M/s. Sun Microsystems India Pvt. Ltd, Bangalore V. ACIT, Bangalore

ITA 54/BANG/2011

• Counselvise Citation: 5421114 RSA 2011
• Duration Of Justice: 1 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 19-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KOUSHIK MUKHERJEE
• Keywords: Corroborative evidences; Commercial expediency
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.54/BANG/2011 ASSESSMENT YEAR : 2005-06 SUN MICRO SYSTEMS INDIA PRIVATE LTD., 6 TH FLOOR, DIVYASHREE CHAMBERS, LANGFORD ROAD, BANGALORE 560 025. PAN : AAECS 7710C VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE 12, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI KOUSHIK MUKHERJEE, C.A. RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 06.09.2012 DATE OF PRONOUNCEMENT : 14.09.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 06.10.2010 OF THE CIT(APPEALS)-IV, BANGALORE RELATING TO A.Y. 2005-06. 2. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR N O ADJUDICATION. GROUNDS 2 & 3 RAISED BY THE ASSESSEE READ AS FOLLOW S:- ITA NO.54/BANG/2011 PAGE 2 OF 18 2.(A) THAT THE LEARNED CIT(A) ERRED IN UPHOLDING TH E ORDER PASSED UNDER SECTION 143(3) OF THE ACT BY THE ADDIT IONAL COMMISSIONER OF INCOME-TAX, RANGE 12, BANGALORE (HEREINAFTER REFERRED TO AS THE LEARNED ASSESSING OFFICER) IN MAKING AN ADHOC ADDITION OF RS.10,000,000 ON ACC OUNT OF BUSINESS PROMOTION WHICH IS LESS THAN 10% OF THE EXPENDITURE CLAIMED UNDER THIS HEAD. (B) THAT THE AUTHORITIES ABOVE FAILED TO APPRECIAT E THAT THE SAID AMOUNTS WERE EXPENSED BY THE COMPANY ENTIRELY FOR T HE BUSINESS PURPOSES AND ACCORDINGLY SHOULD BE ALLOWED AS A DEDUCTION WHILE ARRIVING AT THE TAXABLE PROFITS OF THE COMPANY. 3.(A) THAT THE LEARNED CIT(A) ERRED IN UPHOLDING T HE ORDER PASSED BY THE LEARNED ASSESSING OFFICER IN MAKING A N ADHOC ADDITION OF RS 2,000,000 ON ACCOUNT OF TRAINI NG EXPENSES WHICH IS ABOUT 15% OF THE EXPENDITURE CLAI MED UNDER THIS HEAD. (B) THAT THE AUTHORITIES ABOVE FAILED TO APPRECIAT E THAT THE SAID AMOUNTS WERE EXPENSED BY THE COMPANY ENTIRELY FOR T HE BUSINESS PURPOSES AND ACCORDINGLY SHOULD BE ALLOWED AS A DEDUCTION WHILE ARRIVING AT THE TAXABLE PROFITS OF THE COMPANY. 3. THE ASSESSEE IS A COMPANY. IT IS A WHOLLY OWNE D SUBSIDIARY OF SUN GROUP, REPRESENTED BY SUN MICROSYSTEMS INFORMATION INC., USA AND SUNMICRO SYSTEMS, CALIFORNIA INC., USA. THE ASSESS EES OPERATIONS IN INDIA ARE BROADLY ORGANIZED IN THREE CATEGORIES:- (I) INDIA ENGINEERING CENTRE : THIS DIVISION IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES FOR THE SUN GROUP. (II) GLOBAL SALES OPERATIONS : THIS DIVISION PROVIDES FOR MARKETING SUPPORT SERVICES OF THE SUN GROUP FOR SALES TO CUST OMERS IN INDIA. (III) ENTERPRISE SERVICES : THIS DIVISION PROVIDES OPERATION SERVICES, SUPPORT SERVICES AND PROFESSIONAL SUPPORT SERVICES. THE SUPPORT ITA NO.54/BANG/2011 PAGE 3 OF 18 SERVICES RELATES TO PROVIDING CUSTOMERS IN INDIA WI TH POST-SALES MAINTENANCE SUPPORT FOR BOTH HARDWARE & SOFTWARE. 4. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASS ESSING OFFICER NOTICED THAT THE ASSESSEE HAS INCURRED A SUM OF IS Q 11,71,39,084 UNDER THE HEAD BUSINESS PROMOTION. THE AO CALLED UPON THE ASSESSEE TO FURNISH THE DETAILS OF THE AFORESAID EXPENDITURE. THE ASSESSEE FURNISHED THE DETAILS. ON PERUSAL OF THE SAME, THE AO NOTICE D THAT THE ASSESSEE HAD INCURRED EXPENSES TO THE TUNE OF Q 51,00,959 IN HOLDING PARTIES, DINNERS, LUNCH, CONFERENCE, ETC. IN LUXURY HOTEL. BESIDES T HE ABOVE, THE AO ALSO NOTICED THAT THE ASSESSEE HAD PAID A SUM OF Q 32,71,959 TO AN EVENT MANAGEMENT COMPANY TO ORGANIZE SOME EVENTS AND A SU M OF Q 3 LAKHS FOR SPONSORSHIP OF JAGJIT SINGH SHOW, ETC. THE AO WAS OF THE VIEW THAT THE AFORESAID EXPENDITURE WAS NOT IN RELATION TO BUSINE SS OF THE ASSESSEE. THE ASSESSEE IN REPLY TO THE QUERY OF THE AO IN THIS RE GARD, FURNISHED A COMPLETE BREAK UP OF THE EXPENSES TOGETHER WITH SUP PORTING EVIDENCE. THE ASSESSEE REITERATED ITS STAND THAT THE EXPENSES WER E INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND THE SAME HA D TO BE ALLOWED. THE AO WAS, HOWEVER, OF THE VIEW THAT THE ASSESSEE FAIL ED TO FURNISH BILLS, VOUCHERS IN SUPPORT OF THE EXPENDITURE. HE WAS OF THE VIEW THAT ON ANALYSIS OF THE NATURE OF EXPENSES, IT COULD NOT BE SAID THAT THE SAME WAS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. ACCORDINGLY, THE AO MADE AN ADHOC DISALL OWANCE OF Q ONE CRORE AND ADDED BACK THE SAME TO THE TOTAL INCOME O F THE ASSESSEE. 5. SIMILARLY, THE ASSESSEE HAD INCURRED EXPENSES ON TRAINING. THE AO ON SCRUTINY OF THE DETAILS OF TRAINING EXPENSES NOT ICED THAT THE TRAINING HAD ITA NO.54/BANG/2011 PAGE 4 OF 18 BEEN DONE IN SOME PRESTIGIOUS HOTELS COSTING Q 27,00,028. ACCORDING TO THE AO, EXPENSES INCURRED WHICH WERE RELATABLE TO U SE OF 5 STAR HOTELS CANNOT BE SAID TO HAVE ANY BUSINESS RELEVANCE AND A CCORDINGLY EXPRESSED THE VIEW THAT THE EXPENSES CANNOT BE ALLOWED IN FUL L. THE AO ACCORDINGLY DISALLOWED A SUM OF Q 20 LAKHS OUT OF TRAINING EXPENSES. 6. BOTH THE AFORESAID ADDITIONS WERE CONFIRMED BY T HE CIT(A). THE LD. CIT(A) ON THE DISALLOWANCE OF SALES PROMOTION EXPEN SES OBSERVED AS FOLLOWS:- BUSINESS NEEDS, SALES PROMOTION EXPENSES AND EXCL USIVELY INCURRED IN CONNECTION WITH THE BUSINESS ARE ALL ST ANDARD TERMS USED TO JUSTIFY EXTRAVAGANT EXPENDITURES. THE AO HA S RIGHTLY POINTED OUT CERTAIN EXTRAVAGANT EXPENDITURES LIKE RS.1,25,46,772/- INCURRED ON SHOW-BIZ ESTATE MANAGE MENT SERVICES FOR PARTNERS MEET, RS.39,27,600/- TOWARDS SPONSORSHIP OF TV-18, RS.32,71,959/- ON EVENT MANAGEMENT, RS.51,00 ,959/- INCURRED ON LUNCH/DINNER IN STAR HOTELS AND RS.2,45 ,06,808/- FOR WHICH NO DETAILS WERE GIVEN BY THE APPELLANT, WHICH LED TO THE QUANTIFICATION OF DISALLOWANCE OF RS.1,00,00,000/- WHICH IS EVEN LESS THAN 10% OF TOTAL EXPENDITURE UNDER THIS HEAD. I CAN ONLY SAY THAT AO WAS MAGNANIMOUS ENOUGH TO RESTRICT THE DISA LLOWANCE TO LESS THAN 10%. HAD PROPER ANALYSIS OF EACH OF THE B ILLS BEEN MADE, THE DISALLOWANCE COULD HAVE FAR EXCEEDED EVEN THIS SUM. HOWEVER, IT IS HELD THAT THERE IS NO CASE FOR GIVIN G ANY RELIEF UNDER THIS HEAD AND THE ENTIRE AMOUNT QUANTIFIED BY THE AO FOR DISALLOWANCE BEING RS.1 CRORE IS HEREBY CONFIRMED. 7. WITH REGARD TO THE DISALLOWANCE OF TRAINING EXPE NSES, THE LD. CIT(A) HELD AS FOLLOWS:- AFTER CONSIDERING THE APPELLANTS ARGUMENTS ON THI S ISSUE IT IS HELD AS UNDER: THE AO HAS NOTICED THAT A SUM OF RS.17,97,171/- WAS INCURRED FOR REIMBURSEMENT OF THE EXPENSES TO THE EMPLOYEES AND A FURTHER SUM F RS.27,00,028/ WAS INCURRED ON EMPLOYEES AND PARTNERS IN LEISURE RESORTS LIKE PRESTIGE LEISURE RESORTS, E AGLETON, TAJ WEST ITA NO.54/BANG/2011 PAGE 5 OF 18 END, HYATT REGENCY AND OTHERS. APPARENTLY, THE EXPE NDITURE INCURRED CANNOT BE REGARDED AS EXCLUSIVELY INCURRED IN CONNECTION WITH THE BUSINESS AND QUANTIFICATION MADE BY THE AO OF DISALLOWANCE BEING RS.20 LAKHS IS CONFIRMED IN TOTO AS IT REPRESENTS LESS THAN 12% OF THE TOTAL EXPENDITURE U NDER THIS HEAD. 8. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE HAS RAISED GROUNDS 2 & 3 BEFORE THE TRIBUNAL. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. C OUNSEL FOR THE ASSESSEE TOOK US THROUGH THE EVIDENCE FILED BY THE ASSESSEE FOR SUBSTANTIATING ITS CASE FOR ALLOWING THE AFORESAID EXPENSES IN FULL. THE LD. DR REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE ORDER OF THE CIT(A). 10. AS FAR AS BUSINESS PROMOTION EXPENSES ARE CONCE RNED, THE BREAK-UP OF THESE EXPENSES ARE GIVEN AT PAGES 36 TO 38 OF TH E ASSESSEES PAPERBOOK. THE SUPPORTING EVIDENCE IN RESPECT OF B REAK UP OF EVIDENCE GIVEN AT PAGES 36 TO 38 OF THE PAPERBOOK ARE AVAILA BLE AT PAGES 39 TO 70 OF THE ASSESSEES PAPERBOOK. IN THE COURSE OF ASSESSM ENT PROCEEDINGS, THE ASSESSEE HAD GIVEN ALL THE AFORESAID DETAILS BEFORE THE AO. THE SUPPORTING EVIDENCE FILED BY THE ASSESSEE GIVES THE PURPOSE FO R WHICH THESE EXPENSES HAVE BEEN INCURRED. THE AO HAS NOT POINTED OUT ANY SPECIFIC ITEMS OF EXPENSES WHICH COULD BE SAID TO BE NOT RELATABLE TO BUSINESS PROMOTION. EVEN THE CIT(A) HAS NOT GIVEN ANY SUCH FINDING. FR OM A PERUSAL OF THE ORDERS OF THE REVENUE AUTHORITIES, IT APPEARS THAT THEY WERE CARRIED AWAY BY THE FACT THAT SOME OF THE EXPENSES INCURRED WERE AT TRIBUTABLE TO THE USE OF 5 STAR HOTELS. IN OTHER WORDS, THE REVENUE AUTHORI TIES WERE OF THE VIEW THAT ITA NO.54/BANG/2011 PAGE 6 OF 18 THE EXPENSES INCURRED WERE EXTRAVAGANT AND THAT WAS THE BASIS ON WHICH THE IMPUGNED DISALLOWANCE WAS MADE BY THE REVENUE A UTHORITIES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. MOTOR INDUSTRIES CO. LTD. 223 ITR 112 (KAR) , WHEREIN THE HONBLE KARNATAKA HIGH COURT IN THE CONTEXT OF A DISPUTE WITH REGARD TO WHETHER A PARTICULAR ITEM OF EXPENDITURE WAS CAPITAL OR REVENUE EXPENDIT URE, HELD THAT THE EXPENDITURE WAS INCURRED OWING TO COMMERCIAL EXPEDI ENCY. THE HONBLE HIGH COURT FURTHER EXPLAINED THE LEGAL POSITION AS FOLLOWS:- THE LEGAL POSITION AS STATED IN THE ABOVE DECISI ONS, CAN THUS BE SAID TO BE FAIRLY WELL-SETTLED, NAMELY, THE COMMERCIAL EXPEDIENCY OF A BUSINESSMANS DECISION TO INCUR AN EXPENDITURE CANNOT BE TESTED ON THE TOUCHSTONE OF STRICT LEGAL LIABILITY TO INCUR SUCH AN EXPENDITURE. SUCH DECISIONS IN THE VERY NA TURE OF THINGS HAVE TO BE TAKEN FROM A BUSINESS POINT OF VIEW AND HAVE TO BE RESPECTED BY THE AUTHORITIES NO MATTER THAT IT MAY APPEAR TO THE LATTER THAT THE EXPENDITURE INCURRED WAS UNNECESSAR Y OR AVOIDABLE. 11. IN THE LIGHT OF THE DECISION REFERRED TO ABOVE AND TAKING INTO CONSIDERATION THE FACT THAT THE ASSESSEE HAS SUBSTA NTIATED ITS CLAIM THAT THE EXPENSES WERE INCURRED FOR BUSINESS PROMOTION AND F OR TRAINING, THE DISALLOWANCE MADE BY THE REVENUE AUTHORITIES CANNOT BE SUSTAINED. THE SAME IS DIRECTED TO BE DELETED. THUS, GROUNDS NO. 2 & 3 ARE ALLOWED. 12. GROUND NO.4 RAISED BY THE ASSESSEE IS AS FOLLOW S:- 4. THAT THE LEARNED CIT(A) ERRED IN UPHOLDING THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER IN MAKING A N ADDITION OF RS 91,540,677 TOWARDS AMORTIZATION OF EXPENSES, WIT HOUT APPRECIATING THAT THESE COSTS ARE INCURRED FOR INVE NTORIES TO SERVICE WARRANTY AND MAINTENANCE CONTRACTS. ITA NO.54/BANG/2011 PAGE 7 OF 18 13. THE FACTS WITH REGARD TO THE AFORESAID GROUND O F APPEAL ARE AS FOLLOWS. IN THE PROFIT & LOSS ACCOUNT, THE ASSESSE E CLAIMED DEDUCTION OF A SUM OF Q 9,15,40,677 UNDER THE HEAD AMORTIZATION OF INVENT ORY. THE AO CALLED UPON THE ASSESSEE TO FURNISH THE JUSTIFICATI ON FOR DEDUCTION OF THE AFORESAID SUM. IN REPLY, THE ASSESSEE SUBMITTED TH AT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS 91,540,677 TO THE PROFIT AN D LOSS ACCOUNT IN RESPECT OF AMORTIZATION OF INVENTORY ON ACCOUNT OF CONSUMPTION AND OBSOLESCENCE. THE INVENTORY PURCHASED BY THE COMPAN Y IS USED FOR THE FOLLOWING: AFTER SALES SERVICE - USE OF SPARES ON THE WARRAN TY PRODUCTS. ANNUAL MAINTENANCE SERVICES. THE ASSESSEE POINTED OUT THAT IT ENTERED INTO A WAR RANTY AND SUPPORT SERVICES AGREEMENT (AGREEMENT) WITH SUN MICROSYST EMS PTE LTD (SUN SINGAPORE) FOR RENDERING OF MARKETING, TECHN ICAL PRESALES SUPPORT AND WARRANTY SERVICES AND OTHER AUXILIARY S ERVICES. SUN SINGAPORE DIRECTLY SELLS SUN PRODUCTS TO CUSTOMERS IN THE ASIA PACIFIC REGION. SUN SINGAPORE THROUGH ITS AFFILIATES RENDER S THE WARRANTY SERVICES. ACCORDINGLY, SUN SINGAPORE SELLS DIRECTLY TO CUSTOMER IN INDIA, WHERE WARRANTY COSTS ARE INBUILT IN THE PRODUCT PRI CE AND AVAILS THE SERVICES OF THE ASSESSEE FOR RENDERING WARRANTY AND TECHNICAL SERVICES ON ITS BEHALF TO THE INDIAN CUSTOMERS. IN ACCORDAN CE WITH THE INTER- COMPANY AGREEMENT FOR WARRANTY AND SUPPORT SERVICES , THE ASSESSEE CHARGES SUN SINGAPORE, 10% MARK UP ON COSTS INCURRE D FOR RENDERING THE SERVICES. IN ORDER TO MEET THE CUSTOMERS REQU IREMENT, THE ASSESSEE WAS REQUIRED TO HOLD AT ALL TIMES, A MINIM UM LEVEL OF SPARES ITA NO.54/BANG/2011 PAGE 8 OF 18 AND OTHER COMPONENTS AND ACCESSORIES WITH IT IN ORD ER TO UTILIZE THE SAME WHILE RENDERING SERVICES. GIVEN THE LARGE BASE OF CUSTOMERS, THE ASSESSEE WAS REQUIRED TO HOLD ADEQUATE VOLUME OF SP ARES AND COMPONENTS FOR THE PURPOSE OF SERVICING ITS CUSTOME RS. SIMILARLY THE ASSESSEE ALSO RENDERS MAINTENANCE SERVICES WITH CUS TOMERS DIRECTLY. 14. DURING THE PREVIOUS YEAR, THE ASSESSEE EARNED REVENUE OF Q 15,44,38,038 FOR PROVIDING WARRANTY SERVICES. IN R ESPECT OF ANNUAL MAINTENANCE SERVICES ENTERED INTO WITH CUSTOMERS DI RECTLY, THE ASSESSEE EARNED REVENUE DURING THE PREVIOUS YEAR OF Q 6,19,76,253. 15. THE ASSESSEE POINTED OUT THAT IT RECOGNIZES THE REV ENUE FROM MAINTENANCE CONTRACTS RATEABLY OVER THE TERMS OF TH E MAINTENANCE CONTRACT ON A STRAIGHT-LINE BASIS (AS DISCLOSED IN NOTE 2B OF SCHEDULE 18 OF NOTES TO THE FINANCIAL STATEMENTS). THE ASSE SSEE CLAIMED THAT THIS TREATMENT WAS IN LINE WITH THE ACCOUNTING STANDARD 9 (AS 9) - REVENUE RECOGNITION ISSUED BY THE INSTITUTE OF CHAR TERED ACCOUNTANTS OF INDIA (ICAI). PARA 7.1 OF AS 9 STATES THAT REVENUE FROM SERVICE TRANSACTIONS IS USUALLY RECOG NISED AS THE SERVICE IS PERFORMED, EITHER BY THE PROPORTIONATE C OMPLETION METHOD OR BY THE COMPLETED SERVICE CONTRACT METHOD . UNDER THE PROPORTIONATE COMPLETION METHOD THE REVEN UE IS RECOGNISED ON THE BASIS OF CONTRACT VALUE, ASSOCIATED COSTS, N UMBER OF ACTS OR OTHER SUITABLE BASIS. FOR PRACTICAL PURPOSES, WHEN SERVICES ARE PROVIDED BY AN INDETERMINATE NUMBER OF ACTS OVER A SPECIFIC PERIOD OF TIME, REVENUE IS RECOGNISED ON A STRAIGHT LINE BASI S OVER THE SPECIFIC PERIOD UNLESS THERE IS EVIDENCE THAT SOME OTHER MET HOD BETTER ITA NO.54/BANG/2011 PAGE 9 OF 18 REPRESENTS THE PATTERN OF PERFORMANCE. THUS, THE RE VENUE RECOGNITION POLICY OF THE ASSESSEE IS IN LINE WITH THE AS-9. T HE ASSESSEE POINTED OUT THAT THE SPARE PARTS USED BY IT FOR SERVICING T HE CUSTOMERS ARE VALUED AT COST OR NET REALIZABLE VALUE, WHICHEVER I S LOWER AS PER AS-2 ON VALUATION OF INVENTORIES. THE ACCOUNTING POLIC Y OF THE COMPANY ON INVENTORIES AS DISCLOSED IN NOTE 2H OF SCHEDULE 18 OF NOTES TO THE FINANCIAL STATEMENTS IS REPRODUCED BELOW FOR YOUR G OODSELFS REFERENCE - INVENTORIES HELD FOR SERVICING CUSTOMERS ARE VALUE D AT COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER. COST FOR THE VALUATION INCLUDES PURCHASE PRICE OF THE ITEM, CUSTOMS DUTY A ND OTHER DIRECT COSTS INCURRED FOR PUTTING THE INVENTORY AT ITS CURRENT PLACE AND POSITION FOR INTENDED USE. INVENTORY IS AMORTIZ ED ON ACCOUNT OF CONSUMPTION AND OBSOLESCENCE OVER A PERIOD OF TH IRTY SIX MONTHS, AS PER THE MANAGEMENTS ESTIMATE. THE ASSESSEE CLAIMED THAT THE ABOVE POLICY IS BASED ON CAREFUL CONSIDERATION OF THE LIFE OF A TYPICAL COMPONENT, P AST FAILURE, RATES OF SPARES USED, CUSTOMER TRENDS, CHANGES IN TECHNOLOGY ETC. THE PERIOD OF 36 MONTHS HAS BEEN SCIENTIFICALLY ESTIMATED BY T HE MANAGEMENT CONSIDERING THE LIFE SPAN OF THE COMPONENTS, OBSOLE SCENCE, ETC. SUCH AMORTIZATION DONE ON A MONTHLY BASIS IS TREATED AS A CHARGE TO THE PROFIT AND LOSS ACCOUNT. 16. THE ASSESSEE ALSO GAVE A BREAK UP OF THE AMOUN T CLAIMED AS DEDUCTION AS FOLLOWS:- F.Y. AMOUNT IN RS. 2000-01 26,11,538 2001-02 3,50,37,267 2002-03 1,94,46,261 2003-04 2,52,04,043 2004-05 92,41,568 TOTAL 9,15,40,677 ITA NO.54/BANG/2011 PAGE 10 OF 18 17. THE AO HOWEVER REJECTED THE CLAIM OF THE ASSESSEE F OR DEDUCTION FOR THE FOLLOWING REASONS:- 8.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND D O NOT AGREE WITH THE ARGUMENTS OF THE ASSESSEE. NO DOUBT THE AS SESSEE CAN CLAIM THESE AMOUNTS ON THE BASIS OF ACTUAL EXPENDIT URE AND CONSUMPTION OF SPARE PARTS, IF SUCH SPARE PARTS ARE TO BE PROVIDED AS PER THE TERMS OF SALE OF VARIOUS HARDWARE BY THE ASSESSEE COMPANY AND ONLY IF SUCH CLAIMS ARE MADE BY THE CUS TOMERS AND ENTERTAINED BY THE ASSESSEE COMPANY DURING THE YEAR . IF THE ASSESSEE IS PROVIDING THESE EXPENSES ON THE BASIS O F CERTAIN LUMP-SUM FORMULA AND NOT IN NATURE OF ACTUAL EXPEND ITURE, THEN IT IS CERTAINLY IN NATURE OF PROVISION MADE BY THE ASSESSEE WHICH IS NOT AN ALLOWABLE EXPENDITURE. I AM UNABLE TO AGREE WITH THE ASSEESSEES CONTENTION THAT IT IS NOT (SIC ) THAT IT IS NOT POSSIBLE TO MAINTAIN A RECORD REGARDING ACTUAL EXPE NDITURE OF SPARE PARTS. LOOKING TO THE INFRASTRUCTURE WITH THE ASSESSEE, IT SHOULD NOT BE DIFFICULT TO MAINTAIN SUCH RECORD. FU RTHER, I DO NOT AGREE WITH THE ASSESSEE THAT THIS EXPENDITURE I S NOT AN UNASCERTAINED LIABILITY OR CONTINGENT LIABILITY. (EMPHASIS SUPPLIED) 8.4 TO CLAIM THIS EXPENDITURE, FIRSTLY SOME CUSTOM ER OF THE ASSESSEE HAS TO MAKE A CLAIM TOWARDS REPLACEMENT OF DEFECTIVE PARTS. SECONDLY SUCH CLAIM SHOULD BE IN ACCORDANCE WITH THE SALE WARRANTY ETC. GIVEN BY THE ASSESSEE COMPANY AN D THIRDLY, THE ASSESSEE MUST HAVE ALLOWED SUCH CLAIMS AND ENTE RTAIN THE REQUEST OF THE CUSTOMERS. IF ALL THESE CONDITIONS A RE NOT SATISFIED THEN THE ASSESSEE COMPANY CAN NOT CLAIM SUCH EXPEND ITURE. LT APPEARS THAT THE ASSESSEE IS DECLARING A PARTICULAR ITEM OF SPARE PART AS OBSOLETE IF IT WAS ACQUIRED 36 MONTHS BEFOR E. I AM UNABLE TO AGREE WITH SUCH A METHOD OF CLAIM OBSOLES CENCE BY THE ASSESSEE, BECAUSE THE SPARE PARTS MAY STILL BE GOOD ENOUGH TO USE FOR THE INTENDED PURPOSES. 8.5 IT HAS BEEN FURTHER GATHERED THAT SUN MICRO SYS TEM INDIA IS ONLY MARKETING PRODUCT ON BEHALF OF ITS PRINCIPA L I.E. SUNMICRO SYSTEMS INCORPORATION USA/SUN MICRO SYSTEMS, SINGAP ORE AND ANY SUCH CLAIMS FROM THE CUSTOMERS SHOULD BE SETTLE D BY THE PRINCIPLE AND NOT BY THE ASSESSEE COMPANY WHICH IS JUST A MARKETING ENTITY. 8.6 CONSIDERING THE FACTS OF THE CASE AND DISCUSSI ON IN FOREGOING PARAGRAPHS, I DISALLOW ENTIRE AMOUNT OF R S. ITA NO.54/BANG/2011 PAGE 11 OF 18 9,15,40,677/- AND ADD BACK THE SAME IN THE HANDS OF THE ASSESSEE COMPANY. 18. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONFIRM ED THE ORDER OF THE AO. THE LD. CIT(A)S OBSERVATIONS ON THIS ISSU E WERE AS FOLLOWS:- 10.4 AFTER CONSIDERING THE APPELLANTS ARGUMENTS AND THE FACTS OF THE CASE, IT IS HELD AS UNDER:- NO DOUBT THAT THE HONBLE DELHI HIGH COURT IN THE C ASE OF CIT V. ERICSON COMMUNICATIONS PVT. LTD. REPORTED IN 318 IT R 340 HAS HELD THAT THE PROVISION FOR WARRANTY CHARGES IS A D EFINITE BUSINESS LIABILITY ALLOWABLE AS A DEDUCTION IF THE SAME IS B ASED ON SCIENTIFIC BASIS AND A CONSISTENT POLICY IS APPLIED BY THE APPELLANT COMPANY. TO THIS EXTENT, THE APPELLANT HAS CLAIMED THAT THEY HAVE ADOPTED A SCIENTIFIC BASIS AND THEY SATISFY THE CON DITIONS OF MATCHING PRINCIPLE. IT IS ALSO CLAIMED THAT THEY AR E CONSISTENTLY FOLLOWING THE SAME ACCOUNTING POLICY OVER A PERIOD OF YEARS. IT WAS ALSO CLAIMED THAT IT IS AN ASCERTAINED LIABILIT Y AND ALLOWABLE U/S 37(1). WHILE IN THIS CASE, THE SUBMISSION GIVEN BY THE APPELLANT THEMSELVES ARE NOT CORRECT SINCE THEY HAV E GIVEN THE BREAK OF AMOUNT OF RS.9,15,00,40,677/- AS UNDER: F.Y. AMOUNT IN RS. 2000-01 26,11,538 2001-02 3,50,37,267 2002-03 1,94,46,261 2003-04 2,52,04,043 2004-05 92,41,568 TOTAL 9,15,40,677 FROM THE ABOVE DESCRIPTION ITSELF, IT CAN BE SEEN T HAT THE APPELLANT HAS INCLUDED EVEN THE AMOUNTS PERTAINING TO THE F.Y . 2000-01. ACCORDING TO THEIR CLAIM IF THE SAME IS DONE ON SCI ENTIFIC BASIS, PURCHASE MADE IN APRIL 2000 SHOULD HAVE BEEN AMORTI ZED IN MAY 2003, MAY 2000 IN JUNE 2003, ETC. AND THE SPARES PU RCHASED IN FEBRUARY 2001 SHOULD HAVE BEEN AMORTIZED IN MARCH 2 004 (I.E. AFTER 36 MONTHS). APPARENTLY THAT HAS NOT BEEN DO NE AS CAN BE SEEN FROM THE ABOVE TABLE - WHEREIN AN AMOUNT OF RS .26,11,538/- PERTAINING TO THE PERIOD BEFORE 36 MONTHS IS ALSO D EBITED IN THE ACCOUNTS. THIS CLEARLY DOES NOT SUPPORT THEIR CONTE NTION THAT THE SAME IS DONE SCIENTIFICALLY. ONCE ON FACTS IF IT IS PROVED THAT THE ITA NO.54/BANG/2011 PAGE 12 OF 18 MANAGEMENT POLICY IS NOT CONSISTENT AND THEIR THEOR Y THAT AT THE END OF 36 MONTHS THE SPARES AND STORES ARE REGARDED AS OBSOLETE AS PER THE MANAGEMENT POLICY FAILS AND ON FACTS THE APPELLANTS CASE DOES NOT FIT INTO THE CASES CITED BY THE APPEL LANT COMPANY. THOUGH IT IS TRUE THAT WHATEVER STORES, SPARES AND CONSUMABLES CONSUMED BY THE APPELLANT COMPANY IN THE YEAR UNDER REFERENCE IS CERTAINLY AN ALLOWABLE EXPENDITURE MERELY ON SOM E BASIS ESTIMATING A PORTION OF THE STORES AND INVENTORY AS OBSOLETE AND THAT TOO NOT ON SCIENTIFIC BASIS DOES NOT ENTITLE T HE APPELLANT TO CLAIM SUCH AN EXPENDITURE, AND HENCE, IT IS HELD TH AT THE AO HAS JUSTIFIABLY DISALLOWED THE ENTIRE SUM AS NOT HAVING BEEN DONE IN ACCORDANCE WITH THE ACCEPTED PRINCIPLES OF ACCOUNTI NG. HENCE, THIS DISALLOWANCE IS CONFIRMED. 18. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE HAS RAISED GROUND NO.4 BEFORE THE TRIBUNAL. 19. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT THE ASSESSEE WAS ENGAGED IN PROVIDING AFTER SALES SERVI CE AND REPLACEMENT OF SPARES AT A VERY SHORT NOTICE TO CUSTOMERS IN RESPE CT OF SUN PRODUCTS WHICH ARE EITHER COVERED BY WARRANTY (DIRECT SALES BY SUN , SINGAPORE) OR UNDER A SEPARATE MAINTENANCE CONTRACT WITH THE ASSESSEE. I T WAS SUBMITTED THAT THE REPLACEMENT OF DEFECTIVE SPARES PROVIDING ON CA LL SOLUTIONS TO CUSTOMERS QUERIES WHICH ARE PART OF THE AMC RENDERE D IS CRITICAL TO THE LINE OF BUSINESS OF THE COMPANY. THE ASSESSEE THEREFOR E HAS TO HOLD AT ALL TIMES A MINIMUM LEVEL OF SPARES AND OTHER COMPONENT S & ACCESSORIES FOR PERFORMING ITS OBLIGATIONS. THE ASSESSEE AGAIN REI TERATED THAT IT WAS WRITING OFF FOR A PERIOD OF 36 MONTHS TOWARDS CONSUMPTION A ND OBSOLESCENCE OF THE PARTS AND THIS WAS DONE ON THE BASIS OF PAST EXPERI ENCE OF THE ASSESSEE. THE ASSESSEE ALSO DREW OUR ATTENTION TO THE ACCOUNT ING POLICY OF THE COMPANY REGARDING INVENTORIES. IT WAS SUBMITTED TH AT THE FINDINGS OF THE AO AND THE CIT(A) THAT THE SUM OF Q 9,15,40,677 INCLUDED AMORTIZATION ITA NO.54/BANG/2011 PAGE 13 OF 18 EVEN BEYOND THE PERIOD OF 36 MONTHS IS FACTUALLY NO T CORRECT. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PAGES 154 & 155 OF THE ASSESSEES PAPERBOOK, WHICH GIVES THE BREAK UP OF SUM OF Q 9,15,40,677. THIS CHART DEMONSTRATES THAT THE WRIT E OFF WAS ONLY FOR A PERIOD OF 36 MONTHS. THE LD. COUNSEL PLACED RELIAN CE ON SEVERAL JUDICIAL PRONOUNCEMENTS AND HIGHLIGHTED THAT THESE PRONOUNCE MENTS EMPHASIZE THE NEED FOR FOLLOWING MATCHING CONCEPT, I.E., REVE NUES FOR A PARTICULAR PERIOD SHOULD BE MATCHED WITH THE CORRESPONDING EXP ENSES INCURRED OR TO BE INCURRED FOR EARNING THE REVENUE. REFERENCE WAS ALSO MADE TO DECISIONS FOR HIGHLIGHTING THE PRINCIPLE THAT FOR C LAIMING AS A DEDUCTION ANY SUM ON ACCOUNT OF LIABILITY, IT IS SUFFICIENT IF IT COULD BE SHOWN THAT THE INCURRING OF THE LIABILITY WAS CERTAIN AND THAT THE QUANTIFICATION OF THE LIABILITY CLAIMED AS DEDUCTION IS REASONABLE. THE DECISIONS REFERRED TO IN THIS REGARD WERE AS FOLLOWS:- (I) JK INDUSTRIES LTD. V. UOI 297 ITR 176 SC (II) TAPARIA TOOLS LTD. V. JCIT 260 ITR 102 (III) MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD . V. CIT 225 ITR 802 (IV) ROTORK CONTROLS INDIA PVT. LTD. V. CIT 314 IT R 62 20. IT WAS ALSO SUBMITTED THAT THE CLAIM OF THE AS SESSEE WAS IN ACCORDANCE WITH AS 9 OF THE ACCOUNTING STANDARDS OF ICAI. 21. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT THE ASSESSEE HAD NOT SATISFACTORILY EXPLAINED ITS CLAIM THAT THE SPARE P ARTS BECOME OBSOLETE WITHIN 36 MONTHS. IT WAS SUBMITTED THAT IN ANY EVE NT, SUCH ESTIMATION ITA NO.54/BANG/2011 PAGE 14 OF 18 CANNOT BE SAID TO BE SCIENTIFIC. IT WAS SUBMITTED THAT THE AUDITORS NOTE TO THE ACCOUNTS ON WHICH THE ASSESSEE HAS PLACED STRON G RELIANCE WOULD NOT BE SUFFICIENT TO EXPLAIN THE PLEA OF THE ASSESSEE. IT WAS SUBMITTED THAT THE ASSESSEE HAS TO PROVE THAT IT WAS FOLLOWING A PROPE R AND CONSISTENT APPROACH WITH REGARD TO ITS CLAIM FOR DEDUCTION AND THAT THE ASSESSEE HAS NOT DONE SO. THE LD. DR THEREFORE SUBMITTED THAT T HE ORDER OF THE CIT(A) SHOULD BE UPHELD. 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TH E LAW WITH REGARD TO ALLOWING DEDUCTION OF EXPENDITURE WHILE COMPUTING I NCOME ON THE BASIS OF PROVISION FOR LIABILITY ON ACCOUNT OF WARRANTY OBLI GATION HAS BEEN SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS PVT. LTD. V. CIT 314 ITR 62 (SC) . THE HONBLE SUPREME COURT HAS LAID DOWN THE FOLLOWING PRINCIPLES IN THIS REGARD: 13. IN THIS CASE WE ARE CONCERNED WITH PRODUCT WA RRANTIES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DE ALING 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 WHIC H IT IS INCURRED; (B) IT MAKES A PROVISION FOR WARRANTY ONL Y WHEN THE CUSTOMER MAKES A CLAIM; AND (C) IT PROVIDES FOR WAR RANTY AT 2% OF TURNOVER OF THE COMPANY BASED ON PAST EXPERIE NCE (HISTORICAL TREND). THE FIRST OPTION IS UNSUSTAINABLE SINCE IT WOULD TANTAMOUNT TO ACCOUNTING FOR WARRANTY EXPENSE S ON CASH BASIS, WHICH IS PROHIBITED BOTH UNDER THE COMPANIES ACT AS WELL AS BY THE ACCOUNTING STANDARDS WHICH REQUIRE ACCRUA L CONCEPT TO BE FOLLOWED. IN THE PRESENT CASE, THE DEPARTMENT IS INSISTING ON THE FIRST OPTION WHICH, AS STATED ABOVE, IS ERRONEO US AS IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAP PROPRIATE SINCE IT DOES NOT REFLECT THE EXPECTED WARRANTY COSTS IN RESPECT OF REVENUE ALREADY RECOGNIZED (ACCRUED). IN OTHER WORD S, IT IS NOT BASED ON MATCHING CONCEPT. UNDER THE MATCHING CONCE PT, IF REVENUE IS RECOGNIZED THE COST INCURRED TO EARN THA T REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED F OR. WHEN VALVE ACTUATORS ARE SOLD AND THE WARRANTY COSTS ARE AN INTEGRAL ITA NO.54/BANG/2011 PAGE 15 OF 18 PART OF THAT SALE PRICE THEN THE APPELLANT HAS TO P ROVIDE FOR SUCH WARRANTY COSTS IN ITS ACCOUNT FOR THE RELEVANT YEAR , OTHERWISE THE MATCHING CONCEPT FAILS. IN SUCH A CASE THE SECOND O PTION IS ALSO INAPPROPRIATE. UNDER THE CIRCUMSTANCES, THE THIRD OPTION IS MOST APPROPRIATE BECAUSE IT FULFILLS ACCRUAL CONCEP T AS WELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIAT E HISTORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNTING SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATURE OF THE SALES, THE WARRANTY PROVISIONS MA DE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY. T HUS, THE DECISION ON THE WARRANTY PROVISION SHOULD BE BASED ON PAST EXPERIENCE OF THE COMPANY. A DETAILED ASSESSMENT OF THE WARRANTY PROVISIONING POLICY IS REQUIRED PARTICULAR LY IF THE EXPERIENCE SUGGESTS THAT WARRANTY PROVISIONS ARE GE NERALLY REVERSED IF THEY REMAINED UNUTILIZED AT THE END OF THE PERIOD PRESCRIBED IN THE WARRANTY. THEREFORE, THE COMPANY SHOULD SCRUTINIZE THE HISTORICAL TREND OF WARRANTY PROVISI ONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT. ON THI S BASIS A SENSIBLE ESTIMATE SHOULD BE MADE. THE WARRANTY PROV ISION FOR THE PRODUCTS SHOULD BE BASED ON THE ESTIMATE AT YEA R END OF FUTURE WARRANTY EXPENSES. SUCH ESTIMATES NEED REASS ESSMENT EVERY YEAR. AS ONE REACHES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBABILITY THAT THE WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERABLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMATION AMOUNT. WHETHER THIS SHOULD BE DO NE THROUGH A PRO RATA REVERSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WARRANTY PROVISI ONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST THEN THE QUESTION OF REVERSAL IN THE SUBS EQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIG NIFICANT WAY. IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THI S CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE BY THE APPEL LANT-ENTERPRISE BECAUSE IT HAS INCURRED A PRESENT OBLIGATION AS A R ESULT OF PAST EVENTS. THERE IS ALSO AN OUTFLOW OF RESOURCES. A RE LIABLE ESTIMATE OF THE OBLIGATION WAS ALSO POSSIBLE. THEREFORE, THE APPELLANT HAS INCURRED A LIABILITY, ON THE FACTS AND CIRCUMSTANCE S OF THIS CASE, DURING THE RELEVANT ASSESSMENT YEAR WHICH WAS ENTIT LED TO DEDUCTION UNDER SECTION 37 OF THE 1961 ACT. THEREFO RE, ALL THE THREE CONDITIONS FOR RECOGNIZING A LIABILITY FOR TH E PURPOSES OF PROVISIONING STANDS SATISFIED IN THIS CASE. IT IS I MPORTANT TO NOTE THAT THERE ARE FOUR IMPORTANT ASPECTS OF PROVISIONI NG. THEY ARE PROVISIONING WHICH RELATES TO PRESENT OBLIGATION, I T ARISES OUT OF OBLIGATING EVENTS, IT INVOLVES OUTFLOW OF RESOURCES AND LASTLY IT INVOLVES RELIABLE ESTIMATION OF OBLIGATION. KEEPING IN MIND ALL THE FOUR ASPECTS, WE ARE OF THE VIEW THAT THE HIGH COUR T SHOULD NOT ITA NO.54/BANG/2011 PAGE 16 OF 18 HAVE INTERFERED WITH THE DECISION OF THE TRIBUNAL I N THIS CASE. (EMPHASIS SUPPLIED) 23. KEEPING IN MIND THE PRINCIPLES LAID DOWN BY TH E HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS PVT. LTD. (SUPRA), WE SHALL EXAMINE THE FACTS OF THE PRESENT CASE. IN THE PRESENT CASE , THE ASSESSEE WAS PROVIDING AFTER SALES SERVICE AND MAINTENANCE SERVI CES. IT WAS IN PURSUANCE OF AN AGREEMENT FOR RENDERING THESE SERVI CES WITH SUN, SINGAPORE BETWEEN THE ASSESSEE AND THE CUSTOMERS DI RECTLY. AS FAR AS RENDERING WARRANTY SUPPORT SERVICES WITH SUN SINGAP ORE IS CONCERNED, THE ASSESSEE CHARGES SUN SINGAPORE 10% MARK UP COST FOR RENDERING SERVICES. DURING THE PREVIOUS YEAR, THE ASSESSEE EARNED REVEN UE OF Q 15,44,38,038 FOR PROVIDING WARRANTY SERVICES. IN RESPECT OF ANN UAL MAINTENANCE SERVICES ENTERED INTO WITH CUSTOMERS DIRECTLY, THE ASSESSEE EARNED REVENUE DURING THE PREVIOUS YEAR OF Q 6,19,76,253. FOR EARNING THE AFORESAID INCOME, TH E ASSESSEE HAD TO INCUR CERTAIN EXPENSES. THIS WILL INCLUDE PROVIDING SPARES AND RENDERING SERVICES TO THE CUSTOMERS OF SUN, SIN GAPORE OR ASSESSEES OWN CUSTOMERS. THE DISPUTE INVOLVED IS WITH REGARD TO THE INVENTORIES THAT ARE HELD BY THE ASSESSEE, WHICH ARE USED FOR CARRYI NG OUT THE SERVICING AS AFORESAID. ACCORDING TO THE ASSESSEE, THERE ARE NU MEROUS ITEMS FOR WHICH IT IS NOT POSSIBLE TO HAVE REGULAR ACCOUNTS AND THE REFORE THE ASSESSEE VALUES THE INVENTORY AT COST OR NET REALIZABLE VALU E. THE ASSESSEE CLAIMS 1/36 TH OF SUCH COST AS DEDUCTION OVER A PERIOD OF 36 MONT HS. ACCORDING TO THE ASSESSEE, THIS WILL TAKE CARE OF THE CONSUMPTIO N AND OBSOLESCENCE OF THE INVENTORY. WE DO NOT FIND ANY DISCREPANCY IN T HE QUANTUM OF AMOUNT CLAIMED I.E., THE SAME RELATES TO AMORTIZATION OVER A PERIOD OF 36 MONTHS ITA NO.54/BANG/2011 PAGE 17 OF 18 AND THEREFORE THE COMPLAINT OF THE AO THAT THE AMOR TIZATION INCLUDES A PERIOD BEYOND 36 MONTHS, IN OUR VIEW, HAS NO MERITS . THE CHART FILED AT PAGES 154 & 155 OF THE ASSESSEES PAPERBOOK CLEARLY DEMONSTRATES THE PLEA OF THE ASSESSEE IN THIS REGARD. 24. AS FAR AS THE QUESTION WHETHER THE CLAIM OF TH E ASSESSEE FALLS WITHIN THE PARAMETERS OF THE LAW LAID DOWN BY THE HONBLE SUPREME COURT REFERRED TO EARLIER, WE ARE OF THE VIEW THAT THIS ASPECT HAS NEITHER BEEN INVESTIGATED BY THE AO OR THE CIT(APPEALS). THE AO PROCEEDED ON DIFFERENT BASIS VIZ., THAT THE LIABILITY IS CONTINGENT AND CANNOT BE CLAI MED AS DEDUCTION. THE CIT(A) ON AN ERRONEOUS ASSUMPTION THAT THE AMORTIZA TION OF INVENTORY IS FOR A PERIOD BEYOND 36 MONTHS HELD THAT THE ESTIMATE IS NOT SCIENTIFIC. AS LAID DOWN BY THE HONBLE SUPREME COURT, IF THE INCURRING OF THE LIABILITY IS CERTAIN AND QUANTIFICATION OF THE LIABILITY IS DONE ON A SC IENTIFIC BASIS, THEN THERE SHOULD BE NO OBJECTION FOR ALLOWING THE CLAIM OF TH E ASSESSEE FOR DEDUCTION. IT IS NO LONGER OPEN TO THE REVENUE TO TAKE A STAND THAT SUCH EXPENSES ARE CONTINGENT AND CANNOT BE ALLOWED AS A DEDUCTION, IN VIEW OF THE LAW LAID DOWN BY THE HONBLE SUPREME COURT REFERRED TO ABOVE . WE ARE THEREFORE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE T O SET ASIDE THE ORDER OF THE LD. CIT(A) AND REMAND THE ISSUE TO THE ASSESSIN G OFFICER FOR FRESH CONSIDERATION IN THE LIGHT OF THE DECISION OF THE H ONBLE SUPREME COURT REFERRED TO ABOVE. IN THIS REGARD, WE ALSO NOTICE THAT IN THE ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE ACT FOR AYS 2004-05 & 2006-07, THE REVENUE HAS ACCEPTED THE CLAIM OF THE ASSESSEE. IT IS ONLY FOR THE CURRENT ASSESSMENT YEAR THAT THE REVENUE HAS DISPUTED THE C LAIM OF THE ASSESSEE. WE THEREFORE DIRECT THE AO TO CONSIDER THE ISSUE AF RESH IN THE LIGHT OF ITA NO.54/BANG/2011 PAGE 18 OF 18 DIRECTIONS GIVEN ABOVE. THE ASSESSEE WILL ALSO EXP LAIN THE BASIS ON WHICH IT MADE THE AFORESAID AMORTIZATION. NOW THAT THE A CTUAL DATA WILL BE AVAILABLE WITH THE ASSESSEE, THE ASSESSEE WILL ALSO FURNISH DETAILS OF THE ACTUAL CONSUMPTION OF THE INVENTORY AND THE INVENTO RIES WHICH WERE TREATED AS OBSOLETE, REALIZABLE VALUE OF SUCH OBSOLETE ITEM S, IF SUCH DETAILS ARE AVAILABLE WITH THE ASSESSEE. THUS, GROUND NO.4 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 25. THE OTHER GROUNDS OF APPEAL ARE PURELY CONSEQU ENTIAL AND DO NOT REQUIRE ANY ADJUDICATION. 26. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 14 TH DAY OF SEPTEMBER, 2012. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 14 TH SEPTEMBER, 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.