Eicher Motors Ltd., New Delhi V. DCIT, New Delhi

ITA 2268/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6615 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-11-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 15-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIL KUMAR SHARMA SENIOR
• Assessee Lawyers: BHAVITA KUMAR S
• Keywords: Depreciation; Rectification of order; Rule of consistency; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A; 115JB; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.2228/DEL./2014 (ASSESSMENT YEAR : 2010-11) DCIT, CIRCLE 11 (1), VS. M/S. EICHER MOTORS LTD., NEW DELHI. 3 RD FLOOR, SELECT CITY WALK, A 3, DISTT. CENTRE, SAKET, NEW DELHI 110 017. (PAN : AAACE3882D) ITA NO.2268/DEL./2014 (ASSESSMENT YEAR : 2010-11) M/S. EICHER MOTORS LTD., VS. DCIT, CIRCLE 11 (1), 3 RD FLOOR, SELECT CITY WALK, NEW DELHI. A 3, DISTT. CENTRE, SAKET, NEW DELHI 110 017. (PAN : AAACE3882D) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI GAURAV JAIN AND MS. BHAVITA KUMAR, ADVOCATES REVENUE BY : SHRI ANIL KUMAR SHARMA, SENIOR DR DATE OF HEARING : 17.11.2016 DATE OF ORDER : 25.11.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : SINCE COMMON QUESTIONS OF FACTS AND LAW HAVE BEEN R AISED IN BOTH THE AFORESAID CROSS APPEALS, THE SAME ARE B EING DISPOSED OFF BY WAY OF CONSOLIDATED ORDER TO AVOID REPETITION OF DISCUSSION. ITA NOS2228 & 2268/DEL./2014 2 2. THE APPELLANT, DEPUTY COMMISSIONER OF INCOME-TAX , CIRCLE 11(1), NEW DELHI (HEREINAFTER REFERRED TO AS THE R EVENUE) IN ITA NO.2228/DEL/2014 BY FILING THE PRESENT APPEAL SOUGH T TO SET ASIDE THE IMPUGNED ORDER DATED 31.01.2014 PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-XIII, NEW DELHI QUA THE ASS ESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.6,91,42,261/- MADE U/S 35(2AB) IN RESPECT OF RESEARCH AND DEVELOPMENT EXPENDITURE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.2,10,00,000/- MADE ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR WARRANTY IN EXCESS OF ACTUAL WARRANTY CLAIMS BEING THE SAME AS UNASCERTAINED LIABILITY. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 3. THE APPELLANT, M/S. EICHER MOTORS LIMITED (HEREI NAFTER REFERRED TO AS THE ASSESSEE) IN ITA NO.2268/DEL/2 014 BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 31.01.2014 PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)- XIII, NEW DELHI QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A)-XIII, NEW DELHI HAS GROSSLY ERRED ON FACTS AND ITA NOS2228 & 2268/DEL./2014 3 IN LAW IN CONFIRMING THE DISALLOWANCE OF NOTIONAL EXPENSES OF RS.26,97,608/- U/S 14A OF THE INCOME TAX ACT ALLEGEDLY RELATING TO DIVIDEND INCOME. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A)-XIII, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF NORMAL EXPENSES OF RS.26,97,608/- U/S 14A WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 4. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE ISSUES INVOLVED IN BOTH THE AFORESAID CROSS APPEALS ARE : DURING THE SCRUTINY PROCEEDINGS QUA ASSESSMENT YEAR 2010-11, A SSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUC TION OF RS.10,37,13,391/- ON ACCOUNT OF RESEARCH AND DEVELO PMENT EXPENDITURE UNDER SECTION 35 (2AB) OF THE INCOME-TA X ACT, 1961 (FOR SHORT THE ACT) @ 150% OF THE TOTAL EXPENSES TO BE INCURRED UNDER NOMENCLATURE WEIGHTED DEDUCTIONS, THE DETAILS OF WHICH HAS BEEN FURNISHED BY THE ASSESSEE AS UNDER :- S.NO. PARTICULARS AMOUNT (RS.) 1 CAPITAL EXPENDITU RE ON R&D CLAIMED U/S 35(1)(IV) 59,50,354 2 REVENUE EXPENDITURE ON R&D CLAIMED U/S 35(1)(I) 6,31,91,907 3 ADDITIONAL DEDUCTION ON CAPITAL EXPENDITURE ON R&D U/S 35(2AB) 29,75,177 4 ADDITIONAL DEDUCTION ON REVENUE EXPENDITURE ON R&D U/S 35 (2AB) 3,15,95,953 TOTAL DEDUCTION U/S 35 / 35 (2AB) 10,37,13,391 ITA NOS2228 & 2268/DEL./2014 4 5. FINDING THE SUBMISSIONS MADE BY ASSESSEE NOT TEN ABLE, AO CAME TO THE CONCLUSION THAT SINCE THE ASSESSEE HAS FAILED TO FULFILL THE CONDITIONS CONTAINED UNDER RULE 7A (A) OF THE A CT, NO SUCH WEIGHTED DEDUCTION CAN BE ALLOWED AS THE ASSESSEE I S PURELY DOING R&D FOR THE PURPOSE OF THEIR SALES BY PRODUCING THE ITEMS THAT CAN BE SOLD IN DOMESTIC OR OVERSEAS MARKETS AND THEREBY DISALLOWED THE ADDITIONAL DEDUCTIONS CLAIMED BY THE ASSESSEE TO TH E TUNE OF RS.6,91,42,261/- UNDER SECTION 35(2AB). 6. AO, FROM THE P&L ACCOUNT, FURTHER NOTICED THAT T HE ASSESSEE HAS MADE A PROVISION FOR WARRANTY AT RS.3.67 CRORES AND THE ASSESSEE WAS CALLED UPON TO EXPLAIN AS TO WHY EXCES S PROVISION OF RS.3.67 CRORES SHOULD NOT BE DISALLOWED BEING NOT A SCERTAINED LIABILITY. ASSESSEE FILED COMPREHENSIVE REPLY. AO CAME TO THE CONCLUSION THAT SINCE NO SCIENTIFIC BASIS HAS BEEN FURNISHED, IT IS CLEAR THAT PROVISION WAS ONLY MADE ON ESTIMATE BASI S AND NOT AS AN ASCERTAINED LIABILITY AND THEREBY DISALLOWED THE EX CESS ACTUAL WARRANTY CLAIMS AMOUNTING TO RS.2,10,00,000/-. 7. AO FURTHER OBSERVED THAT THE ASSESSEE HAS CLAIME D TO HAVE EARNED DIVIDEND INCOME OF RS.15,82,84,580/-. ASSES SEE WAS CALLED UPON TO EXPLAIN AS TO WHY THE EXPENSES INCURRED IN EARNING DIVIDEND SHOULD NOT BE DISALLOWED U/S 14A OF THE AC T AND TO FURNISH THE WORKING OF DISALLOWANCE IN VIEW OF RULE 8D OF THE ITA NOS2228 & 2268/DEL./2014 5 INCOME-TAX RULES, 1962 (FOR SHORT THE RULES). LD . AR FOR THE ASSESSEE SUBMITTED THAT THERE IS NEITHER ANY INTERE ST NOR ANY ADMINISTRATIVE EXPENSES RELATING TO THE DIVIDEND IN COME, AS SUCH NO DISALLOWANCE U/S 14A IS REQUIRED. AO HAS DISAGREED WITH THE SUBMISSIONS RAISED BY THE ASSESSEE AND WORKED OUT D ISALLOWANCE UNDER RULE 8D TO THE TUNE OF RS.318,84,938/-. HOWE VER, LD. CIT (A), IN VIEW OF THE REVISED WORKING OF THE AVERAGE INVESTMENTS AND ASSETS, WORKED OUT THE DISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENSES AND RESTRICTED THE SAME TO RS.26,97,608/- U/S 14A OF THE ACT. 8. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT ( A) BY FILING THE APPEAL WHO HAS PARTLY ALLOWED THE SAME. FEELIN G AGGRIEVED, THE REVENUE AS WELL AS ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING PRESENT CROSS APPEALS. 9. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUND NO.1 OF ITA NO.2228/DEL/2014 10. THE LD. DR FOR THE REVENUE CHALLENGING THE IMPU GNED ORDER CONTENDED THAT SINCE THE ASSESSEE HAS FAILED TO COM PLY WITH THE ITA NOS2228 & 2268/DEL./2014 6 CONDITIONS CONTAINED UNDER RULE 6 (7A)(A) OF THE RU LES, WHICH STATES THAT, THE FACILITY SHOULD NOT RELATE PURELY TO MARKET SA LE PROMOTION, QUALITY CONTROL, TESTING, COMMERCIAL PRO DUCTION, STYLE CHANGES, ETC., THE DISALLOWANCE HAS BEEN RIGHTLY AND VALIDLY MADE BY THE AO AND RELIED UPON THE ASSESSMENT ORDER. 11. HOWEVER, ON THE OTHER HAND, LD. AR FOR THE ASSE SSEE TO REPEL THE ARGUMENT ADVANCED BY LD. DR CONTENDED THAT SINC E THE AO HAS HIMSELF ADMITTED THAT THE ASSESSEE HAS APPROVED R&D CENTRE AND ALL THE CONDITIONS HAVE BEEN EXAMINED BY DSIR AT TH E TIME OF ACCORDING APPROVAL, THE CIT (A) HAS RIGHTLY DELETED THE ADDITION. 12. UNDISPUTEDLY, THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCTION AT 150% OF THE SCIENTIFIC RESEARCH EXPENDITURE PERT AINING TO ITS R&D CENTRE AT CHENNAI TO THE FOLLOWING EFFECT:- (I) CAPITAL EXPENDITURE ON PLANT, FURNITURE, EQUIPMENTS, VEHICLES ETC. RS.59,50,354 (II) REVENUE EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT RS.6,31,91,907 (III) ADDITIONAL DEDUCTION AT 50 PERCENT IN RESPECT OF AFORESAID CAPITAL AND REVENUE EXPENSES UNDER SECTION 35 (2AB) RS.3,45,71,130 TOTAL RS.10,37,13,391 13. IT IS ALSO NOT IN DISPUTE THAT THE AO DISALLOWE D WEIGHTED DEDUCTION AT 50% AMOUNTING TO RS.34,57,130/- CLAIME D BY THE ASSESSEE U/S 35(2AB) OF THE ACT ON THE GROUND THAT ASSESSEE HAS FAILED TO FULFILL THE CONDITIONS LAID DOWN UNDER RU LE 6 (7A)(A) OF THE RULES. ITA NOS2228 & 2268/DEL./2014 7 14. TO EXAMINE THE ISSUE IN CONTROVERSY, THE PROVIS IONS CONTAINED UNDER RULE 6(7A)(A) OF THE RULES ARE REPR ODUCED AS UNDER FOR READY PERUSAL :- 6. (7A) APPROVAL OF EXPENDITURE INCURRED ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY BY A COMPANY UNDE R SUB-SECTION (2AB) OF SECTION 35 SHALL BE SUBJECT TO THE FOLLOWING CONDITIONS, NAMELY:- (A) THE FACILITY SHOULD NOT RELATE PURELY TO MARKET SALE PROMOTION, QUALITY CONTROL, TESTING, COMMERCIAL PRODUCTION, STYLE CHANGES, ROUTINE DATA COLLECTION OR ACTIVITIES OF A LIKE NATURE. 15. BARE PERUSAL OF THE PROVISIONS CONTAINED UNDER RULE 6(7A)(A) OF THE RULES SPECIFICALLY DEMARCATE THE AR EA FOR WHICH IN- HOUSE RESEARCH AND DEVELOPMENT FACILITY IS TO BE US ED BY A COMPANY I.E. THE EXPENDITURE OF R&D SHOULD NOT BE I NCURRED PURELY FOR MARKET RESEARCH, SALES PROMOTION, QUALIT Y CONTROL, TESTING, COMMERCIAL PRODUCTION, STYLE CHANGES, ROUT INE DATA COLLECTION AND ACTIVITIES OF A LIKE NATURE. 16. IN THE INSTANT CASE, ASSESSEE COMPANY CLAIMED T O HAVE INCURRED R&D EXPENDITURE TO BRING DOWN THE NOISE LE VEL BY REDESIGNING INTAKE AND EXHAUST SYSTEM; TO REDUCE EN VIRONMENTAL POLLUTION ON ACCOUNT OF UNBURNT GASES BY COMBUSTION CHAMBER REDESIGN, AFTER TREATMENT OF EXHAUST SYSTEM (E.G. H OT TUBE ENGINE MANAGEMENT SYSTEM); CARBURETOR REDESIGN, ENGINE MAN AGEMENT ITA NOS2228 & 2268/DEL./2014 8 SYSTEM, THROTTLE SENSOR. UNDISPUTEDLY, AFTER EXAMI NING THE OBJECTIVES OF THE R&D FACILITIES USED BY THE ASSESS EE COMPANY AT CHENNAI, DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RE SEARCH (DSIR) ACCORDED APPROVAL U/S 35(2AB) IN RESPECT OF CHENNAI CENTRE OF THE ASSESSEE COMPANY FIRST TIME ON 11.08.2005, RENEWED FROM TIME TO TIME ON THE BASIS OF PHYSICAL INSPECTION AND REMAIN ED INTACT TILL 04.10.2012. ORDER OF APPROVAL OF IN-HOUSE RESEARCH AND DEVELOPMENT FACILITIES U/S 35(2AB) OF THE ACT, IN F ORM NO.3CM DATED 18.12.2008 RENEWED UP TO 04.12.2012 ARE AVAIL ABLE AT PAGES 54 TO 60 OF THE PAPER BOOK. BARE PERUSAL OF THE OR DERS OF APPROVAL U/S 35(2AB) PASSED BY DSIR GO TO PROVE THAT THE APP ROVAL HAS BEEN ACCORDED TO THE ASSESSEE COMPANY TO CARRY OUT IN-HOUSE R&D FACILITIES AT CHENNAI CENTRE ONLY WHEN IT HAS FULFI LLED OF THE CONDITIONS LAID DOWN U/S 6(7A)(A) OF THE RULES. 17. MOREOVER, WHEN THE R&D CENTRE AT CHENNAI HAS BE EN ESTABLISHED BY ASSESSEE COMPANY ON 11.08.2005 AND R &D EXPENDITURE HAVE BEEN CONTINUOUSLY ALLOWED ON THE B ASIS OF APPROVAL ACCORDED BY DSIR, NO MATERIAL HAS COME ON RECORD TO DEPART FROM THE RULE OF CONSISTENCY BY THE AO. 18. MOREOVER, WHEN THE AO HAS HIMSELF ADMITTED THAT THE R&D CENTRE AT CHENNAI APPROVED BY DSIR IS CARRYING OUT ITS RESEARCH AND DEVELOPMENT ACTIVITIES, BY DISALLOWING THE WEIG HTED DEDUCTION ITA NOS2228 & 2268/DEL./2014 9 AT 50%, THE REMAINING EXPENDITURE OF RS.34,57,130/- CANNOT BE DISALLOWED. MOREOVER, THE CONJOINT READING OF SECT ION 35(2AB) AND RULE 6(7A)(A) LEADS TO THE CONCLUSION THAT THE FULFILLMENT OF THE CONDITIONS TO CARRY OUT R&D ACTIVITIES ARE TO BE EX AMINED BY DSIR AND IT IS NOT WITHIN THE PURVIEW OF AO. SO, IN CAS E, THERE IS ESCALATION OF SALES OF THE PRODUCT PRODUCED BY THE ASSESSEE COMPANY, IT MAY BE DUE TO THE CONSEQUENCE OF RESEAR CH AND NOT BECAUSE OF THE FACT THAT R&D FACILITIES HAVE BEEN U SED FOR MARKET RESEARCH AND SALES PROMOTION. SO, WE ARE OF THE CONSIDERED VIEW THAT THE CIT (A) HAS RIGHTLY AND VALIDLY DELETED TH E ADDITION OF RS6,91,42,261/-. SO, GROUND NO.1 IS DETERMINED AGA INST THE REVENUE. GROUND NO.2 OF ITA NO.2228/DEL/2014 19. AO DISALLOWED AN AMOUNT OF RS.2,10,00,000/- BEI NG EXCESS OF ACTUAL WARRANTY CLAIMED OUT OF RS.3,67,00,000/- MADE AS PROVISION FOR WARRANTY BY THE ASSESSEE COMPANY ON T HE GROUND THAT IT WAS NOT ASCERTAINED LIABILITY. CIT (A) VIDE IMP UGNED ORDER DELETED THE DISALLOWANCE OF RS.2,10,00,000/-. 