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

ITA 3560/DEL/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9719 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-07-2009
• Assessment Year: 2002-2003
• Appeal Filed On: 02-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: STEPHEN GEORGE
• Keywords: Set aside
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH `A : NEW DELHI) BEFORE SHRI D.R.SINGH, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER ITA NO.3560/DEL./2008 (ASSESSMENT YEAR : 2002-03) DCIT, CIRCLE 1(1), VS. M/S EICHER MOTORS LTD., NEW DELHI. 12, COMMERCIAL COMPLEX, G.K.-II, NEW DELHI. (PAN/GIR NO.AAACE3882D) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, ADV. & GAURAV JAIN. REVENUE BY : SHRI STEPHEN GEORGE, CIT(DR) ORDER PER K.D. RANJAN: AM THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 20 02-03 ARISE OUT OF THE ORDER OF CIT(A)-XIII, NEW DELHI. 2. THE ONLY ISSUE FOR CONSIDERATION RELATES TO DELE TING THE ADDITION OF RS.241.33 LAKH MADE ON ACCOUNT OF PROVISIONS FOR WARRANTY. THE FA CTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF AN AMOUNT OF RS.648.66 LAKHS ON ACCOUNT OF WARRANTY INCLUSIVE OF PROVISION FOR WARRANTY OF RS. 241.33 LAKH. THE ASSESSING OFFICER OBSERVED THAT SINCE THE ASSESSEE HAD NOT FURNISHED ANY MATERIAL TO SHOW THE ACTUAL WORKING OF PROVISION, THE AMOUNT OF RS.241.33 LAKH WAS NOT ALLOWABLE. THIS DISALLOWANCE WAS CONFIRMED BY THE COMMISSIONER OF I NCOME-TAX (APPEALS). SUBSEQUENTLY, THE TRIBUNAL RESTORED THE ISSUE TO TH E FILE OF ASSESSING OFFICER WITH THE DIRECTIONS THAT THE BASIS FOR DISALLOWED AMOUNT SHO ULD BE ASCERTAINED AFTER SEEKING CLARIFICATION REGARDING THE FIGURES. 3. THE ASSESSING OFFICER AS DIRECTED BY THE TRIBUNA L EXAMINED THE MATTER. THE ASSESSEE VIDE LETTER DATED 12.12.2006 SUBMITTED THA T THE CALCULATION OF PROVISION FOR WARRANTY HAD BEEN MADE @ 0.73% ON THE SALES FOR ASS ESSMENT YEAR 2002-03 BASED ON ACTUAL WARRANTY CLAIMED TO HAVE BEEN PAID IN THREE EARLIER YEARS. THE TOTAL WARRANTY CLAIMED WERE AT RS.717 LAKH FOR FINANCIAL YEARS 199 8-99 TO 2000-01 AND THE TOTAL TURNOVER I.T.A. NO.3560/DEL./2008 (A.Y. : 2002-03) 2 FOR LAST THREE YEARS WAS RS.98,654 LAKH. THUS, THE PERCENTAGE OF WARRANTY PAID WAS 0.73% AND THE PROVISIONS ON THIS BASIS FOR THE YEAR UNDER CONSIDERATION WAS AT RS.360.33 LAKH. ADDITIONAL PROVISION OF RS.223 LAKH WAS MADE FOR WARRANTY EXPENSES TO BE INCURRED FOR CONNECTING RODS REPLACEMENT AND RS.26 LAKH FOR ONE YEAR ADDITIONAL WARRANTY FOR HCV. THUS, IT HAD MADE A TOTAL PROVISION OF RS.609 .77 LAKH OUT OF THE WARRANTY CLAIMED OF RS.368.44 LAKH SETTLED DURING THE YEAR. NET PRO VISION FOR WARRANTY OF RS.241.33 LAKH REMAINED WHICH WAS CLAIMED AS DEDUCTION. THIS ARGU MENT OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER ON THE GROUND THAT THE PRO VISION WAS MADE ONLY ON THE LAST YEARS FIGURES. THERE WAS NO BASIS FOR CLAIMING ADDITIONA L PROVISION AND FOR ONE YEAR ADDITIONAL WARRANTY FOR HCV. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE FURNISHED CALCULATION BASED ON EARLIER YEARS CLAIM. THE ASSE SSING OFFICER WAS OF THE OPINION THAT PROVISION WAS MADE IN RESPECT OF LIABILITY WHICH WA S NEITHER CRYSTALLIZED NOR IT COULD BE SAID THAT IT WOULD ARISE. THEREFORE, THE PROVISION WAS FOR UNASCERTAINED LIABILITY AND WAS NOT ALLOWABLD AS DEDUCTION. 4. ON APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), IT WAS SUBMITTED THAT THE ASSESSEE HAD RECURRING LIABILITY OF WARRAN TY TO THE EXTENT OF UN-EXPIRED PORTION OF WARRANTY PERIOD. THE ASSESSEE FOLLOWED THE CONSIST ENT METHOD OF PROVIDING FOR WARRANTY LIABILITY WHICH WAS IN LINE WITH THE MERCANTILE SYS TEM OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE THEREBY THE EXPENSES AND INCOME WERE TO BE MATCHED, TO CORRECTLY REFLECTED THE COST OF GOODS SOLD AND LIABILITY IN RESPECT OF AFORESAID AMOUNT ACCRUED IMMEDIATELY ON SALE OF GOODS. PROVISION FOR WARRANTY WAS MADE ON SCIENTIFIC METHOD AFTER CONSIDERING THE ACTUAL SALE AND ACTUAL WARRANTY CLAIMED DURING THE THREE YEARS IMMEDIATELY PRECEDING ASSESSMENT YEAR 2002-03. LD.AR OF THE ASSESSEE PLA CED RELIANCE ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF BHARAT EARTH MOVE RS VS. CIT, 112 TAXMAN 61. THE RELIANCE WAS ALSO PACED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF VINITEC CORPORATION PVT. LTD., 278 ITR 337, WHEREI N IT HAS BEEN HELD THE PROVISION FOR WARRANTY CLAIMED ON RATIONAL BASIS IS ADMISSIBLE DE DUCTION. 5. COMMISSIONER OF INCOME-TAX (APPEALS) ON CONSIDER ATION OF THE FACTS AND THE SUBMISSIONS MADE BY THE ASSESSEE OBSERVED THAT THE TRIBUNAL SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH DIRECTION TO VER IFY THE METHOD OF CALCULATION AS WELL AS DOCUMENTARY EVIDENCES IN SUPPORT OF CLAIM MADE BY T HE ASSESSEE. THE ASSESSING OFFICER I.T.A. NO.3560/DEL./2008 (A.Y. : 2002-03) 3 HAD NOT PROVIDED ANY FINDING WHICH CHALLENGES CONSI STENT METHODOLOGY BEING FOLLOWED BY THE ASSESSEE FOR PROVIDING PROVISION FOR WARRANT Y. NEITHER ANY OF THE DOCUMENTS OR CALCULATION SUBMITTED BY THE ASSESSEE HAD BEEN CHAL LENGED. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ONLY ON THE GR OUND THAT PROVISION MADE BY THE ASSESSEE WAS NOT IN RESPECT OF ASCERTAINED LIABILI TY. THE COMMISSIONER OF INCOME-TAX (APPEALS) RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF VINITEC CORPORATION PVT. LTD. (SUPRA) AND THE DECISION OF H ONBLE SUPREME COURT IN BHARAT EARTH MOVERS(SUPRA) AND OTHER DECISION, HELD THAT PROVISI ON MADE BY THE ASSESSEE ON THE BASIS OF PAST CLAIMS COULD NOT BE TREATED AS PROVISION FO R ASCERTAIND LIABILITY. HE ACCORDINGLY DELETED THE ADDITION. 6. BEFORE US, LD.DR SUPPORTED THE ORDER OF THE ASS ESSING OFFICER AND ON THE OTHER HAND, LD.AR OF THE ASSESSEE SUBMITTED THAT PROV ISION FOR WARRANTY WAS MADE ON THE BASIS OF CLAIMS RECEIVED BY THE ASSESSEE FOR LAST T HREE YEARS. 7. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD CAREFULLY. IN THE CASE BEFORE US, THE ASSESSEE HAS BEEN MAKING PROVISION IN RESPECT OF WARRANTY ON THE BASIS OF PAST HISTORY OF THE CASE. THE ASSESSEE HAD ALSO PROVIDED ADDITIONAL WARRANTY IN RESPECT OF HEAVY COMMERCIAL VEHICLE AND WARRANTY FOR CONCORD (MOTOR PARTS REPLACEMENT). THE ESTIMATION OF LIAB ILITY FOR WARRANTY IS BASED ON PAST HISTORY OF THE CASE. THEREFORE, THE ISSUE IS COVER ED SQUARELY BY THE DECISION OF HON'BLE APEX COURT IN THE CASE OF BHARAT EARTH MOVERS (SUPR A) WHEREIN HON'BLE APEX COURT HELD AS UNDER: IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN T HE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY BE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT WOULD BE ASCERTAINED IS THE IN CURRING ANY LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUI REMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN PRAES ENTI THAT IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF TH E FUTURE DATE OF WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAI N. HON'BLE APEX COURT IN RECENT DECISION IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT, 314 ITR 62 HELD AS UNDER: THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION U/S 37. THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT LIABI LITY IS NOT THE NORMAL RULE. IT I.T.A. NO.3560/DEL./2008 (A.Y. : 2002-03) 4 WOULD DEPEND ON THE NATURE OF BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC ME THOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HIS TORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WH EN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION ; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF AN AMOUNT OF THE OBLIGATION. IF THESE CO NDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE OF NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTURED IN THE PAST AND THE FACTS SHOW THAT DEFECT EXISTED IN SOME OF THE ITEMS MANUFACTURED AN D SOLD, THEN PROVISION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPT U/S 37 8. FROM ABOVE DECISIONS OF THE HON'BLE APEX COURT, IT IS CLEAR THAT PROVISION FOR WARRANTY HAS TO BE ESTIMATED ON SCIENTIFIC METHOD. IN THE CASE BEFORE US, THE ASSESSEE HAD ESTIMATED, THE PROVISION FOR WARRANTY ON THE BASIS OF PAST HISTORY THEREFORE, THE ESTIMATE FOR WARRANTY MADE BY THE ASSESSEE ON THE PAST HISTO RY OF THE CASE CANNOT BE TREATED A PROVISION FOR UNASCERTAINED LIABILITY. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HON'BLE APEX COURT IN THE CASE OF BHARAT EARTH MOVE RS (SUPRA) AND THE LATEST DECISION OF HON'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS I NDIA (P) LTD. VS. CIT (SUPRA), 314 ITR 62. RESPECTFULLY FOLLOWING THE PRECEDENT, IT I S HELD THAT THE PROVISION FOR WARRANTY IS ALLOWABLE AS DEDUCTION AND ACCORDINGLY WE DO NOT FI ND ANY INFIRMITY IN THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN DELE TING THE ADDITION. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. 10. ORDER PRONOUNCED IN OPEN COURT ON 18.09.2009. [ D.R. SINGH ] [ K. D. RANJA N ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : SEPT. 18, 2009. *SKB* I.T.A. NO.3560/DEL./2008 (A.Y. : 2002-03) 5 COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS)-XIII, NEW DELHI. 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT.