D.C.I.T Cir - 11,Kolkata., Kolkata V. M/s Eastern Metec Pvt Ltd, Kolkata

ITA 411/KOL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 99858 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 28-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M K BISWAS JCIT SRDR
• Assessee Lawyers: S M SURANA
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 411 / KOL / 2013 ASSESSMENT YEAR :2009-10 DCIT CIR-1, KOL P-7, CHOWRINGHEE SQUARE, KOLKATA 700 069 V/S . M/S EASTERN METEC PVT. LTD., 121, HARISH MUKHERJEE ROAD, KOLKATA 700 026 [ PAN NO.AABCE 5871 H ] /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI M.K. BISWAS, JCIT-SR-DR /BY RESPONDENT SHRI S.M. SURANA, ADVOCATE /DATE OF HEARING 11-09-2015 /DATE OF PRONOUNCEMENT 07-10-2015 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER OF COMMISSIONER OF INCOME TAX (APPEALS)-XII, KOLKATA IN APPEAL NO.4 51/CIT(A)-XII/11/2011-12 DATED 29.11.2012. ASSESSMENT WAS FRAMED BY ACIT, RA NGE-11, KOLKATA U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REF ERRED TO AS THE ACT) VIDE HIS ORDER DATED 29.12.2011 FOR ASSESSMENT YEAR 2009 -10. REVENUE HAS THE FOLLOWING GROUNDS:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , LD. CIT(APPEALS) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE ON ACCOUNT OF MATERIAL WARRANTY OF RS.2,22,02,014/- WITHOUT APPRECIATING T HE FINDINGS OF THE AO ITA NO.411/KOL/2013 A.Y. 2009-10 DCIT CIR-11, KOL. V. M/S ESTERN METEC PVT. LT D. PAGE 2 AS WELL AS FACTS OF THE CASE THAT THE SAID EXPENSES IS NOTHING BUT CONTINGENT LIABILITY, WHICH IS NOT ALLOWABLE AS PER I.T. ACT, 1961. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD. CIT(A) WAS NOT JUSTIFIED IN RESTRICTING THE DISALLOWANCE TO 10% ON ACCOUNT OF OUTSTANDING LIABILITY WITHOUT APPRECIATING THE FIND INGS OF THE AO AS WELL AS FACTS OF CASE THAT THE ASSESSEE COULD NOT SUBSTA NTIATE THE GENUINENESS OF THE SUCH EXPENDITURE. 2. BRIEFLY STATED FACTS ARE THAT ASSESSEE IS PRIVAT E LIMITED COMPANY ENGAGED IN THE BUSINESS OF ENGINEERING, DESIGNING , DRAWING AND SUPPLY OF FURNACE SPARES. THE ASSESSEE FILED ITS RETURN OF IN COME DECLARING A PROFIT OF RS. 2,53,33,214/-. THE AO ON THE SCRUTINY OF PROFIT AND LOSS ACCOUNT NOTICED THAT THE ASSESSEE CLAIMED A PROVISION FOR A SUM OF RS. 2.22 CRORES BEING 5% OF THE SALES VOLUME AS MATERIAL WARRANTY CLAIM DURI NG THE YEAR. THE SAME AMOUNT OF PROVISION WAS ALSO SHOWN IN THE BALANCE S HEET AS OTHER LIABILITY. THE AO NOTICED THAT THE ASSESSEE IS CREATING PROVIS ION FOR EVERY YEAR AND CLAIMING THE EXPENSES FOR THE SAME ON YEAR TO YEAR BASIS FOR THE MATERIAL WARRANTY CLAIM. NO AMOUNT OF THE MONEY SPENT OUT OF THE PROVISION CREATED BY THE ASSESSEE FOR MATERIAL WARRANTY CLAIM TILL DATE. THE AO CALLS UPON THE ASSESSEE TO JUSTIFY THE CLAIM FOR MATERIAL WARRANTY , THE ASSESSEE SUBMITTED THAT THE ASSESSEE-COMPANY STARTED ITS OPERATION IN THE AY 2007-08 AND SELLING THE PRODUCTS WITH THE WARRANTY/ GUARANTEE FOR THE F IVE YEARS. SO IN CASE OF ANY DEFECT IN THE PRODUCT FOR THE NEXT FIVE YEARS THE A SSESSEE-COMPANY UNDERTAKES THE WARRANTY/ GUARANTEE TO REPAIR/REPLACE THE SAME AS THE CASE MAY BE. THEREFORE SUCH PROVISIONS WERE CREATED. HOWEVER THE ASSESSEE DISREGARDED THE CLAIM BY STATING THAT THESE PROVISIONS ARE MERE LY CONTINGENT LIABILITIES AND NO EXPENDITURE HAS BEEN INCURRED IN ACTUALLY SO FAR . THE AO HAS ALSO CITED THE CASE LAWS IN REGARD TO ASSESSEES CLAIM AS DETAILED BELOW:- HONBLE SUPREME COURT IN THE CASE OF SHRI SAJJAN MI LLS LTD. V, CIT 156 ITR 585 (SC) AND HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ROTORK CONTROLS INDIA LTD. (2007) 293 ITR 311 (MAD) ITA NO.411/KOL/2013 A.Y. 2009-10 DCIT CIR-11, KOL. V. M/S ESTERN METEC PVT. LT D. PAGE 3 BEFORE THE CIT(A) THE ASSESSEE HAS POINTED OUT THAT THE JUDGMENT OF THE HONBLE SUPREME COURT HAS REVERSED THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD. (SUPRA). THEREFORE THE LD. CIT(A) HAS ALLOWED THE APPEAL IN FAVOUR OF THE ASSESSEE. AGGRIEVED BY THIS ORDER OF LD. CIT(A) REVENUE CAME IN APPEAL BEF ORE US. 3. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS BEFORE US. BEFORE US LD. DR RELIED ON THE ORDERS OF AO WHE REAS LD. AR OF THE ASSESSEE SUBMITTED THE CASE LAW OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD (SUPRA) WHEREIN IT WAS HELD THAT THE ASSESSEE HAS BEEN MANUFACTURING AND SELLING VALVE ACTUATORS IN L ARGE NUMBER SINCE 1983- 84 ONWARDS. STATISTICAL DATA INDICATES THAT EVERY Y EAR SOME ACTUATORS FOUND TO BE DEFECTIVE. THE DATE OVER THE YEARS ALSO INDICATE THAT EVERY YEAR THAT, BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPARED TO BUY T HE VALVE ACTUATORS WITHOUT A WARRANTY. THEREFORE, WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS, WARRANTY STO OD ATTACHED TO THE SALE PRICE OF THE PRODUCT AND A RELIABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH WARRANTY WAS ALLOWABLE. IN THE AFORESAID MATTER TH E AO REJECTED THE CLAIM OF THE ASSESSEE CITING THE CASE LAW OF HONBLE MADRAS HIGH COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD . (SUPRA). THE AO DID NOT QUOTE THE CASE LAW OF THE HONBLE SUPREME COURT WHERE THE SAME CASE WAS REVER SED BY THE HONBLE SUPREME COURT WHEREIN THE PROVISION FOR WARRANTY WE RE ALLOWED. HOWEVER THE LD. CIT(A) HAS QUOTED THE SAME CASE IN HIS ORDER AN D ALLOWED ASSESSEES GROUND. WE FIND IN THE PRESENT CASE THE PAST HISTOR Y FOR THE CLAIM OF THE WARRANTY HAS NOT BEEN CONSIDERED BY THE LD. CIT(A). WE NEED TO HAVE THE HISTORICAL DATA TO WORK OUT THE PROVISION FOR WARRA NTY IN SCIENTIFIC MANNER. IT IS ALSO PERTINENT TO NOTE THAT THE ASSESSEE-COMPANY HA S EXCEEDED MORE THAN 5 YEARS OF EXPERIENCE. SO THE COMPANY MUST HAVE THE D ESIRED DATA TO WORK OUT THE BASE FOR THE PROVISION OF WARRANTY. SIMPLY ALLO WING THE ASSESSEE TO CREATE THE PROVISION @ 5% OF THE SALES DOES NOT SEEM APPRO PRIATE. IN VIEW OF THE ABOVE AND IN THE INTEREST OF JUSTICE, WE DEEM IT FI T TO RESTORE THE FILE TO THE AO ITA NO.411/KOL/2013 A.Y. 2009-10 DCIT CIR-11, KOL. V. M/S ESTERN METEC PVT. LT D. PAGE 4 FOR ALLOWING HIM TO CREATE THE PROVISIONS IN SCIENT IFIC MANNER. IN THE RESULT THIS GROUND OF REVENUES APPEAL IS ALLOWED FOR STATISTIC AL PURPOSE. 4. COMING TO REVENUES SECOND GROUND. DURING THE AS SESSMENT PROCEEDINGS ASSESSEE HAS SHOWN IN THE BALANCE SHEET FOR THE OUTSTANDING PAYABLE AS DETAILED BELOW:- SL.NO. HEAD OF ACCOUNT BALANCE SHEET P&L A/C FIGURES 1 JOB WORK 1,22,29,153/- 1,48,55,401/- 2 SITE EXPENSES 1,12,59,000/- 1,60,80,137/- 3 TRANSPORTATION CHARGES 1,07,67,890/- 2,33,93,067/ - DURING THE COURSE OF ASSESSMENT THE AO COULD VERIFY THE JOB WORK & SITE WORK EXPENSES AND TRANSPORT CHARGES ONLY TO THE EXTENT O F 30%. ON EXPLANATION BY THE AO FROM THE ASSESSEE, THE ASSESSEE COULD NOT SU BSTANTIATE THE GENUINENESS BY PRODUCING THE PROPER BILLS AND VOUCH ERS. THEREFORE THE AO HAS DISALLOWED THE EXPENSES APPEARING AS OUTSTANDIN G AT THE YEAR END TO THE TUNE OF 70%. (RS. 8560407.00 BEING 70% OF 1,48,55,4 01/- JOB WORK AND RS. 78,81,300/- BEING 70% OF 1,60,80,137/- SITE EXPENSE S AND RS.75,27,143/- TOWARDS THE TRANSPORTATION CHARGE). THE AO ADDED TH E EXPENSES DISALLOWED TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED, ASS ESSEE PREFERRED APPEAL BEFORE LD.CIT(A). BEFORE LD. CIT(A) THE AR HAS SUBM ITTED THAT THE ASSESSEE HAS TO INCUR VARIOUS EXPENSES AT VARIOUS SITES BY T AKING THE CASUAL LABOURS AND DEPLOYING LOCAL RESOURCES , SO IT MAY NOT BE PO SSIBLE ALL THE TIME TO GET PROPER BILLS FROM SUCH CASUAL LABOURS. ACCORDINGLY LD. CIT(A) RESTRICTED THE DISALLOWANCE OF THE AFORESAID EXPENSES TO 10%. AGGR IEVED BY THE ORDER OF LD. CIT(A) ON THE AFORESAID ISSUES, THE REVENUE PREFERR ED AN APPEAL BEFORE THE TRIBUNAL, RAISING GROUNDS SET OUT IN THE EARLIER PA RT OF THIS ORDER. 5. WE FIND THAT THE AO HAS DISALLOWED THE SAID EXPE NSES @ 70% ON AD HOC BASIS. THE REASON FOR THE DISALLOWANCE TO THE TUNE OF 70% IS THAT ASSESSEE COULD NOT PRODUCE THE NECESSARY DOCUMENTS. IT APPEARS TO US THAT THE DISALLOWANCE TO THE TRUE OF 70% DOES NOT HOLD A NY MERIT AS IT IS VERY MUCH ITA NO.411/KOL/2013 A.Y. 2009-10 DCIT CIR-11, KOL. V. M/S ESTERN METEC PVT. LT D. PAGE 5 ON THE HIGHER SIDE. UNDER THE NORMAL CONDITION OF THE MANUFACTURING BUSINESS WHERE LABOUR IS INVOLVED, THE LABOUR COST CONSTITUT E THE SIGNIFICANCE COST OF THE TOTAL COST. THEREFORE, CONSIDERING THE SIZE OF THE BUSINESS AND THE LABOUR COST, WE ARE INCLINED NOT TO INTERFERE IN THE ORDER OF TH E LD. CIT(A). 6. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT 07/ 10/2015 SD/- SD/- (N.V.VASUDEVAN) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP !- 07 /10/2015 / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT-DCIT CIR-11, P-7, CHOWRINGHEE SQ. KOLK ATA-69 2. / RESPONDENT- M/S EASTERN METEC PVT. LT., 121, HAR ISH MUKHERJEE RD, KOL-26 3. * +, - - . / CONCERNED CIT KOLKATA 4. - - .- / CIT (A) KOLKATA 5. 012 33+,, - +, , / DR, ITAT, KOLKATA 6. 267 / GUARD FILE. BY ORDER/ - , /TRUE COPY/ / - +, ,