Indo Russian Aviation Ltd., Nashik V. Assistant Commissioner of Income-tax,

ITA 171/PUN/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 5367 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-01-2018
• Assessment Year: 2006-2007
• Appeal Filed On: 13-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR VIVEK AGGARWAL; M K VERMA
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 1 7 1 /P U N/201 5 / ASSESSMENT YEAR : 20 06 - 07 INDO RUSSIAN AVIATION LTD., C/O HAL ADMINISTRATIVE BLOCK, OJHAR TOWNSHIP, NASHIK 422207 . / APPELLANT PAN: AAACI5908C VS. THE ASST. COMMISSIONER OF INCOME TAX, CI RCLE 1, NASHIK . / RESPONDENT ASSESSEE BY : SHRI P RAMOD SHINGTE REVENUE BY : DR VIVEK AGGARWAL AND SHRI M.K. VERMA / DATE OF HEARING : 0 2 . 0 8 . 201 8 / DATE OF PRONOUNCEMENT: 17 . 1 0 .201 8 / ORDER PER SUSHMA CHOWLA, J M : TH E APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) - I , NASHIK , DATED 10.12.2014 RELATING TO ASSESSMENT YEAR 20 06 - 07 AGAINST ORDER PASSED UNDER SECTION 143(3) R.W.S. 254 OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOWANCE OF WARRANTY CLAIM AMOUNTING TO RS.2,76,87,623/ - BY REJECTING APPELLANTS CONTENTION AND ALL THE DOCUMENTARY EVIDENCES PRODUCED BEFORE THEM. YOUR APPELLANT PRAYS FOR TOTAL RELIEF. ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 2 3. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A) IN MAKING DISALLOWANCE OF WARRANTY CLAIM OF 2,76,87,623/ - . 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING IN AIRCRAFT PARTS AND ENGINES. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME AT 4.97 CRORES. THE ASSESSMENT UNDER SECTION 143 (3) OF THE ACT WAS COMPLETED AFTER MAKING VARIOUS DISALLOWANCES AT 8.41 CRORES. THE CIT(A) PARTLY ALLOWED APPEAL OF ASSESSEE, AGAINST WHICH BOTH THE ASSESSEE AND REVENUE WENT IN APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL IN ITA NOS.121/PN/2010 AND 112/PN /2010 VIDE ORDERS DATED 15.06.2011 AND 21.06.2011 HAD SET ASIDE THE ISSUE OF PROVISION FOR GRATUITY, VACATION LEAVE AND WARRANTY EXPENSES WITH DIRECTION TO THE FILE OF ASSESSING OFFICER. THE CASE OF ASSESSEE WAS TAKEN UP FOR RE - SCRUTINY. THE ASSESSING OF FICER NOTED THAT THE ASSESSEE HAD CLAIMED THAT PROVISION FOR WARRANTY EXPENSES AT 3.25 CRORES IN THE RETURN OF INCOME, WHICH WAS DISALLOWED IN EARLIER ORDER PASSED UNDER SECTION 143(3) OF THE ACT ON THE GROUND THAT WARRANTY EXPENSES WERE CONTINGENT IN NATURE AND WERE NOT INCURRED AND HENCE, THE CLAIM OF PROVISION FOR WARRANTY EXPENSES WAS NOT ALLOWABLE DEDUCTION. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2004 - 05, THE ASSESSEE HAD MADE SUBMISSION ON 20.11.2010 IN SUPPORT OF ITS CLAIM RELATING TO PROVISION FOR WARRANTY EXPENSES. THE ASSESSING OFFICER ON OBSERVATIO N OF INFORMATION FURNISHED I.E. FROM SAMPAL CONTRACT DATED 03.04.2002 BETWEEN INDO RUSSIAN AVIATION LTD. I.E. THE ASSESSEE COMPANY AND MINISTRY OF DEFENCE (INDIAN AIR FORCE), THE ASSESSEE COMPANY WAS SUPPLYING VARIOUS MATERIAL TO THE VENDOR AND OFFERED W ARRANTY TO REPLACE DAMAGED MATERIAL FREE OF COST. FURTHER, THE ASSESSING OFFICER NOTED THE CONTENTS OF LETTER DATED 29.05.2001 ADDRESSED BY THE ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 3 ASSESSEE TO ITS VENDOR, WHEREIN THE VENDOR HAD CLAIMED FOR REPLACEMENT OF MATERIAL SUPPLIED UNDER WARRANTY. AN OTHER LETTER DATED 24.03.2001 WAS ADDRESSED TO M/S. RUSSIAN AVIATION LTD., MOSCOW, RUSSIA BY THE ASSESSEE COMPANY. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD ASKED FOR REPLACEMENT OF MATERIAL SUPPLIED WHICH WAS FOUND DEFECTIVE BY THE CUSTOMER OF AS SESSEE COMPANY. THE ASSESSING OFFICER ALSO NOTED THAT THE ASSESSEE WAS NOT MANUFACTURING ANY MATERIAL SUPPLIED TO ITS VENDOR. THE CONCLUSION OF ASSESSING OFFICER WAS THAT THE ASSESSEE WAS WORKING AS DEALER OF SUPPLIER COMPANY; HENCE WARRANTY EXPENSES WER E NOT ATTRIBUTABLE TO THE ASSESSEE. THE ASSESSEE WAS THUS, SHOW CAUSED AS TO WHY THE SAID EXPENDITURE BE ALLOWED IN ITS HANDS. THE ASSESSEE EXPLAINED THAT PROVISION FOR WARRANTY WAS RECOGNIZED O N THE BASIS OF CLAIM OF ENGINE R - 29 - 300 AT 2.76 CRORES AND OTHER CLAIMS OF 48,12,377/ - , TOTALING 3.25 CRORES. THE CLAIMS WORTH 48,12,377/ - WERE THE WARRANTY CLAIMS BY THE CUSTOMERS AGAINST SUPPLIES MADE BY ASSESSEE DURING THE FINANCIAL YEAR 2005 - 06. THE ASSESSEE GAVE DETAILS IN THIS REGA RD. IT ALSO GAVE THE DETAILS IN RESPECT OF CLAIMS RAISED BY INDIAN AIR FORCE (IAF) ON ASSESSEE TOWARDS THE OVERHAULING OF ENGINE NO.R - 29B - 300. THE ASSESSEE EXPLAINED THAT THE SALE OF ENGINE TO IAF WAS UNDER TRIPARTITE AGREEMENT AMONG IAF, ASSESSEE AND M/ S. UMPO UFA THROUGH M/S. ROSOBORONEXPORT WAS CHANNEL PARTNER/INDIAN REPRESENTATIVE FOR RUSSIAN COUNTERPART. THE SALE/OVERHAULDING OF SPECIFIC ENGINE WAS EFFECTED BY ASSESSEE VIDE INVOICE DATED 27.09.2001. THE SAID ENGINE WAS FITTED IN A MIG AIRCRAFT NO.S M - 257 WHICH SUFFERED AN ACCIDENT ON 21.02.2002 . THE ASSESSEE ALSO POINTED OUT THAT THE PRIMARY RESPONSIBILITY OF THE WARRANTY CLAIM FULFILLMENT WAS OF M/S. UMPO UFA THROUGH M/S. ROSOBORONEXPORT AND ASSESSEE WAS SUPPOSED TO ACT AS INTERMEDIARY. THE ASSESS EE THEN POINTED OUT THE SEQUENCE OF EVENTS AND REFUSAL OF THE SAID CONCERN TO ACCEPT WARRANTY CLAIM. THE ASSESSEE THUS, ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 4 RECOGNIZED WARRANTY PROVISION IN ITS BALANCE SHEET AS ON 31.03.2006 TO THE EXTENT OF 2.76 CRORES BASED ON THE ACTUAL OVERHAULING CHARGES BILLED TO IAF OF 2,27, 29,604/ - (BASIC PRICE) + 49,58,019/ - (INTEREST). THE ASSESSEE POINTED OUT THAT THOUGH IAF PURSUE D THE MATTER BUT M/S. UMPO UFA WAS NOT READY TO PERFORM PART OF THEIR CONTRACT AND FURTHER VIDE LETTER DATED 11.06.2009 IAF HAD ASKED FOR PAYMENT OF CLAIMS FROM ASSESSEE AND NO PAYMENT WAS MADE AND IT WAS INDICATED THAT AS PER CONTRACT, THE SAME WOULD BE RECOVERED FROM OUTSTANDING INVOICE PAYMENTS OF ASSESSEE COMPANY , T HE ASSESSEE AD MITS THAT THOUGH NO SUCH DEDUCTION WAS DONE TILL DATE . TH E ASSESSING OFFICER HELD THAT THE SAID SUBMISSIONS DO NOT ELUCIDATE REGARDING ACTUAL EXPENDITURE MADE TOWARDS WARRANTY EXPENSES. THE ASSESSING OFFICER ALLOWED THE CLAIM OF WARRANTY EXPENSES TO THE EXTENT OF 48,12,377/ - AND BALANCE CLAIM OF 2.76 CRORES WAS NOT ALLOWED AS DEDUCTION. THE ASSESSING OFFICER RELIED ON VARIOUS JUDICIAL DECISIONS IN THIS REGARD AND PROVISION OF WARRANTY EXPENSES WAS DISALLOWED. 5. THE CIT(A) UPHELD THE ORDER OF ASSESS ING OFFICER SINCE THE ASSESSEE HAD NOT OWNED THE WARRANTY CLAIM WHICH AS PER THE ASSESSEE WAS REQUIRED TO BE SETTLED BY M/S. UMPO UFA. THE ASSESSEE BEFORE THE CIT(A) ALSO FURNISHED ALL THE COPIES OF LETTER S ADDRESSED TO IAF WHERE OUTSTANDING PAYMENTS WORT H USD 190780 AGAINST VARIOUS SUPPLIES MADE BY ASSESSEE TO AIR HEADQUARTERS, W ERE HELD - UP. THE CIT(A) DISMISSED THE CLAIM OF ASSESSEE AND UPHELD THE ADDITION OF 2.76 CRORES. 6. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT MIG AIRCRAFT WAS SUPPLIED TO IAF AND IN THAT AGREEMENT, ASSESSEE HAD TO TAKE ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 5 CARE OF SUPPLY AND MAINTENA NCE OF ENGINES WHICH WERE REFURBISHED. ON 21.02.2002 BECAUSE OF ENGINE FAILURE, THERE WAS ACCIDENT OF MIG AND THE SAID FAILURE OF ENGINE WAS WITHIN WARRANTY PERIOD OF OVERHAULING OF ENGINES AND HENCE COVERED BY WARRANTY PROVISIONS. THE ASSESSEE INTIMATED THE ACCIDENT TO RUSSIAN COUNTERPART ON 25.02.2002. HOWEVER, THE RUSSIAN COMPANY REFUSED TO ACCEPT THE CLAIM AS NOT WITHIN TIME. THE ASSESSEE WAS CONCERNED WITH THE ENGINE LOSS. ENQUIRY ABOUT THE AIR ACCIDENT WAS FINALIZED IN 2006 AND IAF LODGED THE CLA IM WITH ASSESSEE IN 2006, SO THE ASSESSEE IN THE YEAR 2006 HAD MADE THE PROVISION FOR WARRANTY EXPENSES OF 2.76 CRORES. OUR ATTENTION WAS DRAWN TO THE ORDER OF TRIBUNAL, WHEREIN THE ASSESSING OFFICER WAS DIRECTED TO LOOK INTO THE BASIS OF PROVISION FOR WARRANTY. HOWEVER, BOTH THE ASSESSING OFFICER AND CIT(A) DENIED THE CLAIM OF ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IT WAS THE RESPONSIBILITY OF ASSESSEE WHICH IS FURTHER STRENGTHENED BY THE FACT THAT AMOUNT DUE TO THE ASSESSEE AGAINST SUPPLIES TO IAF HAVE NOT BEEN RELEASED TO THE ASSESSEE BY AIR HEADQUARTERS. HE FURTHER POINTED OUT THAT TOTAL COST OF ENGINE AS PER THE CLAIM WAS 4.61 CRORES AND THE OVERHAUL PART OF ENGINE WAS 2.27 CRORES. THE DOCUMENTS IN THIS REGARD ARE PLACED AT PAGES 98 TO 100 OF PAPER BOOK. FURTHER DOCUMENTS WERE SEPARATELY FILED SHOWING METHODOLOGY OF CALCULATION OF WARRANTY CLAIM. HE PLACED RELIANCE O N THE ORDER OF HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS VS. CIT (2000) 245 ITR 428 (SC). 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, REFERRED TO THE AGREEMENT BETWEEN THE PARTIES AND QUESTIONED WHETHER IT WAS THE LIAB ILITY OF ASSESSEE ESPECIALLY WHERE THE ASSESSEE WHILE WRITING LETTERS TO THE COUNTERPART CLAIM ED IT WAS NOT ITS LIABILITY. THE LEARNED DEPARTMENTAL ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 6 REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF CIT(A) IN PARA 3 AT PAGE 8. 9. WE HAVE HEAR D THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE PRESENT APPEAL IS THE PROVISION MADE BY THE ASSESSEE ON ACCOUNT OF ITS LIABILITY OF PROVIDING WARRANTY OF MIG ENGINES SUPPLIED. THE ASSESSEE HAD ENTERED INTO TRIPARTITE AGREEMENT WI TH RUSSIAN COMPANY M/S. UMPO UFA, IAF AND ASSESSEE ; COPY OF SAID AGREEMENT IS PLACED AT PAGE 1 ONWARDS OF PAPER BOOK. AS PER UNDERSTANDING BETWEEN THE PARTIES, M/S. UMPO UFA WAS TO CARRY OUT OVERHAUL OF 30 PCS OF R29B - 300 ENGINES AND THE PRICE OF ENGINES WAS ALSO FIXED BETWEEN THE PARTIES. THE PRICE OF OVERHAUL ENGINES WAS FIXED AT USD 432,800 AND THE TOTAL AMOUNT OF CONTRACT WAS USD 129,84,000 . THE SAID ENGINES WERE TO BE DELIVERED AFTER OVERHAUL. THE OVERHAULING HAD TO BE CARRIED OUT BY UFA. AS PER U NDERSTANDING, LIFE OF ENGINES , QUALITY AND WARRANTY SERVICES W ERE ALSO DISCUSSED . AS PER CLAUSE 5.3, UFA WAS TO ENSURE THE WARRANTY PERIOD FOR THE ENGINES AFTER OVERHAUL FOR 180 HOURS OF OPERATION OR 12 MONTHS OF OPERATION OR 18 MONTHS FROM THE DATE OF DI SPATCH, WHICHEVER WAS EARLIER. IT WAS ALSO AGREED THAT WARRANTY DOES NOT SPREAD FOR CONSUMABLE MATERIALS AND SMALL PARTS WHICH COULD BE REPLACED DURING SERVICES. IT WAS FURTHER AGREED THAT WHENEVER DEFECT WAS DISCOVERED WITHIN WARRANTY PERIOD, THEN CLAIM S COULD BE PRESENTED BY THE CUSTOMER TO THE ASSESSEE IN RESPECT OF FOLLOWINGS: - A. QUANTITY OF THE OVERHAULED ENGINE IN CASE IT IS NOT IN CONFORMITY WITH THE QUANTITY STIPULATED IN THE PACKING LIST IF THE ENGINES HAVE ARRIVED AT THE PLACE OF DESTINATION IN UNDAMAGED PACKAGES WITHIN 60 DAYS AFTER THE DATE OF DELIVERY AFTER OVERHAUL AND IF THERE IS NO CARRIER RESPONSIBILITY AND IF IT DOES NOT CORRESPOND TO THE QUANTITY IN THE INVOICE AND THE QUANTITY ACTUALLY RECEIVED WITHIN 120 DAYS. B. QUALITY OF THE OVERH AULED ENGINES IF IT DOES NOT CORRESPOND TO THE QUALITY STIPULATED IN ARTICLE 5 OF THIS CONTRACT WITHIN THE WARRANTY PERIOD AND NOT LATER THAN 30 DAYS OF THE EXPIRATION OF WARRANTY PERIOD. ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 7 10. THE SAID CLAIM WAS TO BE MADE BY CUSTOMER TO THE ASSESSEE WITHI N 30 DAYS FROM THE DATE OF REVALLING OF DEFECT. THE ASSESSEE IN TURN, WAS ENTITLED TO CHECK GROUND OF THE CLAIM ON SPOT THROUGH HIS REPRESENTATIVES OR ENGINES BEING RETURNED TO M/S. UFA PREMISES FOR INVESTIGATION. IT IS FURTHER UNDERSTOOD AS UNDER: - 6.4 THE CUSTOMER WILL PROVIDE IMMEDIATELY FULL DETAILS OF DEFECTS DISCOVERED WITHIN THE WARRANTY PERIOD TO M/S IRAL TO ENABLE THEM TO INFORM M/S. UFA FOR ELIMINATION OF DEFECTS WITHIN 90 DAYS FROM THE DATE OF COMMUNICATION OF THE DEFECT. 6.5 WHENEVER THE DEF ECT IS DISCOVERED WITHIN WARRANTY PERIOD THE DEFECT MAY BE LOCALIZED BY THE CUSTOMERS PERSONNEL AT THE LEVEL OF AN AGGREGATE, EQUIPMENT OR SYSTEM, THE SAME WILL BE DISPATCHED TO UFA PLANT FOR REPAIRS BY AGREEMENT WITH UFA. 6.6 IN CASE M/S. UFA DOES NOT E XAMINE THE CLAIM IN TERMS INDICATED IN THE PRESENT CONTRACT OR DOES NOT RESPOND WITHIN 120 DAYS OF THE DATE OF THE CLAIM, THE CUSTOMER CAN UNILATERALLY ELIMINATE DEFECTS BY HIMSELF OR RECOVER THE COST OF THE ITEM FROM ANY OUTSTANDING INVOICE. IN CASE THE CUSTOMER REPAIRS THE ITEM UNILATERALLY, HE SHALL SUBMIT TO M/S. IRAL AND ACCOUNT OF EXPENSES BORNE FOR THE DEFECT ELIMINATION WITH CALCULATION OF EXPENSES AND ACT REPORT OF THE WORK DONE. M/S. IRAL IS TO REFUND THE EXPENSES BORNE WITHOUT DEMUR WITHIN 60 DAYS OF THE RECEIPT OF THE ACT REPORT. ALTERNATIVELY THE CUSTOMER HAS A RIGHT TO DEDUCT THE AMOUNT FROM ANY OUTSTANDING INVOICE. M/S. UFA WARRANTY OBLIGATIONS IN THIS CASE ARE TO BE VALID. 6.7 IN CASE IT IS ESTABLISHED THAT THE CLAIM IS DUE TO THE CUST OMERS FAULT ALL COSTS SHALL BE BORNE BY THE CUSTOMER FOR THE RECTIFICATION OF THE DEFECT. 11. IN OTHER WORDS, AS PER UNDERSTANDING BETWEEN THE PARTIES, THE CLAIM DURING WARRANTY PERIOD HAD TO BE MADE TO THE ASSESSEE AND WHERE THE CUSTOMER REPAIRS THE IT EMS DURING WARRANTY PERIOD, THEN THE ASSESSEE HAD TO REFUND EXPENSES BORNE. ALTERNATIVELY, IT WA S ALSO PROVIDED THAT CUSTOMER HAD THE RIGHT TO DEDUCT AMOUNT FROM ANY OUTSTANDING DUES TO THE ASSESSEE. IN OTHER WORDS, THOUGH THE ASSESSEE WAS NOT MANUFACTUR ING OR REFURBISHING THE ENGINES BUT IT HAD TO BEAR THE COST OF WARRANTY EXPENSES, WHEREIN IF WITHIN STIPULATED PERIOD ANY DEFECT WA S FOUND IN THE ENGINES, THEN THE SAME W OULD BE REIMBURSED BY THIRD PARTY TO THE CONTRACT I.E. M/S. UFA. OTHER TERMS AND COND ITIONS WERE AGREED UPON BETWEEN THE PARTIES, WHICH WE ARE NOT REFERR ING AS THEY DO NOT RELAT E TO THE ISSUE BEFORE US. ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 8 12. THE QUESTION WHICH ARISES IN THE PRESENT APPEAL BEFORE US IS THE ALLOWABILITY OF PROVISION MADE BY ASSESSEE FOR WARRANTY EXP ENSES WITHIN WAR RANTY PERIOD. COMING TO THE FACTS OF THE CASE, THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD BOOKED AN EXPENDITURE OF 3.25 CRORES UNDER THE HEAD PROVISION FOR WARRANTY EXPENSES. THE ASSESSING OFFICER HAS ALLOWED THE CLAIM TO THE EXTENT OF 48 ,12,377/ - AND BALANCE CLAIM OF 2.76 CRORES IS IN DISPUTE. THE SAID CLAIM WAS ON ACCOUNT OF ACTUAL OVERHAULING CHARGES BILLED TO IAF OF 2.27 CRORES (BASIC PRICE) + 49,58,019/ - (INTEREST). THE REASON FOR SAID PROVISION WAS AGAINST AN ACCIDENT OF MIG AIRCRAFT WHICH WAS SUPPLIED BY ASSESSEE TO IAF. THE EXPENDITURE OF MIG AIRCRAFT WAS BECAUSE OF ENGINE FAILURE, WHICH IN TURN, WAS WITHIN WARRANTY PERIOD OF OVERHAULING OF ENGINE. HENCE, THE CLAIM WAS COVERED BY WARRANTY PROVISIONS ARISING OUT OF TRIPARTI TE AGREEMENT BETWEEN THE PERSON OVERHAULING ENGINE, THE ASSESSEE AND IAF. THE SAID ACCIDENT WAS INTIMATED TO THE RUSSIAN COUNTERPART ON 25.02.2002 BY THE ASSESSEE. THE RUSSIAN COMPANY HAS REFUSED TO ACCEPT THE CLAIM BEING NOT MADE IN TIMEFRAME. THE ASSE SSEE HAS BOOKED THE EXPENDITURE IN 2006 I.E. THE YEAR IN WHICH ENQUIRY ABOUT THE ACCIDENT WAS FINALIZED AND IAF LODGED THE CLAIM OF RECOVERY OF 2.76 CRORES WITH THE ASSESSEE. THE QUESTION WHICH ARISES IN THE PRESENT APPEAL IS AGAINST ALLOWABILITY OF SAI D PROVISION IN THE HANDS OF ASSESSEE. 13. THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS VS. CIT (SUPRA) HAVE LAID DOWN THE LAW IN RESPECT OF PROVISION TO BE MADE I.E. RECOGNITION OF LIABILITY WHICH MAY BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. TH E APEX COURT HELD AS UNDER: - 4. THE LAW IS SETTLED; IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CER TAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 9 THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. 14. THE HON'BLE SUPREME COURT RELIED ON THE RATIO LAID DOWN IN METAL BOX CO. OF INDIA LTD. VS. THEIR WORKMEN (1969) 73 ITR 53 (SC), WHEREIN FEW PRINCIPLES WERE LAID DOWN WHICH WERE REFERRED TO AND WERE EXTRACTED AND REPRODUCED AS UNDER: - (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON MERCANTILE SYSTEM, A LIABILITY ALREAD Y ACCRUED, THOUGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PAID; PERMISSIBLE ONLY IN CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID (II) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS BUT ACCRUED DUE ARE BROUGHT IN FOR INCOME - TAX ASSESSMENT, SO ALSO LIABILITIES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT T HE PROFITS AND GAINS OF THE BUSINESS; (III) A CONDITION SUBSEQUENT, THE FULFILLMENT OF WHICH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGENT LIABILITY; (IV) A TRADER COMPUTING HIS TAXABLE PROFITS FOR A PARTICULAR YEAR MAY PROPERLY DEDUCT NOT ONLY THE PAYMENTS ACTUALLY MADE TO HIS EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN RESPECT OF THEIR SERVICES IN THAT YEAR TO BE MADE IN A SUBSEQUENT YEAR IF IT CAN BE SATISFACTORILY ESTIMATED. 15. APPLYING THE SAID PRINCIPLE, THE PROVISION MADE BY THE ASSESSEE THEREIN FOR MEETING THE LIABILITY INCURRED UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES OF THE COMPA NY, WERE HELD TO BE DEDUCTIBLE OUT OF GROSS RECEIPTS FOR THE YEAR DURING WHICH SUCH PROVISION WAS MADE. 16. TAKING THE SHELTER FROM THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT (SUPRA), WE FIND THAT THE ORDERS OF AUTHORITIES BELOW SUFFER FROM I NFIRMITY TO THE EXTENT THAT IT CANNOT BE HELD THAT MERELY BECAUSE LIABILITY HA D NOT BEEN DISCHARGED BY ASSESSEE AND WA S BEING PURSUED FOR REIMBURSEMENT FROM THE RUSSIAN AUTHORITY WOULD MAKE THE CLAIM OF ASSESSEE AS NOT ALLOWABLE. AS ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 10 UNDERSTOOD FROM THE TE RMS OF AGREEMENT AFTER THE ENGINES WE RE SUPPLIED, THEN WARRANTY FOR THE SPECIFIED PERIOD WA S THE RESPONSIBILITY OF ASSESSEE THOUGH TO BE DISCHARGED JOINTLY BY M/S. UFA I.E. FOR TAKING CARE OF ANY DEFECTS IN REFURBISHMENT OF ENGINES WHICH HAVE BEEN SUPPLIED TO IAF. HOWEVER, IN THE PRESENT CASE, THERE WA S COMPLETE FAILURE OF ENGINE WHICH RESULTED IN MIG ACCIDENT IN 2002 AND AFTER ENQUIRY WAS COMPLETED IN 2006, IT WAS ESTABLISHED THAT ACCIDENT WAS DUE TO THE ENGINE FAILURE AND HENCE, THE CLAIM WAS RAISED BY I AF UPON THE ASSESSEE TO REIMBURSE COST OF ENGINES. THE ASSESSEE FORWARDED THE SAID CLAIM TO THE RUSSIAN COMPANY, WHICH REFUSED TO ACKNOWLEDGE IT ON THE GROUND THAT IT WAS NOT MADE WITHIN TIMEFRAME STIPULATED IN THE AGREEMENT. THE ASSESSEE WA S NO DOUBT RA ISING THE ISSUE WITH THE RUSSIAN COMPANY TILL DATE AND THERE ARE SERIES OF CORRESPONDENCE BUT IN NONE OF THE SAID CORRESPONDENCE, THE RUSSIAN COMPANY HA D ACKNOWLEDGED ITS LIABILITY OF PAYING DAMAGES ON ACCOUNT OF FAILURE OF ENGINE. THE ASSESSEE ON THE OTH ER HAND, WAS ALSO CORRESPONDING WITH IAF TO WHICH IT WA S MAKING REGULAR SUPPLIES AND IAF HA D NOT RELEASED THE PAYMENTS DUE TO THE ASSESSEE BECAUSE THE ISSUE OF WARRANTY CLAIM HA D NOT BEEN SETTLED BY THE ASSESSEE. IN OTHER WORDS, THE PAYMENTS WHICH WE RE DU E TO ASSESSEE , WE RE BEING WITHHELD BY IAF AGAINST WARRANTY CLAIMS. UNDOUBTEDLY, IT IS THE LIABILITY OF ASSESSEE AS PER CONTRACT TO PROVIDE WARRANTY WITHIN STIPULATED PERIOD TO THE CUSTOMER I.E. IAF. IN THIS CASE UNDER THE CIRCUMSTANCES, WHERE THERE WA S E NGINE FAILURE WITHIN WARRANTY PERIOD, THEN AS PER TERMS OF AGREEMENT AND SINCE THE ENQUIRY HA D BEEN COMPLETED IN 2006, THE ASSESSEE WHICH WA S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING , HAD ACCOUNTED FOR THE SAID CLAIM OF WARRANTY UNDER THE HEAD PROVISION FOR WARRANTY. SUCH CLAIM MADE BY THE ASSESSEE UNDER THE PROVISIONS OF THE ACT WA S DULY ALLOWABLE AS DEDUCTION IN THE HANDS OF ASSESSEE , A PPLYING THE RATIO LAID DOWN BY THE APEX COURT IN BHARAT EARTH MOVERS VS. CIT ITA NO. 171 /P U N/20 1 5 INDO RUSSIAN AVIATION LTD. 11 (SUPRA). IT MAY ALSO BE REITERATED THAT OTHER CLAIM OF WARRANTY PROVISION OF ABOUT 48 LAKHS HAD BEEN ALLOWED BY ASSESSING OFFICER. ACCORDINGLY, WE HOLD SO. THUS, WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW AND THE SAME ARE REVERSED. THE GROUND OF APPEAL RAISED BY ASSESSEE IS THUS, ALLOWED. 1 7 . IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 17 TH DAY OF OCTOBER , 201 8 . SD/ - SD/ - (ANIL CHATURVEDI ) (SUSHMA CHOWLA ) / ACCOUNTANT MEM BER / JUDICIAL MEMBER / PUNE ; DATED : 17 TH OCTOBER , 201 8 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / TH E RESPONDENT; 3. ( ) / THE CIT (A) - I , NASHIK ; 4. THE CIT - I , NASHIK ; 5. , , / DR B , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE