ACIT, CIRCLE- 11(2), New Delhi V. Humboldt Wedag India Pvt. Ltd., Delhi

ITA 4663/DEL/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 6500 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 18-07-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VANITA R SHARMA
• Assessee Lawyers: S K AGGARWAL
• Keywords: Business expenditure; Capital expenditure
• Section: 13; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C, NEW DELHI BEFORE SH. KUL BHARAT, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO. 4663/DEL/2017 : ASSTT. YEAR : 2012-13 ITA NO. 4664/DEL/2017 : ASSTT. YEAR : 2013-14 ACIT, CIRCLE-11(2), NEW DELHI VS M/S HUMBOLDT WEDAG INDIA PVT. LTD. MEHTAB HOUSE, A-36, MOHAN CO-OP ESTATE, MATHURA ROAD, NEW DELHI-110044 (APPELLANT) (RESPONDENT) PAN NO. A A A CH7474G CO NO. 190/DEL/2017 : ASSTT. YEAR : 2012-13 CO NO. 191/DEL/2017 : ASSTT. YEAR : 2013-14 M/S HUMBOLDT WEDAG INDIA PVT. LTD. MEHTAB HOUSE, A-36, MOHAN CO-OP ESTATE, MATHURA ROAD, NEW DELHI-110044 VS ACIT, CIRCLE-11(2), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AAACH7474G ASSESSEE BY : SH. S. K. AGGARWAL, CA REVENUE BY : MS. VANITA R. SHARMA, CIT DR DATE OF HEAR ING: 18. 0 3 .20 2 1 DATE OF PRONOUNCEMENT: 07 .04 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEALS BY THE REVENUE AND THE CROSS OBJECTIONS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS OF THE LD. CIT(A)-4, NEW DELHI DATED 24.05.2017. ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 2 2. IN ITA NO. 4663/DEL/2017, FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENUE: 1. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CAS E, THE LD. CIT (A) HAD ERRED IN LAW AND IN FACTS IN DISALLOWING THE ADDITION OF PROVISIONS FOR LIQUIDAT ED DAMAGES, WITHOUT EXAMINING THE ISSUE INVOLVED AND THE FINDING OF THE AO. 2. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CASE , THE LD. CIT (A) HAD ERRED IN LAW AND IN FACTS IN DISALLOWING THE ADDITION OF PROVISIONS FOR WARRANTY , AS THE ASSESSEE HAS FAILED TO MAINTAIN A SCIENTIFIC AN D CONSISTENT METHOD FOR ESTIMATION OF/DETERMINATION O F ITS PROVISION OF WARRANTY. 3. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CASE , THE LD. CIT (A) HAD ERRED IN LAW AND IN FACTS IN DISALLOWING THE ADDITION OF ADVANCES & DEPOSITS WRITTEN OFF, WITHOUT ALLOWING THE AO TO EXAMINE WHETHER THE ENTRIES WERE ACTUALLY WRITTEN OFF IN TH E BOOKS AND LEDGER OF THE ASSESSEE. 3. IN ITA NO. 4664/DEL/2017, FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENUE: 1. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CAS E, THE LD. CIT (A) HAD ERRED IN LAW AND IN FACTS IN DISALLOWING THE ADDITION OF PROVISIONS FOR LIQUIDAT ED DAMAGES, WITHOUT EXAMINING THE ISSUE INVOLVED AND THE FINDING OF THE AO. 2. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CASE , THE LD. CIT (A) HAD ERRED IN LAW AND IN FACTS IN DISALLOWING THE ADDITION OF PROVISIONS FOR WARRANTY , AS THE ASSESSEE HAS FAILED TO MAINTAIN A SCIENTIFIC AN D CONSISTENT METHOD FOR ESTIMATION OF/DETERMINATION O F ITS PROVISION OF WARRANTY. ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 3 4. IN CO NO. 190/DEL/2017, FOLLOWING GROUNDS HAVE B EEN RAISED BY THE ASSESSEE: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE CIT(A) HAS ERRED IN NOT ALLOWING THE DEDUCTION FOR ADVANCES & DEPOSITS WRIT TEN OFF OF RS. 3,19,622 BEING EMPLOYEES ADVANCES AND SECURITY DEPOSITS FOR PREMISES ON RENT GIVEN IN THE COURSE OF BUSINESS AND WRITTEN OFF BY DEBITED TO TH E P&L A/C (INCLUDED IN TOTAL ADVANCES & DEPOSITS WRIT TEN OFF OF RS. 12,34,220) FOR AY 2012-13, SINCE, (I) SUBJECT ADVANCES & DEPOSITS WRITTEN OFF ARE IN THE NATURE OF EMPLOYEES ADVANCES WRITTEN OFF AND SECURITY DEPOSITS WRITTEN OFF IN THE COURSE OF BUSINESS ARE ALLOWABLE AS A NORMAL BUSINESS EXPENSE U/S 28 OF THE ACT; (II) EMPLOYEES ADVANCES WRITTEN OFF REPRESENT AMOUNT WHICH COULD NOT BE RECOVERED BY ASSESSEE ON FULL & FINAL SETTLEMENT OF EMPLOYEES WHO LEFT THE EMPLOYMENT WITH ASSESSEE. AMOUNT WRITTEN OFF IS CLAIMED AS A DEDUCTION U/S 28 OF THE ACT AND THEREFORE, REQUIREMENT OF OFFERING CORRESPONDING INCOME IN THE HANDS OF EMPLOYEES SHOULD NOT BE RELEVANT; (III) SECURITY DEPOSITS WRITTEN OFF REPRESENTS AMOUNT WHICH COULD NOT BE RECOVERED BY ASSESSEE FROM PARTY (I.E. PREMISES OWNER) ON FULL & FINAL SETTLEMENT ON LEAVING THE RENTED PREMISES BY THE ASSESSEE. SAID PREMISES WAS USED BY ASSESSEE IN CARRYING OUT ITS BUSINESS OPERATIONS AND THEREFORE, AMOUNT WRITTEN OFF IS NOT CAPITAL IN NATURE; 5. IN CO NO. 191/DEL/2017, FOLLOWING GROUNDS HAVE B EEN RAISED BY THE ASSESSEE: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE CIT(A) HAS ERRED IN NOT ALLOWING THE DEDUCTION FOR ADVANCES & DEPOSITS WRIT TEN OFF OF RS. 2,58,178, BEING AMOUNTS WRITTEN OFF IN T HE ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 4 COURSE OF BUSINESS AND DEBITED IN THE P&L A/C FOR A Y 2013-14, SINCE, (I) ADVANCES & DEPOSITS WRITTEN OFF ARE IN THE NATURE OF ADVANCES GIVEN TO VENDORS IN THE COURSE OF BUSINESS WHICH COULD NOT BE RECOVERED BY ASSESSEE AND ARE THEREFORE ALLOWABLE AS A NORMAL BUSINESS EXPENSE U/S 28 OF THE ACT; AND (II) ASSESSEE HAS SUBMITTED ALL RELEVANT DETAILS WITH RESPECT TO THE ADVANCES WRITTEN OFF I.E. LEDGER ACCOUNTS WHICH SPECIFICALLY MENTIONS PARTY DETAILS, NATURE OF EXPENSE, INVOICE NUMBER AND INVOICE DATE. THEREFORE, THE ALLEGATION OF HONBLE CIT(A) THAT THE ADVANCES WRITTEN OFF IS NOT VERIFIABLE IS BAD IN LAW. 6. THE APPEAL INVOLVES THREE ISSUES NAMELY, LIQUIDA TED DAMAGES, PROVISION FOR WARRANT WHICH ARE REPETITIVE IN NATURE AND THE THIRD DEPOSITS BEING WRITTEN OFF. 7. THE CO IN-TURN RELATES TO WRITTEN OFF OF ADVANCE S ON RENT AND VENDORS AMOUNTS. PROVISION FOR LIQUIDATED DAMAGES: 8. FOR THE SAKE OF READY REFERENCE AND BREVITY, THE RELEVANT PART OF THE ASSESSMENT ORDER IS REPRODUCED AS UNDER : ON PERUSAL OF RECORDS FURNISHED BY ASSEESSEE IT IS OBSERVED THAT THE ASSEESSEE COMPANY DEBITED ITS P&L A/C BY A SUM OF RS. 14,45,09,240/- TOWARD PROVISION FOR LIQUIDATED DAMA GES (L.D.). IT WAS OBSERVED THAT SUCH PROVISION WAS MADE IN THE PRECEDING YEAR WHICH WAS DEBITED TO P&L A/C BUT WAS DISALLOWE D IN THE ASSESSMENT FOR AY 2009-10 AND 2010-11. IN THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY WAS AS KED TO ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 5 FURNISH THE DETAILS AND BASIS FOR CLAIM OF DEDUCTIO N ON ACCOUNT OF PROVISION FOR LIQUIDATED DAMAGES MADE FOR CURREN T YEAR AND EXPLAIN THE ADMISSIBILITY OF ITS CLAIM FOR DEDUCTIO N. IN RESPONSE, THE ASSESSEE COMPANY FILED VARIOUS DETAILS INCLUDIN G THE CLIENT'S NAME, DESCRIPTION OF DELAY ETC. THE SUBMISSION OF THE ASSESSEE IS BRIEFLY SUMMARIZE D AS UNDER: 'AS PER THE SUBMISSION MADE BY THE ASSESSEE IN THIS REGARD, IT WAS STATED THAT THE COMPANY MAKES PROVISIONS FOR LI QUIDATED DAMAGES IS RESPECT OF DEFAULTS IN PROVIDING SERVICE S ON TIME TO CUSTOMERS IN TERMS OF DELIVERABLES AS AGREED TO IN THE RELEVANT CONTRACTS. AS THESE CONTRACTUAL OBLIGATIONS HAVE A PRESCRIBED TIME LIMIT TO DELIVER THE SERVICES AS WELL AS PROVI DE FOR THE AMOUNT OF DAMAGES PAYABLE TO THE CUSTOMER FOR TIRE DELAY, THE PROVISION FOR THE SAME WERE STATED TO BE ASCERTAINE D AND FURTHER THE PERIOD OF DELAY IN CONTRACT WAS ALSO ST ATED TO BE KNOWN ON THE DATE OF CLOSING OF ACCOUNTS. THUS, THE SAID LIABILITY WAS STATED TO BE CRYSTALLIZED, ACCRUED AND THUS UND ER MERCANTILE SYSTEM OF ACCOUNTING, THE AMOUNT WAS STA TED TO BE DEDUCTIBLE AS PER THE LAW. IT WAS ALSO STATED THAT IN TERM OF THE AGREEMENTS OF THE ASSEESSEE COMPANY FOR THE SUPPLY OF GOODS, TIME WAS ESSENCE OF THE CONTRACT AND ANY DELAY IN T HE DELIVERY OF THE GOODS WOULD RESULT IN THE LIABILITY TO PAY D AMAGES. IT WAS ALSO STATED THAT THE STIPULATION IN THE CONTRACT SH OWED THAT THE LIABILITY FOR LIQUIDATED DAMAGES WERE CERTAIN, ACCR UED AND WAS NOT TO DEPEND UPON THE HAPPENING OF ANY EVENT OTHER THAN DELAY IN DELIVERIES. THE ASSESSEE COMPANY CLAIMED THAT TH E LIABILITY TO PAY LIQUIDATED DAMAGES ACCRUED AS SOON AS THE DELAY TOOK PLACE AND AS PER THE AGREEMENT SUCH DELAY WAS A BREACH OF CONTRACT ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 6 AND , THEREFORE, IT WAS CLAIMED THAT DETERRENT IN T HE FORM OF PENALTIES AGAINST DELAYS IN DELIVERIES WAS TO AVOID FUTURE LITIGATION AS TO THE QUANTUM DAMAGES. IT WAS FURTHE R SUBMITTED THAT THE CALCULATION OR QUANTIFICATION OF DAMAGES W AS BASED ON ACCOUNTING OF DAMAGES AS AND WHEN DELAYS TOOK PLACE AND AS PER THE CONTRACT AGREEMENTS, LIQUIDATED DAMAGES CLA USE SPECIFIED THE QUANTUM OF LIQUIDATED DAMAGES PAYABLE BY THE ASSESSEE COMPANY AND, THEREFORE, IT WAS CLAIMED THA T QUANTIFICATION WAS PREDETERMINED AND NOTING WAS CON TINGENT. THEREFORE, THE ASSESSEE CLAIMED THAT SUCH PROVISION FOR LIQUIDATED DAMAGES SHOULD BE ALLOWED.' THE SUBMISSION FURNISHED BY THE ASSESSEE COMPANY, A S DISCUSSED ABOVE, MADE IN COURSE OF ASSESSMENT PROCE EDINGS VIDE THE SUBMISSION DATED 11.03.2016 AND ARGUMENTS MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS IS CONS IDERED BUT FOUND UNTENABLE. A PROVISION FOR LIQUIDATED DAMAGES IS PRIMARILY AN AGREED UPON SETTLEMENT OF THE ANTICIPATED ACTUAL DAMAGES ARISING FROM A FUTURE BREACH OF CONTRACT, VIZ. LATE COMPLETION. PROVISION FOR LIQUIDATED DAMAGES ALLOW CONTRACTING PARTIES TO PROTECT THEMSELVES AGAINST THE DIFFICULTY, UNCERTAI NTY AND EXPENSE THAT NECESSARILY FOLLOW THE EFFORT TO PROVE ACTUAL DAMAGES. ALTHOUGH THE CONCEPT BEHIND LDS APPEARS ST RAIGHT FORWARD, LIQUIDATED PROVISION ARE VERY OFTEN DISPUT ED IN COURTS. THE PROVISION FOR LIQUIDATED DAMAGES AND ITS ALLOW ABILITY IS A QUESTION OF FACT REQUIRES A CLOSE .EXAMINATION OF T HE FACTS, INCLUDING THE CONTRACT, THE LANGUAGE OF THE SPECIFI C CONTRACT PROVISION AND THE METHODS USED TO COMPUTE THE LIQUI DATED DAMAGES RATE. HOWEVER, IT MAY BE SEEN THAT LIQUIDAT ED ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 7 DAMAGES PROVISION ARE NOT IN THE NATURE OF PENALTY. THE DISTINCTION BETWEEN A CONTRACTUAL PENALTY AND VALID PROVISION FOR LIQUIDATED DAMAGES IS THAT A PENALTY, IN EFFECT, IS A SCRUTINY FOR PERFORMANCE. WHILE A PROVISION OF LDS REQUIRE A CER TAIN SUM TO BE PAID AS COMPENSATION FOR A BREACH OF CONTACT. IN RESPECT OF A PROVISION FOR LIQUIDATED DAMAGES, THE TWO PRIMARY CONSIDERATIONS ARE: (I) THE REASONABLENESS OF THE A MOUNT STIPULATED AND' (II) THE DIFFICULTY OF DETERMINING AND PROVING ACTUAL DAMAGES IN THE EVENT OF THE BREACH. FIRST, IT REQUIRES TO BE EXAMINED IF THE STIPULATED AMOUNT IS CONSCIONABLE. THIS MEANS THAT THE AMOUNT STIPULATED IS REASONABLE IN VIEW OF THE CONTRACT'S VALUE AND THE PROBABLE OR PRESUMPTIVE LOSS IN CASE OF BREACH. DETERMINING, WH ETHER THE AMOUNT STIPULATED IS REASONABLE, IS NORMALLY SEEN F ROM TWO APPROACHES. THE PROSPECTIVE APPROACH EXAMINES THE REASONABLENESS OF THE LIQUIDATED DAMAGES RATE AT TH E TIME THE CONTACT WAS EXECUTED. THE RETROSPECTIVE APPROACH US ES HINDSIGHT TO DETERMINE THE REASONABLENESS OF THE RA TE BY COMPARING THE ACTUAL DAMAGES SUSTAINED WITH THE LIQ UIDATED DAMAGES. IF THE DISCREPANCY BETWEEN THE ACTUAL DAMA GES AND THE LIQUIDATED DAMAGES RATE IS VERY LARGE, THE RETR OSPECTIVE APPROACH WILL FIND THAT THE LIQUIDATED DAMAGES PROV ISION IS A PENALTY, AND WILL THUS INVALIDATE IT. HOWEVER, BOTH THE PROSPECTIVE AND RETROSPECTIVE APPROACH MAY BE APPLI ED TO DETERMINE WHETHER A PROVISION FOR LIQUIDATED DAMAGE S CONSTITUTES A PENALTY. SECOND, IT IS ALSO IMPORTANT TO EXAMINE THE NATURE OF THE TRANSACTION TO SEE WHETHER THE AMOUNT OF DAMAGES RE SULTING ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 8 FROM THE DEFAULT WOULD BE EASILY AND READILY DETERM INABLE. A PROVISION FOR LIQUIDATED DAMAGES IS MORE LIKELY TO BE CORRECT IF IT WOULD BE DIFFICULT TO DETERMINE THE AMOUNT OF DA MAGES FOLLOWING A BREACH OF CONTRACT. KEEPING IN VIEW, THE ABOVE GENERAL CONSIDERATIONS I N RESPECT OF PROVISION FOR LIQUIDATED DAMAGES, IT MAY BE OBSERVE D THAT IN ORDER TO QUALIFY FOR RECOGNITION AS A LIABILITY, TH ERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO A PROBABILITY OF A N OUTFLOW OF RESOURCES TO SETTLE THE OBLIGATION. FURTHER, A PROV ISION HAS TO MADE WITH A REASONABLE DEGREE OF CERTAINTY WITH PAS T HISTORY OF EXPERIENCE. A PROVISION WILL ALSO NOT QUALITY TO BE A LIABILITY IF IT IS MADE WITHOUT ADOPTING A SCIENTIFIC METHODOLOGY. ON PERUSAL OF THE STATEMENT OF DETAILS AND BASIS FOR PROVISION OF LIQUIDATED DAMAGES SUBMITTED BY THE ASSESSEE COMPANY, IT WAS O BSERVED THAT THE JUSTIFICATION OF THE STIPULATION AND DETER MINATION OF LIQUIDATED DAMAGES IS NOT LAID OUT IN A SCIENTIFIC MANNER. FURTHERMORE, THE BASIS FOR ARRIVING AT SUCH EXPECTE D AMOUNT PROVIDED IS ALSO RANDOM AND UNSUBSTANTIATED. AS REG ARDS THE QUANTIFICATION, THE ASSESSEE COMPANY HAS NOT SUBSTA NTIATED IN ANY WAY, THE FAIRNESS AND REASONABILITY OF THE ESTI MATE MADE FOR PROVISION OF LIQUIDATED DAMAGES. FURTHERMORE, P ROVISION ARE MADE IN ANTICIPATION AND THEREFORE, ARE INHERENTLY CONTINGENT AND DEPENDENT UPON A FUTURE EVENT WHICH IS YET TO C RYSTALLIZE AND IS THEREFORE, UNASCERTAINABLE. ESTIMATED EXPENS ES FOR UNASCERTAINABLE FUTURE CONTINGENCIES CANNOT BE ALLO WED AS A VALID CLAIM OF DEDUCTION IN THE P&L A/C OF THE ASSE SSEE. FURTHERMORE, BY THE ASSESSEE'S OWN ADMISSION, THE P ROVISION FOR LIQUIDATED DAMAGES IS MADE ON THE BASIS OF CONTRACT UAL TERMS BETWEEN THE ASSESSEE AND ITS CUSTOMERS WHERE IT IS OF VIEW THAT ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 9 THE SAME MAY BE PAYABLE FOR NON-FULFILLMENT OF ITS OBLIGATIONS UNDER SUCH CONTRACTS. THUS, THE ASSESSEE HAD ITSELF AGREED THAT THE ESTIMATES ARE BASED ON A PERCEPTION OF NON-FULF ILLMENT OF CONTRACTUAL OBLIGATION. FURTHERMORE, THE CASE LAWS AND THE JUDICIAL PRECEDENTS CITED BY THE ASSESSEE ARE DISTI NGUISHABLE FROM THE FACTS AND CIRCUMSTANCES OF THE PRESENT CAS E. FURTHER THE REVENUE ALSO FILED AN APPEAL BEFORE THE HON'BLE ITAT ON THE ISSUE OF DISALLOWANCE OF LIQUIDATED DAMAGES IN AY 2010- 11 AND 2011-12. HENCE THE ISSUE IS IN DISPUTE AND D IDN'T GET FINALITY. 9. THE LD. CIT (A) DELETED THE ADDITION BASED ON TH E ORDER OF THE LD. DRP. THE ISSUE HAS ATTAINED FINALITY BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 20 08-09 AND FOR THE SUBSEQUENT ASSESSMENT YEAR. THE RELEVANT PA RT OF THE ORDER (PARA 13) OF THE ITAT IN ITA NO.2295/DEL/2013 DATED 31.10.2017 IS AS UNDER: 13. SO FAR AS THE ISSUE PERTAINING TO DISALLOWANCE OF PROVISION OF LIQUIDATED DAMAGES', THE CHARGE OF TH E ASSESSING OFFICER IS THAT THE ASSESSEE HAS BEEN UNA BLE TO SHOW THAT HOW IT HAS QUANTIFIED THE SAID PROVISI ON AND THERE IS NO DEGREE OF CERTAINTY OR ANY KIND OF SCIENTIFIC METHODOLOGY ADOPTED BY THE ASSESSEE. FRO M THE PERUSAL OF THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE ID. CIT (A) AND ALSO RELEVANT FINDING, W E FIND THAT THE ASSESSEE WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CEMENT PLANT TECHNOLOG Y EQUIPMENT AND FOR RENDERING SERVICES ON SUCH SUPPLY , HAD ENTERED INTO WRITTEN CONTRACT WITH THE PARTIES WHEREIN THERE WAS SPECIFIC CLAUSE AGREED AMONGST TH E PARTIES IN RELATION TO LIQUIDATED DAMAGES ON ACCOUN T OF DELAY IN DELIVERABLES. THE RELEVANT CLAUSES CLEARLY ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 10 POINT OUT THAT THERE IS A CONTRACTUAL OBLIGATION TO PAY LIQUIDATED DAMAGES IN RESPECT OF CONTRACT WHENEVER THERE WOULD BE DEFAULT IN PROVIDING SERVICES ON TIM E TO THE CUSTOMERS AND IN TERMS OF DELIVERABLES AS AGREE D IN THE CONTRACT. SINCE TIME WAS THE ESSENCE OF THE CONTRACT AND ANY DELAY IN DELIVERY OF THE GOODS WOU LD HAVE RESULTED IN LIABILITY TO PAY DAMAGES, THEREFOR E, THE ASSESSEE HAD MADE PROVISION BY TAKING INTO ACCOUNT THE PERIOD OF DELAY FROM THE CLOSE OF ACCOUNTS. THE ID. CIT (A) HAS CATEGORICALLY NOTED T HAT ASSESSEE HAS PROVIDED FOR LIQUIDATED DAMAGES BASED ON THE PERIOD OF DELAY WHICH OCCURRED DURING THE EN D OF THE YEAR AND ON THE BASIS OF PERCENTAGE OF THE CONTRACT THE VALUE PAYABLE AS DAMAGES IN TERMS OF T HE AGREEMENT. APART FROM THAT, ASSESSEE HAS ALSO REVERSED THE PROVISION FOR LIQUIDATED DAMAGES IN TH E YEAR IN WHICH CLIENTS WAIVED THE SAID LIQUIDATED DAMAGES AND THE WRITE BACK AMOUNT HAS BEEN OFFERED TO TAX BY THE ASSESSEE. WHENCE A PROVISION IS ARISI NG OUT OF A CONTRACTUAL OBLIGATION AND THE BASIS OF PROVIDING THE PROVISION IS BASED ON PAST EXPERIENCE AND SUCH A REASONABLE BASIS OF ESTIMATION HAS BEEN REGULARLY FOLLOWED BY THE ASSESSEE IN THE PAST, THE N OSTENSIBLY IT CANNOT BE HELD THAT THE BASIS OF ESTIMATION OR WORKING OF THE PROVISION IS NOT CORRE CT. FURTHER, ONCE IT IS BROUGHT ON RECORD THAT ASSESSEE ON THE YEAR OF REVERSAL HAS PAID TAXES ON EXCESS PROVISION AND SIMILAR FEATURE APPEARED IN THE EARLI ER YEARS AND ASSESSEE HAD PAYMENTS FOR LIQUIDATED DAMAGES ON DELAY OF DELIVERABLES, THEN NO ADVERSE VIEW CAN BE TAKEN, BECAUSE IT IS NOT THE CHARGE OF THE ASSESSING OFFICER THAT ASSESSEE HAS MADE SOME KIND OF EXCESSIVE PROVISION IN THIS YEAR IN RELATION TO PAS T. THE FINDING AND OBSERVATIONS OF THE ID. CIT (A), AR E BASED ON CORRECT APPRECIATION ON FACTS AND LAW, HEN CE, WE CONFIRM THE ORDER OF LD. CIT (A) ON THIS SCORE A ND ACCORDINGLY, GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 11 10. SINCE, THE MATTER STANDS ADJUDICATED AND ALLOWE D FOR SEVERAL YEARS PRIOR, IN THE ABSENCE OF ANY MATERIAL CHANGES, WE HEREBY HOLD THAT THE ADDITION MADE BY THE AO CANNOT BE SUSTAINED. DISALLOWANCE OF PROVISION FOR WARRANTY : 11. FOR THE SAKE OF READY REFERENCE AND BREVITY, TH E RELEVANT PART OF THE ASSESSMENT ORDER IS REPRODUCED AS UNDER : IT IS OBSERVED THAT THE ASSESSEE COMPANY DEBITED A SUM OF RS. 17,61,74,571/- TOWARDS PROVISION FOR WARRANTY. THE ASSESSEE COMPANY WAS ASKED TO FURNISH DETAILS OF SUCH PROVIS ION, METHOD ADOPTED TO MAKE THE PROVISION AND EXPLAIN THE ADMIS SIBILITY OF ITS CLAIM FOR DEDUCTION. IN RESPONSE, THE ASSESSEE COMPANY MADE THE FOLLOWIN G SUBMISSION, THE RELEVANT PORTIONS OF WHICH IS REPRO DUCED AS UNDER: DURING THE AY 2012-13, THE ASSESSEE ANTICIPATES THA T EXPENSES FOR WARRANTY WOULD BE INCURRED BY IT IN RESPECT OF CONTRACTS ENTERED WITH CUSTOMERS. ACCORDINGLY, FOR SUCH OBLIG ATION, THE ASSESSEE HAD MADE PROVISIONS FOR WARRANTY OF RS. 17,61,74,571/- IN ITS BOOKS OF ACCOUNTS AND HAD ACC ORDINGLY TAKEN IT AS AN ALLOWANCE IN THE RETURN OF INCOME FO R THE AY 2012-13. IT IS SUBMITTED THAT THE ASSESSEE HAS CREATED PROVI SION FOR WARRANTY OF RS. 17,61,74,571/- BY DEBITING ITS P&L A/C FOR AY ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 12 2012-13 IN RESPECT OF CONTRACTS WHERE IT ANTICIPATE S THAT WARRANTY EXPENSE WOULD BE REQUIRED TO BE INCURRED B Y IT. THAT CLAUSE OF WARRANTY IS INVARIABLY CONTAINED IN CONTRACTS FOR PAYMENTS OF WARRANTY ON FAILURE OF PROPER FUNCTIONI NG OF EQUIPMENT SUPPLIED. IT CAN ALSO BE INFERRED THAT TH E ASSESSEE IS UNDER CONTRACTUAL OBLIGATION TO DISCHARGE WARRANTY CLAIMS RAISED BY THE CUSTOMERS ARISING IN A LATER PERIOD. HOWEVER , AS PER MERCANTILE SYSTEM OF ACCOUNTING BEING FOLLOWING BY THE ASSESSEE, IT IS REQUIRED TO MAKE PROVISION FOR WARR ANTY IN THE YEAR IN WHICH IT RECOGNIZED REVENUE FROM CONTRACT B Y FOLLOWING THE PRINCIPLE OF MATCHING OF REVENUE AND COST. WHILE ESTIMATING THE WARRANTY EXPENSE FOR THE YEAR, THE ASSESSEE TRANSFORMS VARIOUS RELEVANT FACTORS HAVING A BEARING ON THE DETERMINATION OF WARRANTY EXPENSE INTO STATI STICAL INFORMATION. THESE FACTORS MAY RELATE TO DATA WITH REGARD TO THE PAST HISTORICAL EXPERIENCE, FAILURE RATE EXPERIENCE D IN THE PAST, INCREASE IN SALES VOLUME OF THE PRODUCTS UNDER WARR ANTY, TECHNICAL EVALUATION, NATURE AND USE OF PRODUCT, LE NGTH OF WARRANTY WITH REGARD TO GOODS SOLD AND THEIR SPARE PARTS, ETC. THE PROVISION MADE BY THE ASSESSEE VARIES YEAR BY Y EAR DEPENDING UPON THE POSSIBILITY OF WARRANTIES CLAIM TO BE MADE IN FUTURE YEARS. THE ASSESSEE HAS UTILIZED PROVISIO N FOR WARRANTY OF RS. 24,32,96,504/ - DURING AY 2012-13. IT IS THUS SUBMITTED THAT PROVISION FOR WARRANTY OF RS. 17,61,74,571/- MADE DURING THE AY 2012-13 IS ON SCI ENTIFIC BASIS AND EXPERIENCE OF THE ASSESSEE WHICH GIVES A REASONABLE ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 13 ESTIMATE OF THE CURRENT OBLIGATION WHICH THE ASSESS EE MAY HAVE TO INCUR TO PROVIDE FOR WARRANTY ON THE EQUIPMENTS SOLD BY IT. THE ABOVE SUBMISSION OF THE ASSESSEE IS CONSIDERED. THE ASSESSEE COMPANY CLAIMED THAT IT PROVIDED WARRANTY FOR THE EQUIPMENT FOR PLANT & MACHINERY SUPPLIED BY IT. UND ER THE WARRANTY CLAUSE IN THE CONTRACTUAL OBLIGATION, THE ASSESSEE COMPANY HAS CLAIMED THAT IT REQUIRE INCURRING OF EX PENDITURE FOR REPAIR, MODIFICATION, DEFECTS, DEFICIENCIES AND DAM AGES TO THE EQUIPMENT. HOWEVER, ON CONSIDERATION OF THE DETAILS OF THE PRO VISION FOR WARRANTY AND THE SUBMISSION MADE BY THE ASSEESSEE C OMPANY, IT IS SEEN THAT THE PROVISION MADE ARE NOT BASED UP ON ANY SCIENTIFIC METHODOLOGY. FURTHER, IN MOST OF THE YEA RS, SUCH PROVISIONS WERE NOT INCURRED BY WAY OF UTILIZATION. THEREFORE, THE CLAIM OF THE ASSEESSEE COMPANY THAT THE PROVISI ON FOR WARRANTY BASED ON PAST TREND IS NOT JUSTIFIED AND E STABLISHED. RATHER, IT INDICATES THAT SUCH PROVISIONS ARE CREAT ED TO REDUCE THE TAXABLE PROFIT OF THE CURRENT YEAR. FURTHERMORE , AS PER POINT NO. 2 (XII) OF SCHEDULE O OF NOTES TO THE FINANCIAL STATEMENTS IT IS STATED THAT A PROVISION IS MADE FOR FUTURE WARRA NTY COST FUTURE COST IN RESPECT OF COMPLETED CONTRACTS WHERE THE WARRANTY PERIOD HAS NOT EXPIRED. FURTHER, IT MAY BE NOTED THAT A PROVISION IS A LIAB ILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF E STIMATION. A PROVISION IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT: (B) IT IS P ROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION AND ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 14 (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT O F OBLIGATION. IN THE INSTANT CASE, THE ASSESSEE HAS NOT BEEN ABLE TO FURNISH ANY SUPPORTING MATERIAL TO SHOW THAT THE CONDITIONS (A) (B) & (C) ARE FULFILLED IN ANY MANNER. FURTHERMORE, THE A SSESSEE'S ARGUMENT THAT THE PROVISION FOR WARRANTY IS ALLOWAB LE AS IT IS TO BE MADE ON THE BASIS OF MATCHING CONCEPT UNDER MERC ANTILE SYSTEM OF ACCOUNTING IS UNTENABLE AS BY THE ASSESSE E'S OWN ADMISSION THE EXPENSES ON ACCOUNT OF WARRANTY SHALL ARISE IN AN UNASCERTAINABLE FUTURE AND IS THEREFORE, IN THE NAT URE OF A CONTINGENT LIABILITY. A CONTINGENT LIABILITY CANNOT BE CLAIMED AS AN ALLOWABLE DEDUCTION ON THE BASIS OF MATCHING CON CEPT. ONLY COSTS OR EXPENSES WHICH ARE ASCERTAINABLE AND HAVE ACCRUED CAN BE CLAIMED AS AN ALLOWABLE DEDUCTION. FURTHERMORE, IN THE CASE OF THE ASSESSEE THERE IS NO RELIABLE ESTIMATE AS TO THE AMOUNT OF OBLIGATION THAT MAY ARISE TO THE ASSESSEE IN THE NEAR FUTURE AND THEREFORE, A PROVISION FOR WARRANTY IS AN UNASC ERTAINABLE LIABILITY WHICH CANNOT BE CLAIMED AS DEDUCTION. FUR THERMORE, THE CASE LAWS AND THE JUDICIAL PRECEDENTS CITED BY THE ASSESSEE ARE DISTINGUISHABLE FROM THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. FURTHER THE REVENUE ALSO FILED AN APPEAL BEFORE THE HON'BLE ITAT ON THE ISSUE OF DISALLOWANCE OF LIQUIDATED DAMAGES IN AY 2010- 11 AND 2011-12. HENCE THE ISSUE IS IN DISPUTE AND D IDN'T GET FINALITY. 12. THE LD. CIT (A) DELETED THE ADDITION BASED ON T HE ORDER OF THE LD. DRP. THE ISSUE HAS ATTAINED FINALITY BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 20 08-09 AND FOR THE SUBSEQUENT ASSESSMENT YEAR. THE RELEVANT PA RT OF THE ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 15 ORDER (PARA 14) OF THE ITAT IN ITA NO.2295/DEL/2013 DATED 31.10.2017 IS AS UNDER: 14. SO FAR AS THE ISSUE RELATING TO DISALLOWANCE O F PROVISION FOR WARRANTY, IT IS AN ADMITTED FACT TH AT UNDER THE TERMS OF AGREEMENT, ASSESSEE HAS PROVIDED WARRANTY FOR THE PERIOD RANGING FROM 12 TO 36 MONTH S TO WHICH ASSESSEE IS CONTRACTUALLY OBLIGED TO PAY WARRANTY ON ITS OWN CASE IN CASE OF ANY BREACH IN SUPPLY AND SERVICES, IN CASE IF THERE IS ANY DEMAND FROM THE PURCHASER. THE TERMS OF AGREEMENT CLEARLY PROVIDES THAT ASSESSEE HAS TO TAKE EFFECTIVE STEPS; FOR REJECTION OR MODIFY OR REPLACE OR REMOVE THE DEFECT OR DEFICIENCY OR IN CASE OF DAMAGE OF EQUIPMENT; ASSESSEE SHALL DO THE NEEDFUL AND FOR THIS PURPOSE IT HAS BEEN MAKING PROVISION FOR MAKING SUCH GUARANTEE. THE ID. CIT (A) HAS ALSO TAKEN NOTE OF T HE ACTUAL EXPENSES INCURRED ON WARRANTY BY THE ASSESSE E IN EARLIER YEARS AND ALSO CALCULATED THE PERCENTAGE OF SUCH EXPENDITURE (AS NOTED BY US HEREIN ABOVE). IF BASED ON SUCH ACTUAL EXPENDITURE INCURRED ON WARRANTY, ASSESSEE HAS MADE THE PROVISION FOR WARRANTY, THEN OSTENSIBLY IT CAN BE HELD THAT, NOT ONLY ASSESSEE HAS MADE THE PROVISION AS PER PAST EXPERIENCE BUT THERE WAS A CERTAIN DEGREE OF CERTAINTY WHILE MAKING SUCH ESTIMATE. THE RATIO LAI D DOWN BY THE HONBLE APEX COURT IN THE CASE OF ROTOR K CONTROLS INDIA (P) LTD. VS CIT (SUPRA) IS SQUARELY APPLICABLE WHEREIN THE HON'BLE APEX COURT HAD MADE THE FOLLOWING IMPORTANT OBSERVATIONS:- IN THIS CASE WE ARE CONCERNED WITH PRODUCT WARRANTIES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DEALING IN COMPUTERS GIVES WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS FOLLOWING OPTIONS: (A) ACCOUNT FOR WARRANTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED; (B) IT MAKES A ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 16 PROVISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM; AND (C) IT PROVIDES FOR WARRANTY AT 2 PER CENT OF TURNOVER OF THE COMPANY BASED ON PAST EXPERIENCE (HISTORICAL TREND). THE FIRST OPTIO N IS UNSUSTAINABLE SINCE IT WOULD TANTAMOUNT TO ACCOUNTING FOR WARRANTY EXPENSES ON CASH BASIS, WHICH IS PROHIBITED BOTH UNDER THE COMPANIES ACT AS WELL AS BY THE ACCOUNTING STANDARDS WHICH REQUIRE ACCRUAL CONCEPT TO BE FOLLOWED. IN THE PRESENT CASE, THE DEPARTMENT IS INSISTING ON THE FIRST OPTION WHICH, AS STATED ABOVE, IS ERRONEOUS A S IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAPPROPRIATE SINCE IT DOES NOT REFLECT THE EXPECTED WARRANTY COSTS IN RESPECT OF REVENUE ALREADY RECOGNIZED (ACCRUED). IN OTHER WORDS, IT IS NOT BASED ON MATCHING CONCEPT. UNDER THE MATCHING CONCEPT, IF REVENUE IS RECOGNIZED THE COST INCURRED TO EARN THAT REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED FOR. WHEN VALVE ACTUATORS ARE SOLD AND THE WARRANTY COSTS ARE AN INTEGRAL PART OF THAT SALE PRICE THEN THE APPELLANT HAS TO PROVIDE FOR SUCH WARRANTY COSTS IN ITS ACCOUNT FOR THE RELEVANT YEAR, OTHERWISE THE MATCHING CONCEPT FAILS. IN SUCH A CASE THE SECOND OPTION IS ALSO INAPPROPRIATE. UNDER THE CIRCUMSTANCES, THE THIRD OPTION IS MOST APPROPRIATE BECAUSE IT FULFILS ACCRUAL CONCEPT AS WELL AS THE MATCHING CONCEPT.' 13. SINCE, THE MATTER STANDS ADJUDICATED AND ALLOWE D FOR SEVERAL YEARS PRIOR, IN THE ABSENCE OF ANY MATERIAL CHANGE, WE HEREBY HOLD THAT THE ADDITION MADE BY THE AO CANNOT BE SUSTAINED. ADVANCE AND DEPOSITS WRITTEN OFF: 14. THE ASSESSEE COMPANY DEBITED A SUM OF RS. 12,34 ,220/- TOWARD' ADVANCE & DEPOSITS WRITTEN OFF. ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 17 15. THE LD. CIT (A) FOUND THAT THE AMOUNT OF RS.12, 34,220/- CONSISTS OF RS.9,14,598/- PERTAINS TO DUTY ENTITLEM ENT WRITTEN OFF WHICH STANDS OFFERED IN THE EARLIER YEAR AND HE NCE DELETED THE ADDITION. WE FIND NO INFIRMITY WITH THE DECISIO N OF THE LD. CIT (A) ON THIS ASPECT. 16. WITH REGARD TO WRITE OFF OF EMPLOYEE ADVANCES A ND SECURITY DEPOSIT GIVEN FOR HIRING OF OFFICE SPACE, THE LD. C IT (A) HELD THAT THE EXPENDITURE BEING CAPITAL IN NATURE AND HELD TH AT THEY ARE NOT ALLOWABLE AS DEDUCTION IN THIS YEAR. 17. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PER USED THE MATERIAL AVAILABLE ON RECORD. 18. WE ARE IN AGREEMENTS WITH THE FUNDAMENTALS ARGU ED THAT IT IS A GENERALLY ACCEPTED PRINCIPLE THAT LOSSES, OTHE R THAN CAPITAL LOSSES, WHICH ARISE OUT OF AND ARE INCIDENTAL TO TH E BUSINESS OF ASSESSEE MUST BE NECESSARILY DEDUCTED IN THE ASCERT AINMENT OF PROFITS OF THE BUSINESS U/S 28 OF THE ACT. ON THE B ASIS OF VARIOUS JUDGMENTS OF THE HONBLE COURTS, IN ORDER THAT AN I TEM OF LOSS CAN BE TAKEN INTO ACCOUNT IN COMPUTING THE PROFITS OF THE BUSINESS, IT SHOULD FULFILL THE FOLLOWING CONDITION S: IT SHOULD BE A REAL LOSS, NOT NOTIONAL OR FICTITIOU S; IT SHOULD BE A LOSS ON REVENUE ACCOUNT AND NOT ON C APITAL ACCOUNT; IT MUST HAVE ACTUALLY ARISEN AND BEEN INCURRED, NOT MERELY ANTICIPATED AS CERTAIN TO OCCUR IN FUTURE; IT SHOULD BE ONE THAT IS INCIDENTAL TO THE CARRYING ON OF THE BUSINESS AND MUST ARISE DIRECTLY FROM OR BE INCIDEN TAL TO THE CARRYING OUT OF AN OPERATION OF THE BUSINESS; A ND ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 18 THERE SHOULD BE NO PROHIBITION IN THE ACT, EXPRESS OR IMPLIED, AGAINST THE DEDUCTIBILITY THEREOF. 19. IN PONDICHERRY RAILWAY CO LTD VS CIT [1931] 5 I TC 363 (PC)/ BADRIDAS DAGA VS CIT [1958] 34 ITR 10 (SC)/ C ALCUTTA CO LTD VS CIT [1959] 37 ITR 1 (SC)/ CIT VS BAI SHIRINB AI K KOOKA [1962] 46 ITR 86 (SC)/ KAMALPAT MOTILAL VS CIT [197 6] 104 ITR 783 (SC) IT WAS HELD THAT SUBJECT TO THE SPECIAL RE QUIREMENTS OF THE ACT, THE PROFIT TO BE ASSESSED ARE THE REAL PRO FITS AND THEY MUST BE ASCERTAINED ON THE ORDINARY PRINCIPLES OF C OMMERCIAL TRADING AND COMMERCIAL ACCOUNTING. IT IS THUS CLEAR THAT PROFITS SHOULD BE COMPUTED AFTER DEDUCTING THE LOSSES AND E XPENDITURE INCURRED FOR THE PURPOSES OF BUSINESS 'UNLESS THE L OSSES AND EXPENDITURE ARE EXPRESSLY, OR BY NECESSARY IMPLICAT ION, DISALLOWED BY THE ACT. 20. IN THE CASE OF MADEVA UPENDRA SINAI VS UOI [197 5] 98 ITR 209 (SC), IT WAS HELD THAT IF THE DEDUCTION OF A PA RTICULAR ITEM FROM, THE INCOMINGS OF THE BUSINESS OR PROFESSION I S NEITHER EXPRESSLY COVERED BY THE SECTIONS, NOR PROHIBITED E XPRESSLY OR BY NECESSARY IMPLICATION BY THOSE PROVISIONS, IT CA N BE ALLOWED UNDER SECTION 28(I) PROVIDED, ON ORDINARY COMMERCIA L PRINCIPLES, IT IS A PROPER ITEM TO BE DEBITED AGAINST THE INCOM INGS IN ASCERTAINING THE PROFITS AND GAINS PROPERLY SO CA LLED. 21. SECTION 28 OF THE ACT PROVIDES FOR TAXATION OF PROFITS AND GAINS OF ANY BUSINESS OR PROFESSION. FROM THE CHAR GING PROVISIONS OF THE ACT, IT IS DISCERNIBLE THAT THE W ORDS INCOME OR PROFITS AND GAINS SHOULD BE UNDERSTOOD AS INCLUDI NG LOSSES ALSO, SO THAT, IN ONE SENSE PROFITS AND GAINS REP RESENT PLUS ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 19 INCOME WHEREAS LOSSES REPRESENT MINUS INCOME. IN OTHER WORDS, LOSS IS NEGATIVE PROFIT. BOTH POSITIVE AND N EGATIVE PROFITS ARE OF REVENUE CHARACTER. BOTH MUST ENTER INTO COMP UTATION, WHEREVER IT BECOMES MATERIAL, IN THE SAME MODE OF T HE TAXABLE INCOME OF THE ASSESSEE. THEREFORE, THE TRADING LOSS OF A BUSINESS IS DEDUCTIBLE IN COMPUTING PROFITS EARNED BY THE BUSINESS EVEN THOUGH THERE IS NO SPECIFIC PROVISION FOR ALLOWANCE THEREOF. 22. FINALLY, THE HONBLE SUPREME COURT IN THE CASE OF CIT VS MYSORE SUGAR CO. LTD [1962] 46 ITR 649 (SUPREME COU RT) LAID DOWN THE PRINCIPLES FOR ALLOWANCE OF LOSS INCIDENTA L TO BUSINESS AS UNDER: THE TAX UNDER THE HEAD 'BUSINESS' IS PAYABLE UNDER SECTION 10 OF THE INCOME-TAX ACT. THAT SECTION PROVIDES BY SUB-SECTION (1) THAT THE TAX SHALL BE PAYABLE BY AN APPELLANT UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS, ETC.' IN RESPECT OF THE PROFITS OR GAINS OF ANY BUSINESS, ETC., CARRIED ON BY HIM. UND ER SUB-SECTION (2), THESE PROFITS OR GAINS ARE COMPUTE D AFTER MAKING CERTAIN ALLOWANCES. CLAUSE (XI) ALLOWS DEDUCTION OF BAD AND DOUBTFUL BUSINESS DEBTS. IT PROVIDES THAT WHEN THE APPELLANT'S ACCOUNTS IN RESP ECT OF ANY PART OF HIS BUSINESS ARE NOT KEPT ON THE CAS H BASIS, SUCH SUM, IN RESPECT OF BAD AND DOUBTFUL DEB TS, DUE TO THE APPELLANT IN RESPECT OF THAT PART OF HIS BUSINESS IS DEDUCTIBLE BUT NOT EXCEEDING THE AMOUNT ACTUALLY WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF THE APPELLANT. CLAUSE (XV) ALLOWS ANY EXPENDITURE N OT ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 20 INCLUDED IN CLAUSES (I) TO (XIV), WHICH IS NOT IN T HE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE APPELLANT, TO BE DEDUCTED, IF LAID OUT OR EXPEN DED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS, ETC. THE CLAUSES EXPRESSLY PROVIDE WHAT C AN BE DEDUCTED; BUT THE GENERAL SCHEME OF THE SECTION IS THAT PROFITS OR GAINS MUST BE CALCULATED AFTER DEDUCTING OUTGOINGS REASONABLY ATTRIBUTABLE AS BUSINESS EXPENDITURE BUT SO AS NOT TO DEDUCT ANY PORTION OF AN EXPENDITURE OF A CAPITAL, NATURE. IF AN EXPENDITURE CONIES WITHIN ANY OF THE ENUMERATED CLASSES OF ALLOWANCES, THE CASE CAN BE CONSIDERED UNDER THE APPROPRIATE CLASS; BUT, THERE MAY BE AN EXPENDITURE WHICH, THOUGH NOT EXACTLY COVERED BY AN Y OF THE ENUMERATED CLASSES, MAY HAVE TO BE CONSIDERE D IN FINDING OUT THE TRUE ASSESSABLE PROFITS OR 'STAI NS. THIS WAS LAID DOWN BY THE PRIVY COUNCIL IN COMMISSIONER OF INCOME-TAX V. CHITNAVIS, AND HAS BEEN ACCEPTED BY THIS COURT. IN OTHER WORDS, SECTIO N 10(2) DOES NOT DEAL EXHAUSTIVELY WITH THE DEDUCTION S, WHICH MUST BE MADE TO ARRIVE AT THE TRUE PROFITS AN D GAINS.......... 23. A READING OF THE ABOVE WOULD SHOW THAT THE HON BLE SUPREME COURT HAS LAID DOWN THAT WHILE COMPUTING TH E ASSESSABLE PROFITS AND GAINS, AN APPELLANT IS ENT ITLED TO CLAIM INCURRED FOR THE PURPOSE OF ITS BUSINESS BUT NOT CO VERED UNDER ANY SPECIFIC CLAUSE. ITA NOS. 4663 & 4664/DEL/2017 CO NOS. 190 & 191/DEL/2017 HUMBOLDT WEDAG INDIA PVT. LTD. 21 24. ON GOING THROUGH THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, KEEPING IN VIEW THE JUDGMENTS OF HON BLE SUPREME COURT SINCE THE AMOUNT HAS BEEN INCURRED DURING THE REGULAR COURSE OF BUSINESS, THE SAME IS ALLOWED TO BE CLAIM ED UNDER EXPENSES FOR THE YEAR. 25. AS A RESULT, BOTH THE APPEALS OF THE REVENUE AR E DISMISSED AND THE CROSS OBJECTIONS OF THE ASSESSEE ARE ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 07/04/2021. SD/- SD/- (KUL BHARAT) ( DR. B. R. R. KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER DATED: 07/04/2021 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR