Dy.Comm. of Income-tax, Pune V. Finolex Technologies Ltd., Pune

ITA 1598/PUN/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2029 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2001-2002
• Appeal Filed On: 12-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R D ONKAR
• Assessee Lawyers: ANN KAPTHUAMA
• Keywords: Speculation loss; Revenue expenditure; Capital expenditure
• Section: 37(1); 43(5); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1598/PN/2011 (ASSTT.YEAR : 2001-02) DY.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), PUNE .. APPELLANT VS. FINOLEX TECHNOLOGIES LTD, 26/27, MUMBAI PUNE ROAD, PIMPRI, PUNE. .. RESPONDENT PAN NO. AAACL 3264E ITA NO. 1599/PN/2011 (ASSTT.YEAR : 2001-02) DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), PUNE .. APPELLANT VS. FINOLEX WIRE PRODUCTS LTD. 26/27, MUMBAI PUNE ROAD, PIMPRI, PUNE. .. RESPONDENT PAN NO. AAACF 2641M ASSESSEE BY : SRI R.D. ONKAR RESPONDENT BY : MS. ANN KAPTHUAMA DATE OF HEARING : 19-02-2013 DATE OF PRONOUNCEMENT : 22-02-2013 ORDER PER R.K. PANDA, AM: THE ABOVE 2 APPEALS FILED BY THE REVENUE ARE DIRECT ED AGAINST THE SEPARATE ORDERS DATED 29-09-2011 OF THE CIT(A)-V PUNE RELATI NG TO ASSESSMENT YEAR 2001- 02. SINCE COMMON GROUNDS HAVE BEEN TAKEN BY THE RE VENUE IN BOTH THESE APPEALS, THEREFORE, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER : ITA 1598/PN/2011 (FINOLEX TECHNOLOGIES LTD) : 2. GROUNDS OF APPEAL NO.1 BY THE REVENUE READS AS U NDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND LAW, THE LD. CIT(A) ERRED IN HOLDING THE LOSS ON CANCELLATION OF FO RWARD FOREIGN EXCHANGE CONTRACTS AMOUNTING TO RS.6,35,373/- AS ALLOWAB LE DEDUCTION IGNORING THE FACT THAT IT IS A SPECULATION LOSS. 2 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY ENGAGED IN THE MANUFACTURING OF OPTIC FIBRE CABLES. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS D EBITED A SUM OF ` 6,35,373 ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE SAID LOSS BE NOT TREATED AS SPECULATION LOSS IN VIEW OF THE PROVISIONS OF SECTION 43(5) OF THE INCOME TA X ACT. IT WAS SUBMITTED THAT THE LOSS REPRESENTS DIFFERENCE DUE TO FOREIGN EXCHANGE FLUCTUATION. THE SAID LOSS HAS ARISEN ON ACCOUNT OF DIFFERENCE IN BOOKING RATE AND RATE AT THE TIME OF ACTUAL REALISATION/PAYMENT. IT WAS SUBMITTED THAT THE SAME IS ALLOWABLE AS INCURRED DURING THE NORMAL COURSE OF BUSINESS AND THERE IS NO ELEME NT OF SPECULATION INVOLVED IN THE SAME. 3.1 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE REFERRED TO PROVISIONS OF SECT ION 43(5) AND THE DECISION OF BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF COMF UND FINANCIAL SERVICES (INDIA) LTD. VS DCIT REPORTED IN 67 ITD 304 AND CAME TO THE CONCLUSION THAT THE LOSS OF ` 6,35,373 INCURRED BY THE ASSESSEE DUE TO LOSS IN FO REIGN EXCHANGE FLUCTUATION IS SPECULATION LOSS WHICH CANNOT BE ALLOWED TO BE SET OFF AGAINST ANY OTHER INCOME AS PROVIDED UNDER SECTION 73 OF THE ACT. ALTERNATIVEL Y, THE ASSESSING OFFICER FURTHER HELD THAT IF THE CONTENTION OF THE ASSESSEE THAT TH IS IS NOT A SPECULATION LOSS, THEN ALSO THE SAME CANNOT BE ALLOWED AS A REVENUE EXPEND ITURE IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SANDOZ (INDIA) LTD. REPORTED IN 206 ITR 599 ACCORDING TO WHICH LOSS DUE TO INCREASE IN RUPEE PAYMENT OBLIGATION OF FOREIGN PAYMENT LOSS DUE TO DEVALUATI ON OF INDIAN RUPEE IS NOT ALLOWABLE AS REVENUE EXPENDITURE. HE ACCORDINGLY M ADE ADDITION OF ` 6,35,373 TO THE TOTAL INCOME OF THE ASSESSEE. 3 4. BEFORE THE CIT(A) IT WAS ARGUED THAT THE FOREIGN CURRENCY LOSS INCURRED BY THE ASSESSEE WAS DUE TO ADVERSE FLUCTUATION IN THE RATE OF FOREIGN CURRENCY VIS--VIS INDIAN RUPEES AT THE TIME OF ACTUAL REALISATION/PAY MENT. IT WAS SUBMITTED THAT THE ASSESSEE IS IMPORTING RAW MATERIAL ITEMS IN THE COU RSE OF ITS BUSINESS AND THE ADDITIONAL BURDEN INCURRED BY IT DUE TO ADVERSE FLU CTUATIONS IN THE RATE HAS BEEN CLAIMED ON ACTUAL BASIS AS PER THE MANDATORY ACCOUN TING STANDARD 11. RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF WOODWARD GOVERNOR INDIA PVT. LTD. REPORTED IN 312 ITR 254 IT WAS SUBM ITTED THAT THE LOSS THAT HAS ARISEN IN THE COURSE OF BUSINESS IN RESPECT OF IMPO RT OF RAW MATERIAL IS A TRADING LOSS AND THEREFORE THE SAID AMOUNT IS FULLY DEDUCTI BLE U/S.37 OF THE INCOME TAX ACT. 5. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GO VERNOR INDIA PVT. LTD., (SUPRA) THE LEARNED CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE AND DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THE LEARNED CIT(A) WHILE ALLOWING THE CLAIM OF THE ASSESSEE HAS OBSERVED AS UNDER : I HAVE CONSIDERED THE APPELLANTS SUBMISSIONS IN RES PECT OF THIS DISALLOWANCE MADE BY THE ASSESSING OFFICER. IT HAS BE EN EXPLAINED BY THE APPELLANT THAT THIS FOREIGN CURRENCY FLUCTUATION LOSS IS SUFFERED DUE TO ACTUAL PAYMENT MADE IN FOREIGN CURRENCY TO THE SUPP LIERS OF RAW MATERIAL AND THE ASSESSING OFFICER HAD INCORRECTLY OBSERVED THAT THE SAID LOSS IS ON ACCOUNT OF CANCELLATION OF FORWARD FOREIGN EXCHANGE CONTRACTS. THE ENTIRE DISCUSSION OF THE ASSESSING O FFICER IS ON THE BASIS OF CANCELLATION OF FORWARD FOREIGN EXCHANGE CONTRACTS AND IT WAS OBSERVED BY THE ASSESSING OFFICER THAT THESE CONTRA CTS WERE SETTLED OTHERWISE THAN BY ACTUAL DELIVERIES AND WERE CANCEL LED BEFORE THE DATE OF MATURITY. HOWEVER, IN THE APPELLANT'S CASE, THIS LOSS HAS ARISEN ON ACCOUNT OF ACTUAL PAYMENT FOR RAW MATERIAL PURCHASE D DUE TO ADVERSE FLUCTUATION IN THE FOREIGN CURRENCY RATE. THEREFORE , IT WAS CONTENDED BY THE APPELLANT THAT THIS WAS A TRADING LOSS AND WAS FULLY ALLOWABLE U/S.37 OF THE ACT. THE APPELLANT HAS ALSO RELIED UP ON THE HON'BLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. L TD. (2009) 312 ITR 4 254 (SC) IN WHICH IT WAS HELD THAT LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHA NGE AS ON THE DATE OF BALANCE SHEET WAS AN ITEM OF EXPENDITURE ALLOWAB LE U/S.37(1) OF THE ACT. SINCE IN THE APPELLANT'S CASE THE LOSS HAS ARISEN ON ACCOUNT OF ACTUAL PAYMENT OF RAW MATERIAL AND NOT ON ACCOUN T OF ANY CANCELLATION OF FORWARD CONTRACT IN FOREIGN EXCHANGE , IT IS AN ACTUAL LOSS WHICH WAS TO BE ALLOWED U/S.37(1) OF THE ACT. THIS GROUND OF APPEAL IS THEREFORE, DECIDED IN FAVOUR OF THE APPELLANT. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NO T CONTROVERT THE FINDINGS GIVEN BY THE LEARNED CIT(A). SINCE LEARNED CIT(A) WHILE DELETING THE ADDITION HAS FOLLOWED THE DECISION OF HONBLE SUPREME COURT IN T HE CASE OF WOODWARD GOVERNOR (SUPRA) AND SINCE NOTHING CONTRARY WAS BRO UGHT TO OUR NOTICE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE AGAINST THE ABO VE DECISION, THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDING LY, THE SAME IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 8. GROUND OF APPEAL NO.2 BY THE REVENUE READS AS UN DER : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND LAW, THE LD. CIT(A) ERRED IN NOT UPHOLDING THE DISALLOWANCE OF RS.60,0 0,000/- DEBITED TO P&L ACCOUNT ON ACCOUNT OF SETTLEMENT OF DISPUTE B ETWEEN ASSESSEE AND BTNL IGNORING THE FACT THAT THE SAID EXPENDITURE IS NOT INCURRED BY THE ASSESSEE. 9. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE HAS DEBITED A SUM OF ` 60 LAKHS ON ACCOUNT OF WARRANTY CLAIM. ON BEING ASKED BY THE ASSESSING OFFICER TO FILE THE DETAILS OF THE EXPENSES AND TO JUSTIFY THE CLAIM IT WAS SUBMITTED THAT THE COMPANY HAS RECEIVED AND EXECUTED ONE ORDER FOR SUP PLY OF 2.933 KMS OF OPTIC FIBRE CABLE VALUED AT ` 32.60 CRORES FROM M/S. BHARTI TELENET LIMITED (BTNL ). DURING NEGOTIATION THE COMPANY HAD ASSURED BTNL THA T OPTIC FIBRE CABLES TO BE SUPPLIED WERE IDEAL FOR RODENT PROTECTION. BTNL HA D LAID 2,540 KMS CABLES AS ON MAY 1999. DURING MAY 1999, BTNL REPORTED 3 FIBRE C UTS IN THE CABLES INSTALLED IN THE BHOPAL-HOSNABAD ROAD SECTOR DUE TO RODENT ATTAC K. THIS CUT WAS DETECTED IN A STRETCH OF 72 KMS AREA THAT WAS HIGHLY RODENT INFES TED. BTNL SUFFERED MAJOR DISRUPTION IN THEIR NET WORK LEADING TO THE LOSS OF REVENUE AND TREMENDOUS 5 EMBARRASSMENT AND LOSS OF GOODWILL FROM THE CUSTOME RS DUE TO THE INCONVENIENCE CAUSED TO THEM. IT THEREFORE DEMANDED THAT SINCE T HE OPTIC FIBRE CABLE SUPPLIED BY THE COMPANY IS NOT IN ACCORDANCE WITH THE CONTRACT, THEREFORE, THE COMPANY SHOULD CARRY OUT THE RECTIFICATION WORK TO AVOID RECURRENC E OF SUCH PROBLEM IN FUTURE. 9.1 IT WAS SUBMITTED THAT THE COMPANY, AFTER DUE IN VESTIGATION INTO THE COMPLAINT FROM BTNL AND ON THE ADVICE OF M/S. CENTRAL ZONE RE SEARCH INSTITUTE, WHO WERE EXPERTS IN THE RELEVANT FIELD, DECIDED TO PUT SPECI AL LAYER OF CONCRETE THAT WILL PREVENT DAMAGE IN FUTURE FOR SUCH RODENT ATTACKS. THE COST FOR THIS CONCRETING WORKED OUT TO ` 85,000 PER KM AND THE TOTAL COST FOR PUTTING THIS S PECIAL LAYER FOR ENTIRE STRETCH OF 72 KMS ON DAMAGED OPTIC FIBRE CAB LE CAME TO ` 61.20 LAKHS. AFTER HECTIC NEGOTIATIONS BOTH THE PARTIES AGREED TO THE COMPENSATION OF ` 60 LAKHS ON THIS ACCOUNT. THIS ENTIRE RECTIFICATION WORK WAS AGREED TO BE DONE BY BTNL AND THE COMPANY DECIDED TO ACCEPT THE REDUCTION IN PAYMENT BY THE SAID AMOUNT OF ` 60 LAKHS TOWARDS COST OF THE RECTIFICATION. IT WAS SU BMITTED THAT THE CLAIM WAS ACCEPTED KEEPING IN MIND THE LOSS OF A PREMIER CUST OMER LIKE BTNL AND CONSIDERING FUTURE BUSINESS PROSPECTS. IT WAS FURT HER SUBMITTED THAT THE ENTIRE CLAIM HAD CRYSTALLISED DURING THE YEAR UNDER CONSID ERATION, I.E. A.Y. 2001-02. ACCORDINGLY, IT WAS SUBMITTED THAT THE ENTIRE EXPEN DITURE OF ` 60 LAKHS INCURRED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ALLOWABLE AS DEDUCTION U/S.37 OF THE INCOME TAX ACT. 10. HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCE D WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE. HE NOTED THAT THE AMOUNT OF ` 60 LAKHS DEBITED TO PROFIT AND LOSS ACCOUNT WAS ON ACCOUNT OF SETTLEMENT OF DI SPUTE BETWEEN THE ASSESSEE AND THE BTNL. THE ASSESSING OFFICER REFERRED TO THE PR OVISIONS OF SECTION 37(1) WHICH SPEAKS OF ALLOWANCE OF EXPENSES LAID OUT OR EXPENDE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS WHICH CAN BE ALLOWED IN COM PUTING THE INCOME CHARGEABLE 6 TO TAX. IN THE INSTANT CASE, THE EXPENDITURE FOR C ONCRETING THE DAMAGED PART OF CABLE WAS INCURRED BY BTNL. THEREFORE, THE EXPENDITURE WA S PRIMARILY INCURRED BY BTNL AND THEY HAVE REDUCED THIS AMOUNT FROM THE PAY MENT TO BE MADE TO THE ASSESSEE. THE ASSESSEE CANNOT BE SAID TO HAVE INCU RRED THESE EXPENSES NOR HE HAS LAID DOWN THESE EXPENSES. THEREFORE, ACCORDING TO THE ASSESSING OFFICER IT IS FOR BTNL TO CLAIM THE EXPENSES AND NOT THE ASSESSEE. T HEREFORE, HE HELD THAT THIS AMOUNT CANNOT BE ALLOWED IN THE HANDS OF THE ASSESS EE. 11. ALTERNATIVELY, THE ASSESSING OFFICER WAS OF THE OPINION THAT SINCE THE ASSESSEE HAS AGREED FOR THIS REMISSION TO MAINTAIN ITS GOODWILL WHICH WILL ENSURE CONTINUITY OF CLIENTELE, SUCH AGREEMENT WILL NECESS ARILY BRING AN ENDURING BENEFIT IN INTANGIBLE FORM. REFERRING TO THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF CIT VS. TRAVANCORE SUGAR AND CHEMICALS LTD. REPO RTED IN 88 ITR 1 HE HELD THAT SUCH EXPENDITURE IS CAPITAL IN NATURE. FURTHER, HE WAS OF THE OPINION THAT EVEN IF IT IS ALLOWED AS CAPITAL EXPENDITURE, WHAT THE ASSESSE E CAN CAPITALISE IS ONLY THE EXPENDITURE IT INCURRED AND NOT LOSS OF THE RECEIPT S. THEREFORE, IT CANNOT ALSO BE CAPITALISED. HE ACCORDINGLY DISALLOWED THE CLAIM O F EXPENDITURE OF ` 60 LAKHS. 12. BEFORE THE CIT(A) THE ASSESSEE REITERATED THE S AME ARGUMENTS AS MADE BEFORE THE ASSESSING OFFICER. IT WAS SUBMITTED THA T THERE IS A STIPULATION IN THE AGREEMENT THAT THE ASSESSEE SHALL WARRANTY THE OPTI C FIBRE CABLE AGAINST MANUFACTURING DEFECTS SUBJECT TO STIPULATION PERIOD . THE ASSESSEE ACCEPTED THE CLAIM RAISED BY THE CUSTOMER TOWARDS THE SAID DEFEC T IN THE CABLES SUPPLIED AND AS POINTED OUT BY THE CUSTOMER. IT WAS SUBMITTED THAT THE ASSESSEE HAS ACCOUNTED FOR AND OFFERED TO TAX THE ENTIRE SALE INCOME AND THERE FORE PROVIDED FOR THE AMOUNT IN RESPECT OF THE CLAIM RAISED BY THE CUSTOMER FOR DEF ECT IN THE MATERIAL SUPPLIED TO THE CUSTOMER. THE LIABILITY IS INCURRED BY THE ASSESSE E IN THE ORDINARY COURSE OF ITS BUSINESS AND IS CERTAIN AND ACCRUED. THE CLAIM FOR DEDUCTION IS NOT OF A DISPUTED 7 LIABILITY. RELYING ON THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. REPORTED IN 314 ITR 62 IT WAS SUBMITTED THAT THE SAID AMOUNT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE P URPOSE OF ITS BUSINESS AND IS FULLY DEDUCTIBLE. 13. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LEARNED CIT(A) DELETED THE ADDITION BY HOLDING AS UNDER : 8. THE APPELLANT'S EXPLANATION HAS BEEN CAREFULLY PERUSED. THE APPELLANT HAS EXPLAINED THE NATURE AND CIRCUMSTANCE S OF THIS CLAIM OF ` 60,00,000/- TOWARDS PAYMENT MADE TO BTNL. IT WAS EX PLAINED BY THE APPELLANT THAT DUE TO DAMAGE IN THE OPTIC FI RE CABLE SUPPLIED TO ITS CUSTOMER BTNL, THE APPELLANT HAD TO MEET THE COST OF REPAIR BY WAY OF PUTTING SPECIAL LAYER OF CONCRETE @ ` 85,000/- PER KM. THIS WAS BECAUSE THE CUSTOMER INCURRED THESE EXPENDITURE AND THEN DEDUCTED THE SAME FROM THE PAYMENT DUE TO THE APPEL LANT WHICH WAS WITHHELD. THUS, IT WAS RECOVERY OF THE COST OF REPAIR FOR THIS DEFECTIVE MATERIAL SUPPLIED BY THE APPELLANT. IT WA S ALSO EXPLAINED THAT IN THE AGREEMENT FOR SUPPLY IT WAS STATED THAT THE APPELLANT WOULD WARRANTY THE OPTIC CABLE FIBRE AGAINST MANUFA CTURING DEFECTS FOR THE STIPULATED PERIOD. THEREFORE, SINCE THE APP ELLANT HAD ACCOUNTED FOR THE ENTIRE SALE PROCEEDS IN THE P&L A /C, THE DEDUCTION ON ACCOUNT OF THE CLAIM MADE BY THE CUSTO MER FOR THE DEFECT WAS CLAIMED AS A REVENUE EXPENDITURE AS IT W AS NOT A DISPUTED LIABILITY. FOR THIS, RELIANCE WAS PLACED O N THE JUDGEMENT OF THE HON'BLE APEX COURT IN THE CASE OF ROTORK CONTRO LS 314 ITR 62 (SC). MOREOVER, IT WAS STATED THAT THE EXPENDITURE WAS INCURRED IN THE ORDINARY COURSE OF BUSINESS AND TOWARDS THE DEFECTI VE FINISHED GOODS SUPPLIED TO THE CUSTOMER WHICH BECAME PAYABLE UNDER THE WARRANTY CLAUSE AND THE CONTRACTUAL OBLIGATION. THE REFORE, IT CANNOT BE TREATED TO BE A CAPITAL EXPENDITURE. IT IS NOTIC ED FROM THE ASSESSMENT ORDER THAT THESE FACTS WERE EXPLAINED IN THE ASSESSMENT PROCEEDINGS ALSO AND THE ASSESSING OFFIC ER HAS NOT DISPUTED ANY OF THESE FACTS. BUT STILL, HE DISALLOW ED THE CLAIM ON THE BASIS OF THE EXPENDITURE NOT BEING INCURRED BY THE APPELLANT ITSELF, OR ALTERNATIVELY, THAT IT WAS OF CAPITAL NA TURE. 9. I HAVE PERUSED THE ABOVE EXPLANATION OF THE APPE LLANT AND I AM OF THE CONSIDERED OPINION THAT THE CLAIM OF ` 60,00,000 LAKHS WAS ALLOWABLE AS REVENUE EXPENDITURE IN VIEW OF THE FACTS AND CIRC UMSTANCES EXPLAINED BY THE APPELLANT; WHICH ARE NOT DISPUTED. THIS DISALLOW ANCE THEREFORE, CANNOT BE SUSTAINED AND THE GROUND OF APPEAL IS ALLOWED. 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIO US DECISIONS RELIED ON BY BOTH THE SIDES. THERE IS NO DISPUTE TO THE FACT THAT TH ERE WAS DAMAGE DUE TO RODENT ATTACK IN THE OPTIC CABLE SUPPLIED BY THE ASSESSEE TO ITS CUSTOMER BTNL. THERE IS 8 ALSO NO DISPUTE TO THE FACT THAT THERE IS A STIPULA TION IN THE AGREEMENT THAT THE ASSESSEE SHALL WARRANTY THE OPTIC FIBRE CABLE AGAIN ST THE MANUFACTURING DEFECTS SUBJECT TO STIPULATION PERIOD, A FACT SUBMITTED BEF ORE THE LEARNED CIT(A) AND NOT DISPUTED BY THE REVENUE. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAD ACCOUNTED FOR THE ENTIRE SALE PROCEEDS IN THE PROFI T AND LOSS ACCOUNT IN THE YEAR OF SALE. THERE IS ALSO NO DISPUTE TO THE FACT THAT AF TER NEGOTIATIONS WITH THE COMPANY THE ESTIMATED COST FOR PUTTING THE SPECIAL LAYER OF CONCRETE TO PREVENT DAMAGE IN FUTURE FOR SUCH RODENT ATTACK WAS SETTLED AT ` 60 LAKHS. THERE IS NO DISPUTE TO THE FACT THAT THE ABOVE AMOUNT WAS DEDUCTED FROM THE AM OUNT RECEIVABLE BY THE ASSESSEE FROM BTNL. THERE IS ALSO NO DISPUTE TO TH E FACT THAT THE ASSESSEE UNDER THE HEAD ADMINISTRATIVE SELLING EXPENSES HAS DEBI TED THE SAME AS WARRANTY CLAIM OF ` 60 LAKHS FOR THE YEAR ENDING 31-03-2001. 15. THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. VS. CIT REPORTED IN 62 ITR 314 HAS HELD AS UNDER : THE ASSESSEE SOLD VALVE ACTUATORS. AT THE TIME OF SALE THE ASSESSEE PROVIDED A STANDARD WARRANTY WHEREBY IN THE EVENT OF ANY ACTUATOR OR PART THEREO F BECOMING DEFECTIVE WITHIN 12 MONTHS FROM THE DATE OF COMMISSIONING OR I8 MONTHS FROM THE DATE OF DISPATCH, WHICHEVER WAS EARLIER, IT UNDERTOOK TO REC TIFY OR REPLACE THE DEFECTIVE PART FREE OF CHARGE. RIGHT FROM THE ASSESSMENT YEAR 1983-84 THE CLAIM FOR ALLOWANCE OF THIS WARRANTY HAD BEEN ALLOWED. FOR THE ASSESSMENT YEAR 1991-92, IT HAD MADE A PROVISION FOR WARRANTY OF RS.10,18,800 AT THE RATE O F 1.5 PER CENT, OF THE TURNOVER. SINCE THIS PROVISION EXCEEDED THE ACTUAL EXPENDITURE, THE ASSESSEE REVERSED RS.5,00,246 AS REVERSAL OF EXCESS PROVISION, AND CLAIMED DEDUCTI ON OF THE NET PROVISION OF RS, 5,18,554. BUT THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT IT WAS MERELY A CONTINGENT LIABILITY. THE HIGH COURT ON APPEAL HELD THAT NO OBLIGATION WAS CAST ON THE DATE OF SALE AND CONSEQUENTLY THERE WAS NO AC CRUED LIABILITY. ON APPEAL TO THE SUPREME COURT: HELD, REVERSING THE DECISION OF THE HIGH COURT, THA T THE VALVE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHISTICATED GOODS AND STATIS TICAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE ; THAT VALV E ACTUATOR BEING A SOPHISTICATED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALVE ACTUATOR WI THOUT A WARRANTY. THEREFORE, THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE; IN OTHER WORDS, THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE THE ASSESSEE HAD A PRESENT OBLIG ATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE MOUNT OF THE OBLIGATION. THEREFORE, THE ASSESSEE HAD INCUR RED A LIABILITY DURING THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UND ER SECTION 37 OF THE INCOME-TAX ACT, 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE T HE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT LIABIL ITY IS NOT THE NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PRODUCT 9 MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONL Y BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT A N OUT/LOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTATE CA N BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN B E RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDICA TES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTURED IN THE PAST AND THE F ACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVI SION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DE DUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. 16. SINCE IN THE INSTANT CASE THE LEARNED CIT(A) WH ILE ALLOWING THE CLAIM OF THE ASSESSEE HAS FOLLOWED THE DECISION OF HONBLE SUPRE ME COURT IN THE CASE OF ROTORK CONTROLS (SUPRA) AND SINCE THE EXPENDITURE WAS INCU RRED IN THE ORDINARY COURSE OF BUSINESS TOWARDS DEFECTIVE FINISHED GOODS SUPPLIED TO THE CUSTOMER WHICH BECAME PAYABLE UNDER THE WARRANTY CLAUSE AND AS PER THE CO NTRACTUAL OBLIGATION, THEREFORE, IT CANNOT BE TREATED AS CAPITAL EXPENDITURE AND HAS TO BE TREATED AS REVENUE EXPENDITURE. WE THEREFORE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE AS REVENUE EXPENDITURE. THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVERT THE FACTUAL FIN DINGS GIVEN BY THE LEARNED CIT(A) NOR COULD DISTINGUISH THE DECISION OF THE HO NBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS(SUPRA) RELIED ON BY THE LEA RNED CIT(A). WE THEREFORE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) AND ACCORDINGLY UPHOLD THE SAME. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY DIS MISSED. 17. GROUNDS OF APPEAL NO.3 & 4 BEING GENERAL IN NAT URE ARE DISMISSED. ITA NO.1599/PN/2011 (FINOLEX WIRE PRODUCTS LTD.) : 18. THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE READS AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND LAW, THE LD. CIT(A) ERRED IN HOLDING THE LOSS ON CANCELLATION OF FO RWARD FOREIGN EXCHANGE CONTRACTS AMOUNTING TO ` 54,01,451 AS ALLOWABLE DEDUCTION IGNORING THE FACT THAT IT IS A SPECULATION LOSS. 10 19. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUND IS IDENTICAL TO GROUND OF APPEAL NO.1 IN ITA NO.1598/PN/2011. WE HAVE ALR EADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE REVENUE HAS BEEN DISMISSED . FOLLOWING THE SAME RATIO, THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 20. IN THE RESULT, BOTH THE APPEALS FILED BY THE RE VENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 22 ND DAY OF FEBRUARY 2013. SD/- SD/- (R.S. PADVEKAR) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED THE 22 ND FEBRUARY 2013 SATISH COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-V, PUNE 4. CCIT, PUNE 5. D.R. A BENCH, PUNE 6. GUARD FILE BY ORDER // TRUE COPY // SENI OR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE