MAHINDRA SONA LTD, MUMBAI V. ACIT CIR 2(2), MUMBAI

ITA 2417/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8544 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 26-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R S SRIVASTAV
• Assessee Lawyers: DEVDATTA MAINKAR
• Section: 80HHC; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI RAJENDRA SI NGH(AM) ITA NO.2416/M/2010 ASSESSMENT YEAR 2004-05 ITA NO.2417/M/2010 ASSESSMENT YEAR 2005-06 M/S.MAHINDRA SONA LIMITED THE ITO WARD 2(2)(4), M UMBAI GATEWAY BUILDING, APOLLO BUNDER ROOM NO.545, AAYAK AR BHAVAN MUMBAI 400 001. M.K.ROAD, MUMBAI 400 020. PAN : AAACM3524A APPELLANT RESPONDENT ASSESSEE BY : SHRI DEVDATTA MAINKAR REVENUE BY : SHRI R.S.SRIVASTAV O R D E R PER RAJENDRA SINGH (AM) THESE APPEALS OF THE ASSESSEE ARE DIRECTED AGAINST ORDERS DATED 1.2.2010 AND 12.1.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2004-05 AND 2005- 06 RESPECTIVELY. THESE APPEALS WHICH WERE HEARD TOG ETHER ARE DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIEN CE. 2. WE FIRST TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO.2416/M/2010 . IN THIS APPEAL THE ASSESSEE HAS RAISED DISPUTES O N FOUR DIFFERENT GROUNDS. 2 2.1 THE FIRST DISPUTE IS REGARDING DISALLOWANCE OUT OF REPAIR AND MAINTENANCE EXPENSES. THE ASSESSEE CLAIMED EXPENDITURE OF RS..6 ,95,371/- ON REPAIR AND MAINTENANCE OF BUILDING WHICH HAS BEEN DISALLOWED B Y THE AO. IN APPEAL CIT(A) NOTED THAT THE EXPENDITURE INCLUDED A SUM OF RS.84, 372 ON FLOORING, RS.38,586/- ON FOUNDATION WORK; RS.36,000/- PUMP RO OM CONSTRUCTION; RS.52,566/- FIXING TILES; RS.6,250/- WATCHMAN CABIN TOTALING RS.2,17,774/-. CIT(A) HELD THESE EXPENSES WERE CAPITAL IN NATURE A ND CONFIRMED THE DISALLOWANCE TO THE ABOVE EXTENT AND THE BALANCE AD DITION WAS DELETED. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN A PPEAL. 2.1.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE REI TERATED THE EARLIER SUBMISSION THAT EXPENSES WERE REVENUE IN NATURE AND SHOULD BE ALLOWED. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDER OF CIT(A). 2.1.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED T HE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF CERTAIN EXPENS ES SUCH AS FLOORING, FOUNDATION WORK, PUMP ROOM CONSTRUCTION, FIXING OF TILES, CONSTRUCTION OF WATCHMAN CABIN TOTALING RS.2,17,774/-. THESE EXPENS ES IN OUR VIEW ARE NOT REVENUE IN NATURE. THE EXPENSES HAVE RESULTED INTO CREATION OF NEW AND ENDURING ASSETS WHICH IN OUR OPINION ARE CAPITAL IN NATURE. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) CONFIRMING THE ADD ITION AND THE SAME IS THEREFORE UPHELD. 2.2 THE DISPUTES RAISED IN GROUND NOS.2 & 3 RELATE TO COMPUTATION OF DEDUCTION UNDER SECTION 80HHC IN RELATION TO SCRAP SALE OF RS.45,65,982/- AND MISCELLANEOUS INCOME OF RS.10,25,799/-. THE AO HAD DEDUCTED 90% OF THE SAID 3 INCOME FROM THE PROFIT OF BUSINESS AS PER EXPLANAT ION (BAA) WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC. CIT(A) HAS CONFIRMED THE ORDER OF AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.2.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUB MITTED THAT SCRAP WAS GENERATED OUT OF MANUFACTURING OF PRODUCT MEANT FOR EXPORT AND THEREFORE IT WAS AN INTEGRAL PART OF MANUFACTURING ACTIVITY AND SCRAP SALE THEREFORE SHOULD BE CONSIDERED AS OPERATIONAL INCOME FULLY ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC AS PART OF PROFIT ON BUSINESS. SIMILAR TREATM ENT SHOULD ALSO BEEN GIVEN TO THE OTHER INCOME IT WAS ARGUED. THE LEARNED DR O N THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 2.2.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TREATMENT OF IN COME FROM SCRAP SALE AND OTHER INCOME WHILE COMPUTING DEDUCTION UNDER SECTIO N 80HHC. THE COMPUTATION UNDER SECTION 80HHC IS MADE ON THE BASI S OF PROFIT OF BUSINESS WHICH HAS BEEN DEFINED AS PROFIT COMPUTED UNDER THE HEAD PROFIT AND GAINS OF BUSINESS AND PROFESSION AS REDUCED BY 90% OF INCOM E SUCH AS INTEREST, RENT, COMMISSION OR OTHER INCOME OF SIMILAR NATURE. THE S CRAP GENERATION IS PART OF THE MANUFACTURING ACTIVITY AND THEREFORE INCOME ARI SING FROM SCRAP SALES IS THE OPERATION INCOME FROM THE UNDERTAKING. THEREFORE IN OUR VIEW THE SCRAP SALE HAS TO BE TREATED AS PART OF THE BUSINESS PROFIT AN D 90% OF THE SAME IS NOT REQUIRED TO BE EXCLUDED AS PER EXPLANATION (BAA). A S REGARDS THE OTHER INCOME THE LEARNED AR FOR THE ASSESSEE DID NOT SHOW AS TO HOW THE OTHER INCOME COULD BE CONSIDERED AS OPERATIONAL INCOME OF THE UN DERTAKING. THEREFORE IN OUR VIEW 90% OF THE OTHER INCOME HAS TO BE DEDUCTED AS PER EXPLANATION (BAA) WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC. WE H OLD ACCORDINGLY. 4 2.3 THE FOURTH DISPUTE IS REGARDING DEDUCTION OF EX CHANGE LOSS OF RS.89,66,312/- FROM EXPORT TURNOVER OF RS.25,09,78, 740/-. AFTER HEARING BOTH THE PARTIES WE FIND THAT THIS ISSUE HAD NOT BEEN AD JUDICATED BY CIT(A). WE THEREFORE RESTORE THIS ISSUE FOR THE FILE OF CIT(A) FOR ADJUDICATING THE SAME AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 3. THE APPEAL OF THE ASSESSEE IN ITA NO.2417/M/2010 FOR ASSESSMENT YEAR 2005-06. IN THIS APPEAL ONLY DISPUTE RAISED BY THE ASSESSEE IS REGARDING DISALLOWANCE OF PROVISION FOR WARRANTY OF RS.18,23, 000/-. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF AUTOMOTIVE COMPONENTS. THE ASSESSEE ISSUES WARRANTY AT THE TIME OF SALE OF THE PRODUCT. THE AS SESSEE WAS OBLIGED TO HONOUR THE WARRANTY PERIOD FOR A PERIOD OF 3 YEARS. THE ASSESSEE SUBMITTED THAT PROVISION FOR WARRANTY WAS MADE ON THE BASIS O F EMPIRICAL STUDY AND AVAILABLE DATA USED IN A SCIENTIFIC MANNER. THE AO HOWEVER DID NOT ACCEPT THE CLAIM AND DID TREAT IT AS CONTINGENT LIABILITY AND DISALLOWED THE SAME. IN APPEAL THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD INCURR ED THE LIABILITY AT THE TIME OF SALE WHICH HAD BEEN DETERMINED IN AN OBJECTIVE M ANNER AND THEREFORE IT HAD TO BE ALLOWED. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CALCUTTA & CO. LTD. (37 ITR 1) AND THE J UDGMENT IN CASE OF METAL BOX INDIA LTD. (75 ITR 53). CIT(A) HOWEVER NOT SATISFIE D. IT WAS OBSERVED BY HIM THAT PROVISION FOR WARRANTY WAS AGAINST THE FUTURE LIABILITY WHICH HAD NOT CRYSTALLIZED DURING THE YEAR. IT WAS ONLY A CONTING ENT LIABILITY WHICH COULD NOT BE ALLOWED. CIT(A) ACCORDINGLY CONFIRMED THE DISALLOWA NCE AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5 3.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT THE ISSUE WAS COVERED BY THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF ROTORK CONTROLS INDIA (P.) LTD. VS CIT(314 ITR 62) IN WHICH PROVISI ON FOR WARRANTY HAS BEEN HELD ALLOWABLE. THE LEARNED DR ON THE OTHER HAND PL ACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE ASSESSEE WHO IS A MANUFACTURER OF AU TOMOTIVE COMPONENTS HAD BEEN ISSUING WARRANTY AT THE SALE OF THE PRODUCT FO R REMOVAL OF DEFECTS OVER A PARTICULAR PERIOD OF TIME. THE ASSESSEE HAD MADE PR OVISIONS FOR WARRANTY EXPENDITURE IN THE YEAR OF SALE ON THE BASIS OF PA ST EXPERIENCE ETC. THE ISSUE IS WHETHER SUCH PROVISION FOR WARRANTEE CAN BE ALLOWED AS DEDUCTION. WE FIND THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE HONBLE S UPREME COURT IN CASE OF ROTORK CONTROLS INDIA (P) LTD. (SUPRA) IN WHICH THE HONBLE SUPREME COURT OBSERVED THAT WARRANTY WAS AN INTEGRAL PART OF SALE PRICE AS THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IT WAS A LSO OBSERVED THAT WARRANTY PROVISIONS HAVE TO BE RECOGNIZED BECAUSE AN ASSESSE E HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF OBLIGATION. THEREFORE THE ASSESSEE HAD INCURRED THE LIABILITY WHICH WAS AN ALLOWABLE D EDUCTION UNDER SECTION 37 OF THE I.T.ACT. RESPECTFULLY FOLLOWING THE SAID JUDGME NT WE SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF THE ASSESSEE. 6 4. IN THE RESULT THE APPEAL OF THE ASSESSEE FOR ASS ESSMENT YEAR 2004-05 IS PARTLY ALLOWED WHEREAS THAT FOR ASSESSMENT YEAR 200 5-06 IS ALLOWED. 5. THE DECISION WAS PRONOUNCED IN THE OPEN COURT 0 9.02.2011. SD/- SD/- ( D.K. AGARWAL ) (RAJEN DRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 09.02.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR I BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK