ACIT, CHENNAI V. M/s. Novar India Limited (now known as Honeywell electrical Devices and Systems India Limited), CHENNAI

ITA 1925/CHNY/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6503 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 12-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: G S D BABU
• Section: 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH D : CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NO. 1925/MDS/2010 ASSESSMENT YEAR : 2005-06 THE ACIT COMPANY CIRCLE II(2) CHENNAI VS M/S NOVAR INDIA LTD. (NOW KNOWN AS HONEYWELL ELECTRICAL DEVICES AND SYSTEMS INDIA LTD.) CRESCENDO 995-B, SECOND AVENUE ANNA NAGAR, CHENNAI 600 040 [PAN AAACM4378E] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ANIRUDH RAI, CIT RESPONDENT BY : SHRI G.S.D. BABU O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE, FOR ASSESSMENT YEA R 2005-06, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), DATED 13.8.2010. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE O F DOOR BELLS, LOW VOLTAGE SWITCHES ETC. FOR THE RELEVANT YEAR, THE ASSESSEE HAS DECLARED TOTAL INCOME OF ` 3,88,23,460/- IN ITS RETURN OF INCOME FILED ON ITA 1925/10 :- 2 -: 31.10.2005. ASSESSMENT ORDER WAS PASSED U/S 143(3) ON 29.12.2008. AGAINST VARIOUS ADDITIONS MADE IN THE ASSESSMENT OR DER, THE ASSESSEE PREFERRED FIRST APPEAL AND THE ADDITIONS WHICH ARE THE SUBJECT MATTER OF THIS APPEAL HAVE BEEN DELETED BY THE LD. CIT(A), AG AINST WHICH THE REVENUE IS AGGRIEVED. FOLLOWING GROUNDS HAVE BEE N RAISED: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS) IS CONTRARY TO THE LAW AND FACTS OF T HE CASE. 2. THE LEARNED CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE MADE IN RESPECT OF 'PROVISION FOR DISCOUNT' OF ` 18,38,40,583/-. 2.1 IT IS SUBMITTED THAT THE CIT(A) HAS RELIED UPO N THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F M/S.ROTARK CONTROLS INDIA PVT. LTD. HOWEVER, THE ABOVE CASE DEALS WITH WARRANTY PROVISIONS WHICH WER E TO BE TAKEN AS ASCERTAINED LIABILITY ARISING OUT OF SALE OF SOPHISTICATED EQUIPMENTS WHICH NECESSARY INVOLVE S REPAIRS, MAINTENANCE, REPLACEMENT OF PARTS ETC AS P ART OF WARRANTY. IN THE INSTANT CASE, THE ISSUE IS CONC ERNED WITH DISCOUNTS WHICH ARE MERELY CONTINGENT LIABILIT Y WHICH MAY OR MAY NOT FOLLOW THE SALE. 3. THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE TR AVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY WHEN REDUC ED FROM THE EXPORT TURNOVER SHOULD BE EXCLUDED FROM TH E TOTAL TURNOVER ALSO. 3.1 IT IS SUBMITTED THAT THE DECISION OF THE HON' BLE ITAT, CHENNAI, IN THE CASE OF M/S SAKSOFT (121 TTJ 865) RELIED ON BY THE CIT (A) HAS NOT BECOME FINAL AND FURTHER APPEAL HAS BEEN FILED BEFORE THE HON'BLE HI GH COURT, CHENNAI. 3.2 IT IS SUBMITTED THAT IF THE ITEMS WHICH ARE TO BE EXCLUDED FROM THE EXPORT TURNOVER AS PER THE STATUT E ARE EXCLUDED FROM THE TOTAL TURNOVER ALSO THEN THE VERY PURPOSE OF EXCLUDING THE SAID ITEMS FROM THE EXPORT ITA 1925/10 :- 3 -: TURNOVER WILL GET DEFEATED AS THE EFFECT OF EXCLUSI ON OF THE SAME FROM THE TOTAL TURNOVER (DENOMINATOR) WILL NULLIFY THE EFFECT OF EXCLUSION FROM THE EXPORT TUR NOVER (NUMERATOR). 4. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDU CED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 3. WE HAVE HEARD THE RIVAL SUBMISSIONS; PERUSED THE O RDERS OF THE AUTHORITIES BELOW; AND HAVE ALSO TREADED THROUGH TH E PAPER BOOK. THE FIRST ISSUE, CONTAINED IN GROUND NO.2 AND 2.1, RELA TES TO DELETION OF ADDITION OF ` 18,38,30,583/- ADDED ON ACCOUNT OF DISALLOWANCE MAD E IN RESPECT OF PROVISION FOR DISCOUNT. THE FACTS AP ROPOS THIS ISSUE ARE THAT DURING THE YEAR UNDER APPEAL, ASSESSEE HAD DE BITED TO THE PROFIT & LOSS ACCOUNT CERTAIN AMOUNTS UNDER THE HEAD OTHE R EXPENSES. THE ASSESSING OFFICER DISALLOWED THIS AMOUNT OF ` 18,38,40,583/- TAKING THE VIEW THAT IT REPRESENTED ESTIMATED PROVISION F OR DISCOUNT AND THUS, IT IS AN UNASCERTAINED LIABILITY/CONTINGENT LIABILITY. THE ASSESSEE FILED A RECTIFICATION PETITION U/S 154 OF THE ACT S TATING THAT OUT OF ` 18,38,40,583/- , ONLY ` 3,85,17,201/- IS PROVISION FOR DISCOUNT AND REMAINING AMOUNT OF ` 14,53,23,382/- IS TOWARDS LIABILITY WHICH HAS ACTUALLY ACCRUED. FINDING THIS SUBMISSION OF THE A SSESSEE TO BE CORRECT, THE ASSESSING OFFICER HAS RECTIFIED HIS OR DER BY DISALLOWING ONLY AN AMOUNT OF ` 3,85,17,201/-. ACCORDING TO THE ASSESSING OFFICER , THIS AMOUNT ONLY REPRESENTS PROVISION FOR DISCOUNT , FOR WHICH LIABILITY ITA 1925/10 :- 4 -: HAS NOT YET ACCRUED, SO IT CANNOT BE ALLOWED. THE CASE OF THE ASSESSEE IS THAT THE COMPANY HAD ABOUT HUNDRED CUST OMERS [DISTRIBUTORS OR CHANNEL PARTNERS] SPREAD ACROSS AL L THE KEY CITIES IN INDIA. THE DISCOUNTS, AS PER THE ASSESSEE, ARE OFFERED TO THE CHANNEL PARTNERS TO STAY IN THE COMPETITIVE MARKET. A SAMPLE COPY OF THE DISCOUNT AGREEMENT WITH ONE OF THE CHANNEL PART NERS WAS ALSO PRODUCED. THESE DISCOUNTS ARE STATED TO BE LINKED TO ANNUAL PERFORMANCE TARGETS, I.E TURNOVER DISCOUNT, WHICH I S GIVEN TO CHANNEL PARTNERS ARE BASED ON THE TARGETS TO BE MET BY THEM . THERE ARE PROJECT DISCOUNTS AND SCHEME DISCOUNTS WHICH ARE AD DITIONAL DISCOUNTS GIVEN TO CUSTOMERS. THE PROVISION FOR DISCOUNT TO THE TUNE OF ` 3,85,17,201/- HAS BEEN MADE BY THE ASSESSEE FOR TH E FOLLOWING REASONS: (I) THE TURNOVER DISCOUNTS ARE RELEASED ONLY AFTER RECEIPT OF RELEVANT C FORMS FROM THE CUSTOMERS. (II) THE PROJECT DISCOUNTS ARE OFFERED ONLY ON RECEIPT OF PROOF FROM THE CUSTOMERS THAT THEY HAVE SUPPLIED THE SAME AT THE REDUCED PRICE. THIS IS NORMALLY DELAYED AS FOR REAL ESTATE PROJECTS THE CONSOLIDATION OF BILLS HAPPENS AFTER A FEW MONTHS OF ACTUAL EXECUTION. (III) THE SCHEME DISCOUNT IN THE TRADE MARKET IS ALSO SETTLED ONLY ON RECEIPT OF PROOF FROM THE DISTRIBUTORS THAT THEY HAVE PASSED ON THE ADDITIONAL DISCOUNT TO THEIR CUSTOMERS. ITA 1925/10 :- 5 -: 4. THE SUBMISSION OF THE ASSESSEE, IN NUT SHELL, IS TH AT THE ASSESSEE HAS MADE PROVISION ON SCIENTIFIC BASIS ON THE PREMI SE THAT ALL THE DISTRIBUTORS WOULD ACHIEVE THE TARGET ASSIGNED TO T HEM AND THERE WOULD BE FURTHER DISCOUNTS. IT WAS STATED THAT THE ONLY REASON FOR CREATING A PROVISION AND NOT CHARGING THE SAME AS A N EXPENSE IS BECAUSE OF THE FACT THAT THE EXACT QUANTIFICATION C OULD NOT BE DONE FOR VARIOUS REASONS ARISING ONLY AFTER THE FINALIZATION OF THE ACCOUNTS FOR EVERY FINANCIAL YEAR. IN THIS WAY, THE CASE OF THE ASSESSEE-COMPANY IS THAT THE LIABILITY TO PROVIDE THE DISCOUNT IS CLEAR LY ESTABLISHED, REQUIRING THE DEBIT TO THE PROFIT & LOSS ACCOUNT. THE LD. C IT(A) HAS ACCEPTED THE VERSION OF THE ASSESSEE THAT IN ACCORDANCE WIT H THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCO UNTANTS OF INDIA, IT IS UNDER OBLIGATION TO FOLLOW THE SAME AS PER THE P ROVISION OF THE COMPANIES ACT, 1956. 5. THE LD.DR HAS DISPUTED THE FINDING OF THE LD. C IT(A) IN DELETING THE ADDITION BY STATING THAT THIS AMOUNT R EPRESENTS ONLY AND ONLY A PROVISION WHICH TANTAMOUNTS TO ANY UNASCERT AINED LIABILITY WHICH IS NOT QUANTIFIABLE DURING THE YEAR AND IS TH US, A CONTINGENT LIABILITY BASED ON ESTIMATES ALONE. TO SUBSTANTI ATE THIS VERSION, THE LD.DR HAS RELIED ON THE DECISION OF HON'BLE SUPREME COURT RENDERED IN THE CASE OF METAL BOX COMPANY OF INDIA LTD VS THEIR WORKMEN, 73 ITR ITA 1925/10 :- 6 -: 53 AND THAT OF HON'BLE JURISDICTIONAL HIGH COURT RE NDERED IN THE CASE OF DY. CIT VS BEARDSELL LTD, 244 ITR 256. WITH REGAR D TO THE DECISIONS IN THE CASE OF CIT VS HONDA SIEL POWER PRODUCTS LTD, 3 12 ITR 254, AND M/S ROTORK CONTROLS INDIA (P) LTD VS CIT, 314 ITR 6 2, RELIED ON BY THE LD. CIT(A), IT WAS STATED THAT THE FACTS OF THE ABO VE CASES ARE DIFFERENT AND ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAV E FOUND THAT THE ASSESSEE CAN CLAIM SUCH A PROVISION ONLY IF IT SATISFIES THE FOLLOWING CONDITIONS: AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. 7. IN OUR OPINION, THESE ARE GENERAL OBSERVATIONS MADE BY THE HON'BLE SUPREME COURT IN THE CASE OF HONDA SIEL POW ER PRODUCTS LTD (SUPRA). IF THE DECISION IS READ IN TOTO, THESE C ONDITIONS COULD BE GIVEN EFFECTIVE MEANING. 8. IN THE CASE OF METAL BOX COMPANY OF INDIA LTD (SU PRA), THE HON'BLE SUPREME COURT HAS HELD AS UNDER: ITA 1925/10 :- 7 -: CONTINGENT LIABILITIES DISCOUNTED AND VALUED AS NE CESSARY, CAN BE TAKEN INTO ACCOUNT AS TRADING EXPENSES IF TH EY ARE SUFFICIENTLY CERTAIN TO BE CAPABLE OF VALUATION AND IF PROFITS CANNOT BE PROPERLY ESTIMATED WITHOUT TAKING THEM IN TO CONSIDERATION. AN ESTIMATED LIABILITY UNDER A SCHE ME OF GRATUITY, IF PROPERLY ASCERTAINABLE AND ITS PRESENT VALUE IS DISCOUNTED, IS DEDUCTIBLE FROM THE GROSS RECEIPTS W HILE PREPARING THE PROFIT & LOSS ACCOUNT. THIS IS RECOG NIZED IN TRADE CIRCLES AND THERE IS NOTHING IN THE BONUS ACT WHICH PROHIBITS SUCH A PRACTICE. SUCH A PROVISION PROVID ES FOR A KNOWN LIABILITY OF WHICH THE AMOUNT CAN BE DETERMIN ED WITH SUBSTANTIAL ACCURACY. IT CANNOT, THEREFORE, BE TER MED A RESERVE. THEREFORE, THE ESTIMATED LIABILITY FOR THE YEAR ON ACCOUNT OF A SCHEME OF GRATUITY SHOULD BE ALLOWED T O BE DEDUCTED FROM THE GROSS PROFITS. THE ALLOWANCE IS NOT RESTRICTED TO THE ACTUAL PAYMENT OF GRATUITY DURING THE YEAR. 9. IN THE CASE OF DY. CIT VS BEARDSELL LTD (SUPRA), H ON'BLE JURISDICTIONAL HIGH COURT HAS HELD AS UNDER: HELD , THAT IF A DEBT HAD BECOME IRRECOVERABLE THE SAME COULD BE WRITTEN OFF AND DEDUCTED FROM THE PROFIT O F THE BUSINESS. A DEBT, THE RECOVERY OF WHICH WAS DOUBTF UL COULD NOT BE TERMED TO BE AN ASCERTAINED LIABILITY AS MEN TIONED UNDER SECTION 115J OF THE ACT AND COULD NOT BE EXCL UDED FROM THE BOOK PROFITS. ACCORDINGLY, THE CONCLUSION OF THE TRIBUNAL IN DIRECTING THE ASSESSING OFFICER TO RECT IFY THE ALLEGED MISTAKE OF INCLUSION OF THE UNASCERTAINED L IABILITY IN THE BOOK PROFIT COULD NOT BE UPHELD. 10. THUS, IT BECOMES EVIDENTIALLY CLEAR THAT WHEN THE L IABILITY IS ASCERTAINED AND NOT QUANTIFIABLE DURING THE YEAR AN D IS SIMPLY A CONTINGENT BASED ON ESTIMATES, THE SAME CANNOT BE A LLOWED AS DEDUCTION. IN THE GIVEN CASE, THE ASSESSEES VERSIO N, AS PUT FORTH IN PARA 6.4 OF THE APPELLATE ORDER, CLEARLY STATES THA T THE ONLY REASON FOR CREATING A PROVISION AND NOT CHARGING THE SAME AS A N EXPENSES IS ITA 1925/10 :- 8 -: BECAUSE OF THE FACT THAT THE EXACT QUANTIFICATION COULD NOT BE UNDERTAKEN FOR THE VARIOUS REASONS. IN OUR OPINION , THE BASIS FOR THE PROVISION IS SIMPLY ADHOC AND ARBITRARY. IT DEPEND S ON THE FACTS OF EACH AND EVERY CASE TO COME TO A CONCLUSION AS TO WHETHER THE LIABILITY IS ASCERTAINED OR UNASCERTAINED ONE AND I T CANNOT BE GENERALISED. THE DISCOUNTS GIVEN TO MEET OUT A PAR TICULAR TARGET TO THE CHANNEL PARTNERS AND FURTHER DISCOUNTS GIVEN TO TH E CUSTOMERS ARE NOT SPECIFICALLY SPECIFIED AND NOBODY KNOWS AS TO WHAT WOULD BE THE EXACT POSITION WHEN TRANSACTIONS TAKE PLACE. THERE IS N O PAST HISTORY OF THIS ASSESSEE. THEREFORE, IN THESE CIRCUMSTANCES, WE AR E UNABLE TO ACCEPT THE VERSION OF THE ASSESSEE. WE, THEREFORE, SET AS IDE THE FINDINGS OF THE LD. CIT(A) AND REVERSE THE SAME. THE GROUNDS R AISED BY THE REVENUE, IN THIS REGARD, ARE ALLOWED. 11. THE NEXT GROUND IS IN RELATION TO CLAIM OF THE AS SESSEE THAT THE TRAVEL EXPENDITURE, INCURRED IN FOREIGN CURRENCY, W HEN REDUCED FROM THE EXPORT TURNOVER SHOULD BE EXCLUDED FROM THE TOT AL TURNOVER ALSO. THIS ISSUE STANDS SQUARELY COVERED BY THE DECISION OF CHENNAI BENCH IN THE CASE OF M/S SAKSOFT (121 TTJ 865) WHICH IS MEN TIONED IN GROUND NO.3.1 OF THE APPEAL. THIS FACT COULD NOT BE DENIE D BY THE REVENUE AND WAS FOUND TO BE CORRECT. HENCE, THIS ISSUE BEI NG COVERED BY THE ORDER OF THE TRIBUNAL, IS DECIDED IN FAVOUR OF THE ASSESSEE. ITA 1925/10 :- 9 -: 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.6.2011. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 30 TH JUNE, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR