Switzer Instrument Ltd., CHENNAI V. ACIT, CHENNAI

ITA 343/CHNY/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9506 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 17-03-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 25-02-2013
• Court: TRIBUNAL
• Department Lawyers: SUNDAR RAO
• Assessee Lawyers: R VIJAYARAGHAVAN

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ! ' . #$ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NO. 317/MDS/2013 / ASSESSMENT YEAR : 2006-07 THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-VI(4), CHENNAI 600 034. (/ APPELLANT) V. M/S. SWITZER INSTRUMENTS LTD., 29(OLD NO.14), THANIKACHALAM ROAD, T. NAGAR, CHENNAI 600 017. PAN AAKCS6322G (/ RESPONDENT) AND ./ ITA NO. 343/MDS/2013 / ASSESSMENT YEAR : 2006-07 M/S. SWITZER INSTRUMENTS LTD., CHENNAI 17. (/ APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CHENNAI 600 017. ( / RESPONDENT) DEPARTMENT BY : SHRI SUNDAR RAO, CIT ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE !' / DATE OF HEARING : 17.03.2016 #$ !' / DATE OF PRONOUNCEMENT: 27.04.2016 - - ITA 317 & 343/1 3 2 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS BY THE ASSESSEE AND BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COM MISSIONER OF INCOME-TAX(APPEALS) DATED 30.11.2012 FOR THE ASSESS MENT YEAR 2006-07. 2. THE GROUND RAISED BY THE REVENUE IT IS APPEAL IS THAT THE CIT(APPEALS) HAS ERRED IN DELETING THE DISALLOWANCE OF PROVISION FOR WARRANTY OF ` 56,45,187/- RELYING UPON THE ITAT ORDER IN THE ASSESSEES OWN CASE FOR THE A.Y. 2007-08 IN ITA NO.1005/MDS/2011 DATED 15.9.2011. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSING OFF ICER HAS DISALLOWED THE PROVISION OF WARRANTY AS THERE IS NO SCIENTIFIC BASIS FOR CALCULATING THE PROVISION AND IN ALLOCATI NG THE WARRANTY PROVISIONS MADE; THERE IS HUGE DIFFERENCE BETWEEN A CTUAL EXPENDITURE INCURRED TOWARDS THE WARRANTY IN THE AY 2006-07 AND 2007-08 (I.E. ` 4,65,346/- AND ` 25,18,481/- RESPECTIVELY), THOUGH THE ASSESSEE FURNISHED XEROX COPIES OF THE O RDER OF THE ITAT, C BENCH, CHENNAI IN ASSESSEES OWN CASE FOR THE - - ITA 317 & 343/1 3 3 IMMEDIATE SUCCEEDING ASSESSMENT YEAR 2007-08 AND SU BMITTED THAT THE ISSUE UNDER APPEAL HAS BEEN ADJUDICATED BY THE JURISDICTIONAL ITAT CONFIRMING THE ORDER OF THE THE N CIT(APPEALS) DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE. AGA INST THIS, THE ASSESSEE CARRIED THE MATTER BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS), WHO FOLLOWING THE ORDER OF THE TRIBUNAL ALLOWED THIS GROUND OF APPEAL. AGGRIEVED, THE REVE NUE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD. SIMILAR ISSUE WAS CONSIDERED BY THIS TR IBUNAL IN ASSESSEES OWN CASE FOR THE AY 2007-08. THE TRIBUN AL VIDE ORDER DATED 15.9.2011, IT WAS HELD AS FOLLOWS : 10. IN THE PRESENT CASE, IT IS VERY CLEAR THAT THE ASSESSEE HAD INCURRED WARRANTY EXPENDITURE IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. IT IS TO BE SEEN THAT THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE IN THE RELEVANT PREVIOUS YEAR WAS HIGHER THAN THE PROVISION AVAILAB LE IN ITS ACCOUNTS AT THE BEGINNING OF THE PREVIOUS YEAR. THI S FACT ESTABLISHES THAT THE WARRANTY OBLIGATION OF THE ASS ESSEE IS NOT A CONTINGENT LIABILITY BUT IN FACT IT IS AN ACTUAL LI ABILITY. ACTUAL LIABILITY IS TO BE PROVIDED IN THE ACCOUNTS IN THE FORM OF A PROVISION. THE ASSESSEE HAS MADE A PROVISION OF ` 69,37,199/- FOR THE IMPUGNED ASSESSMENT YEAR. THIS SHOULD BE VI EWED AGAINST THE ACTUAL EXPENDITURE INCURRED IN THE RELE VANT PREVIOUS YEAR AT ` 76,98,322/-. THIS SIMPLE FIGURE ITSELF MAKES OUT A PRIMA FACIE CASE THAT THE ASSESSEE HAS PROVIDED FOR ACTUAL LIABILITY AND THE LIABILITY CANNOT BE TREATED AS CO NTINGENT IN NATURE AND ALSO THE QUANTUM PROVIDED BY THE ASSESSEE IS - - ITA 317 & 343/1 3 4 FAIRLY REASONABLE. 11. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE F IND THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS RIGHTLY DEL ETED THE DISALLOWANCE MADE BY THE ASSESSING AUTHORITY. ACCOR DINGLY, THE GROUND RELATING TO THE ISSUE OF PROVISION FOR WARRA NTY IS DECIDED AGAINST THE REVENUE. BEING SO, IN OUR OPINION, THE CIT(APPEALS) HAS RIGH TLY DELETED THE DISALLOWANCE BY FOLLOWING THE ABOVE ORDER OF THE TR IBUNAL. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(APPEALS). 5. THE GROUND RAISED BY THE ASSESSEE IN ITS APPEAL IS THAT THE CIT(APPEALS) ERRED IN CONFIRMING THE ADDITION O F ` 13,16,93,701/- BEING THE OUTSTANDING LIABILITIES DI RECTLY TRANSFERRED TO REVENUE RESERVE ACCOUNT IN THE BALAN CE SHEET UNDER THE NORMAL PROVISION OF THE INCOME-TAX. 6. IN THIS CASE, THE AO MADE THE ADDITION, SINCE TH E ASSESSEE HAS NOT FURNISHED ANY DETAILS SHOWING THE EXPENSES OF THAT LIABILITY, EVEN AFTER REMITTING THE ISSUE BY THE CIT U/S.263 OF THE ACT. BEFORE THE CIT(APPEALS) ALSO, THE ASSESSE E HAS NOT PLACED ANY EVIDENCE TO SHOW THAT THE EXPENSES OF LI ABILITY OUTSTANDING IS ` 13,16,93,702/-. HENCE. THE CIT(APPEALS) OBSERVED THAT THE ABOVE LIABILITY REMAINED STRATEG IC STAND - - ITA 317 & 343/1 3 5 WITHOUT ANY OPERATION FOR A LONG PERIOD AND THERE I S NO CLAIM FROM ANYBODY TOWARDS THIS LIABILITY. FURTHER, THE ASSESSEE HAS TRANSFERRED THE ABOVE AMOUNT TO THE GENERAL RESERVE IN THE BALANCES SHEET NOT BRINGING THE SAME TO THE PROFIT AND LOSS ACCOUNT. IN SUCH CIRCUMSTANCES, THE REVENUE AUTHOR ITIES ARE JUSTIFIED IN TREATING IT AS ITS LIABILITY IN VIEW O F THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT V. T.V.SUNDARAM IY ENGAR & SONS LTD.(222 ITR 344), WHEREIN IT WAS OBSERVED AS UNDER : .THAT IF A COMMONSENSE VIEW OF THE MATTER WERE TA KEN, THE ASSESSEE, BECAUSE OF THE TRADING OPERATION, HAD BECOME RICHER BY THE AMOUNT WHICH IT TRANSFERRED TO ITS PROFIT AND LOSS ACCOUNT. THE MONEYS HAD ARISEN OUT OF ORDINARY TRADING TRANSACTIONS. ALTHOUGH THE AMOUNT S RECEIVED ORIGINALLY WERE NOT OF INCOME NATURE, THE AMOUNTS REMAINED WITH THE ASSESSEE FOR A LONG PERIO D UNCLAIMED BY THE TRADE PARTIES. BY LAPSE OF TIME, THE CLAIM OF THE DEPOSIT BECAME TIME-BARRED AND THE AMO UNT ATTAINED A TOTALLY DIFFERENT QUALITY. IT BECAME A DEFINITE TRADE SURPLUS. THE ASSESSE ITSELF HAD TREATED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THE AMOUNTS WERE ASSESSABLE IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE DO NO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(APPEALS). 7. THE NEXT GROUND IN THE ASSESSEES APPEAL IS THAT THE CIT(APPEALS) ERRED IN CONFIRMING THE ADDITION OF ` 14,68,82,346/- CREDITED DIRECTLY TO THE CAPITAL RESERVE ACCOUNT WH ICH PERTAINS TO - - ITA 317 & 343/1 3 6 THE SURPLUS ARISING FROM THE REVALUATION OF THE FIX ED ASSETS AND AN AMOUNT OF ` 13,16,93,701/- TO THE REVENUE RESERVE ACCOUNT WHILE COMPUTING THE BOOK PROFIT UNDER CLAUSE (B) TO EXPLANATION U/S.115JB(2). 8. THE ASSESSEE DIRECTLY TRANSFERRED A SUM OF ` 14,68,82,346/- TO THE CAPITAL RESERVE ACCOUNT ON RE VALUATION OF ASSETS AND ALSO TRANSFERRED A SUM OF ` 13,16,93,702/- TO THE REVENUE RESERVE ACCOUNT. THE ASSESSING OFFICER CON SIDERED THIS AMOUNT AS PART OF BOOK PROFIT U/S.115JB OF THE ACT. AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS) , WHO CONFIRMED THE FINDING OF THE AO. AGGRIEVED, THE A SSESSEE IS IN APPEAL BEFORE US. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN OUR OPINION, THE BOMBAY HIGH COURT I N THE CASE OF CIT V. VEEKAYLAL INVESTMENT CO. P. LTD. (249 ITR 59 7) HELD AS FOLLOWS: 'A PLAIN READING OF SECTION 115J SHOWS THAT IF THE ASSESSEE IS A COMPANY AND ITS TOTAL INCOME UNDER THE ACT IS LESS THAN 30 PER CENT OF ITS BOOK PROFITS, THEN, FICTIONALLY, IT WILL BE DEE MED THAT ITS TOTAL INCOME CHARGEABLE TO TAX WOULD BE AN AMOUNT EQUAL TO 30 PER CENT OF SUCH BOOK PROFITS. HENCE, IN SUCH A CASE, THE TOTAL INCOME OF THE ASSESSEE IS FIRST REQUIRED TO BE COMPUTED - - ITA 317 & 343/1 3 7 UNDER THE ACT AND IF THE TOTAL INCOME SO COMPUTED IS LESS THAN 30 PER CENT OF THE BOOK PROFITS, THEN THE PROFIT AND LOSS ACCOUNT SHALL HAVE TO BE PREPARED IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI OF THE COMPANIES ACT. THE IMPORTANT THING TO BE NOTED IS THAT WHILE CALCULATING THE TOT AL INCOME UNDER THE ACT, THE ASSESSEE IS REQUIRED TO TAKE INTO ACCOUNT INCOME BY WAY OF CAPITAL GAINS UNDER SECTION 45. IN THE CIRCUMSTANCES, ONE FAILED TO UNDERSTAND AS TO HOW IN COMPUTING THE BOOK PROFITS UNDER THE COMPANIES ACT, THE ASSESSEE-COMPANY CANNOT CONSIDER CAPITAL GAINS FOR THE PURPOSES OF COMPUTING BOOK PROFITS UNDER SECTION 115J. FURTHER, UNDER CLAUSE (2) OF PART II OF SCHEDULE VI TO THE COMPANIES ACT WHERE A COMPANY RECEIVES THE AMOUNT ON ACCOUNT OF SURRENDER OF LEASEHOLD RIGHTS, THE COMPANY IS BOUND TO DISCLOSE IN THE PROFIT AND LOSS ACCOUNT THE SAID AMOUNT AS NON-RECURRING TRANSACTION OR A TRANSACTION OF AN EXCEPTIONAL NATURE IRRESPECTIVE OF ITS NATURE, I.E., WHETHER CAPITAL OR REVENUE. IT WOULD BE INAPPROPRIATE TO DIRECTLY TRANSFER SUCH AMOUNT TO CAPITAL RESERVE. SUCH RECEIPTS ARE ALSO COVERED BY CLAUSE 2(B) OF PART II OF SCHEDULE-VI OF THE COMPANIES ACT WHICH, INTER ALIA, STATES THAT PROFIT AND LOSS ACCOUNT SHALL DISCLOSE EVERY MATERIAL FEATURE, INCLUDING CREDITS OR RECEIPTS AND DEBITS OR EXPENSES IN RESPECT OF NON-RECURRING TRANSACTIONS OR TRANSACTIONS OF AN EXCEPTIONAL NATURE. LASTLY, EVEN UNDER CLAUSE 3(XII)(B) PROFITS OR LOSSES IN RESPECT OF TRANSACTIONS NOT USUALLY UNDERTAKEN BY THE COMPANY OR UNDERTAKEN IN CIRCUMSTANCES OF EXCEPTIONAL OR NON-RECURRING NATURE SHOW CLEARLY THAT; CAPITAL GAINS SHOULD BE INCLUDED FOR THE PURPOSES OF COMPUTING BOOK PROFITS. CAPITAL GAINS WOULD CERTAINLY BE ONE OF THE VARIOUS ITEMS WHOSE INFORMATION IS REQUIRED TO BE GIVEN TO THE SHARE- HOLDERS UNDER THE SAID CLAUSE 3{XII)(B). SO ALSO, THE DISCLOSURE IS REQUIRED TO BE MADE IN RESPECT OF INVESTMENT IN - - ITA 317 & 343/1 3 8 THE CAPITAL OF A PARTNERSHIP FIRM IF THE COMPANY IS PARTNER ON THE DATE OF THE BALANCE SHEET. SIMILARLY, PROFITS OR LOSSES ON SUCH INVESTMENTS ARE ALSO REQUIRED TO BE DISCLOSED. (CLAUSE 3(XII)(A) OF PART II OF SCHEDULE-VI OF THE COMPANIES ACT.) THE INCOME FROM CAPITAL GAINS SHOULD, THEREFORE, BE INCLUDED FOR THE PURPOSES OF COMPUTING BOOK PROFITS UNDER SECTION 115J..' 10. AS IS SEEN FROM THE JUDGMENT OF THE ABOVE HIGH COURT, IT HAS TAKEN INTO CONSIDERATION THE PROVISIO NS OF PART II AND PART III OF SCHEDULE VI OF THE COMPANIE S ACT AND HAS HELD THAT EVEN THE INCOME OF EXTRA ORDINARY NATURE HAS TO BE TAKEN OR ROUTED THROUGH T HE PROFIT AND LOSS ACCOUNT AND IF THAT IS NOT DONE THE N THE PROFITS WOULD NOT BE IN ACCORDANCE WITH THE PROVISI ONS OF SCHEDULE VI OF THE COMPANIES ACT. THIS IS WHAT EXACTLY HAS BEEN HELD BY THE SUPREME COURT IN THE CASE OF APOLLO TYRES VS. CIT (255 ITR 273) THAT THE AO HAS NO POWERS TO RECAST THE PROFITS FOR THE PURPOSES OF COMPUTING BOOK PROFITS UNDER THE PROVISIONS OF SECTION 115J OF THE ACT IF SUCH PROFI T HAVE BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SCHEDULE VI OF THE COMPANIES ACT. HOWEVER, IF THE SAID PROFITS ARE NOT AS PER THE - - ITA 317 & 343/1 3 9 PROVISIONS OF SCHEDULE VI OF THE COMPANIES ACT, THE AO IS NOT ONLY WITHIN HIS RIGHTS BUT ALSO DUTY BOUN D TO WORK OUT SUCH PROFITS IN ACCORDANCE WITH THE PROVISIONS OF SCHEDULE VI OF THE COMPANIES ACT FOR THE PURPOSES OF COMPUTING BOOK PROFIT UNDER THE PROVISIONS OF SECTION 115J OF THE ACT. 11. IT HAS BEEN ALREADY HELD ABOVE THAT THE AMOUNT OF ` 13,16,93,720/- TRANSFERRED TO REVENUE RESERVE ACCOUNT WITHOUT ROUTING IT THROUGH THE PROFIT AND L OSS ACCOUNT IS PROFIT OF THE ASSESSEE. THIS AMOUNTS TRANSFERRED BY THE ASSESSEE-COMPANY TO THE GENERAL RESERVE HAS OBVIOUSLY BEEN TREATED TO BE THE PROFIT S. THEREFORE, IT HAS TO BE TREATED AS PART OF THE PROF ITS FOR THE PURPOSES OF THE PROVISIONS OF SEC.115JB OF THE ACT. SIMILARLY, THE ASSESSEE COMPANY HAD CREDITED AMOUNT OF ` 14,68,82,346 DIRECTLY TO THE CAPITAL RESERVE ACCOUNT. AS PER CLAUSE (B) OF EXPLANATION 1 TO SEC.115JB, BOOK PROFITS MEANS THE NET PROFIT A S SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVA NT PREVIOUS YEAR AS INCREASED BY THE AMOUNTS CARRIED T O - - ITA 317 & 343/1 3 10 ANY RESERVES BY WHATEVER NAME CALLED. 12. IN VIEW OF THE CLEAR PROVISIONS OF SEC.115JB OF THE ACT, WE DO NOT FIND ANY REASON TO INTERFERE WIT H THE ORDER OF THE CIT(APPEALS). ACCORDINGLY, WE CONFIRM THE ORDER OF THE CIT(APPEALS) ON THIS GROUND. 13. IN THE RESULT, THE APPEALS OF THE REVENUE AND THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 27 TH OF APRIL, 2016 AT CHENNAI. SD/- SD/- ( % & . ' ()* ) ( + , - .! ) ( DUVVURU RL REDDY ) (CHANDRA POOJARI) : ;< /JUDICIAL MEMBER (' ;