THE DCIT 8(2), MUMBAI V. M/S. HINDUSTAN DORR OLIVER LTD, MUMBAI

ITA 7296/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7494 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 04-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 06-12-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S K PAHWA; KESHAV SAXENA
• Assessee Lawyers: M D INAMDAR
• Keywords: Bad and doubtful debts; Set aside
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI D. K. AGARWAL, JM AND SHRI T.R. SOOD, AM I.T.A.NO. 7296/MUM/2007 ASSESSMENT YEAR :2004-05 DY. COMMISSIONER OF INCOME-TAX, RANGE 8(2), MUMBAI VS. M/S. HINDUSTAN DORR-OLIVER LTD., DORR-OLIVER HOUSE,CHAKALA, ANDHERI (EAST), MUMBAI 400 099. PAN : AAACH 0964 P (APPELLANT) (RESPONDENT) I.T.A.NO. 7324/MUM/2007 ASSESSMENT YEAR :2004-05 M/S. HINDUSTAN DORR-OLIVER LTD., DORR-OLIVER HOUSE,CHAKALA, ANDHERI (EAST), MUMBAI 400 099. PAN : AAACH 0964 P VS. DY. COMMISSIONER OF INCOME-TAX, RANGE 8(2), MUMBAI. (APPELLANT) (RESPONDENT) DEPARTMENT BY : S/SHRI KESHAV SAXENA & S.K. PAHWA ASSESSEE BY : SHRI M.D. INAMDAR O R D E R PER T.R. SOOD, AM: THESE CROSS APPEALS BY THE REVENUE AND THE ASSESSE E ARE DIRECTED AGAINST THE ORDER DATED 28.09.2007 OF THE LEARNED COMMISSIO NER OF INCOME-TAX (APPEALS)- VIII, MUMBAI AND PERTAIN TO THE ASSESSMENT YEAR 200 4-05. ITA NO.7296/M/07 (REVENUES APPEAL) 2. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING ASSESSEES CLAIM O F BAD DEBTS WITHOUT APPRECIATING THE FINDINGS OF THE ASSESSING OFFICER FOR DISALLOWING THE SAME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE A.O. TO ALLOW RELIEF IN RESPECT OF PROVISION OF WARRANTY AND FIELD SERVICES OF RS.26,16,043/- DISALLOWED BY A.O.IN EARLIER YEARS. 3. AS FAR AS GROUND NO.1 IS CONCERNED, AFTER HEARIN G BOTH THE PARTIES, WE FIND THAT THE ASSESSING OFFICER DISALLOWED A SUM OF RS. 2,23,11,706/- ON ACCOUNT OF ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 2 BAD DEBTS MAINLY BECAUSE THE ASSESSEE HAD NOT CONCL USIVELY PROVED THAT THE DEBT HAS BECOME REALLY BAD. 4. BEFORE THE LEANED CIT(A), IT WAS MAINLY CONTENDE D THAT AFTER THE AMENDMENT IN SECTION 36(1)(VII) WITH EFFECT FROM 1. 4.1989, IT WAS NO MORE A REQUIREMENT THAT THE ASSESSEE NEEDS TO PROVE THAT T HE DEBT HAD REALLY BECOME BAD. RELIANCE WAS ALSO PLACED ON VARIOUS CASE LAWS. 5. AFTER EXAMINING THE SUBMISSION, THE LEARNED CIT (A) AGREED WITH THE WITH THE SUBMISSION AND DECIDED THE ISSUE AS UNDER: IT IS INDEED TO BE ACCEPTED THAT THE DECISIONS TAK EN BY THE MADRAS HIGH COURT IN THE CASE OF CIT V. BRILLIANT TUTORIA LS P. LTD. (2007) 292 ITR 399 (MAD.) AND THE DECISION TAKEN BY THE DELHI HIGH COURT IN THE CASES OF CIT V. MORGAN SECURITIES & CREDIT (P) LTD. , (2007) 292 ITR 339 (DEL.) AND CIT VS. AUTOMETERS LTD. (2007) 292 I TR 345 (DEL) CLEARLY STAND BY AND SUPPORT THE DECISION OF THE SP ECIAL BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF DCIT VS. OMAN INTERN ATIONAL BANK SAOG. (SPECTRUM BUSINESS SUPPORT LTD. V. DCIT 100 I TD 0285 (BOM- SPECIAL BENCH). IN FACT, IT HAS BEEN RIGHTLY POINT ED OUT BY THE LD.COUNSEL THAT THE DECISION OF THE MADRAS HIGH COU RT IN THE CASE OF CIT V. BRILLIANT TUTORIALS P.LTD. (2007) 292 ITR 39 9 (MAD.) HAS IN FACT CONSIDERED THE EARLIER DECISION OF THE MADRAS HIGH COURT IN THE CASE OF CIT V. MICROMAX SYSTEMS PVT. LTD. (2005) 277 ITR 40 9 (MAD.) AND SOUTH INDIA SURGICAL CO. LTD. V. ACIT (2006) 287 IT R 62 (MAD.) TO COME TO ITS FINDING. HAVING CONSIDERED THE ENTIRE LAW ON THE SUBJECT AS IT IS PRESENT ON THE DAY, I AM OF THE VIEW THAT THE A.O. ERRED IN DISALL OWING THE CLAIM OF BAD DEBT BY HOLDING THAT THE APPELLANT HAD TO ESTAB LISH THAT THE DEBT HAD BECOME BAD. THE DECISIONS OF THE VARIOUS HIGH C OURTS AND THE SPECIAL BENCH OF THE MUMBAI TRIBUNAL DO NOT SUPPORT THE VIEW OF THE A.O. THE PLEA OF THE APPELLANT IS, THEREFORE, ACCOR DINGLY ALLOWED. 6. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE MAINLY CARRIED US THROUGH THE ASSESSMENT ORDER AND THEN EMPHASIZED TH AT A READING OF VARIOUS PARAGRAPHS OF ASSESSMENT ORDER SHOW THAT THE ASSESS EE HAD NOT BEEN ABLE TO PROVE THE BONAFIDE WRITING OFF THIS DEBT. HE REFERR ED TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIRECTOR OF INCOME -TAX (INTERNATIONAL TAXATION) VS. OMAN INTERNATIONAL BANK (2009) 313 ITR 128 (BOM ), WHEREIN IT WAS CLEARLY OBSERVED THAT AFTER THE AMENDMENT THOUGH THERE IS N O NEED TO PROVE THAT DEBT ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 3 HAS ACTUALLY BECOME BAD BUT THE BONAFIDE WRITING OF F AN ITEM STILL NEEDS TO BE PROVED. 7. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE STRONGLY ARGUED THAT AFTER THE AMENDMENT WITH EFFECT FROM 1.4.1989, IT IS NO MORE A REQUIREMENT TO PROVE THAT THE DEBT HAS ACTUALLY BECOME BAD. HE ARGUED THAT SIMILAR OBSERVATIONS HAVE BEEN MADE RECENTLY BY THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LIMITED VS. COMMISSIONER OF INCOME-TAX, R ANCHI IN CIVIL APPEAL NO. 5293 OF 2003 DATED 9 TH FEBRUARY, 2010 (COPY OF THE ORDER HAS BEEN PLACED ON RECORD. HE ALSO REFERRED TO THE CHART OF VARIOUS ITEMS GIVE N BY THE ASSESSING OFFICER AT PAGE 2 AND 3 OF THE ORDER AND POINTED OUT THAT SOME OF THE ITEMS HAVE ALREADY BEEN ALLOWED BY THE A.O. THEN HE REFERRED TO THE OB SERVATION MADE AT PARA 4.15 WHEREIN THE ASSESSING OFFICER HAD OBSERVED THAT THE REMAINING DEBTS COULD NOT BE SAID TO BE BAD BECAUSE IT COULD NOT BE SAID THAT BY FILING SUITS ASSESSEE HAD LOST HOPE FOR RECOVERY, THE DISALLOWANCE ON THE BASIS OF THIS OBSERVATION IS NOT JUSTIFIED. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. WE FIND THAT AFTER THE AMENDMENT WITH EFFECT FROM 1.4.1989 IN SECTION 36(1 (VII) THE ONLY CONDITION REQUIRED FOR CLAIMING BAD DEBT IS THAT SUCH TAX SHO ULD HAVE BEEN WRITTEN OFF. THE HONBLE HIGH COURT IN THE CASE OF DIRECTOR OF INCOM E-TAX (INTERNATIONAL TAXATION) VS. OMAN INTERNATIONAL BANK (SUPRA) HAS HELD AS UND ER: HELD, THAT TO TREAT THE DEBT AS A BAD DEBT HAD TO BE A COMMERCIAL OR BUSINESS DECISION OF THE ASSESSEE BASED ON THE RELE VANT MATERIAL IN THE POSSESSION OF THE ASSESSEE. ONCE THE ASSESSEE RECO RDS THE DEBT AS A BAD DEBT IN HIS BOOKS OF ACCOUNT THAT WOULD PRIMA FACIE ESTABLISH THAT IT WAS A BAD DEBT UNLESS THE ASSESSING OFFICER FOR GOOD REAS ONS HOLDS OTHERWISE. THE WRITING OFF IN THE ACCOUNTS HAD TO BE BONA FIDE . ONCE THAT BE THE CASE, THE ASSESSEE WAS NOT CALLED UPON TO DISCHARGE ANY FURTHER BURDEN. AFTER THE AMENDMENT IT WAS NEITHER OBLIGATORY NOR W AS THE BURDEN ON THE ASSESSEE TO PROVE THAT THE DEBT WRITTEN OFF BY HIM WAS INDEED A BAD DEBT AS LONG AS IT WAS BONA FIDE AND BASED ON COMMERCIAL WISDOM OR EXPEDIENCY. ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 4 9. THIS CLEARLY SHOWS THAT WRITING OFF OF A BAD DEB T IS SUFFICIENT AS LONG AS SUCH WRITTEN OFF IN THE ACCOUNTS IS BONAFIDE. THE H ONBLE SUPREME COURT IN THE CASE OF T.R.F. V. CIT (CIVIL APPEAL NO. 5293 OF 2 003) HAS OBSERVED AS UNDER: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FAC T, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRIT TEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 10. PARA 4.15 OF THE ASSESSMENT ORDER READS AS UNDE R: THE DEBTS WHICH ARE NOT MORE THAN THREE YEARS OLD AND WHERE THERE ASSESSEE IS PURSUING LEGAL SUIT CANNOT BE HEL D TO BE BAD DEBT BECAUSE THE ASSESSEE HAD NOT LOST HOPE OF RECOVERY. 11. THE ABOVE PARA SHOWS THAT SOME OF THE DEBTS WE RE ALLOWED BY THE ASSESSING OFFICER AND SOME WERE NOT ALLOWED BECAUSE ACCORDING TO THE ASSESSING OFFICER IT COULD NOT BE SAID THAT THE ASSESSEE HAD LOST THE HOPE OF RECOVERY. BUT THIS REQUIREMENT IS MORE THERE IN THE LAW. THE CASE LAW DISCUSSED BY THE ASSESSING OFFICER WAS MAINLY PRIOR TO THE AMENDMENT TO THE PR OVISO WITH EFFECT FROM 1.4.1989. THEREFORE, WE FIND NOTHING WRONG WITH THE ORDER OF THE LEARNED CIT(A) AND DECIDE THIS ISSUE AGAINST THE REVENUE. 12. AS FAR AS GROUND NO. 2 IS CONCERNED, AFTER HEAR ING BOTH THE PARTIES, WE FIND THAT THE ASSESSING OFFICER HAD REJECTED THE CL AIM OF THE ASSESSEE FOR ALLOWANCE OF A SUM OF RS. 26,16,043/- ON ACCOUNT OF PROVISION FOR WARRANTY AND FIELD SERVICES WRITTEN BACK IN THE ACCOUNTS OUT OF THE PROVISION D ISALLOWED IN EARLIER YEARS. 13. THE LEARNED CIT(A) HAD DECIDED THIS ISSUE VIDE PARA 7, WHICH READS AS UNDER: I HAVE CONSIDERED THE MATTER IN DETAIL AND FIND TH AT THE ISSUE IS OF REPETITIVE IN NATURE AND THAT NECESSARY DIRECTIONS HAD BEEN GIVEN IN THE EARLIER YEARS TO THE A.O. TO VERIFY THE FACTS O N RECORD. I DO NOT FIND IT NECESSARY TO DIFFER FROM MY EARLIER FINDING S AND DIRECT THE A.O. TO GIVE NECESSARY RELIEF WHILE COMPUTING THE D ISALLOWANCE MADE IN VIEW OF THE PROVISIONS DISALLOWED IN THE EARLIER YEARS. THIS GROUND IS, THEREFORE, ALLOWED IN PART. ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 5 14. AFTER HEARING BOTH THE PARTIES, WE FIND THAT AS FAR AS THE DISALLOWANCE OF MADE IN VIEW OF THE PROVISION FOR WARRANTY CHARGE I S CONCERNED, THE SAME IS PENDING BEFORE THE TRIBUNAL. THE LEARNED COUNSEL HA D SPECIFICALLY POINTED OUT THAT THIS PARTICULAR AMOUNT IS INVOLVED IN THE ASSESSMEN T YEAR 2001-02 WHICH IS STILL PENDING BEFORE THE TRIBUNAL. HOWEVER, HE HAD NO OBJ ECTION IF THE MATTER WAS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO RE-CO NSIDER AFTER THE DECISION OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2001-02. EVEN, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NO OBJECTION FOR THE SAME. THER EFORE, WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) ON THIS ASPECT AND RESTORE TH E MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH DIRECTION THAT THIS SHOULD B E DECIDED AFTER THE ORDER FOR THE ASSESSMENT YEAR 2001-02 FROM THE TRIBUNAL IS MADE A VAILABLE. 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.7324/M/07 (ASSESSEES APPEAL) 16. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWIN G GROUND: ON THE FACTS AND CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), MUMBAI, ERRED IN UPHOLDING THE ACTION OF THE DEPUTY COMMISSIONER OF INCOME-TAX - 8(2), MUMBAI, IN DISALLOWING PROVISION OF RS. 13,23 ,450/- MADE FOR WARRANTY AND FIELD SERVICES ON THE ALLEGED GROUND T HAT THE PROVISION BEING A CONTINGENT LIABILITY WAS NOT ENTI TLED FOR DEDUCTION, ALSO THAT THERE IS NO DEFINITE AND SCIEN TIFIC METHOD FOR CALCULATING THE PROVISIONS OF WARRANTIES. 17. AFTER HEARING BOTH THE PARTIES, WE FIND THAT DU RING THE ASSESSMENT PROCEEDINGS ASSESSING OFFICER NOTICED THAT ASSESSEE HAS CREATED A PROVISION FOR WARRANTY CHARGES AMOUNTING TO RS. 13,23,4550/-. A Q UERY WAS RAISED ON THE ALLOWABILITY OF THE PROVISION FOR WARRANTY. IN RESP ONSE TO WHICH IT WAS STATED AS UNDER: HDO IS ENGAGED IN OFFERING PROCESS ENGINEERING SO LUTIONS, SUPPLY OF CAPITAL GOODS AND EXECUTING TURNKEY CONTRACTS. T HE BUSINESS OF HDO DOES NOT END WITH ERECTION AND INSTALLATION OF THE MACHINERY AND PLANT, BUT CONTINUES DURING THE PERIOD OF WARRA NTY IN PROVIDING SUCH SERVICES AS TECHNICAL ADVICE, PROVID ING MAINTENANCE AND REPAIRS AND IN REP LACING ANY PARTS WHICH ARE E ITHER NOT IN ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 6 ACCORDANCE WITH THE STANDARDS OR WHICH WILL HAVE CO ME IN FOR REPLACEMENT DURING THE PERIOD OF WARRANTY. HENCE THERE IS A CONTINUING LIABILITY TO SPEND ON SUCH PROVISIONS OF SERVICES AND MATERIALS SUPPLIED OVER A NUMBER OF YE ARS, SPECIALLY DURING THE YEARS COVERED BY THE PERIOD OF WARRANTY. EVEN THEREAFTER HDO HAS TO CONTINUE TO PROVIDE THE SERVI CES TO MAINTAIN THE BUSINESS OF VALUED CLIENTS ETC. THE NATURE OF OUR BUSINESS IS SUCH THAT WE SUPPLY EQUIPMENT AS A COMPLETE UNIT ON KNOWN DOWN BASIS TO BE ASSEMBLED A T SITE AND TO BE INTEGRATED IN THE CUSTOMERS PLANT. POTENTIAL LIABILITY TO PROVE PERFORMANCE EXISTS ON THE DATE OF SUPPLY THOUGH THE CUSTOMER MAY NOT BE READY. SINCE SHIPMENTS ARE RECORDED AS SALES, I.E. INCOME HAVE BEEN RECKON ED, PRUDENT AND STANDARD ACCOUNTING PRACTICE OF MATCHING REVENU E WITH COSTS WARRANTS CORRESPONDING PROVISION FOR POSSIBLE EXPEN DITURE TO BE MADE WITHOUT WAITING FOR THE CUSTOMER TO TRY THE EQ UIPMENT. THE COMPANY HAS SEVERAL VENDORS WHO SUPPLY COMPONE NT AS PER OUR DESIGN. SEVERAL BROUGHT OUT ITEMS ARE ALSO PURC HASED. THE GUARANTEES WE HAVE WITH CUSTOMERS AS PER CUSTOMERS STANDARD TERMS, GENERALLY LIMIT THE MECHANICAL GUARANTEE UPT O 18 MONTHS FROM THE DATE OF LAST SHIPMENT OR 12 MONTHS FROM TH E DATE OF COMMISSION, WHICHEVER IS EARLIER. BECAUSE OF THE NA TURE OF OUR BUSINESS, BY THE TIME THE LAST SHIPMENT IS MADE, GU ARANTEE PERIOD FOR SOME OF THE ITEMS IS SUBSTANTIALLY UTILIZED AND THEREFORE, DURING FAILURE AT SITE WE HAVE TO MAKE REPLACEMENT AT COST . BESIDES SUBSTANTIAL ITEMS ARE OF PROPRIETY NATURE AND THE VENDORS MANUFACTURE THESE AS PER OUR DRAWING. THE VENDORS GUARANTEE, THEREFORE, IS LIMITED AND MODIFICATIONS HAVE TO BE DONE AT OUR COST. SPECIAL PROVISIONS ARE, MADE ON THE BASIS OF PROBL EMS ENCOUNTERED AT SITE ON THE ABOVE BASIS. THERE ARE INSTANCES WHEN MACHINES ARE MADE FOR THE FIRST TIME WHERE WE DO NOT HAVE EXPERIENCE ON THE PERFORMANCE OF THE MACHINE. THESE ARE GROSS ROOT DESIGNS. IN SUCH CASE WE MAKE A PROVISION FOR ANY UNEXPECTED PROBLEMS THAT MAY ARIS E. 18. AFTER CONSIDERING THE SUBMISSIONS THE ASSESSING OFFICER WAS OF THE VIEW THAT THERE WAS NO SCIENTIFIC METHOD WITH THE A SSESSEE TO KNOW THE LIABILITY OF FUTURE WARRANTEES. HE ALSO REFERRED T O THE DECISION OF CIT V. SWADESHI COTTON MILLS & FLOUR MILLS PVT. LTD. (1964 ) 153 ITR 134 AND CIT V. SUGAR DEALERS (1975) 100 ITR 424(ALL.) AND ULTIMATE LY DISALLOWED THIS PROVISION. ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 7 19. ON APPEAL, THE ACTION OF THE ASSESSING OFFICE R WAS CONFIRMED BY THE CIT(A). 20. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF FABRICATION, SUPPLY AND INSTALLATION OF MACHINERY FOR CONTROLLING VARIOUS EFFLUENTS AFTER I NSTALLATION GENERALLY A WARRANTY IS ALSO GIVEN FROM 12 TO 18 MONTHS AND SOMETIMES CLAIM S ARE MADE BY CUSTOMERS FOR WHICH IN ALL THE YEARS A WARRANTY PROVISION WAS BEI NG CREATED. IT WAS POINTED OUT THAT WHATEVER REMAINS UNSPENT WAS BEING REVERSED IN HE LATER YEARS AND OFFERED TO TAXATION. THEREFORE, IT IS A NORMAL REVENUE EXPENDI TURE. HE FURTHER ARGUED THAT AFTER THE RECENT DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF ROTORK CONTROLS INDIA P. LTD. V. CIT (2009) 314 ITR 62, SU CH PROVISION HAS HELD TO BE ALLOWABLE. 21. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL RE PRESENTATIVE SUBMITTED THAT ASSESSEE HAD NO SCIENTIFIC BASIS FOR CALCULATI NG THE PROVISION MADE IN A PARTICULAR YEAR AND, THEREFORE, SUCH PROVISION WHIC H IN THE NATURE OF CONTINGENT LIABILITY CANNOT BE ALLOWED. HE STRONGLY RELIED ON THE ORDER OF THE ASSESSING OFFICER AND ALSO PLACED RELIANCE ON THE DECISIONS CITED BY THE ASSESSING OFFICER. HE ALSO REFERRED TO THE DECISION OF THE HONBLE SUPREME COU RT IN ROTORK CONTROLS INDIA P.LTD.