20. THE LD. AR FOR THE ASSESSEE RELIED UPON THE ORD ER PASSED BY COORDINATE BENCH OF THE TRIBUNAL IN ITA NO.2561/DEL /2013 ORDER DATED 04.01.2016 FOR AY 2009-10 IN ASSESSEES OWN C ASE AND CONTENDED THAT THERE IS NO CHANGE OF CIRCUMSTANCES AND THE SAID ITA NOS2228 & 2268/DEL./2014 10 ORDER HAS NOT BEEN FURTHER CHALLENGED BY THE REVENU E. FOR FACILITY OF REFERENCE, PARAS 31, 32 & 33 OF THE ORDER (SUPRA ) ARE REPRODUCED AS UNDER FOR READY REFERENCE :- 31. UNDISPUTEDLY, ASSESSEE IS ENGAGED IN THE BUSI NESS OF MANUFACTURING AND SALE OF COMMERCIAL VEHICLES, TRAC TORS, TWO WHEELERS AND GEARS. LD. A.R. CONTENDED THAT VARIOUS PRODUCTS OF THE COMPANY ARE SOLD ALONG WITH WARRANTY AND ASSESS EE IS UNDER OBLIGATION TO REPLACE ANY COMPONENT BEARING MANUFAC TURING DEFECT FREE OF COST AND AT THE END OF THE RELEVANT PREVIOU S YEAR, ASSESSEE HAD MADE AGGREGATE PROVISIONS FOR WARRANTY AT RS.7, 38,00,000/-. 32. LD. D.R. RELIED UPON THE ORDER PASSED BY ASSES SING OFFICER. HOWEVER, LD. A.R. RELIED UPON THE ORDER PASSED BY L . CIT(A) AND CONTENDED THAT THE ASSESSEE ONLY CLAIMED REGARDING DEDUCTION OF AMOUNT EARMARKED FOR PROVISION FOR WARRANTY, HAS BE EN ALLOWED BY THE REVENUE DURING THE ASSESSMENT YEARS 2002-03, 20 03-04, 2006-07 AND 2007-08 AND NO APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINST LD. CIT(A)'S ORDER. LD. A.R. ALS O RELIED UPON THE DECISION DELIVERED BY INCOME TAX APPELLATE TRIB UNAL DELHI BENCH 'B', NEW DELHI IN ASSESSEE'S OWN CASE ENTITLE D DCIT VS M/S. EICHER MOTORS LTD. IN I.T.A. NO. 3560/DEL12008 ORDER DATED 18.09.2009 . LD. A.R. ALSO RELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE ENTITLED ROTORK CONTROLS INDIA PVT. LTD. VS CIT, 314 ITR 62 (S.C.). THE RATIO OF JUDGMENT (SUPRA) IS THAT ESTIMATED PROVISIONS FOR WARRANTY A RE ALLOWABLE FOR DEDUCTION. OPERATIVE PART OF THE JUDGEMENT (SUPRA) IS REPRODUCED BELOW FOR FACILITY OF REFERENCE: 'HELD, REVERSING THE DECISION OF THE HON'BLE HIGH COURT, THAT THE VALVE ACTUATORS, MANUFACTURED BY TH E ASSESSEE, WERE SOPHISTICATED GOODS AND STATISTICAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE; THAT VALVE ACTUATOR BEING A SOPHISTICATE D ITEM NO CUSTOMER WAS PREPARED TO BUY A VALVE ACTUATOR WITHO UT A WARRANTY. THEREFORE, THE WARRANTY BECAME AN INTEGR AL PART OF THE SALE PRICE: IN OTHER WORDS, THE WARRANTY STO OD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE, THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE TH E ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PA ST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF OBLIGATION. THEREFOR E, THE ASSESSEE HAD INCURRED A LIABILITY DURING THE ASSESS MENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE INCOME TAX ACT, 1961. ITA NOS2228 & 2268/DEL./2014 11 THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE T HE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCO UNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT L IABILITY IS NOT THE NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PR ODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO D EPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF AR TICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY 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: (H) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE COND ITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEI NG MANUFACTURED IN THE PAST AND THE FACTS SHOW THAT DE FECTS EXISTED IN SOME OF HT ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. ' 33. THE COORDINATE BENCH OF INCOME TAX APPELLATE T RIBUNAL BY RELYING UPON THE JUDGEMENT CITED AS ROTORK CONTROLS INDIA LTD. (SUPRA) IN THE ASSESSEE'S OWN CASE FOR THE ASSESSME NT YEAR 2002- 03 HELD THAT ASSESSEE HAD ESTIMATED THE PROVISIONS FOR WARRANTY ON THE BASIS OF PAST HISTORY. THE ESTIMATE OF WARRANTY MADE BY THE ASSESSEE ON THE BASIS OF PAST HISTORY CANNOT BE TRE ATED AS A PROVISION FOR ANY ASCERTAINED LIABILITY AND ALLOWED THE PROVISION FOR WARRANTY AS DEDUCTION. FOLLOWING THE LAW LAID D OWN BY HON'BLE SUPREME COURT IN THE JUDGEMENT (SUPRA), DECISION OF COORDINATE BENCH IN THE ASSESSEE'S OWN CASE, WE FIND THAT THER E IS NO INFIRMITY OR PERVERSITY IN THE FINDINGS RETURNED BY LD. CIT(A ) IN ALLOWING THE ASCERTAINED LIABILITY AS ALLOWABLE EXPENDITURE U/S 3 7( 1) OF THE ACT. SO, GROUND NO.3 IS DETERMINED IN FAVOUR OF THE ASSESSEE. 21. FOLLOWING THE ORDER PASSED BY THE COORDINATE BE NCH IN ASSESSEES OWN CASE FOR AY 2009-10 (SUPRA), BY FOLL OWING THE JUDGMENT PASSED BY THE HONBLE SUPREME COURT IN CAS E OF ROTORK ITA NOS2228 & 2268/DEL./2014 12 CONTROLS (SUPRA), WE FIND NO ILLEGALITY OR PERVERSI TY IN THE DELETION OF DISALLOWANCE OF RS.2,10,00,000/- BY THE LD. CIT (A) VIDE IMPUGNED ORDER. SO, GROUND NO.2 IS DETERMINED AGAI NST THE REVENUE. GROUND NO.1 & 2 OF ITA NO.2268/DEL/2014 22. UNDISPUTEDLY, ASSESSEE COMPANY HAS EARNED DIVID END INCOME OF RS.15,82,84,580/- FROM THE INVESTMENTS HE LD IN ITS VARIOUS SUBSIDIARY COMPANIES AND MUTUAL FUNDS CLAIM ED TO BE EXEMPTED U/S 10(33 / 34) OF THE ACT. AO, BY INVOKI NG THE PROVISIONS CONTAINED U/S 14A READ WITH RULE 8D DISA LLOWED AN AMOUNT OF RS.3,18,84,938/- (SUBSEQUENTLY REDUCED TO RS.30,25,000/- VIDE RECTIFICATION ORDER). TAKING N OTE OF THE INCORRECT COMPUTATION OF DISALLOWANCE U/S 14A, CIT (A) HAS RESTRICTED THE DISALLOWANCE U/S 14A READ WITH RULE 8D(2) TO RS.26,97,608/- INSTEAD OF RS.30,25,000/- COMPUTED B Y THE AO. 23. LD. AR FOR THE ASSESSEE CHALLENGING THE IMPUGNE D ORDER CONTENDED INTER ALIA THAT AO WITHOUT RETURNING THE FINDINGS THAT THE ASSESSEE HAS ACTUALLY INCURRED EXPENSES HAVING PROX IMATE NEXUS WITH EARNING OF THE EXEMPT DIVIDEND INCOME AND IT I S FOR THE AO TO PROVE THE PROXIMATE/DIRECT NEXUS OF EXPENSES WITH T HE EARNING OF THE EXEMPT INCOME TO MAKE THE DISALLOWANCE; THAT IN CASE AO IS DISSATISFIED WITH THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE IN ITA NOS2228 & 2268/DEL./2014 13 RELATION TO EXEMPT INCOME HAS BEEN INCURRED BY THE ASSESSEE ONLY THEN PROVISIONS CONTAINED U/S 14A RULE 8D CAN BE IN VOKED; THAT UNLESS AND UNTIL THERE WAS ACTUAL EXPENDITURE FOR E ARNING THE EXEMPTED INCOME THERE CANNOT BE ANY DISALLOWANCE U/ S 14A; THAT DURING THE YEAR UNDER ASSESSMENT, NO FRESH INVESTME NT FALLING IN THE PURVIEW OF SECTION 14A WERE MADE; THAT THERE IS NO NEXUS OF BORROWED FUNDS WITH SUCH INVESTMENTS NOR SUCH FACTS HAVE BEEN ESTABLISHED DURING THE ASSESSMENT COMPLETED U/S 143 (3) OF THE PREVIOUS YEARS; THAT ASSESSEE HAS GOT SUFFICIENT CA SH FLOW DURING THE YEAR UNDER ASSESSMENT AND NO INVESTMENT HAS BEEN MA DE IN THE SECURITIES EARNING TAX EXEMPT INCOME; THAT LD. CIT (A) HAVE ALSO ERRED IN CONSIDERING ALL THE AFORESAID CONTENTIONS RATHER AFFIRMED THE ADDITION MADE BY THE AO AND RELIED UPON JUDGMEN T CITED AS MAXOPP INVESTMENT LTD. VS. CIT - 347 ITR 272 (DEL.) , CIT VS. HERO CYCLES LTD. - 320 ITR 518 (P&H) AND SIL INVEST MENT LTD. VS. ACIT 148 TTJ 213 (DELHI BENCH). 12. THE RATIO OF THE JUDGMENT CITED AS MAXOPP INVESTMENTS LIMITED (SUPRA) PASSED BY THE HONBLE JURISDICTIONAL HIGH COURT IS THAT UNDER SECTION 14A(2,) IT IS A CONDITION PRECEDENT FOR ASSESSING OFFICER TO DETERMINE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME; THAT HE MUST RECORD HIS DIS-SATISFACTION WITH CORRECTNESS OF CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS ITA NOS2228 & 2268/DEL./2014 14 BEEN INCURRED AND THAT DETERMINATION OF AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D ONLY COME INTO PLAY WHEN AO REJECTS CLAIM OF ASSESSEE IN THIS REGARD. 24. HONBLE PUNJAB & HARYANA HIGH COURT IN JUDGMENT CITED AS HERO CYCLES LTD. (SUPRA) ALSO HELD THAT DISALLOWANC E U/S 14A CAN ONLY BE MADE IF THE AO ESTABLISHES PROXIMATE NEXUS OF EXPENDITURE WITH EXEMPT INCOME. ITAT, DELHI BENCH IN CASE OF S IL INVESTMENT LTD. (SUPRA) ALSO HELD THAT THE AO CANNO T MAKE DISALLOWANCE U/S 14A WITHOUT BRINING ANY EVIDENCE O N RECORD TO ESTABLISH THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME. 25. IN THE LIGHT OF THE SETTLED PROPOSITION LAID DO WN IN THE JUDGMENTS (SUPRA) DISCUSSED IN THE PRECEDING PARA, WHEN WE EXAMINE THE DISALLOWANCE WORKED OUT BY THE AO UNDER RULE 8D, REPRODUCED HEREUNDER, THE AO HAS NOT BROUGHT ON REC ORD ANY EVIDENCE TO ESTABLISH IF ANY EXPENDITURE HAS BEEN I NCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME :- SL.NO. PARTICULARS AMOUNT IN RS. A EMPLOYEES COST BASIC SALARY 7,085,205 HOUSE RENT ALLOWANCE 3,095,189 OTHER TAXABLE ALLOWANCE 11,658,649 LEAVE ENCASHMENT 11,745 BONUS/REWARDS 26,942 PROVIDENT FUND CONTRIBUTIONS 12,649 LEAVE TRAVEL ALLOWANCE 657,545 TRANSPORT/VEHICLE EXPENSES 246,796 ITA NOS2228 & 2268/DEL./2014 15 MEDICAL REIMBURSEMENTS 449,792 STAFF WELFARE 109,246 SUB TOTAL (A) 23,353,758 B OVERHEADS CONSUMABLES 1,010,868 FREIGHT & RELATED EXPENSES 231,069 NEWS PAPER / MAGAZINES 439,579 LOSS ON SALE OF FIXED ASSETS 116,728 REPAIRS & MAINTENANCE 2,462,515 ELECTRICITY INSURANCE 2,417 MAINTENANCE CHARGES VEHICLE EXPENSES 479,702 PRINTING & STATIONERY 62,987 COMPUTER CONSUMABLES 227,746 COURIER EXPENSES 41 ,727 TELEPHONE 198,306 TRAVELLING EXPENSES 5,292,203 CONVEYANCE EXPENSES 103,735 PROFESSIONAL & CONSULTANCY 15,442,622 OTHER EXPENSES 131,912 BOOKS & PERIODICALS 72,148 MEMBERSHIP FEES 441,096 RECRUITMENT/JOINING EXPENSES 51,314 C DEVELOPMENT EXPENSES INSPECTION & TESTING 2,390,014 PRODUCT DEVELOPMENT EXPENSES 15,057,518 SUB TOTAL (C) D DEPRECIATION 15,770,484 E GRAND TOTAL 83,380,447 F LESS :- EXCLUDED IN COMPUTATION OF INCOME A. DEPRECIATION 15,770,484 B. R&D WORK IN P ROGRESS OF FY 2008-09, CHARGED OFF 4,031,328 C. LOSS ON SALE OF FIXED ASSETS 116,728 G REVENUE EXPENDITURE ON R&D DEBITED TO P&L ACCOUNT (E-F) 63,191,907 26. THE ENTIRE EXERCISE TO WORK OUT THE DISALLOWANC E UNDER RULE 8D DONE BY THE AO IS ON THE BASIS OF IMAGINED EXPEN DITURE BASED UPON THE AVERAGE VALUE OF THE INVESTMENT WHEREAS TH E EXPRESSION ITA NOS2228 & 2268/DEL./2014 16 EXPENDITURE INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT IMAGINED EXPENDITURE. AO WITHOUT RECORDING HIS DIS SATISFACTION OF THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE AND WITHOUT ARRIVING AT THE CONCLUSION THAT THE CLA IM OF ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IS INCORRECT PROCEEDED TO INVOKE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D. AT THE SAME TIME, AO HAS NOT DISPUTED THE AUDITED BOOKS OF ACCOUNT OF THE ASSESSEE IN RESPECT OF INVESTMENT AND EARNING DIVID END INCOME WHICH ARE AVAILABLE AT PAGE 5 TO 49 OF THE PAPER BO OK. 27. SO, WHEN FROM THE BALANCE SHEET AVAILABLE AT PA GE 16 OF THE PAPER BOOK, PRODUCED BEFORE AO AS WELL AS CIT(A), IT HAS COME ON RECORD THAT ASSESSEE HAS SUFFICIENT CASH FLOW DU RING THE YEAR UNDER ASSESSMENT; THE AO HAS FAILED TO PROVE ANY NE XUS OF BORROWED FUNDS WITH VARIOUS INVESTMENTS HELD BY THE ASSESSEE; THE AO WITHOUT RECORDING HIS DISSATISFACTION OF CORRECT NESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE NOR AO HAS REJE CTED THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURR ED IN EARNING THE DIVIDEND INCOME, THE PROVISIONS CONTAINED UNDER SEC TION 14A READ WITH RULE 8D ARE NOT ATTRACTED. SO, WE ARE OF THE CONSIDERED VIEW THAT AO AS WELL AS CIT (A) HAVE ERRED IN DISALLOWIN G / CONFIRMING THE DISALLOWANCE OF NORMAL EXPENSES OF RS.26,97,608 /- WHILE ITA NOS2228 & 2268/DEL./2014 17 COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. CO NSEQUENTLY, GROUNDS NO.1 & 2 ARE DETERMINED IN FAVOUR OF THE AS SESSEE. 28. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, APPEA L, ITA NO.2228/DEL/2014, FILED BY THE REVENUE STANDS DISMI SSED AND APPEAL, ITA NO.2268/DEL/2014, FILED BY THE ASSESSE E IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 25 TH DAY OF NOVEMBER, 2016. SD/- SD/- (R.S. SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 25 TH DAY OF NOVEMBER, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-XIII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.