M/s. WARTSILA INDIA LTD., NAVI MUMBAI V. DCIT Rg. - 3(3), MUMBAI

ITA 4160/MUM/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8316 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 01-03-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 11-06-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A R BAIULAR
• Assessee Lawyers: J D MISTRY MR SANJIV M SHAH
• Keywords: Search and seizure; Speculation loss; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI V. DURGA RAO , J.M. ITA NO. 4160/MUM/2008 ASSESSMENT YEAR: 2003-04 WARTSILA INDIA LTD., APPELLANT 48, NECO CHAMBERS, SECTOR-11, CBD BELAPUR, NEW MUMBAI 400 614 (PAN AAACW0345D) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT RANGE 3(3), AAYAKAR BHAVAN, MUMBAI. APPELLANT BY : MR. J.D. MISTRY MR. SANJIV M. SHAH RESPONDENT BY : MR. A.R. BAIULAR . ORDER PER V. DURGA RAO, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)- XXXII, MUMBAI, PASSED ON 17/03/2008 FOR THE ASSESSMENT YEAR 2003-04. 2. GROUND NO. A IS IN RESPECT OF PROVISION FOR TRAD E GUARANTEES OF RS. 1,36,82,644/-. 3. BRIEFLY THE FACTS RELATING TO RAISE THIS GROUND ARE THAT THE AO NOTICED THAT THE ASSESSEE HAD CLAIMED RS. 1,36,82,6 44/- AS PROVISION FOR TRADE GUARANTEES UNDER THE HEAD OPERATING & AD MINISTRATIVE EXPENSES. ON BEING ASKED TO JUSTIFY THE CLAIM BY TH E AO BY TAKING INTO CONSIDERATION THE ASSESSMENT ORDERS FOR EARLIER YEA RS WHERE THE CLAIM ITA NO. 4160/MUM/08 WARTSILA INDIA LTD. 2 OF THE ASESSSEE WAS DISALLOWED BY HOLDING THAT THE PROVISION FOR TRADE GUARANTEE WAS A CONTINGENT LIABILITY. IN REPLY, IT WAS CLAIMED BY THE ASSESSEE THAT THIS WAS NOT A CONTINGENT LIABILITY, FOR WHICH HE PLACED RELIANCE ON VARIOUS DECISIONS OF ITAT, MUMBAI INCLU DING THE CASE OF BHARAT EARTH MOVERS, 245 ITR 428 (SC). THE AO NOTIC ED THAT SIMILAR EXPLANATION WAS NOT ACCEPTED IN EARLIER YEARS AND T HE DISALLOWANCE ALSO CONFIRMED AT FIRST APPELLATE LEVEL. AFTER CONS IDERING THE SUBMISSIONS OF THE ASSESSEE, THE AO NOTED THAT WHAT IS DEBITED TO PROFIT & LOSS ACCOUNT WAS PURELY IN THE NATURE OF P ROVISION, WHICH IS NOT ALLOWABLE UNDER THE INCOME TAX ACT, AS A PROVIS ION IS IN THE NATURE OF SETTING APART SOME AMOUNT FOR MEETING THE CONTINGENCY ARISING OUT OF CERTAIN DEFECTS IN THE PRODUCT SOLD BY THE ASSESSEE COMPANY. SINCE THE CLAIM OF THE ASESSSEE IS IN THE NATURE OF CONTINGENT LIABILITY, THE PROVISION SO DEBITED WAS DISALLOWED BY THE AO. ON APPEAL, THE CIT(A) CONFIRMED THE DISALLOWANC E MADE BY THE AO FOLLOWING HIS PREDECESSORS ORDERS IN THE EARLIER YE ARS. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE IT AT. 4. BEFORE US, THE LEARNED COUNSEL FOR THE ASESSSEE HAS CANVASSED THAT THE ISSUE IS COVERED BY THE DECISION OF THE IT AT, MUMBAI BENCHES IN ASSESSEES OWN CASE FOR AY 2004-05 IN ITA NO. 71 14/MUM/2008 VIDE ITS ORDER DATED 26 TH FEBRUARY, 2010. A COPY OF THE SAID ORDER IS AVAILABLE ON RECORD. 5. THE LEARNED DR, ON THE OTHER HAND, HAS NOT CONT ROVERTED THE FACTS AVAILABLE ON RECORD. 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. WE FIND THAT THE ISSUE UNDER CO NSIDERATION IS COVERED BY THE DECISION OF THE ITAT IN ASESSEES OW N CASE (SUPRA) WHEREIN THE ITAT HELD AS UNDER:- 16. FROM THE ABOVE, IT IS EVIDENT THAT THE TRIBUNAL HAS CONCLUDED THAT SINCE SALE PROCEEDS COLLECTED BY THE ASSESSEE ITA NO. 4160/MUM/08 WARTSILA INDIA LTD. 3 INCLUDE AN APPROPRIATE AMOUNT AGAINST ANTICIPATED E XPENDITURE ON ACCOUNT OF AFTER SALE SERVICE, THEREFORE, IT WAS AN ASCERTAINED LIABILITY. THERE IS NO CHANGE IN THE FACTS IN THE P RESENT AY. FURTHER, THE ASESSSEE, IN THE STATEMENT OF FACTS FI LED BEFORE THE LEARNED CIT(A), HAS POINTED OUT THAT THE ASESSSEE I S ENGAGED IN THE BUSINESS OF ERECTING AND INSTALLING POWER PLANT , THE EQUIPMENT WHEREIN ARE HIGHLY SOPHISTICATED AND THUS CARRY WARRANTY. THEREFORE, AT THE TIME OF ENTERING INTO T HE CONTRACT OF SALE WITH ITS CUSTOMER, THE ASSESSEE PROVIDED A PER FORMANCE GUARANTEE TO MAKE GOOD THE DEFECTS FREE OF COST TO THE CUSTOMER. THEREFORE, AT THE TIME OF RECOGNIZING INCOME FOR DE TERMINING ITS TRUE AND FAIR PROFIT OF THE ASSESSEE MADE A PROVISI ON IN RESPECT OF SUCH PERFORMANCE GUARANTEE OBLIGATION IN ITS BOOKS OF ACCOUNT. ANY EXPENDITURE INCURRED ON SUCH GUARANTEE IS THEN DEBITED TO THE PROVISION ACCOUNT. ON THE EXPIRY OF THE PERIOD OF WARRANTY, THE BALANCE IN THE PROVISION ACCOUNT, IF ANY, IS WR ITTEN BACK TO THE P&L A/C AND IS OFFERED FOR TAX. THIS MODUS-OPERANDI HAS NOT BEEN DISPUTED BY THE DEPARTMENT. IT IS WELL SETTLED LAW THAT BY MAKING PROVISION, THE ASSESSEE IS NOT REQUIRED TO ASCERTAI N THE AMOUNT OF EXPENDITURE ACCURATELY BUT IF THE ASSESSEE IS TO DI SCHARGE CERTAIN OBLIGATION THEN THE PROVISION HAS TO BE MADE ON THE BASIS OF ESTIMATED AMOUNT. THIS, IN NO WAY, MAKES THE PROVIS ION AS A PROVISION FOR UNASCERTAINED LIABILITY. LIABILITY IS ASCERTAINED AND ITS QUANTIFICATION ONLY IS SUBJECT TO ACTUAL OUTCOM E OF THE OBLIGATION. BUT NEVERTHELESS THE PROVISION IS FOR A SCERTAINED LIABILITY. WE, ACCORDINGLY, FOLLOWING THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. VS. CIT AND OTHERS, 314 ITR 62 (SUPRA) AS WELL AS THE DECIS ION OF THE TRIBUNAL IN ASSESSEES OWN CASE, SET ASIDE THE ORDE R OF THE LEARNED CIT(A) ON THIS ISSUE AND ALLOW THE GROUND O F APPEAL. 7. SINCE THE ISSUE UNDER CONSIDERATION IS MATERIALL Y IDENTICAL TO THAT OF THE CASE DECIDED BY THE ITAT IN ASSESSEES OWN CASE FOR AY 2004-05, WE RESPECTFULLY FOLLOW THE SAME AND IN THE LIGHT OF THAT WE SET ASIDE THE ORDER OF THE CIT(A) AND ALLOW THIS GR OUND OF APPEAL OF THE ASSESSEE. 8. GROUND NO. B REGARDING DEDUCTION U/S 80 HHC HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US, THEREFORE, THE SAME IS DISMISSED AS NOT PRESSED. 9. GROUND NO. C IS IN RESPECT OF DISALLOWANCE OF SE T OFF OF LONG TERM CAPITAL LOSS OF RS. 18,16,899/-. ITA NO. 4160/MUM/08 WARTSILA INDIA LTD. 4 10. THE AO NOTICED THAT THE ASSESSEE HAD SET OFF BR OUGHT FORWARD LONG TERM CAPITAL LOSS OF RS. 18,16,899/- AGAINST S HORT TERM CAPITAL GAIN OF THE YEAR UNDER CONSIDERATION. ON BEING ASKE D TO SHOW CAUSE AS TO WHY THE AFORESAID CLAIM SHOULD NOT BE DISALLO WED, THE ASSESSEE STATED THAT THE AFORESAID CLAIM HAD BEEN MADE IN VI EW OF THE PROVISIONS OF ERSTWHILE SECTION 74 OF THE ACT. THOU GH THE ASSESSEE HAD ACKNOWLEDGED THE INTRODUCTION OF THE NEW SUB-SECTIO N (1) TO SECTION 74 OF THE ACT, THE ASSESSEE HAD TAKEN A PREPOSTEROU S INTERPRETATION THAT THE SECTION WILL BE PROSPECTIVELY, OR IN OTH ER WORDS IT HAD BEEN STATED THAT THE PROVISION OF SECTION 74(1) ARE ONLY APPLICABLE TO THE CARRY FORWARD AND SET OFF CAPITAL LOSSES OF ASSESSM ENT YEARS 2003-04 ON WORDS. THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DISCUSSED THE ISSUE WITH JUDGMENT OF THE HONBLE SU PREME COURT IN THE CASE OF VENKAT SWAMY NAIDU R. VS. NARASRAM NARA INDAS, AIR 1966 SC 361, DIALLOWED THE CLAIM OF SET OFF OF LONG TERM CAPITAL OF RS. 18,16,899/- WITH SHORT TERM CAPITAL GAIN OF RS. 18, 16,899/- IN VIEW OF THE NEWLY INSERTED PROVISIONS OF SECTION 74(1) VIDE AMENDMENT MADE BY THE FINANCE ACT, 2002, W.E.F. 01/04/2003. ON APP EAL, THE CIT(A) CONFIRMED THE ACTION OF THE AO. AGGRIEVED, THE ASSE SSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). 11. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSE E HAS FAIRLY CONCEDED THAT THE ISSUE UNDER CONSIDERATION IS COVE RED AGAINST THE ASSESSEE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AY 2004-05 (SUPRA). HOWEVER, THE LEARNED COUNSEL FOR T HE ASSESSEE HAS POINTED OUT THAT THE ISSUE WAS COVERED BY THE DECIS ION OF THE TRIBUNAL IN ITA NO.5428/MUM/2007 FOR A.Y. 2004-05 G BENCH IN THE CASE OF GEETANJALI TRADING CO. LTD. VS. ITO (MUM), IN FAVOU R OF THE ASSESSEE. WE FIND THAT THIS ISSUE IS DECIDED AGAINST THE ASSE SSEE BY THE ITAT IN ASSESSEES OWN CASE FOR AY 2004-05 WHEREIN THE ITAT HELD AS UNDER:- 27. IN THE PRESENT CASE, THE FACTS ARE NOT ON THE SAME FOOTING AS IN THE DECISION IN THE CASE OF SHAH SADIQ AND SO NS (SUPRA). IN THE PRESENT CASE, IT IS NOT THAT ASSESSEES RIGHT T O CARRY FORWARD ITA NO. 4160/MUM/08 WARTSILA INDIA LTD. 5 LONG TERM CAPITAL LOSS WHICH ACCRUED TO IT PRIOR TO THE AMENDMENT PER SE HAS BEEN TAKEN AWAY. ONLY THE PROVISIONS REG ARDING SET OFF HAVE BEEN MODIFIED INASMUCH AS THE SET OFF AGAI NST THE SHORT TERM CAPITAL GAINS CANNOT BE MADE. THESE ARE COMPUT ATION PROVISIONS AND SINCE THE SHORT TERM CAPITAL GAINS R ELATES TO AY 2004-05, THEREFORE, WHEN THE SET-OFF AGAINST THE LO NG TERM CAPITAL GAINS IS MADE, THEN, ONE HAS TO GO TO THE PROVISION S OF SECTION 74 AS SUBSTITUTED BY THE FINANCE ACT, 2002, W.E.F. 01/ 04/2003. AS ALREADY POINTED OUT, THE PROVISIONS RELATING TO SET -OFF OF CARRY FORWARD LONG TERM CAPITAL GAINS ARE ONLY MODIFIED B Y MAKING EXPRESS PROVISIONS IN THIS REGARD. THEREFORE, THE B ASIC PREMISE ON WHICH THE HONBLE SUPREME COURT HAD RENDERED ITS DE CISION DOES NOT EXIST IN THE PRESENT CASE. EXPRESS PROVISIONS H AVE BEEN MADE IN THE PRESENT CASE SUBSTITUTING THE OLD PROVISIONS ONLY IN REGARD TO SET OFF AND NOT IN REGARD TO CARRY FORWARD OF TH E LOSSES. IN THE CASE OF SHAH SADIQ AND SONS (SUPRA), IN VIEW OF THE PROVISIONS OF SECTION 75, THE REGISTERED FIRM COULD NOT AT ALL CA RRY FORWARD THE SPECULATION LOSSES BUT THAT IS NOT THE CASE HERE. T HEREFORE, IN OUR HUMBLE OPINION, THE DECISION IN THE CASE OF SHAH SA DIQ AND SONS (SUPRA IS NOT APPLICABLE TO THE FACTS OF THE CASE. WE ARE NOT INCLINED TO ACCEPT THE LEARNED COUNSELS PLEA THAT SINCE THE LONG TERM CAPITAL LOSS ACCRUED PRIOR TO THE AMENDMENT, T HEREFORE, SECTION 74 AS SUBSTITUTED IS NOT TO BE REPORTED TO. BY PLEADING SO, LEARNED COUNSEL WANTS US TO READ SOMETHING IN SECTI ON 74(1) AS SUBSTITUTED WHICH DOES NOT FIND PLACE IN THE SAID S ECTION. LD. COUNSEL WANTS THAT SECTION 74(1) SHOULD BE MADE APP LICABLE FROM 2003-04 AND ONWARDS. WE ARE AFRAID THAT IN A TAXING STATUTE SUCH A READING IS PERMISSIBLE. AS A MATTER OF FACT, SECTION 74(1) HAS BEEN SO SUBSTITUTED AS TO ENCOMPASS WITHIN ITS AMBIT THE LONG TERM CAPITAL LOSS WHICH HAD ACCRUED PRIOR TO T HE DATE OF AMENDMENT AND WERE TO BE CARRIED FORWARD. IT IS THE FUNDAMENTAL PRINCIPLE OF TAXATION THAT COMPUTATION PROVISIONS A S APPLICABLE TO A PARTICULAR ASSESSMENT YEAR HAVE TO BE APPLIED AND ONE CANNOT VENTURE TO GO TO THE COMPUTATION PROVISIONS WHICH W ERE PREVALENT PRIOR TO THE AMENDMENT. THIS WILL BE DOING VIOLENCE WITH THE STATUTE. LD. COUNSEL HAS ALSO RELIED ON THE DECISIO N OF THE HONBLE SUPREME COURT ON THE CASE OF CIT VS. BEHARILAL RAMC HARAN LTD., 166 ITR 157. IN THIS CASE, THE COMPANY HAD INCURRED A CAPITAL LOSS IN AY 1957-58. THIS LOSS WAS SOUGHT TO BE ADJU STED AGAINST THE CAPITAL GAIN FOR AY 1965-66. THIS DECISION IS N OT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN VIEW OF THE ABOVE DISCUSSION, WE CONFIRM THE ORDER OF THE LEARNED CIT(A). 12. SINCE THE ISSUE UNDER CONSIDERATION IS MATERIAL LY IDENTICAL TO THAT OF THE CASE DECIDED BY THE ITAT IN ASSESSEES OWN CASE FOR AY 2004-05, WE RESPECTFULLY FOLLOW THE SAME AND IN THE LIGHT OF THAT WE ITA NO. 4160/MUM/08 WARTSILA INDIA LTD. 6 CONFIRM THE ORDER OF THE CIT(A) AND DISMISS THIS GR OUND OF APPEAL OF THE ASSESSEE. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 9 TH DAY OF MARCH, 2011. SD/- SD/- (P.M. JAGTAP) (V. DURG A RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED: 9TH MARCH, 2011. COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, G BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV ITA NO. 4160/MUM/08 WARTSILA INDIA LTD. 7 S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 01/03/11 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 02/03/11 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER