THE COMMISSIONER OF INCOME TAX V. M/S.WEP PERIPHERALS LTD

ITA/651/2007

AI Insights

The case involves two appeals by the Commissioner of Income Tax and the Assistant Commissioner of Income Tax against M/s WEP Peripherals Ltd., concerning the assessment years 2001-02 and 2002-03. The primary issues were the addition of Rs.90,58,354 as a difference between the opening and closing stock values at the Hyderabad unit, and the disallowance of warranty provisions amounting to Rs.1,60,98,440 for 2001-02 and Rs.89,01,000 for 2002-03. The Income Tax Appellate Tribunal had dismissed the revenue's appeals, which led to the current proceedings in the High Court of Karnataka.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 740370 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-03-2014
• Assessment Year: misc
• Other Referred Cases: Rotork Controls India (P) Ltd. vs. Commissioner of Income Tax Chennai, Commissioner of Income Tax and another vs. M/s.IBM India Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: S R ANURADHA
• Assessee Lawyers: K V ARAVIND
• Keywords: Assessment Year; Audit report; Income Tax; Provision for warranty; Stock valuation
• Section: 37; 142(2A); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 17TH DAY OF MARCH 2014 PRESENT THE HON’BLE MR. JUSTICE DILIP B BHOSALE AND THE HON’BLE MR. JUSTICE B MANOHAR ITA.NO.651/2007 C/W ITA.NO.655/2007 BETWEEN 1. THE COMMISSIONER OF INCOME TAX C.R.BUILDING, QUEENS ROAD BANGALORE 2. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 12(3), C.R.BUILDING, QUEENS ROAD, BANGALORE ... COMMON APPELLANTS (BY SRI K V ARAVIND, ADV.,) AND M/S WEP PERIPHERALS LTD FORMERLY WIPRO E PHERIPHERALS LTD., II FLOOR BASAPPA COMPLEX 40/1A, LAVELLE ROAD BANGALORE 560 001 ... COMMON RESPONDENT (BY SMT S R ANURADHA, ADV.,) THIS ITA.NO.651/2007 FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 27-4-2007 PASSED IN 2 ITA NO.618/BNG/2005, FOR THE ASSESSMENT YEAR 2001-02, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.618/BNG/2005,DATED 27-4-2007 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-12(3),BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THIS ITA.NO.655/2007 FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 27-4-2007 PASSED IN ITA NO.619/BNG/2005, FOR THE ASSESSMENT YEAR 2002-03, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.619/BNG/2005,DATED 27-4-2007 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-12(3),BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THESE ITAS COMING ON FOR HEARING, THIS DAY, THIS COURT, DELIVERED THE FOLLOWING: ORAL JUDGMENT: (DILIP B. BHOSALE J.) These two appeals arise from the common order dated 27th April 2007 whereby, the Income Tax Appellate Tribunal, Bangalore Bench-A (for short the “Tribunal’) dismissed the appeals filed by the revenue bearing ITA 3 618-619/2005 pertaining to assessment years 2001-02 and 2002-03. The Tribunal also disposed of ITA No.421/2005 by the very same order. However, we are not concerned with the same in the present appeals. 2. The appeals (ITA No.618-619/2005) were directed against the order dated 3rd February 2005 passed by the Commissioner of Income Tax (Appeals-III) Bangalore (for short “CIT(A)”) whereby ITA 79/AC 12(3)/CIT(A)III/04-05 filed by the assessee was partly allowed. Though the appeal was partly allowed by CIT(A), insofar as the present appeals are concerned, the questions of law raised herein were decided in favour of the assessee. In other words, insofar as the present appeals are concerned, the appeal filed by the assessee before the CIT(A) was allowed. The Assessing Officer vide order dated 29-10-2004 made addition of Rs.90,58,354/- as a difference between the value of opening stock and closing stock pertaining to Hyderabad Unit. In so far as the provision for warranty is 4 concerned, the Assessing Officer for both the assessment years disallowed the deduction to the extent of Rs.1,60,98,440 (assessment year 2001-02) and Rs.89,01,000/- (assessment year 2002-03). It is in this backdrop, in the present appeals the revenue has raised the following substantial questions of law : 1. Whether the Appellate Authorities were justified in holding that the difference between the Opening Stock and the Closing Stock cannot be added back as held by the Assessing Officer despite the genuineness of the purchases having not been proved by production of Purchase Invoices? 2. Whether the Appellate Authorities were correct in holding that the provision for Warranty is a business expense which is allowable despite the same being a Contingent Liability and the same having not been expended by the Assessee during the current Assessment Year? Insofar as the second substantial question of law is concerned, it is raised in both the appeals. 3. The respondent-assessee disputed addition of Rs.90,58,354/- being a difference between the opening 5 stock as on 1-2-2001 and the closing stock as on 31-3-2001 pertaining to Hyderabad Unit. It appears that on receipt of the final audit report under Section 142(2A) of the Income Tax Act, 1961 (for short “the Act”), the issues were identified and a show cause notice (letter) was issued to the assessee-company on 18-08-2004. The assessee filed their replies on 30-08-2004 and 02-09- 2004. Further clarification was sought from the assessee which was also submitted vide letter dated 28-09-2004. It has come on record that the assessee had purchased goods from Godrej and company worth Rs.3,67,81,086/- and the total value shown as purchases, at the end of assessment year was Rs.4,99,41,820/-. The break up of this amount as mentioned in the order of the assessment reads thus : • Goods purchased by Godrej & Co. and deemed to have carried on account of WEP =Rs.36781086 • Difference between the value of opening stock of Hyderabad unit as of 1st February 2001 over closing stock as of 31st March 2001 which was taken as part of purchase by the assessee =Rs. 9058354 • Other adjustments made to purchases =Rs. 4102381 6 While dealing with this issue, Special Audit Report under Section 142(2A) of the Act, dated 10-08-2004 placed on record, was taken into consideration. This report reveals that the purchases to the extent of 97.69% were verified by the Special Audit Party and in view thereof, the assessee’s contention that the Assessing Officer’s observation in respect of the purchases at Hyderabad Unit were held to be not correct. In other words, it was contended that the observations made/conclusions arrived at by the Assessing Officer in respect of purchases at Hyderabad Unit remained unsubstantiated. It appears that the difference of Rs.90,58,354/- between opening stock and closing stock at Hyderabad factory had been considered only to arrive at the consumption of material at Hyderabad factory of Rs.4,99,41,820/-. In short, the case pleaded by the assessee was that the total purchases made by the assessee were made during the assessment year. This case of the assessee has been accepted by the 7 first appellate authority as well as the Tribunal. The findings of the first appellate authority made on the question read thus: “The appellant’s submissions are carefully considered. On perusal of Special Audit Report u/s.142(2A) dated 10-08-2004 (page 3), I find that the Special Audit Party has verified the purchases to the extent of 97.69%. In the circumstances, I am inclined to agree with the appellant’s contention that the Assessing Officer’s observation that the purchases at Hyderabad unit were unsubstantiated is not correct. Further the Assessing Officer has not brought anything on record to indicate that there was a discrepancy in the value of opening stock, purchases and closing stock reflected in the Annual Accounts of the appellant. The difference of Rs.90,58,354/- between the opening stock and closing stock at Hyderabad factory has been considered by the appellant only to arrive at the consumption of material Rs.4,99,41,820/- at Hyderabad factory. The difference of Rs.90,58,354/- between opening stock and the closing stock at Hyderabad factory has been added to the purchases at Hyderabad factory to arrive at the consumption of Rs.4,99,41,820/-. The appellant has also arrived at the same consumption of Rs.4,99,41,820/- by adding purchases to the value of opening stock and from the resultant figure reducing the value of closing stock (refer Para 3.0 above). In the circumstances, I am of the considered opinion that the addition of 8 Rs.90,58,354/- on account of difference between opening stock and closing stock was not warranted. Accordingly addition of Rs.90,58,354/- is deleted.” The Tribunal confirmed the above findings recorded by the CIT(A). It is clear from the findings recorded by the First Appellate Authority as well as the Tribunal that the evidence produced by the assessee in respect of the purchases and consumption are the finding of fact, though the revenue disputed that no evidence was placed on record to substantiate the purchases worth Rs.90,58,354/- Even if the submission made on behalf of the revenue is presumed to be correct, we would not like to enter into this controversy in view of the concurrent findings recorded by the authorities below and in particular, Special Audit report under Section 142(2A) of the Act, dated 10-08-2004, which confirms the purchases to the extent of 97.69% as were verified by the Special Audit Party. In the circumstances, we confirm the concurrent findings recorded by the authorities below on this question and 9 answer the first question against the revenue and in favour of the assessee. 4. Insofar as the second question is concerned, at the outset, Mr.Aravind, learned counsel for the revenue invited our attention to the judgment of the Supreme Court in Rotork Controls India (P) Ltd. vs. Commissioner of Income Tax Chennai, [2009] 314 ITR 62 (SC) to contend that the matter deserves to be remitted to the Tribunal to consider whether the tests laid down by the Supreme Court in the said judgment stands satisfied. 5. In Rotork Controls India (P) Limited, the Supreme Court was considering the question what is provision? (for warranty). The Supreme Court while dealing with this question observed that “a provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past 10 event; (b) it is probable an outflow of resources will be required to settle the obligation; and (c) reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.” On the basis of these observations and following the observations made by the Supreme Court in paragraph 13, Mr.Aravind, learned counsel appearing for the Revenue submitted that to find out whether all the tests laid down by the Supreme Court stand satisfied in the present case, it deserves to be remanded to the Tribunal. Relevant observations in paragraph 13 read thus: “A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally 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 provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future 11 warranty expenses. Such estimates need reassessment 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 done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant- enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stand satisfied in this case. It is important to note that there are four important aspects of provisioning. They are – provisioning which relates to present obligation, it 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 Court should not to have interfered with the decision of the Tribunal in this case”. 12 6. In the present case, the appellant-Revenue has disputed the allowance of Rs.89,01,000/- being provision for warranty for the assessment year 2002-03 and Rs.1,60,98,440/- for the assessment year 2001-02. In support our attention was invited to the observations made in paragraph 3.0 and 3.1 in the order of the CIT(A) to demonstrate whether all the three tests laid down by the Supreme Court in Rotork’s case stand satisfied in the present case. 7. From bare perusal of the observations made by the CIT(A), which are confirmed by the Tribunal, in our opinion, it cannot be stated that the tests laid down by the Supreme Court in Rotork’s case were taken into consideration and applied. This has not been disputed seriously by the respondents. Hence, insofar as the issue in respect of the provision for warranty is concerned, we are inclined to allow these appeals and remand the matter 13 to the Tribunal to consider the second substantial question of law in the light of the judgment of the Supreme Court in Rotork (supra) and also in Commissioner of Income Tax and another vs. M/s.IBM India Limited, [2013] 357 ITR 88 (Kar.). Order accordingly. 8. With these observations, the appeals are partly allowed. However, there shall be no order as to costs. Sd/- JUDGE Sd/- JUDGE Ia "