS TO THIS SATISFACTION, IT COULD BE CALLED A INCHOATE RIGHT A ND THEREFORE, THE INCOME WOULD ACCRUE ONLY ON SATISFACTORY PERFORMANC E ISSUED BY THE CUSTOMER. WE ACCORDINGLY UPHOLD THE CLAIM OF THE ASSESSEE IN BOTH THE CASES. ' ITA 1556/11 :- 6 -: 6. ACCORDINGLY, BY FOLLOWING THE ABOVE DICTUM AND ADHE RING TO THE PRINCIPLE OF STARE DECISIS , WE UPHOLD THE IMPUGNED ORDER AND CANNOT ALLOW THE APPEAL OF THE REVENUE. 7. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH DECEMBER, 2011. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 15 TH DECEMBER, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR