Dy. CIT, Pune V. Crane Process Flow Technologies India Ltd, Pune

ITA 1565/PUN/2013

• Counselvise Citation: 156524514 RSA 2013
• Duration Of Justice: 1 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 08-12-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 08-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1565/PN/2013 (ASSESSMENT YEAR : 2005-06) DY. COMMISSIONER OF INCOME TAX, CIRCLE- 8, PUNE. . APPELLANT VS. CRANE PROCESS FLOW TECHNOLOGIES INDIA LIMITED, AMAR AVINASH CORPORATE PLAZA, NEAR INOX MULTIPLEX, BUND GARDEN ROAD, PUNE. PAN : AABCA4702H . RESPONDENT DEPARTMENT BY : SHRI RAJESH DAMOR ASSESSEE BY : SHRI NIKHIL PATHAK DATE OF HEARING : 08-12-2014 DATE OF PRONOUNCEMENT : 31-12-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE REVENUE IS DIRECTED AGA INST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-IT/TP, PUN E DATED 30.05.2013 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 18.1 2.2008 PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2005-06. 2. IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION O N ACCOUNT OF WARRANTY PROVISIONS OF RS.24,38,000/- PLACING RELIANCE ON TH E DECISION OF HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS LTD [3 14 ITR 62] WHEN REASONABLE CERTAINTY AND SCIENTIFIC BASIS OF THE PR OVISION OF WARRANTY IS NOT CONCLUSIVELY ESTABLISHED? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION O N ACCOUNT OF WARRANTY PROVISIONS OF RS.24,38,000/-, WHEN THE ACTUAL EXPEN DITURE INCURRED ON WARRANTY CLAIM IN THE NEXT TWO YEARS I.E. A.Y.2006- 07 & 2007-08 IS RS.16.68 LAKHS ONLY, WHICH DEMONSTRATES THE FACT OF EXCESS PROVISIONING? ITA NO.1565/PN/2013 3. IN THIS APPEAL, REVENUE HAS RAISED TWO GROUNDS O F APPEAL BUT THE SOLITARY GRIEVANCE OF THE REVENUE IS WITH REGARD TO THE ACTION OF THE CIT(A) IN DELETING THE ADDITION OF RS.24,38,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROVISION FOR WARRANTY. 4. BRIEFLY PUT, THE RELEVANT FACTS ARE THAT THE RES PONDENT-ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT, 1956 AND IS, INTER-ALIA, ENGAGED IN MANUFACTURE AND SALE OF DIAPHRAGM VALVES, BUTTERFLY VALVES AND RUBBER DIAPHRAGMS. THE SALE OF PRODUCTS BY THE ASSESSEE CONTAIN AN OBLIGATION ON THE ASSESSEE TO MAKE GOOD ANY FAIL URE IN THE PRODUCT FOR A SPECIFIED PERIOD AFTER THE DATE OF SALE. IN ORDER TO ACCOUNT FOR SUCH OBLIGATIONS, ASSESSEE MADE A PROVISION FOR WARRANTIES. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE CHARGED AN AMOUNT OF RS.24,38,000/- TO THE PROFIT & LOSS ACCOUNT AS PROVISION FOR WARRANTY. THE ASSESSING O FFICER REJECTED THE PLEA OF THE ASSESSEE FOR DEDUCTION OF THE ABOVE CLAIM ON TH E GROUND THAT IT WAS A CONTINGENT LIABILITY AND THAT THE SAME COULD NOT BE REASONABLY ESTIMATED. THE CIT(A) DISAGREED WITH THE ASSESSING OFFICER AND HEL D THAT FOLLOWING THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK INDIA LIMITED VS. CIT, (2009) 314 ITR 62 (SC) THE IMPUGNED PROVIS ION COULD NOT BE CONSIDERED AS A CONTINGENT LIABILITY. FURTHER, THE CIT(A) ALSO CONSIDERED THE BASIS ON WHICH ASSESSEE HAD COMPUTED THE IMPUGNED P ROVISION AND FOUND THE SAME TO BE A SCIENTIFIC BASIS. THEREFORE, HE D IRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.24,38,000/-. AGAINST SUCH A DECISION OF THE CIT(A), REVENUE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING, THE LD. DEPARTMENTAL REP RESENTATIVE MERELY REPEATED THE STAND OF THE ASSESSING OFFICER, SO HOW EVER, HE COULD NOT CONTROVERT THE FINDING OF THE CIT(A) THAT IN VIEW O F THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK INDIA LIMITED ( SUPRA), IMPUGNED ITA NO.1565/PN/2013 PROVISION COULD NOT BE CONSIDERED AS A CONTINGENT L IABILITY. THE HONBLE SUPREME COURT HELD THAT PRESENT VALUE OF CONTINGENT LIABILITY, LIKE THE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION U/S 37 OF THE ACT. SO HOWEVER, T HE HONBLE SUPREME COURT, CAUTIONED THAT SUCH A DEDUCTION IS NOT A NORMAL RUL E BUT IT WOULD DEPEND ON NATURE OF THE BUSINESS, THE NATURE OF SALES, THE NA TURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. AS PER THE HONBLE SUPREME COURT, IT WOU LD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PR ODUCED. IN SUM AND SUBSTANCE, AS PER THE HONBLE SUPREME COURT, IN ORD ER TO ALLOW THE DEDUCTION FOR PROVISION FOR WARRANTY EXPENSES, IT WOULD BE NE CESSARY TO ESTABLISH THAT A SCIENTIFIC BASIS IS ADOPTED TO QUANTIFY SUCH A PROV ISION. IF THE HISTORICAL TREND INDICATES THAT A LARGE NUMBER OF SOPHISTICATED GOOD S WERE BEING MANUFACTURED AND 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 U/S 37 OF THE ACT. 6. IN OUR CONSIDERED OPINION, IN THE PRESENT CASE, THE PARITY OF REASONING LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ROTORK INDIA LIMITED (SUPRA) SQUARELY APPLIES. OSTENSIBLY, THE PRODUCTS WHICH ARE MANUFACTURED BY THE ASSESSEE ARE SOPHISTICATED PRODUCTS INASMUCH AS THEY FIND INDUSTRIAL USE AS WELL AS USE IN THE PHARMACEUTICAL AREAS. IT IS ALSO EVIDENT FROM THE TABULATION REFERRED BY THE CIT(A) IN PARA 2.4.2 OF HIS ORDER THAT THE PAST DATA SHOWED THAT SOME OF THE ITEMS MANUFACTURED AND SOLD REPORTED SOME DEFECTS. IN-FACT, THE EMPIRICAL DATA OF THE FAILURE RATE OF PRODUCTS IN THE PAST YEARS HAS FORMED THE BASIS FOR THE ASSESSEE TO DETERMINE THE PROVISION REQUIRED FOR WARRANTIES. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, IN OUR VIEW, THE CIT(A) MADE NO MISTAKE IN AP PLYING THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK IND IA LIMITED (SUPRA) AND ITA NO.1565/PN/2013 ALLOWING ASSESSEES CLAIM FOR DEDUCTION OF PROVISIO N FOR WARRANTY OF RS.24,38,000/-. THE ACTION OF THE CIT(A) IS HEREBY AFFIRMED AND THE REVENUE FAILS IN ITS APPEAL. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2014. SD/- SD/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 31 ST DECEMBER, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-IT/TP, PUNE; 4) THE CIT-IT/TP, PUNE; 5) THE DR A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE