ESSENTIAL POWER TRANSMISSION P. LTD, MUMBAI V. ITO 8(1)(3), MUMBAI

ITA 6515/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0954 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 21-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Keywords: Depreciation; Additional evidence; Capital expenditure
• Section: 271(1)(c); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'E' BENCH, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 6515/MUM/2009 (ASSESSMENT YEAR: 2006-07) M/S. ESSENTIAL POWER TRANSMISSION INCOME TAX OFFICE R - 8(1)((3) PVT. LTD., ESSENPRO HOUSE MUMBAI 24, MAROL CO-OP. INDL. ESTATE VS. ANDHERI (E), MUMBAI 400059 PAN - AAACE 3426 D APPELLANT RESPONDENT APPELLANT BY: SHRI K. GOPAL RESPONDENT BY: SHRI A.K. NAYAK O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A)- XVII, MUMBAI DATED 05.10.2009. 2. ASSESSEE HAS RAISED TOTAL OF 15 GROUNDS WHICH ARE I N FACT DETAILED GROUNDS FOR GROUND NO. 1, WHICH IS AS UNDER: - 1. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) [H EREINAFTER REFERRED TO AS LD. CIT(A)] HAS ERRED IN CONFIRMING THE FOL LOWING ADDITIONS AND DISALLOWANCES MADE BY THE LD. ASSESSING OFFICER WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CAS E: SR. NO. PARTICULARS AMOUNT (RS) A DISALLOWANCE OF EXPENDITURE TOWARDS AFTER SALE SERVICES AND WARRANTIES AS PROVISION 42,54,570 B DISALLOWANCE OF EXPENDITURE INCURRED TOWARDS REPAIRS ON FURNITURE 6,19,936 C DISALLOWANCE OF EXPENDITURE INCURRED TOWARDS REPAIRS OF THE BUILDING 8,14,770 D DISALLOWANCE OF EXPENDITURE INCURRED TOWARDS REPAIRS OF (ASSET) PATTERN 50,332 E DISALLOWANCE OF EXPENDITURE INCURRED TOWARDS REPAIRS OF THE AIR CONDITIONER 1,01,705 ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 2 F DISALLOWANCE OF EXPENDITURE INCURRED TOWARDS REPAIRS OF THE MACHINERY 26,11,844 3. BRIEFLY STATED, THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING POWER TRANSMISSION EQUIPMENTS AND FILED RETURN OF INCOME FOR A.Y. 2006-07 DECLARING TOTAL INCOME OF RS.19,00,624/-. DURING TH E SCRUTINY PROCEEDINGS THE A.O. MADE DISALLOWANCE OF PROVISION FOR WARRANT IES AND VARIOUS EXPENDITURES CLAIMED UNDER THE HEAD REPAIRS AND MA INTENANCE. THE ISSUE IN GROUND NO. 1(A) IS WITH REFERENCE TO PROVISION F OR WARRANTIES AND THE ISSUE IN GROUND NO. 1(B) TO (F) IS WITH REFERENCE TO REPA IRS, WHICH WAS DISALLOWED FOR WANT OF COMPLETE DETAILS AND ALSO BEING IN THE NATURE OF CAPITAL EXPENDITURE, ACCORDING TO THE A.O. 4. WITH REFERENCE TO THE GROUNDS RAISED THE ASSESSEE C OUNSEL SUBMITTED THAT THE A.O. HAS MISTAKENLY DISALLOWED THE PROVISI ON FOR WARRANTIES. IT WAS HIS SUBMISSION THAT THE ASSESSEE HAS MADE PROVISION FOR WARRANTIES IN VARIOUS YEARS AS UNDER: - WARRANTIES 2004-05 2005-06 2006-07 2007-08 2008-09 BALANCE AS ON 31 ST MARCH, 05 PROVISION MADE DURING THE YEAR AMOUNTS USED DURING THE YEAR 0 82.09 0 82.09 56.51 13.96 124.64 222.53 51.10 296.07 42.23 86.78 251.52 4.71 116.33 BALANCE AS ON 31 ST MARCH 82.09 124.64 296.07 251.52 139.90 NET AMOUNT DEBITED / CREDITED TO PROFIT & LOSS A/C 82.09 42.55 171.43 -44.55 -111.62 5. IT WAS SUBMITTED THAT FOR F.Y. 2004-05, I.E. FOR TH E PREVIOUS ASSESSMENT YEAR THE ASSESSEE MADE A PROVISION FOR T HE FIRST TIME OF RS.82.09 LAKHS AS IT WAS FELT THAT PROVISION FOR WARRANTIES IS REQUIRED AS PER THE NEW ACCOUNTING STANDARD, IN VIEW OF THE PAST EXPERIENCE ASSESSEE COMPANY. DURING YEAR UNDER CONSIDERATION, ACCORDING TO THE S AME NORMS THE TOTAL PROVISION REQUIRED WAS TO THE TUNE OF RS.56.51 LAKH S WHEREAS THE ASSESSEE HAS USED RS.13.96 LAKHS OUT OF THE ABOVE PROVISION WHICH WERE EXPENDED ON VARIOUS HEADS LIKE SALARY, TRANSPORT, ETC. THEREFOR E, THE ASSESSEE HAS MADE ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 3 NET PROVISION OF RS.42.55 LAKHS IN THE BOOKS OF ACC OUNT DURING THE YEAR. IN THE LATER YEAR THE GROSS PROVISION WAS TO THE TUNE OF RS.222.53 LAKHS AND THE AMOUNT USED WAS RS.51.50 LAKHS AND THE NET AMOUNT D EBITED TO P & L ACCOUNT WAS RS.171.43 LAKHS. IN THE SUBSEQUENT YEAR , I.E. A.Y. 2008-09 THE ASSESSEE HAS IN FACT REDUCED THE PROVISION AS NEW T ECHNOLOGY WAS INTRODUCED AND WARRANTY PERIOD WAS ALSO REVISED. AC CORDINGLY THE PROVISION WAS LESS AND AMOUNTS USED WERE MORE. CONSEQUENTLY, THERE WERE CREDITS IN F.Y. 2007-08 AND 2008-09 AS SHOWN IN THE ABOVE TABL E. 6. REFERRING TO THE PAPER BOOK FILED WITH DETAILS FOR VARIOUS YEARS IT WAS SUBMITTED THAT ON SOME OF THE ITEMS THE WARRANTY WA S PROVIDED AT 2.5% OF THE SALE VALUE AND ON SOME PRODUCTS IT WAS 4% AND 9 % AND REFERRED TO THE PROVISIONS OF THESE ON THE SALES VALUE IN A CHART F ORM PLACED IN PAPER BOOK AT PAGE 123, 124, 145, 153 AND 156. HE REFERRED TO THE LETTER WRITTEN TO THE A.O. IN A.Y. 2007-08 VIDE LETTER DATED 29.09.2009 P LACED IN PAPER BOOK PAGE NO. 157 WITH REFERENCE TO PROVISION MADE FOR SERVIC ES AND WARRANTEE AND HOW AS-29 WAS APPLICABLE TO THE ASSESSEE AND ALSO T HE FACTUAL ASPECTS WITH REFERENCE TO UTILIZATION OF THE PROVISION. IT WAS H IS SUBMISSION THAT AFTER THE EXPLANATION, THE A.O. IN A.Y. 2007-08 ALLOWED THE P ROVISION WITHOUT ANY DISALLOWANCE. IT WAS HIS SUBMISSION THAT THE A.O. D URING THE YEAR HAS MISUNDERSTOOD THE AMOUNTS USED OF RS.13.96 LAKHS, T HE DETAILS OF WHICH WERE FURNISHED BEFORE HIM AND GAVE WRONG STATEMENT THAT NO AMOUNT WAS SPENT DURING THE YEAR AND ACCORDINGLY THE PROVISION WAS NOT AN ALLOWABLE EXPENDITURE. HE THEN REFERRED TO THE PRINCIPLES EST ABLISHED BY THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT 314 ITR 62. HE SUBMITTED THAT PROVISION OF WARRANTY CLAIM I S AN ELIGIBLE EXPENDITURE UNDER SECTION 37(1). 7. THE LEARNED D.R., HOWEVER, REFERRED TO THE FINDINGS OF THE A.O. IN THE ASSESSMENT ORDER, WHICH WERE AGAIN REAFFIRMED BY TH E CIT(A) IN HIS ORDER AT PARA 3.4. HE ALSO SUBMITTED THAT THE LEARNED CIT(A) DISTINGUISHED THE FACTS IN THE ABOVE SAID CASE OF ROTORK CONTROLS INDIA (P) LTD. BUT RELIED ON THE DECISIONS OF THE ITAT IN THE CASE OF ITO VS. EMCO T RANSFORMERS LTD. 32 ITD 260 (BOM) AND SRINIVASAN COMPUTERS LTD. VS. ACIT 10 7 ITD 357. IT HAS HIS ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 4 SUBMISSION THAT THE PROVISIONS ARE NOT ALLOWABLE DE DUCTION UNDER SECTION 37(1) OF THE IT ACT. 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS ON RECORD. BEFORE ADVERTING TO THE ANALYSIS OF THE ISSUE IT IS WORTHWHILE TO EXTRACT THE ORDER OF THE A.O. WHILE MAKING THE DISALLOWANCE, WH ICH IS AS UNDER: - 4. PROVISIONS FOR WARRANTIES FROM THE PROFIT AND LOSS ACCOUNT IT IS SEEN THAT T HE ASSESSEE COMPANY HAS MADE PROVISIONS FOR SERVICE & WARRANTIE S OF RS.432,54,570/- DURING THE YEAR. THE SAME IS INCLUD ED IN THE BALANCE SHEET UNDER THE HEAD PROVISIONS FOR WARRANTIES. THE OPENING BALANCE OF PROVISIONS OF WARRANTIES WAS RS.8209232/- WHICH IS NOW INCREASED TO RS.1,24,63,802/-. THUS IN THE OPENING BALANCE, THE CURRENT YEARS PROVISION IS ADDED WHICH SHOWS THAT THE ASSESSEE HA S NOT INCURRED ANY EXPENDITURE UNDER THIS HEAD DURING THE YEAR UNDER C ONSIDERATION. THE ASSESSEE WAS ASKED TO PROVIDE DETAILS OF PROVISIONS FOR WARRANTIES AND EXPENDITURES INCURRED DURING THE YEARS TOWARDS SERV ICE OF WARRANTIES. THE ASSESSEE HAS GIVEN THE CALCULATION OF PROVISION S OF WARRANTIES, HOWEVER, IN THE DETAILS OF EXPENDITURE INCURRED THE ASSESSEE HAS GIVEN DETAILS OF EXPENDITURE INCURRED TOWARDS WARRANTIES AS UNDER: - SALARIES & WAGES RS.828051/- TRAVELLING RS .41.558/- FOREIGN TRAVELLING EXPENSES RS. 518133/- SPARES & CONSUMABLES ITEMS RS. 8529/- TOTAL RS.1396236/- FROM THE ABOVE DETAILS AND AS PER THE ACCOUNTS OF T HE ASSESSEE IT IS CLEAR THAT THE ASSESSEE IS NOT DEDUCTING THE EXPEND ITURE INCURRED TOWARDS WARRANTY EXPENSES FROM THE PROVISIONS FOR W ARRANTIES. THIS SHOWS THAT THE ASSESSEE ON ONE HAND IS CLAIMING DED UCTION ON ACCOUNT OF PROVISIONS FOR WARRANTIES AND SECONDLY THE EXPEN DITURES INCURRED FOR SERVICE OF WARRANTIES ARE ALSO CLAIMED BY THE ASSES SEE. AS NO EXPENDITURES ARE ALLOWED ON PROVISIONAL BASIS, THER EFORE, THE EXPENDITURE CLAIMED TOWARDS PROVISIONS FOR WARRANTIES ARE DISAL LOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. THE ADDIT ION ON THIS ACCOUNT IS RS.42,54,570/-. PENALTY PROCEEDINGS U/S 271(1)(C) I S INITIATED ON ACCOUNT OF FURNISHING OF INACCURATE PARTICULARS OF INCOME W ITH A VIEW TO EVADE PAYMENT OF INCOME TAX. 9. THE ABOVE INDICATE THAT THE ASSESSEE HAS GIVEN THE CALCULATION OF PROVISION OF WARRANTIES AND ALSO FURNISHED DETAILS OF EXPENDITURE INCURRED TOWARDS WARRANTIES OF RS.13,96,236/-. THIS ALSO IND ICATES THAT ASSESSEES EXPLANATION THAT THE GROSS PROVISION WAS REDUCED BY THE AMOUNT INCURRED SO AS TO MAKE A NET PROVISION OF RS.42.65 LAKHS IS TO BE ACCEPTED. IT IS ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 5 ASSESSING OFFICER WHO MISUNDERSTOOD THAT THE ASSESS EE WAS MAKING NO EXPENDITURE ON THE PROVISION. THE CIT(A) ALSO, IN O UR VIEW, HAS NOT CONSIDERED THE FACTS IN ITS CORRECT PERSPECTIVE. TH E HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT 314 ITR 62 HAS CONSIDERED THE ISSUE IN DETAIL AND ALLOWED THE PROV ISION AS EXPENDITURE UNDER SECTION 37(1) HOLDING AS UNDER: - A PROVISION IS A LIABILITY WHICH CAN BE MEASURED O NLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RE COGNIZED WHEN: (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 REQUI RED TO BE SETTLED THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PRO VISION CAN BE RECOGNIZED. LIABILITY IS DEFINED AS A PRESENT OBLIG ATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESU LT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENE FITS. A PAT EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERP RISE THAT IS RECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGN ITION THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBAB ILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT IS DETERMINED BY CON SIDERING THE SAID OBLIGATIONS AS A WHOLE. 10. THE PRINCIPLE ESTABLISHED BY THE SAID JUDGEMENT IS EQUALLY APPLICABLE TO THE FACTS OF THE CASE. THE CIT(A) HAS RELIED ON ITAT DECISIONS BUT THOSE FACTS ARE ENTIRELY DIFFERENT. IN THE CASE OF SRINIV ASAN COMPUTER LTD. VS. ACIT 107 ITD 357 (CHENNAI) THE FACTS ARE THAT THE ASSESS EE MADE A PROVISION TOWARDS UNEXPIRED WARRANTEE AND CLAIMED DEDUCTION. THE ASSESSING OFFICERS FINDING THAT THE ACTUAL EXPENDITURE WAS MUCH LESS T HAN THE PROVISION MADE AND DELETED THE EXCESS AMOUNT TREATING THE EXPENDIT URE AS CONTINGENT IN NATURE. THE SAME WAS UPHELD ON THE FACTS. HOWEVER, IN THE PRESENT CASE THE ASSESSEE IS ABLE TO DEMONSTRATE THAT PROVISIONING W AS MADE ON A RATIONAL BASIS ON THE PAST EXPERIENCE AND FURTHER, OVER A PE RIOD OF TIME THE PROVISION WAS REDUCED AS ASSESSEE WAS ABLE TO IMPROVE THE TEC HNOLOGY AND OFFERED THE BALANCE TO THE CREDIT OF P & L ACCOUNT, AFTER UTILI SATION OF PART OF THE AMOUNT IN LATER YEARS. IT IS WORTHWHILE TO MENTION THE ASS ESSEES SUBMISSIONS BEFORE THE CIT(A), WHICH ARE AS UNDER: - ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 6 C) THE WARRANTIES/GUARANTEES START FROM THE DATE O F INSTALLATION AND RANGES FROM 18 TO 36 MONTHS DEPENDING ON THE TYPE O F EQUIPMENT. D) THE ESTIMATED COST OF WARRANTIES FROM A PART OF THE EQUIPMENT COSTING AS ALSO THE SELLING PRICE OF THE EQUIPMENT, FOR INSTANCE: FOR STANDARD GEAR BOXES & GENERAL MOTORS THE GUARAN TEE/ WARRANTEE PERIOD IS 18 MONTHS FROM THE DATE OF INST ALLATION & THE ESTIMATED COST OF WARRANTY IS AROUND 2.5% OF SE LLING PRICE. FOR AERATOR GEAR BOXES THE GUARANTEE/WARRANTEE PERI OD IS 18 MONTHS FROM THE DATE OF INSTALLATION & THE ESTIMATE D COST OF WARRANTY IS AROUND 4% OF SELLING PRICE. FOR EXTRUDER GEAR BOXES FOR KABRA & SPECIAL GEARS B OXES FOR M/S FLAT PRODUCTS THE GUARANTEE/WARRANTEE PERIOD IS 36 MONTHS FROM THE DATE OF INSTALLATION & THE ESTIMATE D COST OF WARRANTY IS AROUND 9% OF SELLING PRICE. E) AS PER THE TERMS OF WARRANTIES & GUARANTEES THE APP ELLANT GUARANTEES AGAINST DEFECTIVE DESIGN, MATERIAL & FAU LTY WORKMANSHIP. THE APPELLANT WARRANTIES FREE REPLACEM ENT OF ANY DEFECTIVE PARTS DURING THE PERIOD OF WARRANTY. APPE LLANT IS ALSO REQUIRED TO GIVE BANK GUARANTEE IN MOST CASES TO GI VE CONFIDENCE TO CUSTOMER THAT WARRANTY PROVISIONS GIVEN SHALL BE HO NOURED DURING THE PERIOD OF UNEXPIRED PERIOD OF WARRANTY. F) THE COMPANY IS HAVING A SEPARATE DEPARTMENT FOR WAR RANTY SERVICES, WHICH IDENTIFIED THE ACTUAL EXPENSES INCU RRED FOR A PARTICULAR SALE. AND ON THE BASIS OF THEIR ANALYSIS ALONG WITH THE HELP OF TECHNICAL DEPARTMENT THE PROVISION FOR WARR ANTY IS ARRIVED AT. 11. SIMILAR EXPLANATION WAS ALSO GIVEN BEFORE THE A.O. IN A.Y. 2007-08 WHERE IT WAS FURTHER SUBMITTED THAT FOR INCREASING THE WARRANTY PROVISION REASONS ARE AS UNDER: - ASSESSEE HAS BEEN DESIGNING AND MANUFACTURING SPEC IAL GEAR UNITS REQUIRED FOR STEEL INDUSTRIES AND PLASTIC INDUSTRIE S. THEY HAVE MANUFACTURED UNITS FOR 1 ST TIME AND DESIGN CALCULATION IS BASED ON INTERNATIONAL STANDARD BUT STILL FEED BACK FOR PERF ORMANCE AND LIFE OF GEAR UNITS WAS TO BE ASCERTAINED FOR THE SPECIAL GE AR UNITS. THE GEAR UNITS ARE RUNNING FOR 24 HRS. 365 DAYS A YEAR CONTI NUOUSLY AND ARE TO BE DESIGN CONSIDERING ALL THE UNFORESEEN CIRCUMSTANCES . THE ULTIMATE CUSTOMER IS ALSO DEMANDING WARRANTY/GUARANTEE OF LO NGER DURATION IN VIEW OF THE COMMITMENTS WITH THEIR CUSTOMERS. THE G EAR UNITS MADE BY ASSESSEE IS PART OF THE COMPLETE EQUIPMENT MANUFACT URED BY ITS CUSTOMER AND ALSO EXPORTED OUTSIDE INDIA. THE ULTIM ATE CUSTOMER DEMANDS WARRANTY/GUARANTEE FOR A LONGER PERIOD CONS IDERING THE TIME FOR SHIPMENT, INSTALLATION, COMMISSIONING FOR SUCH A LARGE EQUIPMENT. SINCE THE STEEL APPLICATION WAS DEVELOPED BY THEM A FTER LOT OF EXCHANGE OF DATA AND TECHNICAL SPECIFICATION AND HENCE THIS CALLED FOR A SPECIAL ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 7 WARRANTY/GUARANTEE FOR SUCH APPLICATION WHERE THE O RDER COULD ONLY BE AWARDED IF THIS WARRANTY/GUARANTEE FOR 36 MONTHS AN D HENCE THE PROVISION WAS ACCORDINGLY MADE. THE MAIN REASON FOR INCREASE IN PROVISION OF WARRANTY FOR ASS. YEAR 200720-08 IS DU E TO FAILURE OF SPECIAL GEAR UNIT SUPPLIED TO M/S. FLAT PRODUCTS AND REQUIR ING TO DELIVER NEW GEAR BOX FREE OF COST AS PER WARRANTY PROVISION. DU E TO THAT WARRANTY PROVISION RATE FOR SPECIAL GEAR-BOXES IS INCREASED FROM 10% LAST YEAR TO 20% CURRENT YEAR. ALSO SALES OF SPECIAL GEAR UNITS SUPPLIED TO M/S. FLAT PRODUCTS AND M/S. KABRA EXTRUSIONTECHNIK LTD. HAS INCREASED FROM 1 CRS., AN INCREASE OF 225%. DUE TO ABOVE 2 REASONS I .E. PROBABILITY INCREASE IN COMPLETE FAILURE OF SPECIAL GEAR UNITS TOGETHER WITH INCREASE IN SALES OF SPECIAL GEAR UNIT QUANTUM OF WARRANTY P ROVISION HAS INCREASED IN A.Y. 2007-2008. 12. THIS INDICATES THAT THE ASSESSEE IS ABLE TO MAKE TH E PROVISION ON A SYSTEMATIC AND SCIENTIFIC BASIS AND ASSESSEE IN FAC T FULFILLED ITS WARRANTY CONDITIONS ALSO TO THE CUSTOMERS. THE A.O., AFTER E XAMINING THE SAME IN LATER YEAR, HAS ACCEPTED THE SAME AND ALLOWED THE PROVISI ON. IN VIEW OF THIS, WE ARE OF THE VIEW THAT BOTH THE A.O. AND CIT(A) ERRED IN ARRIVING AT WRONG CONCLUSION OF THE FACTS OF THE CASE. IN OUR VIEW TH E PROVISION FOR WARRANTIES IS AN ALLOWABLE EXPENDITURE. HOWEVER, THE ASSESSEE IS NOT IN A POSITION TO SUBMIT BEFORE US HOW THIS AMOUNT OF RS.13.29 CRORES WAS ACCOUNTED FOR AND COPY OF THE RETURNS STATED TO HAVE BEEN FILED EARMA RKING THE EXPENDITURE. MOREOVER, THE NORM FOR GROSS PROVISIONING WAS ALSO NOT EXAMINED BY THE A.O. AS SEEN FROM THE ASSESSMENT ORDER AS HE MISUND ERSTOOD THE ISSUE. IN VIEW OF THIS, THE MATTER IS RESTORED TO THE FILE OF THE A.O. TO EXAMINE THE GROSS PROVISION AND ALLOW THE PROVISION WARRANTIES AFTER EXAMINING THE EXPENDITURE INCURRED DURING THE YEAR UNDER VARIOUS HEADS. ASSESSEE SHOULD BE GIVEN OPPORTUNITY TO EXPLAIN THE VARIOUS AMOUNTS AND ACCOUNTS IN WHICH THE EXPENDITURE IS CLAIMED. WITH THESE DIRECTIONS, FOR LIMITED PURPOSE OF VERIFICATION, THE MATTER IS RESTORED TO THE FILE OF THE A.O. GROUND IS CONSIDERED ALLOWED. 13. WITH REFERENCE THE GROUND NOS. 1B TO 1F THE A.O. DI SALLOWED THE ENTIRE EXPENDITURE TOWARDS REPAIRS OF VARIOUS ITEMS CLAIME D BY THE ASSESSEE FOR TWO REASONS; (1) COMPLETE SETS OF BILLS WERE NOT FURNIS HED, AND (2) THE EXPENDITURE WAS CAPITAL IN NATURE. ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 8 14. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE A.O. HA S NOT GIVEN PROPER OPPORTUNITY TO FURNISH ALL THE DETAILS OF VARIOUS C LAIMS BUT PROVIDED SOME SAMPLE BILLS AS IT WOULD INCREASE THE FILE WITH UNN ECESSARY DETAILS. WITHOUT GIVING OPPORTUNITY THE A.O. DISALLOWED THE EXPENDIT URE WHILE ALLOWING EXPENDITURE TO THE EXTENT BILLS WERE FILED BEFORE H IM. THE ASSESSEE PLACED THE BALANCE OF THE BILLS BEFORE THE CIT(A) IN SUPPORT O F THE CLAIM. HOWEVER, THE CIT(A) DID NOT ADMIT ANY ADDITIONAL EVIDENCE ON THE REASON THAT THE ASSESSEE HAS NOT FURNISHED THE SAME BEFORE THE A.O. AND EXER CISED DISCRETION AVAILABLE TO THE CIT(A) TO ALLOW OR NOT TO ALLOW. H E CONFIRMED THE DISALLOWANCE MADE BY THE A.O. 15. THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE HAS FURNISHED MOST OF THE DETAILS OF REPAIRS AND MAINTENANCE AND AS A SAMPLE ONLY FEW BILL COPIES WERE FURNISHED AND THE A.O. WITHOUT GIVING A N OPPORTUNITY DISALLOWED THE BALANCE EXPENDITURE UNDER REPAIRS TO FURNITURE, REPAIRS TO ASSET PATTERN, ETC. IT IS ALSO THE CONTENTION THAT THE A.O. WRONGL Y DISALLOWED THE REPAIRS EXPENDITURE AS CAPITAL EXPENDITURE WHEREAS THE ASSE SSEE HAD CLAIMED CAPITAL EXPENDITURE SEPARATELY IN ITS BOOKS OF ACCOUNT. HE REFERRED TO THE BALANCE SHEET SCHEDULE TO SHOW THAT THE ASSESSEE HAD MORE T HAN RS.2.72 CRORES OF ADDITION TO ASSETS DURING THE YEAR, WHICH THE A.O. CONSIDERED AND ALLOWED. IT WAS HIS SUBMISSION THAT THE A.O. HAS COME TO WRONG CONCLUSION THAT THE EXPENDITURE IS CAPITAL IN NATURE. THE REASONS FOR I NCURRING THE EXPENDITURE THIS YEAR WAS THAT THE FACTORY GOT SUBMERGED IN BOM BAY FLOODS IN JULY 2005 AND THE ASSESSEE INCURRED LOT OF EXPENDITURE IN RES TORING THE FACTORY TO RUNNING CONDITION. IN THIS CONTEXT THE EXPENDITURE OF SOME OF THE ITEMS WERE MORE THAN EARLIER YEARS. IT WAS HIS SUBMISSION THAT THE CIT(A) HAS ALSO WRONGLY NOT CONSIDERED THE ADDITIONAL EVIDENCES AND DID NOT GIVE AN OPPORTUNITY TO THE ASSESSEE TO EXPLAIN THE ENTIRE E XPENDITURE AND JUSTIFY THE SAME. 16. THE LEARNED D.R., HOWEVER, SUBMITTED THAT THE ASSES SEE HAS NOT FURNISHED THE DETAILS AND ACCORDINGLY THE A.O. IS C ORRECT IN DISALLOWING THE REPAIRS. ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 9 17. WE HAVE CONSIDERED THE ISSUE. WE ARE NOT CONVINCED WITH THE REASONING OF THE A.O. IN DISALLOWING THE EXPENDITUR E FOR WHICH BILLS WERE NOT FURNISHED, EVENTHOUGH NECESSARY DETAILS WERE FURNIS HED. THE ASSESSING OFFICERS DISCUSSION OF VARIOUS DISALLOWANCES IN PA RA 6.1 TO 6.5 STARTS WITH THE WORDS ON GOING THROUGH THE DETAILS FILED, IT IS SEEN THAT THE ASSESSEE HAS CLAIMED REPAIRS IT INDICATES THAT THE ASSESSEE HAS FURNISHED DETA ILS OF VARIOUS REPAIRS CLAIMED ON VARIOUS ITEMS. IT WAS TH E SUBMISSION OF THE ASSESSEE THAT ONLY SAMPLE BILLS WERE SUBMITTED IN S UPPORT OF THE DETAILS FILED WHEREAS THE A.O. ALLOWED ONLY THE AMOUNT FOR WHICH BILLS WERE FURNISHED. COPIES OF THE BILLS STATED TO HAVE BEEN FILED BEFOR E THE CIT(A) BUT NOT ADMITTED AS ADDITIONAL EVIDENCE, WERE ALSO PLACED B EFORE US WITH A PRAYER FOR ADMITTING ALL THE ADDITIONAL EVIDENCE. ON CONSIDERI NG THIS, WE ARE OF THE OPINION THAT THE A.O. WAS NOT JUSTIFIED IN DISALLOW ING THE EXPENDITURE. THERE IS JUSTIFICATION FOR INCURRING HEAVY EXPENDITURE DU E TO FLOODING OF FACTORY PREMISES DURING THE IMPUGNED YEAR. THE A.O. HAS NOT CONSIDERED THIS ASPECT AT ALL. MOREOVER, THE ASSESSEE ALSO ADDED PLANT AND MACHINERY IN THE DEPRECIATION SCHEDULE WHICH INDICATES THAT THE CAPI TAL EXPENDITURE IS TREATED SEPARATELY BY THE ASSESSEE. HOWEVER, AS SUBMITTED B Y THE LEARNED COUNSEL THE ASSESSEE WAS NOT GIVEN PROPER OPPORTUNITY BEFOR E MAKING THE DISALLOWANCES. IN VIEW OF THIS, THE MATTER IS RESTO RED BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION. ASSESSEE IS DIRECTED TO FURNISH COMPLETE DETAILS AND JUSTIFICATION BEFORE THE A.O. AND THE A.O. IS D IRECTED TO EXAMINE THE SAME AND ALLOW THE EXPENDITURE AS PER THE FACTS AND LAW, AFTER DUE VERIFICATION. THE GROUNDS ARE CONSIDERED ALLOWED. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FO R STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JULY 2010. SD/- SD/- (N.V. VASUDEVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 30 TH JULY 2010 ITA NO. 6515/MUM/2009 M/S. ESSENTIAL POWER TRANSMISSION PVT. LTD. 10 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XVI, MUMBAI 4. THE CIT VIII, MUMBAI CITY 5. THE DR, E BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.