M/s Mind Tree Ltd., Bangalore V. CIT, Bangalore

ITA 678/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51297 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 18-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARCHANA CHOWDHRY
• Assessee Lawyers: CHYTHANYA K K
• Keywords: Capital asset; Business income; Business expenditure; Principle of natural justice
• Section: 37; 6; 263; 154

Judgement Text

PAGE 1 OF 15 IT A NO.678/BANG/2010 1 IN THE INCOME TAX APPELLATE TR IBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.678/BANG/2010 (ASSESSMENT YEAR 2005-06) M/S MIND TREE LTD., (FORMERLY M/S MINDTREE CONSULTING (P) LTD.) GLOBAL VILLAGE, BEHIND RVCE COLLEGE, BANGALORE-59. - APPELLANT PAN NO.AABCM8839K VS THE COMMISSIONER OF INCOME TAX, BANGALORE-III, BANGALORE. - RESPONDENT APPELLANT BY : SHRI CHYTHANYA, K K, ADVO CATE RESPONDENT BY : SMT. ARCHANA CHOWDHRY, JCIT DATE OF HEARING : 13/09/2011 DATE OF PRONOUN CEMENT :26/09/2011 ORD ER PER GEORGE GEORGE K : AGGRIEVED BY THE ORDER OF THE LD. CIT, BANGALORE III, BANGALORE IN L.REV.4/CIT.B.III/2009-10 DATED 1.3.20 10 FOR THE ASSESSMENT YEAR 2005-06, THE ASSESSEE COMPANY HAS COME UP WITH THE PRESENT APPEAL. 2. THE ASSESSEE COMPANY [THE ASSESSEE HENCEFORTH ] HAD ORIGINALLY RAISED TWELVE GROUNDS IN AN ELABORATE AND NARRATIVE MANNER. HOWE VER, DURING THE COURSE OF HEARING, THE LD. A.R CAME UP W ITH CONCISE GROUNDS OF APPEAL, ACCORDING TO WHICH, THE ASSESSEE HAS RAISED SEVEN GROUNDS AND THE SAME ARE REFORMULATED, FOR THE SAKE OF CLARITY, AS UNDER: PAGE 2 OF 15 IT A NO.678/BANG/2010 2 (I) THAT THE LD. CIT WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF S. 263 WHEN THE ORDER OF THE AO WAS NEITHER ERRONEO US NOR PREJUDICIAL TO THE INTERESTS OF REVENUE; (II) THAT THE CIT WAS NOT JUSTIFIED IN DISTURBING THE CO MPUTATION OF LONG TERM CAPITAL GAINS [LTCG] MADE IN ACCORDANCE W ITH THE PROVISIONS OF S. 112 OF THE ACT; (III) THAT THE CIT WAS NOT JUSTIFIED IN DISALLOWING THE PROVISIONS FOR WARRANTY WHEN THE AO HAD ALLOWED THE SAME ACCEP TING THAT IT WAS A CRYSTALLIZED LIABILITY; THAT THE CIT WAS A LSO NOT JUSTIFIED IN DISALLOWING THE PROVISION FOR DISCOUNT ; & (IV) THAT HE WAS NOT JUSTIFIED IN HOLD THAT THE SET OFF OF THE BROUGHT FORWARD LOSS HAS BEEN ALLOWED WITHOUT VERIF ICATION OF THE SAME, THOUGH A COMPREHENSIVE TABLE OF ELIGIBLE LOSSES HAD BEEN FURNISHED IN THE RETURN OF INCOME AND ALSO DUR ING THE COURSE OF THE REVISION PROCEEDINGS. 3. BRIEFLY STATED, THE ASSESSEE ENGAGES IN SOFTWAR E DEVELOPMENT, CONSULTANCY SERVICES AND PROVIDING INTERNET ENABLIN G TECHNOLOGY, FURNISHED ITS RETURN OF INCOME FOR THE AY UNDER DISPUTE, ADMI TTING LTCG OF RS.1.16 CRORES AND SHORT TERM CAPITAL GAINS [STCG] OF RS.35 .26 LAKHS WHICH WAS SET OFF AGAINST THE PREVIOUS YEARS CAPITAL LOSS. THE APPELLANT HAD ALSO OFFERED LTCG FOR TAX AT THE RATE OF 10%, AS ACCORDING TO TH E APPELLANT, BEING GAIN DERIVED FROM LONG TERM MUTUAL FUNDS. ALSO RS.49.77 LAKHS AND RS.74.37 LAKHS WERE DEBITED TO P & L ACCOUNT BEING PROVISION FOR WARRANTY AND DISCOUNT RESPECTIVELY. IN THE RESULT, THE ASSESSEE HAD ADMITTED RE.NIL INCOME WHICH WAS, INITIALLY, PROCESSED U/S 143(1) O F THE ACT AND, SUBSEQUENTLY, TAKEN UP FOR SCRUTINY. AFTER DUE EXAM INATION OF VARIOUS DETAILS FURNISHED BY THE ASSESSEE, THE AO, FOR THE ELABORAT E DISCUSSIONS AND REASONS RECORDED IN HIS IMPUGNED ORDER, ARRIVED AT THE TAXABLE INCOME AT RS.2.35 CRORES. SUBSEQUENTLY, THE AO ISSUED A NOTI CE U/S 154 OF THE ACT DATED 20.6.2008, PROPOSING TO DISALLOW THE PROVISIO NS AND TAXING THE LTCG AT 20%. ACCORDING TO THE APPELLANT, THE AO HAD DROPPE D THE PROCEEDINGS PAGE 3 OF 15 IT A NO.678/BANG/2010 3 INITIATED U/S 154 OF THE ACT FOR HAVING CONVINCED W ITH THE DETAILS FURNISHED BY THE ASSESSEE IN COMPLIANCE TO THE SAID NOTICE. 3.1 IN THE MEANWHILE, THE LD CIT, IN SU O MOTO ACTION, INITIATED PROCEEDINGS U/S 263 OF THE ACT, OUTLINING REASONS T HAT THE ASSESSMENT ORDER PASSED WAS ERRONEOUS AND PREJUDICIAL TO THE INTERES TS OF REVENUE IN AS MUCH AS THE LTCG ON MUTUAL FUNDS HAD BEEN TAXED AT A LOW ER RATE, THE PROVISIONS FOR WARRANTY AS WELL AS FOR DISCOUNT BEING CONTINGE NT IN NATURE SHOULD NOT HAVE BEEN ALLOWED AND THAT THE SET OFF OF CAPITAL L OSS HAD NOT BEEN ADEQUATELY VERIFIED. 3.2. AFTER DUE CONSIDERATION OF THE ASSESSEES F ORCEFUL REBUTTAL, THE LD. CIT, IN HIS IMPUGNED ORDER U/S 263 OF THE ACT WHICH IS UNDER CHALLENGE, DIRECTED THE AO TO (I) DISALLOW THE PROV ISIONS; (II) RE-VERIFY THE CLAIM OF THE SET OFF OF STCL AND (III) TO TAX THE L TCG AT 10% WITHOUT ALLOWING THE BENEFIT OF INDEXATION IN ACCORDANCE WITH THE PROVISIONS OF S.112 OF THE ACT. 4. AGGRIEVED WITH THE STAND OF THE LD. CIT CITED SUPRA , THE ASSESSEE HAS COME UP WITH THE PRESENT APPEAL. 4.1. DURING THE COURSE OF HEARING, SHRI K.K. CHYTH ANYA, THE LD. COUNSEL, HAD VALIANTLY REITERATED MORE OR LESS WHAT WAS PORTRAYED BEFORE THE LD. CIT DURING THE COURSE OF PROCEEDINGS U/S 26 3 OF THE ACT. IN FURTHERANCE, THE SUBMISSIONS MADE ARE SUMMARIZED AS UNDER: THAT THE LD. CIT WAS NOT JUSTIFIED - IN FAILING TO APPRECIATE THAT DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE AO HAD REQUISITIONED TH E REQUIRED DETAILS AND HAVING MADE ENQUIRIES ON THE ISSUE AND FOR HAVING PAGE 4 OF 15 IT A NO.678/BANG/2010 4 PASSED A SPEAKING ORDER, THE SAME COULD NOT HAVE BE EN HELD TO BE ERRONEOUS; - IN NOT APPRECIATING THE FACT THAT THE AO HAD, IN FA CT, INITIATED PROCEEDINGS U/S 154 OF THE ACT AND SUBSEQUENTLY DRO PPED THE INITIATION AFTER HAVING FULLY SATISFIED WITH THE AS SESSEES EXPLANATION AND, THUS, CIT WAS NOT JUSTIFIED IN ASS UMING THAT THE AO HAD DROPPED THE RECTIFICATION PROCEEDINGS NOT ON THE BASIS OF ASSESSEES CLARIFICATION, BUT, ON THE BASIS THAT TH E ISSUES WERE DEBATABLE; - ALSO IN NOT APPRECIATING THE FACT THAT WHERE TWO VI EWS WERE POSSIBLE, APPLYING ONE OF THEM IN ACCORDANCE WITH T HE PROVISIONS OF LAW COULD NOT BE A CAUSE FOR TREATING THE ASSESSMEN T ERRONEOUS; - IN DISTURBING THE COMPUTATION OF LTCG MADE IN ACCOR DANCE WITH THE PROVISIONS OF S.112 AND ALSO IN DISALLOWING THE PROVISION FOR WARRANTY WHICH WAS A CRYSTALLIZED LIABILITY; THAT THE WARRANTY CLAIMS WERE MORE IN THE NATURE OF ACCRUED/ASCERTAIN ED LIABILITY RATHER THAN CONTINGENT LIABILITY; AND THAT HE FAILE D TO APPRECIATE THAT THE PROVISIONS WERE NOT CONTINGENT FOR HAVING BEEN ACCOUNTED FOR, BASED ON THE CONSISTENT PRACTICE OF THE APPELL ANT; - IN FAILING TO APPRECIATE THAT THE PROVISIONS HAVE B EEN MADE IN CONSIDERATION OF THE SITUATION THAT (A) THE APPELLANT HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENT; (B) THERE WAS PROBABILITY THAT AN OUTLAW OF RESOURCES W OULD BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE HAD BEEN MADE OF THE AMOUNT OF THE OBLIGATION; & - IN HOLDING THAT THE SET OFF OF THE BROUGHT FORWARD LOSS HAS BEEN ALLOWED WITHOUT VERIFICATION OF THE COMPREHENSIVE T ABLE OF ALL THE LEGIBLE LOSSES WHICH WAS FURNISHED AS PART OF THE R ETURN OF INCOME AND ALSO DURING THE COURSE OF PROCEEDINGS U/S 263 OF THE ACT. 4.2. TO DRIVE HOME HIS POINT, THE LD. A R HAD PLAC ED STRONG RELIANCE ON THE RULINGS OF VARIOUS JUDICIARIES INCLUDING THA T OF - (A) B & A PLANTATION & INDUSTRIES V. CIT (2007) 290 ITR 395 (GAU), (B) BONGAIGAON REFINERY & PETROCHEMICALS LTD. V. UOI (2 006) 287 ITR 120 (GAU), (C) BERGER PAINS INDIA LTD. V. ACIT (2010) 322 ITR 369 (CAL), PAGE 5 OF 15 IT A NO.678/BANG/2010 5 (D) M/S.ASSEA BROWN BOVERI LTD V. ADDL. CIT 2010 TIOL 350 ITAT., BANG, (E) CIT V. VALI BROTHERS (2006) 149 TAXMAN 233 (ALL) 4.3. THE LD. D.R FAIRLY URGED THAT THE LD. CIT HAD INVOKED THE PROVISIONS OF S. 263 OF THE ACT IN A JUDICIOUS WAY TO SAFEGUARD THE INTERESTS OF THE REVENUE AS THE ASSESSMENT ORDER FRAMED ORIGI NALLY WAS ERRONEOUS AND RATHER PREJUDICIAL WITHIN THE MEANING OF S. 263 OF THE ACT AND, THUS, HE WAS WITHIN HIS REALM IN INVOKING THE SAID PROVISIONS WH ICH REQUIRE TO BE SUSTAINED IN ITS TOTALITY. 5. WE HAVE SCRUPULOUSLY CONSIDERED THE RIVAL SUBMI SSIONS, DILIGENTLY PERUSED THE RELEVANT RECORDS, THE IMPUGN ED ORDER OF THE LD. CIT AND ALSO THE VARIOUS JUDICIAL PRONOUNCEMENTS ON SIM ILAR ISSUE ON WHICH THE LD. A R HAD PLACED HIS UNSTINTED FAITH. 6. WITH REGARD TO THE ASSESSEES CONTENTION THAT T HE LD. CIT WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF S. 263 OF THE ACT, WE HAVE ATTENTIVELY PERUSED THE REASONS SET-OUT BY THE LD. CIT IN NEGATING THE ASSESSEES CONTENTIONS ON THE ISSUE. IT WAS THE ST AND OF THE LD. CIT THAT 8THE PROC EE DINGS U/S 154 HAVE NOT BEEN DROPPED BECAUSE THE AO WAS SATISFIED WITH THE EXPLANATION FURNISHED BY THE ASS ESSEE. THE PROCEEDINGS U/S 154 WERE DROPPED BECAUSE THE AO WAS OF THE VIEW THAT THE PROPOSED DISALLOWANCE OF PROVISION FOR SET OFF OF POST CONTR ACT SUPPORT SERVICES AND PROVISI ON FOR DISCOUNT AS WELL AS RATE OF TAXATION ON LTCG AR E DEBATABLE ISSUES AND ARE BEYOND THE PURVIEW OF S.154 OF THE I .T. ACT 1961 AND REVISION U/S 263 IS THE MOST APPROPRIATE COURSE OF ACTION THEREFORE, DROPPING OF PROCEEDING U/S 154 DOES NOT HAVE ANY BEARING ON THE VALIDITY OF PROCEEDINGS U/S 263 PAGE 6 OF 15 IT A NO.678/BANG/2010 6 6.1. WE HAVE, WITH DUE RESPECTS, PERUSED THE RULING OF T HE HIGHEST JUDICIARY OF THE LAND IN THE CASE OF MALABAR INDUST RIAL COMPANY LTD V. CIT REPORTED IN 243 ITR 83 (SC) - ON WHICH THE ASSESSEE PLACED STRONG RELIANCE. THE HONBLE COURT HAD HELD THAT WHEN THE AO ADOPTS ONE OF THE TWO COURSES PERMISSIBLE IN LAW AND IT HAS RESULTED IN L OSS OF REVENUE OR WHERE TWO VIEWS ARE POSSIBLE AND THE AO HAS TAKEN ONE VIE W WITH WHICH THE COMMISSIONER DOES NOT AGREE, THE AOS ORDER CANNOT BE TREATED AS ERRONEOUS OR PREJUDICIAL TO THE INTERESTS OF REVENU E UNLESS THE VIEW TAKEN BY THE AO IS UNSUSTAINABLE IN LAW. AS RIGHTLY ADVOCATED BY THE LD. CIT IN HIS IMPUGNED ORDER, THE RATIO PRESCRIBED BY THE HONBLE APEX COURT WILL BE APPLICABLE ONLY WHERE THE AO HAD CONSIDERED TWO POSSIBLE VIEWS ON A PARTICULAR ISSUE AND HAD CONSCIOUSLY ADOPTED ONE OF THE PERMISSIBLE VIEWS. HOWEVER, IN THE PRESENT CASE, THE AO HAD NOT AT ALL CONSIDERED THE NATURE OF PROVISION FOR POST CONTRACT SERVICES AND PROVISION FOR DISCOUNT AND ITS ALLOW- ABILITY AND HAD COMPLETELY IGNORED THE OBSERVATIONS OF THE AUDITORS MADE IN THE AUDIT REPORT U/S 44AB THAT THE SAID SUMS REPRES ENT LIABILITY OF CONTINGENT NATURE. FURTHER MORE, AS POINTED OUT BY THE LD. CIT, THE AO HAD NOT EXAMINED THE CORRECTNESS OR OTHERWISE OF THE CO MPUTATION OF LTCG AS WORKED OUT BY THE ASSESSEE AND HAD ACCEPTED IT AT 1 0% AS OFFERED BY THE ASSESSEE. THERE WAS ALSO NO TRACE IN THE IMPUGNED A SSESSMENT ORDER AS TO WHETHER THE AO HAD EXAMINED THE CORRECTNESS OF SET OFF OF PAST CAPITAL LOSSES AGAINST THE INCOME FROM STCG. 6.2. IN VIEW OF THE ABOVE FACTS, WE ARE IN TOTAL A GREEMENT WITH THE LD. CIT WHO HAD TAKEN SANCTUARY IN THE RULINGS OF H ONBLE SUPREME COURT IN THE CASES OF (I) RAMPAYARI DEVI SAROGI V. CIT REPOR TED IN 67 ITR 84 (SC) AND (II) TARA DEVI AGGARWAL V. CIT 88 ITR 323 (SC). T HE HONBLE COURT IN THE CASE OF THE FORMER HAD HELD THAT PAGE 7 OF 15 IT A NO.678/BANG/2010 7 IT IS NOT NECESSARY TO FURTHER DETAIL THE REASONS GIVEN BY THE COMMISSIONER BECAUSE ON THE FACE OF TH E RECORD THE ORDERS WERE PREJUDICIAL TO THE INTEREST OF THE REVENUE, AND EVEN IF THE FACTS WHICH THE COMMISSIONER INTRODUCED REGARDING THE ENQUIRIES MAD E BY HIM HAD BEEN INDICATED TO THE ASSESSEE, THE RESU LT WOULD HAVE BEEN THE SAME. THE ASSESSEE, IN OUR VIEW , HAS NOT IN ANY WAY SUFFERED FROM THE FAILURE OF THE COMMISSIONER TO INDICATE THE RESULTS OF THE ENQUIRI ES, MENTIONED ABOVE. MOREOVER, THE ASSESSEE WILL HAVE F ULL OPPORTUNITY OF SHOWING TO THE INCOME-TAX OFFICER WHETHER HE HAD JURISDICTION OR NOT AND WHETHER THE INCOME ASSESSED IN THE ASSESSMENT ORDERS WHICH WERE ORIGINALLY PASSED WAS CORRECT OR NOT. AND IN THE LATTER CASE, IT WAS RULED THAT - IT [THE HIGH COURT] HELD THAT THERE WERE MATERIALS BEFORE THE COMMISSIONER TO JUSTIFY HIS FINDING THAT THE ORDER OF ASSESSMENT FOR THE YEAR 1960-61 WAS ERRONEOUS IN SO FAR AS IT IS PREJUDICIA L TO THE INTERESTS OF REVENUE. 6.3. IN CONFORMITY WITH THE RULINGS OF THE HONBLE SUPREME COURT CITED SUPRA, WE ARE OF THE FIRM VIEW THAT THE LD. C IT WAS WITHIN HIS SPHERE IN INVOKING THE PROVISIONS OF S.263 OF THE ACT. IT IS ORDERED ACCORDINGLY. 7. WITH REGARD TO TAXATION ON LTCG ARISING OUT OF SALE OF UNITS OF MUTUAL FUND, THE ASSESSEE HAD ITSELF ADMITTED TAX O N LTCG AT RS.14.99 LAKHS AS AGAINST RS.11.68 LAKHS COMPUTED BY THE AO. AFT ER CONSIDERING THE ASSESSEES CONTENTIONS, THE LD. CIT HAD, IN FACT, D IRECTED THE AO TO EXAMINE THE ARITHMETICAL ACCURACY OF THE TAX ON LTCG IN THE LIGHT OF THE PROVISIONS OF S.112 OF THE ACT. PAGE 8 OF 15 IT A NO.678/BANG/2010 8 7.1. THE ASSESSEES BRIEF SUBMISSION BEFORE THIS B ENCH WAS THAT THE CIT WAS NOT JUSTIFIED IN DISTURBING THE COMPUTATION OF LTCG MADE IN ACCORDANCE WITH THE PROVISIONS OF S. 112 OF THE ACT . 7.2. TO ILLUSTRATE FURTHER, LET US HAVE A QUICK LO OK AT THE PROVISIONS OF S. 112 OF THE ACT: 112. (1) WHERE THE TOTAL INCOME OF AN ASSESSEE INCLUDES ANY INCOME, ARISING FROM THE TRANSFER OF A LONG TERM CAPITAL ASSET, WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS, THE TAX PAYABLE BY THE ASSESS EE ON THE TOTAL INCOME SHALL BE THE AGGREGATE OF,- (A) (B) IN THE CASE OF A DOMESTIC COMPANY,- (I) THE AMOUNT OF INCOME-TAX PAYABLE ON THE TOTAL INCOME AS REDUCED BY THE AMOUNT OF SUCH LONG TERM CAPITAL GAINS, HAD THE TOTAL INCOME AS SO REDUCED B EEN ITS TOTAL INCOME; AND (II) THE AMOUNT OF INCOME-TAX CALCULATED ON SUCH LO NG- TERM CAPITAL GAINS AT THE RATE OF TWENTY PER CENT; PROVIDED THAT WHERE THE TAX PAYABLE IN RESPECT OF A NY INCOME ARISING FROM THE TRANSFER OF A LONG TERM CAPITAL ASSET, BEING LISTED SECURITIES OR UNIT OR Z ERO COUPON BOND, EXCEEDS TEN PER CENT OF THE AMOUNT OF CAPITAL GAINS BEFORE GIVING EFFECT TO THE PROVISION S OF THE SECOND PROVISO TO SECTION 48, THEN, SUCH EXCESS SHALL BE IGNORED FOR THE PURPOSE OF COMPUTING THE T AX PAYABLE BY THE ASSESSEE. 7.3. IT WAS THE STAND OF THE ASSESSEE THAT THE COM PUTATION OF LTCG WAS IN ACCORDANCE WITH THE PROVISIONS OF S.112 OF T HE ACT. PAGE 9 OF 15 IT A NO.678/BANG/2010 9 7.4. INCIDENTALLY, THE LD. CIT HAD ONLY SUGGESTED - IN THE FORM OF A DIRECTION - TO THE AO TO EXAMINE THE ARITHMETICAL A CCURACY OF THE WORKING FURNISHED BY THE ASSESSEE. WHILE DOING SO, THE AO HAS BEEN ADVISED TO KEEP THE PROVISIONS OF S. 112 OF THE ACT IN VIEW. AS A M ATTER OF FACT, THE LD. CIT HAD NOT CONTEMPLATED IN ANY WAY TO DENY THE LEGITIM ACY OF THE ASSESSEE, BUT, DIRECTED THE AO TO VERIFY THE ACCURACY OF THE WORKI NG FURNISHED BY THE ASSESSEE. THUS, THE APPREHENSION EXPRESSED BY THE ASSESSEE IS UNFOUNDED. WE ARE, THEREFORE, OF THE CONSIDERED VIEW THAT THER E WAS NO INFIRMITY IN THE DIRECTION OF THE LD. CIT WHICH REQUIRES OUR INTERFE RENCE. 8. IN RESPECT OF THE SET OFF OF BROUGHT FORWARD LO SSES, THE APPREHENSION OF THE ASSESSEE WAS THAT THE LD. CIT W AS NOT JUSTIFIED IN HOLDING THAT THE AO HAD ALLOWED THE SAME WITHOUT VE RIFICATION. IT WAS THE CONTENTION OF THE ASSESSEE THAT WHEN A COMPREHENSIV E TABLE OF THE ELIGIBLE LOSSES WAS FURNISHED AS PART OF THE RETURN OF INCOM E AND ALSO DURING THE COURSE OF PROCEEDINGS U/S 263 OF THE ACT, THERE WAS NO NEED FOR SUCH A DIRECTION ON THE PART OF THE LD. CIT. 8.1. AS COULD BE SEEN FROM THE IMPUGNED ORDER OF T HE AO, THERE WAS NO TRACE OF ANY EXAMINATION/VERIFICATION OF TH E TABLE OF THE ELIGIBLE LOSSES PURPORTED TO HAVE BEEN FURNISHED BY THE ASSE SSEE BEFORE ALLOWING SUCH A CLAIM. IN VIEW OF THIS, PERHAPS, TO ENSURE THE VERACITY OF THE ASSESSEES CLAIM, THE LD CIT HAD DIRECTED THE AO TO VERIFY THE CORRECTNESS OR OTHERWISE OF THE ASSESSEES CLAIM AND TO DECIDE THE ISSUE IN ACCORDANCE WITH THE LAW THAT TOO AFTER AFFORDING AN OPPORTUNIT Y TO THE ASSESSEE OF BEING HEARD. THIS STAND OF THE LD. CIT, TO PUT GEN TLY, GOES WITHOUT SAYING THE IMPARTIALITY AND FORTHRIGHTNESS ON THE PART OF THE CIT. WE, THEREFORE, FIND NO ABNORMITY IN THE ABOVE DIRECTION WHICH CALL S FOR OUR INTERVENTION. PAGE 10 OF 15 I TA NO.678/BANG/2010 10 9. AS REGARDS THE ALLOW-ABILITY OF THE PROVISIONS FOR POST CONTRACT SUPPORT SERVICES AND FOR DISCOUNT, IT WAS CONTENDED BY THE ASSESSEE THAT THE AO HAD, IN FACT, ALLOWED THE PROVISIONS FOR WARRANT Y ACCEPTING THAT IT WAS A CRYSTALLIZED LIABILITY AND THAT THE WARRANTY CLAIMS WERE MORE IN THE NATURE OF ACCRUED/ASCERTAINED LIABILITIES RATHER THAN THE CON TINGENT LIABILITY AS BRANDED BY THE LD. CIT. 9.1. HOWEVER, THE LD. CIT TOOK A DIVERGENT VIEW BA SED ON THE AUDIT REPORT IN FORM 3CD FURNISHED BY THE ASSESSEE. TO I LLUSTRATE FURTHER, THE LIABILITY HAS BEEN MENTIONED AS CONTINGENT NATURE. 9.2. BRUSHING ASIDE THE ASSESSEES CONTENTION THAT THE SUMS CLAIMED WERE NOT CONTINGENT IN NATURE AND THE SAME WERE CLA IMED BASED ON THE CONSISTENT PRACTICE OF THE COMPANYS SOUND ACCOUNT PRINCIPLES AND ACCEPTED JUDICIAL POSITION AND ALSO DISTINGUISHING VARIOUS C ASE LAWS ON WHICH THE ASSESSEE HAD PLACED STRONG RELIANCE , THE LD. CIT, TAKING REFUGE IN THE RULING OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL INDIA P. LTD V. CIT REPORTED IN 314 ITR 62 (SC) - WHEREIN IT HAS BE EN ASCERTAINED THAT A PROVISION IS RECOGNIZED WHEN (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT, (B) IT IS POSSIBLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIAB LE ESTIMATE CAN BE MADE ON THE AMOUNT OF THE OBLIGATION, IF THESE CONDITIONS A RE NOT MET, NO PROVISION CAN BE RECOGNIZED HELD THAT THE SUMS DEBITED TO PROFIT AND LOSS ACCOUNT BEING PROVISION FOR POST CONTRACT SUPPORT SERVICES AND PROVISIONS FOR DISCOUNT RESPECTIVELY ARE TO BE DISALLOWED AND ADDE D BACK IN VIEW OF THE REMARKS OF THE AUDITOR IN COL.17(K) OF FORM 3CD TO THE EFFECT THAT THE ABOVE SUMS REPRESENT LIABILITIES OF CONTINGENT NATU RE . PAGE 11 OF 15 I TA NO.678/BANG/2010 11 9.3. WE HAVE ATTENTIVELY CONSIDERED THE FORCEFUL C ONTENTIONS OF THE LD. A R AND ALSO THE WELL REASONING OF THE LD. CIT ON THE ISSUE. 9.4. THE ASSESSEE PERSISTENTLY URGES THAT THE SAID SUMS WERE NOT CONTINGENT IN NATURE AND THE SAME WERE CLAIMED BASE D ON THE CONSISTENT PRACTICE OF THE COMPANYS SOUND ACCOUNTING PRINCIPL ES AND ACCEPTED JUDICIAL POSITION. THESE CONTENTIONS OF THE ASSESSEE CANNOT BE SIDE-TRACKED ON THE SOLE GROUND THAT THE NOMENCLATURE LOOSELY USED IN T HE AUDIT REPORT AS CONTINGENT LIABILITY WHICH, IN OUR CONSIDERED VIEW, DOES NOT CHANGE THE CHARACTERISTIC OF AN ACCRUED/ASCERTAINED LIABILITY. INCIDENTALLY, THE ASSESSEE FOR THE AY 2007-08, TOOK A STAND THAT THE PROVISION FOR POST CONTRACT SUPPORT SERVICES WERE IN THE NATURE OF WARRANTY CLA IMS WHEREIN THE ASSESSEE SHALL PROVIDE POST SALES SERVICES TO ITS CUSTOMERS FREE OF COST AND THAT THE PROVISION FOR POST CONTRACT SUPPORT SERVICE WAS QUA NTIFIED IN THE BOOKS OF ACCOUNT AS A PERCENTAGE TO THE TOTAL SALES MADE. T HIS CONTENTION OF THE ASSESSEE WAS CONCEDED BY THE AO AND, PERHAPS, ADMIT TED THE ASSESSEES CLAIM IN TOTO [COURTESY: ASST. ORDER FOR 2007=08]. 9.5. WE HAVE ALSO GLANCED AT THE JUDICIAL PRONOUNC EMENTS ON A SIMILAR ISSUE, CHIEFLY, IN THE FOLLOWING CASES: (I) IN THE CASE OF CIT V. SONY INDIA (P) LTD. (2007) 160 397 (DEL), IT HAS BEEN HELD THAT - 2. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES AN D PERUSED THE ORDER UNDER CHALLENGE. THE ISSUE WHETHE R AMOUNTS SET APART BY THE ASSESSEE TO MEET CLAIMS ARISING OUT OF WARRANTIES ISSUED BY IT TO ITS CUSTO MERS CAN BE TAKEN AS A PERMISSIBLE DEDUCTION UNDER SECTI ON 37 IS NO LONGER RES INTEGRA IN THE LIGHT OF A DIVIS ION BENCH OF THIS COURT IN CIT V. VINITEC CORPN. (P.) L TD. [2005] 278 ITR 337. THIS COURT HAS RELIED UPON THE PAGE 12 OF 15 I TA NO.678/BANG/2010 12 DECISION OF THE SUPREME COURT IN BHARAT EARTH MOVER S V. CIT [2000]245 ITR 428 AND IRC V. MITSUBISHI MOTORS NEW ZEALAND LTD. [1996] 222 ITR 697 (PC) HELD THAT THE LIABILITY ARISING OUT OF A WARRANTY I S AN ALLOWABLE DEDUCTION EVEN WHEN THE AMOUNT PAYABLE BY THE ASSESSEE IS QUANTIFIED AND DISCHARGED IN FUTURE . THE FOLLOWING PASSAGE FROM THE ABOVE DECISION IS IN THIS REGARD APPOSITE: '14. THE RATIO DECIDENDI OF THE ABOVE CASES IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CAS E. IT IS NOT DISPUTED THAT THE WARRANTY CLAUSE IS PART OF THE SALE DOCUMENT AND IMPOSES A LIABILITY UPON THE ASSESSEE TO DISCHARGE ITS OBLIGATIONS UNDER THAT CL AUSE FOR THE PERIOD OF WARRANTY. IT IS A LIABILITY WHICH IS CAPABLE OF BEING CONSTRUED IN DEFINITE TERMS WHICH HAS ARISEN IN THE ACCOUNTING YEAR. MAY BE ITS ACTUAL QUANTIFICATION AND DISCHARGE IS DEFERRED TO A FUTUR E DATE. ONCE AN ASSESSEE IS MAINTAINING HIS ACCOUNTS ON THE MERCANTILE SYSTEM, A LIABILITY ACCRUED, THOUGH TO BE DISCHARGED AT A FUTURE DATE WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS O F HIS BUSINESS, REGARD BEING HAD TO BE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY.' (II) IN THE CASE OF HONDA SIEL CARS IND IA LTD. V. ACIT REPORTED IN (2007) 111 TTJ 630 (DEL), IT WAS HELD T HAT - 21.4 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, EXAMINED THE FACT S, EVIDENCE AND MATERIAL PLACED ON RECORD. THERE IS NO DISPUTE ABOUT THE FACT THAT THE CARS SOLD TO THE CUSTOMERS ARE COVERED BY WARRANTY AND AFTER-SALE SERVICES FOR REPAIR AND REPLACEMENT FOR A PERIOD OF ONE YEAR. THE ASSESSEE HAS BEEN FOLLOWING THE SAME METHOD OF ACCOUNTING AND HAS BEEN MAKING PROVISIONS FOR THE SAME ON THE BASIS OF ACTUAL EXPENSES INCURR ED IN THE PAST. IT IS A FACT THAT IN THE PAST SUCH EXPENSES HAVE BEEN ALLOWED BY THE REVENUE. EVEN SUC H CLAIM OF THE ASSESSEE WAS ALLOWED FOR THE ASSESSMEN T YEAR 2001-02. THIS IS NOT THE CASE OF THE REVENUE PAGE 13 OF 15 I TA NO.678/BANG/2010 13 THAT THE PROVISIONS MADE FAR EXCEEDED THE ACTUAL EXPENSES INCURRED. IN THE CASE OF BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428, THE HON'BLE SUPREME COURT HAS CONSIDERED THE GENERAL PRINCIPLES REGARDING ALLOWANCE OF BUSINESS EXPENDITURE AND THE DIFFERENCE BETWEEN THE ACCRUED AND CONTINGENT LIABILITIES. IT WAS HELD AS UNDER: 'IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.' THE VERY FACT THAT THE ASSESSEE HAD MADE PROVISION ONLY DOES NOT MEAN THAT THE LIABILITY WAS NOT ASCERTAINED AND CONTINGENT IN NATURE.. 21.5 THUS, THE VARIOUS JUDGMENTS CITED ABOVE SUPPOR T THE VIEW THAT THE LIABILITY WAS INCURRED ON THE DAT E WHEN SALES WERE MADE. THEREFORE, THIS WAS ASCERTAINED AND ACCRUED LIABILITY OF THE ASSESSEE A ND ACCORDINGLY, THE SAME WAS ALLOWABLE. (III) THE JURISDICTIONAL HONBLE BENCH IN THE CASE OF INF OSYS TECHNOLOGIES LTD V. JCIT (2007) 109 TTJ (BANG) 631 HAD HELD THUS 4.4 WE HAVE CAREFULLY CONSIDERED THE RELEVANT FACT S, ARGUMENTS ADVANCED AND THE DECISIONS CITED. IN PAGE 14 OF 15 I TA NO.678/BANG/2010 14 RESPECT OF SALES EFFECTED DURING THE YEAR, THE ASSESSEE COLLECTS ENTIRE SALE PROCEEDS. SUCH SALE PROCEEDS ARE PART OF INCOME CHARGED TO TAX. THE ASSESSEE IS ALSO REQUIRED TO RENDER POST-SALES CUSTOMER SERVICES IN THE NATURE OF CLAIMS WITHIN TH E WARRANTY PERIOD. THUS, THOUGH SUCH WARRANTY CLAIMS MAYOR MAY NOT ARISE, THE ASSESSEE IS UNDER OBLIGATI ON TO FULFILL SUCH CLAIM, IF CLAIM IS MADE. THE PROVIS ION IS MADE AT THE RATE OF 2 PER CENT OF SALE PRICE. THOUG H NO PRECISE BASE IS INDICATED BY THE ASSESSEE, YET, IF CAN BE CONSIDERED TO BE REASONABLE HAVING REGARD TO THE CLAIM MADE IN THE PAST. THE PROVISION IS MADE O N 'MATCHING PRINCIPLE' I.E. MATCHING COST WITH REVENU E. SUCH MATCHING PRINCIPLE HAS BEEN RECOGNIZED IN THE CASE OF TAPARIA TOOLS LTD. VS. JT. CIT (2003) 180 CTR (BOM) 256 : (2003) 260 ITR 102 (BOM). THUS, THE PROVISION REPRESENTS A LIABILITY IN PRAESENTI T HOUGH DISCHARGED AT A LATER DATE.. IN CONFORMITY WITH THE VARIOU S JUDICIAL PRONOUNCEMENTS ON THE ISSUE, WE ARE OF THE FIRM VIEW THAT THE ASCERTAINED AND ACCRUED LIABILITY OF THE ASSESSEE WAS ALLOWABLE. HOWEVER, THE LD. CIT T OOK A VIEW THAT SINCE THE AUDITOR IN COL.17 (K) OF FORM 3CD HAD REMARKED TO T HE EFFECT THAT THE SAID SUMS REPRESENT LIABILITIES OF CONTINGENT NATURE AND AS SUCH THE ASSESSEE WAS NOT ENTITLED TO CLAIM SUCH CLAIMS AS ALLOWABLE. TH E ASSESSEE ASCERTAINED THAT THE SUMS WERE NOT CONTINGENT IN NATURE AND THE AUDI TOR HAD INADVERTENTLY REMARKED AS SO, BUT, THE SAID SUMS WERE NOT CONTING ENT IN NATURE AND THE SAME WERE CLAIMED BASED ON THE CONSISTENT PRACTICE OF THE COMPANYS SOUND ACCOUNTING PRINCIPLES. IN VIEW OF THE CONFLICTING VIEWS TAKEN BY THE RIVAL PARTIES AND ALSO NUMEROUS JUDICIAL RULINGS ON THE ISSUE AND A BOVE ALL IN THE INTERESTS OF NATURAL JUSTICE AND EQUITY THE ISSUE IS REMITTED BA CK ON THE FILE OF THE AO WITH SPECIFIC DIRECTIONS TO LOOK INTO THE CONTENTIO NS PUT-FORTH BY THE ASSESSEE AND TO TAKE APPROPRIATE ACTION IN ACCORDAN CE WITH THE PROVISIONS OF PAGE 15 OF 15 I TA NO.678/BANG/2010 15 THE ACT. THEREFORE, THE DIRECTION OF THE CIT TO DI SALLOW THE PROVISION FOR WARRANTY AND DISCOUNT IS DELETED AND THE AO SHALL E XAMINE THE ISSUE UNFETTERED BY THE DIRECTION OF THE CIT, KEEPING IN VIEW THE RATIOS LAID DOWN BY VARIOUS JUDICIARIES REFERRED SUPRA ON THE ISSUE WHILE CARRYING OUT THE DIRECTIONS OF THIS BENCH INDICATED ABOVE. IT IS OR DERED ACCORDINGLY. 10. BEFORE PARTING WITH, WE WOULD LIKE TO REITERAT E THAT THE NUMEROUS CASE LAWS ON WHICH THE LD. AR PLACED UNSTI NTED FAITH TO DRIVE HOME HIS POINTS, HAVE BEEN KEPT IN VIEW WHILE DECIDING T HE ISSUES RAISED BY THE ASSESSEE. 11. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED ON 26 TH DAY OF SEPTEMBER, 2011 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNED. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.