(SUPRA) AND IN THAT CASE WARRANTY CHARGES WER E HELD TO BE ALLOWABLE IN THE CASE OF MASS PRODUCTS, WHERE ON THE BASIS OF STATI STICAL DATA IT IS KNOWN THAT SOME OF THE MANUFACTURED ITEMS WOULD BE DEFECTIVE. THIS PRINCIPLE CANNOT BE APPLIED IN THE CASE OF TURNKEY PROJECTS WHICH THE ASSESSEE IS EXECUTING. HE PARTICULARLY REFERRED TO THE LAST TWO PARAS OF THE HEAD NOTE WHI CH READ 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 RESU LT OF A PAST EVEN, (B) IT IS PROBABLE THAT AN OUTFLOW OF RE SOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIAB LE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THERE COND ITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 8 THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTUR ED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOM E OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARR ANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITL ED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. 22. WE HEARD THE RIVAL SUBMISSIONS CAREFULLY. WE FI ND THAT ADMITTEDLY ASSESSEE IS ENGAGED IN THE BUSINESS OF FABRICATION, SUPPLY AND INSTALLATION OF POLLUTION CONTROL MACHINES. ONCE THE FABRICATION I S INVOLVED THAT MEANS EVERY MACHINE HAS TO BE DESIGNED ON TAILOR MADE BASIS AND WHICH BECOMES CLEAR FROM THE REPRESENTATION MADE BEFORE THE A.O. WHICH HAS B EEN EXTRACTED BY HIM IN PARA 8.2 AND EXTRACTED BY US IN PARA 17. 23. WE FURTHER FIND THAT IN CASE OF ROTORK CONTROLS INDIA P. LTD. (SUPRA) THE MAIN FINDINGS OF THE HONBLE SUPREME COURT STARTING FROM PAGE 71 & 72 OF THE REPORT, WHICH READ A UNDER: WHAT IS A PROVISION? THIS IS THE QUESTION WHICH NE EDS TO BE ANSWERED. A PROVISION IS A LIABILITY WHICH CAN B E MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROV ISION IS RECOGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT O BLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION ; (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATIO N. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNI ZED. LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISIN G FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT,. THE OBLIGATING EVENT IS AN E VENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW O F RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXI STING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINES S OF THE ENTERPRISE THAT ARE RECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MUST BE NOT ONLY PRESENT OBLI GATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTL E THAT OBLIGATION. WHERE IS ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMINED BY CONSIDERING THE SAID O BLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CAS E OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM, THE P ROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILIT Y NOT ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE SAID ACT. ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 9 HOWEVER, WHEN THERE IS MANUFACTURE AND SALE OF AN A RMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GO ODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITE MS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE H AVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION. 24. THE ABOVE CLEARLY SHOWS THAT IN THAT CASE PROVI SION FOR WARRANTY WAS ALLOWED WHEREIN PRODUCTION WAS CARRIED ON IN MASS P RODUCTION (ARMY OF PRODUCTS RUNNING INTO THOUSANDS AS EXPRESSED BY THE HONBLE SUPREME COURT) AND ON THE BASIS OF PAST EXPERIENCE AS WELL AS STATISTICAL AN D SCIENTIFIC DATA, IT WAS KNOWN THAT CERTAIN PERCENTAGE OF ITEMS WOULD BE DEFECTIVE AND PROVISION WAS CREATED FOR THE SAME. IN THE ABOVE PARA ITSELF IT HAS BEEN VERY CLE ARLY STATED THAT NO SUCH LIABILITY CAN BE ALLOWED IN THE CASE OF SINGLE ITEM PRODUCTIO N WHICH IN THE CASE BEFORE US AS THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF TRAIL ER MADE MACHINES. THE HONBLE SUPREME COURT HAS OBSERVED AS UNDER: IN THIS CONNECTION, IT MAY BE NOTED THAT IN THE CA SE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM, THE PROVIS ION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NO T ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE SAID ACT. HOWEVER, WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING IN TO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEFECTS B EING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WHICH R ESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION. 25. BEFORE US NO ATTEMPT WAS MADE ON BEHALF OF THE ASSESSEE TO SHOW THAT IF THE ASSESSEE HAS GOT ANY STATISTICAL OR SCIENTIFIC BASIS FOR CALCULATING SUCH WARRANTY AND HOW THE SAME CAN BE CALCULATED. THEREFORE, IN OUR HUMBLE VIEW THE RATIO OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF ROTORK CONTROLS INDIA PVT. LTD. (SUPRA) IS AGAINST THE ASSESSEE ON THE FACTS OF THE CASE. 26. IN ANY CASE, WE FIND THAT THE LEARNED CIT(A) HA S ADJUDICATED THIS ISSUE BY THE FOLLOWING PARA: IN APPEAL, THE LD. COUNSEL FOR THE APPELLANT HAS C ONCEDED TO THE FACT THAT THIS ISSUE IS A COVERED ISSUE BY THE EARLIER APPELL ATE ORDERS AS UNDER : 1.ITA NO.7682/MUM/03 FOR A.Y. 89-90 2. ITA NO.61/MUM/94 FOR A.Y. 1990-91 ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 10 3. ITA NO. 8321/MUM/93 FOR A.Y. 1990-91 4. ITA NO. 7961/MUM/94 FOR A.Y. 1991-92 5. ITA NO.7787/MUM/94 FOR A.Y. 1991-92 6. CIT(A) VIII/IT/176/03-04 FOR A.Y.200 0-01 7. CIT(A) VIII/IT/164/04-05 FOR A.Y. 20 01-02 8. CIT(A)VIII/IT/175/05-06 FOR A.Y. 200 2-03 9. CIT(A)VIII/IT/32/06-07 FOR A.Y. 2003 -04 NOT WITHSTANDING THE ABOVE ORDERS, IT HAS BEEN ARGU ED THAT THE PLEA OF THE APPELLANT DESERVES TO BE ACCEPTED. 27. THE ABOVE CLEARLY SHOWS THAT BEFORE THE CIT(A) THE ASSESSEE HAS CONCEDED THIS ISSUE AND THEREFORE, THE ASSESSEE CA NNOT BE AID TO BE AGGRIEVED BY THE ORDER OF THE FIRST APPELLATE AUTHORITY. IN THES E CIRCUMSTANCES, WE FIND NOTHING WRONG WITH THE ORDER OF THE LEARNED CIT(A) AND CONF IRM THE SAME. 28. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISS ED. ORDER PRONOUNCED ON THIS 9 TH DAY OF MARCH 2010. SD. SD. (D.K. AGARWAL) (T. R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED THE 9 TH MARCH, 2010. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT, MC VIII, MUMBAI. 4. THE CIT(A)-VIII, MUMBAI 5. THE DR H BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 11 ITA NO.7296 & 7324/M/07 M/S.HINDUSTAN DORR OLIVER LTD. 12