Nik-san Enginnering Co.Pvt.Ltd., Mumbai V. The Dy.CIT.,Circle-4, Baroda

ITA 2559/AHD/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 72947 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 18-12-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 08-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Assessee Lawyers: MUKUND BAKSHI A R

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMADABAD , , , , BEFORE SHRI D.K.TYAGI , JUDICIAL MEMBER AND .., SHRI T.R. MEENA, ACCOUNTANT MEMBER !.. , ' # $ # $ # $ # $ ITA NO. 2559/AHD/2012 ASSESSMENT YEAR :2009-10 NIK-SAN ENGINEERING CO. PVT. LTD. 201-204 VIKAS CHAMBER, JUNCTION OF LINK & MARVE ROAD, MALAD WEST, MUMBAI, MAHARASHTRA-400064 V/S . THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-4, AAYAKAR BHAVAN, BARODA PAN NO. A ABCN8963D (APPELLANT) .. (RESPONDENT) %& ' ( / BY APPELLANT SHRI MUKUND BAKSHI, A.R. )%& ' ( /BY RESPONDENT SHRI P. L. KUREEL, SR. D.R. *+, ' -' /DATE OF HEARING 15.12.2013 ./0 ' -' /DATE OF PRONOUNCEMENT 31.01.2014 O R D E R PER : SHRI T.R.MEENA, ACCOUNTANT MEMBER THIS IS AN APPEAL AT THE BEHEST OF ASSESSEE WHICH H AS EMANATED FROM THE ORDER OF CIT(A)-III, BARODA, DATED 27.09.2012 F OR ASSESSMENT YEAR 2009- 10. THE EFFECTIVE GROUNDS OF ASSESSEES APPEAL ARE AS UNDER: 1. THE LD. CIT(A)-III, BARODA HAS FURTHER ERRED IN LAW AND IN FACTS IN NOT APPRECIATING THE BASIS OF QUANTIFYING THE AMOUN T PROVISION MADE WHICH IS BASED ON THE PERIOD FOR WHICH THE WARRANTY IS PR OVIDED BY THE APPELLANT. CONSIDERING SUCH BASIS, THE LD. CIT(A) OUGHT TO HAV E ACCEPTED THE SAME AS SCIENTIFIC. 2. THE LD. CIT(A)-III, BARODA HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE ACTION OF LD. AO IN THE DISALLOWANCE OF RS.1,12,91,739/- ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 2 BEING THE AMOUNT OF PROVISION MADE TOWARDS WARRANTY PROVIDED ON THE SALE OF EQUIPMENTS ON THE GROUND THAT SUCH PROVISIO N IS NOT QUANTIFIED ON A SCIENTIFIC BASIS. THE IMPUGNED DISALLOWANCE OF RS. 1,12,91,739/- BEING ERRONEOUS IN FACTS AND IN LAW IS PRAYED TO BE ALLOW ED. 3. THE LD. CIT(A)-III, BARODA HAS FURTHER ERRED IN LAW AND IN FACTS IN NOT APPRECIATING THE FACT THAT THE AMOUNT PROVIDED FOR WARRANTY IS ACCRUED TO THE APPELLANT ONLY ON COMPLETION OF THE PERIOD F OR WHICH SUCH WARRANTY IS PROVIDED AND THAT THE AMOUNT PROVIDED FOR BY THE APPELLANT COULD HAVE BEEN SAID TO HAVE BEEN RECEIVED ONLY ON THE COMPLET ION OF SUCH PERIOD AND THAT SUCH AMOUNT COULD NOT HAVE BEEN HELD AS IN COME OF THE YEAR UNDER CONSIDERATION. 4. IN THE ALTERNATIVE, THE INCOME OFFERED IN THE VA RIOUS SUBSEQUENT YEARS ON REVERSAL OF THE PROVISION MADE DURING THE YEAR IS DIRECTED TO BE REDUCED FROM THE INCOME OF THE RESPECTIVE YEARS. T HE APPELLANT PLEADS FOR APPROPRIATE DIRECTIONS. ALL THE FOUR GROUNDS ARE REVOLVING AROUND DISALLOWA NCE OF WARRANTY OF RS.1,12,91,739/- CLAIMED BY THE ASSESSEE. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS E NGAGED IN THE BUSINESS OF MANUFACTURING OF DISTRIBUTION TRANSFORMERS, LTCT S, PTS, CT/PT AND TRADING OF STEEL MATERIAL ETC. THE ASSESSEE IN SCHEDULE 10 OF THE P&L ACCOUNT REDUCED AMOUNTING RS.82,14,088/- FROM THE SALES AND HAS SHOWN UNDER THE HEAD PROVISION FOR CONTINGENCIES. SCHEDULE 6 EAR MARKED FOR THE GROUPING OF SUNDRY DEBTORS, AN AMOUNT OF RS.2,07,03,434/- WAS R EDUCED. HENCE, THE TOTAL DEBTORS AS ON 31.03.2009 WERE REFLECTED AS RS.19,72 ,61,069/- INSTEAD OF RS.21,79,64,503/-. THE A.O. GAVE REASONABLE OPPORT UNITY OF BEING HARD ON THIS ISSUE, WHICH WAS AFFORDED BY THE ASSESSEE AND IT WAS SUBMITTED THAT IT HAD PROVIDED FOR CONTINGENCY AS UNDER: ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 3 PROVISIONS REQUIRED FOR THE FY 200809 RS.1,12,91,73 9 REVERSAL OF PROVISION FOR FY 2007-08 RS. 30,77, 651 NET PROVISION FOR THE YEAR RS. 82,14,088 IT WAS CLAIMED BY THE ASSESSEE THAT IT HAD TO PROVI DE WARRANTY FOR A CERTAIN PERIOD DURING WHICH IF ANY PRODUCT WAS NOT PERFORMI NG WELL OR DAMAGES AND REQUIRED REPLACEMENT THE SAME IS TO BE REPLACED BY THE ASSESSEE COMPANY AND AS A PRECAUTION, PROVISION FOR CONTINGENCIES WA S PROVIDED @ 5% WHERE THE PERIOD OF WARRANTY IS 5 YEARS AND @ 3% WHERE TH E WARRANTY PERIOD IS OF 3 YEARS. THE REVERSAL WAS BEING MADE FOR THE PERIOD WHICH HAS ELAPSED FROM THE TOTAL WARRANTY PERIOD OF 3/5 YEARS, AS THE CASE MAY BE. THE ASSESSEE STATED THAT IN ACCORDANCE WITH THE REQUIREMENT BY T HE CUSTOMERS AND THAT BEING CONTRACTUAL LIABILITY, IT HAD MADE PROVISION OF WARRANTY AMOUNTING TO RS.1,12,91,739/- FOR THE YEAR UNDER CONSIDERATION. THE A.O. FOUND THESE PROVISIONS MADE BY THE ASSESSEE CONTINGENT AND ARE NOT ALLOWABLE. HE FURTHER CONSIDERED ASSESSEES REPLY DATED 16.11.201 1 WHERE IT WAS SUBMITTED THAT THE EXPENSES INCURRED AGAINST THE SERVICE COST OR THE COST OF EQUIPMENT WHICH ARE RETURNED DURING THE WARRANTY PERIOD WAS M OSTLY ON SPARES, CONSUMABLE, MATERIALS, LABOUR ETC. THE ASSESSEE CO ULD NOT FURNISH THE DETAIL OF QUANTIFICATION OF EXPENSES ON SUCH REPAIRS, SERV ICE AND COST ATTRIBUTABLE TO THE REPLACEMENT OF EQUIPMENTS FALLING IN WARRANTY P ERIOD. THE ASSESSEE FURTHER SUBMITTED REPLY VIDE 25.11.2011 ON REPAIR O F EQUIPMENT. AFTER CONSIDERING THE ASSESSEES REPLY, IT WAS HELD THAT THE ASSESSEE DID NOT MAINTAIN SEPARATE RECORD FOR IDENTIFYING THE EXPENS ES AND CONSUMPTION OF ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 4 MATERIAL FOR REPAIRS, REPLACEMENT DURING THE PERIOD OF WARRANTY. THE ASSESSEE HAD DEBITED THESE EXPENSES DURING THE YEAR UNDER CO NSIDERATION IN THE P&L ACCOUNT. EVEN WARRANTY EXPENSES ARE PERTAINED TO P REVIOUS YEARS. AS ADMITTED BY THE ASSESSEE, HE WAS NOT ABLE TO QUANTI FY THE EXPENSES INCURRED ON WARRANTY BASED EQUIPMENT. THE PROVISION MADE BY THE ASSESSEE IS ADHOC BASIS. BEING LIABILITY IS CONTINGENT AND PROVISION AL IT CANNOT BE ALLOWED. IT WAS OBSERVED THAT INCOME TAX LAW MAKES A DISTINCTION BE TWEEN ACTUAL LIABILITY IN PRAESENTI AND THE LIABILITY DE FUTURE. THE LIABILI TY DE FUTURE FOR IS ONLY CONTINGENT. BUT LIABILITY IS PRAESENTI IS THE ACTU AL LIABILITY WHICH IS DEDUCTIBLE. THE EXPENDITURE WHICH BECOMES AN EXPENDITURE ON THE HAPPENING OF AN EVENT IN FUTURE IS NOT EXPENDITURE IN THE EYES OF THE INC OME-TAX LAW. THEREFORE, THE A.O. MADE ADDITION OF RS.1,12,91,739/- IN THE INCOM E OF THE ASSESSEE. 3. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAD DISMISSED THE APPEAL OF T HE ASSESSEE BY CONSIDERING THE ASSESSEES REPLY. THE ASSESSEE REP LIED BEFORE THE CIT(A) ON FOLLOWING VARIOUS DECISIONS: I. CIT V. VINITEC CORPORATION PVT. LTD. (2005) 278 ITR 337 (DELHI) II. IBM INDIA LTD. V. CIT(APPEALS) (2007) 29 ITR (A T) 183 (BANGALORE) III. CIT V. INDIA TRANSFORMERS LTD. (2004) 270 ITR 259 (KER) IV. CIT V. BEEMA MANUFACTURERS P. LTD. (2003) 130 T AXMAN 400 (MAD) V. CIT VS. ROTORK CONTROLA INDIA PVT. LTD. VS. CIT 314 ITR 62 (SC) VI. CIT VS. HIMALAYA MACHINERY PVT. LTD. 334 ITR 64 (GUJ.) VII. CIT VS. INDIAN TRANSFORMERS LTD. 270 ITR 259 ( KER.) ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 5 VIII. CIT VS. WOODWARD GOVERNOR INDIA LTD. 321 ITR 147 (DEL.) IX. CIT VS. HINDITRON SERVICES PVT. LTD. 321 ITR 26 3 (MUM.) X. ANUP ENGINEERING LTD. VS. CIT 247 ITR 457 XI. CIT VS. SIMPLEX CONCRETE PILES INDIA PVT. LTD. 179 ITR 8 (CAL.) AND CLAIMED THAT LIABILITY AS: I) THE FACT OF INCURRENCE OF SUCH LIABILITY UNDER C ONTRACTS, II) THERE BEING A SCIENTIFIC BASIS FOR ESTIMATION, III) THE FACTS AND EVIDENCES EVIDENCING THE ACTUAL INCURRENCE OF REPAIRS AND REPLACEMENTS, IV) MOST IMPORTANTLY THE REVERSAL OF SUCH PROVISION S IN THE SUBSEQUENT YEARS, V) THE AUTHORITIES SUPPORTING THE CONTENTIONS OF TH E APPELLANT, AND VI) THE NON-ALLOWANCE OF LIABILITY WOULD RESULT INT O TAXATION OF SAME AMOUNT TWICE, ONE, ON DISALLOWANCE OF THE CLAIM AND SECOND , ON INCLUSION BY THE APPELLANT IN THE INCOMES OF SUBSEQUENT YEARS ON ITS REVERSAL, AFTER CONSIDERING THE ASSESSEES REPLY, THE LD. CIT (A) ANALYZED THE FACTS OF THE CASE AND CASE LAWS CITED BY THE ASSESSEE, PARTICULA RLY, HONBLE SUPREME COURT DECISION INCASE OF CIT VS. ROTORK CONTROLA IN DIA PVT. LTD. (SUPRA) AND HELD THAT AS PER THE HONBLE SUPREME COURT, THE CLA IM OF THE WARRANTY PROVISIONS MADE BY THE APPELLANT IS NOT ADMISSIBLE. THE APPELLANT IS NOT MAKING THE WARRANTY PROVISIONS ON A SCIENTIFIC BASI S BASED UPON THE PAST EXPERIENCE AND PAST ACTUAL EXPENDITURE INCURRED DUE TO SUCH CLAIMS. THE WARRANTY PROVISIONS AS WELL AS ITS REVERSAL ARE BEI NG DONE ON ADHOC BASIS AND ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 6 NO RECORD OF ACTUAL EXPENDITURE BEING INCURRED ON G OODS COVERED BY WARRANTY IS BEING MAINTAINED BY THE APPELLANT. HENCE, HE CO NFIRMED THE ADDITION MADE BY THE A.O. 4. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE ASSESSEE ARGUED THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURI NG AND SELLING OF TRANSFORMER TO VARIOUS VIDYUT VITRAN NIGAMS/GUJARAT ELECTRICITY BOARD. THEY HAD MADE CONTRACT WITH THIS VIDYUT BOARD. HE HAS D RAWN OUR ATTENTION ON PAGE NO.21 I.E. COPY OF AGREEMENT BETWEEN THE ASSES SEE AND JODHPUR VIDYUT VITRAN NIGAM LIMITED AND PAGE NO.22 TO 37 ARE THE C OPY OF AGREEMENT BETWEEN ASSESSEE AND GUJARAT ELECTRICITY BOARD. AS PER ITEM NO.47, THE GUARANTEE IS FOR 60 MONTHS FROM THE DATE OF SUPPLY. THE REPAIR WILL BE BORN BY THE ASSESSEE. ACCORDINGLY, IN ITEM NO.48 OF AGREEM ENT, THE ASSESSEE HAD TO PERFORM PERFORMANCE GUARANTEE AMOUNTING TO 10% OF O RDER VALUE WHICH SHOULD BE VALID FOR 60 MONTHS FROM THE DATE OF DELI VERY OF SUPPLY. AS PER PAGE NOS. 38 TO 49, THE ASSESSEE HAD GIVEN WORKING OF WA RRANTY CALCULATED ON THE BASIS OF TERMS AND CONDITIONS OF THE CONTRACT. THE ASSESSEE HAS DEBITED THE WARRANTY EXPENSES ON SCIENTIFIC MANNER. IN CASE, THE GUARANTEE PERIOD IS OVER, THE PROVISION IS REVERSED AS PER PAGE NOS. 50 T0 58 OF THIS PAPER BOOK IN THE INCOME OF THE ASSESSEE. HE FURTHER HAS DRAW N OUR ATTENTION ON PAGE NO. 59 AND ARGUED THAT THE ASSESSEE HAD MADE PROVISION FOR WARRANTY FROM F.Y. 07-08 TO F.Y. 10-11 AND ON THE BASIS OF C ONTRACT BETWEEN THE PARTIES, SCIENTIFICALLY, THE ASSESSEE HAS REVERSED OUT OF THIS PROVISION IN F.Y. 08-09 RS.30.77 LACS AND IN F.Y. 09-10 RS.56.75 LACS AND ALSO IN SUBSEQUENT ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 7 YEAR THIS REVERSAL HAS BEEN REFLECTED IN THE BOOKS OF ACCOUNT. PAGE NO.8 OF PAPER BOOK IN ITEM NO.6, THE TERMS AND CONDITIONS A RE AS UNDER: 6. PERFORMACE BANK GUARANTEE AND MANUFACTURERS WARRANTY YOU SHALL FURNISH A PERFORMANCE BANK GUARANTEE FRO M ANY SCHEDULE BANK OF INDIA FOR AN AMOUNT EQUIVALENT TO 10% (TEN PERCENT) OF CONTRACT VALUE TOWARDS SATISFACTORY PERFORMANCE OF MATERIAL IN THE PRESCRIBED PROFORMA (AS PER ANNEXURE-III) ON A RAJASTHAN GOVT. NON-JUDICIAL STAMP PAPER WORTH RS.100.00 AS PER CLAUSE NO.1.41.2(B) OF THE GENERAL CONDITION OF CONTRACT. YOU SHALL ALSO FURNISH MANUFACTURERS WARRANTY IN TERMS OF CLAUSE NO.1.41.2(A) OF THE GENERAL CONDITIONS OF CONTRACT ON A RAJASTHAN GOVT. NON-JUDICIAL STAMP PAPER WORTH RS.100/- (AS PER ANN EXURE IV). HE FURTHER RELIED UPON IN CASE OF CIT VS. RAGHUVIR SYNTHETICS LTD. IN TAX APPEAL NO.829 OF 2007 ORDER DATED 05.12.2011 FOR EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES AND CO MMERCIAL EXPEDIENCY. HE FURTHER RELIED IN CASE OF ANUP ENGINEERING LTD. VS. CIT (2001) 247 ITR 457 (GUJ), WHERE ASSESSEE SOLD A CHEMICAL PLANT TO G FOR CONSI DERATION OF RS.40 LACS WITH A WARRANTY CLAUSE G HAD RIGHT TO RETAIN 10% OF TOTAL CONSIDERATION TILL THE PLANT WAS FOUND SATISFACTORY- PLANT WAS NO T TO THE SATISFACTION OF G AND, THEREFORE, G HAD A RIGHT TO RETAIN A SUM OF RS. 4 L ACS AS PER SAID CLAUSE. ENTIRE AMOUNT OF SALE OF RS.40 LACS CANNOT BE TREAT ED AS INCOME. EVEN IT IS ASSUMED THAT ENTIRE AMOUNT ACCRUED TO THE ASSESSEE, LIABILITY FOR REPAIRS OF PLANT ALSO HAVING ARISEN IN THE SAME PREVIOUS YEAR, ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION THEREOF. HE FURTHER RELIED IN CASE OF CIT VS. MODI OLIVETTI LTD. ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 8 [2013] 37 TAXMANN.COM 464 (ALLAHABAD) IN TAX APPEAL NO. 143 OF 2005 DATED AUGUST 19, 2013, WHEREIN EXCESS PROVISION HAD BEEN MADE FOR A PARTIC ULAR ASSESSMENT YEAR IN EXCESS OF ACTUAL EXPENSES WERE I NCURRED IN SUBSEQUENT ASSESSMENT YEAR, DIFFERENCE WAS AGAIN WRITTEN BACK IN SUBSEQUENT ASSESSMENT YEAR. THE TRIBUNAL HAVING FOUND THAT LI ABILITY ON ACCOUNT OF WARRANTY WAS IN PRESENTI TO BE DISCHARGED AT A FUTU RE DATE AND NOT A CONTINGENT ONE. THE EXPENDITURE IS ALLOWABLE. IN CASE OF CIT VS. MICRO LAND LTD. [2012] 347 ITR 613 (KARN), HAS HELD THAT PROVISION FOR FUTURE WARRANTY IS DEDUCTABLE. IN CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT [2009] 314 I TR 62 (SC), HELD THAT PROVISION FOR WARRANTY IS RECOGNIZED, PRE SENT, SETTLEMENT OF OBLIGATION AND RELIABLE ESTIMATION IS THERE. THERE FORE, HE PRAYED TO ALLOW THE EXPENDITURE AS CLAIMED BY THE ASSESSEE. AT THE OUT SET, LD. SR. D.R. VEHEMENTLY RELIED UPON THE ORDER OF CIT(A). 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. AS PER CONTRACT MADE BETWEEN THE PARTIES, THE ASSESSEE HAS TO REPAIR AND MAINTAIN THE TRANSFORMERS AND OTHER EQUIPMENTS. ACCORDINGLY, HE HAD MADE PROVISION FOR LIABILITY AND DEBITED THE EXPEND ITURE IN P&L ACCOUNT. ASSESSEE EVEN DID NOT HAVE SEPARATE REPAIR AND MAINTENANCE ACCOUNTS BUT HAD PROVED THAT IT INCURRED THE EXPENDITU RE OF REPAIR AND MAINTENANCE ON ACCOUNT OF PAST SUPPLY MADE TO THE D IFFERENT PARTIES. WHEN THE CONTRACT IS COMPLETE, AN EXCESS PROVISION IS REVERSED WHICH HAS BEEN DEMONSTRATED BY THE APPELLANT. THE PROVISION FO R WARRANTY IS ON SCIENTIFIC BASIS AND AS PER CONTRACT. THE ASSESSEE RELIED UP ON VARIOUS DECISIONS ARE ITA NO. 2559/AHD/12 A.Y. 09-10 PAGE 9 ALSO SQUARELY APPLICABLE AS ARGUED ABOVE. WE HAVE CONSIDERED VIEW THAT ASSESSEES METHOD OF ACCOUNTING FOR DEBITING THE EX PENSES ON ACCOUNT OF WARRANTY IS REQUIRED TO BE ACCEPTED. THUS, WE REVE RSE THE ORDER OF THE CIT(A) AND ALLOW THE ASSESSEES APPEAL ON ALL GROUNDS. 6. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 31.01.2014 SD/- SD/- ( D.K.TYAGI ) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA 1 1 1 1 ' '' ' )-2 )-2 )-2 )-2 320- 320- 320- 320- / COPY OF ORDER FORWARDED TO:- 1. %& / APPELLANT 2. )%& / RESPONDENT 3. - *7 / CONCERNED CIT 4. *7- / CIT (A) 5. 2; )-+ , , / DR, ITAT, AHMEDABAD 6. = >? / GUARD FILE. BY ORDER/ 1 , @/ B , $