Income Tax Appellate Tribunal - Mumbai
Essential Power Transmission P. Ltd, ... vs Assessee on 5 October, 2009
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 Officer - 8(1)((3)
Pvt. Ltd., Essenpro House Vs. Mumbai
24, Marol Co-op. Indl. Estate
Andheri (E), Mumbai 400059
PAN - AAACE 3426 D
Appellant Respondent
Appellant by: Shri K. Gopal
Respondent by: Shri A.K. Nayak
ORDER
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 in fact detailed grounds for Ground No. 1, which is as under: -
"1. The Ld. Commissioner of Income-tax (Appeals) [hereinafter referred to as "Ld. CIT(A)"] has erred in confirming the following additions and disallowances made by the Ld. Assessing Officer without appreciating the facts and circumstances of the case:
Sr. Particulars Amount
No. (Rs)
A Disallowance of expenditure towards after sale 42,54,570
services and warranties as provision
B Disallowance of expenditure incurred towards 6,19,936
repairs on furniture
C Disallowance of expenditure incurred towards 8,14,770
repairs of the building
D Disallowance of expenditure incurred towards 50,332
repairs of (Asset) pattern
E Disallowance of expenditure incurred towards 1,01,705
repairs of the Air Conditioner
2 ITA No. 6515/Mum/2009
M/s. Essential Power Transmission Pvt. Ltd.
F Disallowance of expenditure incurred towards 26,11,844
repairs of the machinery
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 the scrutiny proceedings the A.O. made disallowance of provision for warranties and various expenditures claimed under the head "Repairs and Maintenance". The issue in ground No. 1(A) is with reference to provision for warranties and the issue in ground No. 1(B) to (F) is with reference to repairs, 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 Counsel submitted that the A.O. has mistakenly disallowed the provision 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 31st March, 05 0 82.09 124.64 296.07 251.52 Provision made during the year 82.09 56.51 222.53 42.23 4.71 Amounts used during the year 0 13.96 51.10 86.78 116.33 Balance as on 31st March 82.09 124.64 296.07 251.52 139.90 Net Amount debited / credited 82.09 42.55 171.43 -44.55 -111.62 to Profit & Loss A/c
5. It was submitted that for F.Y. 2004-05, i.e. for the previous assessment year the assessee made a provision for the 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 same norms the total provision required was to the tune of Rs.56.51 lakhs whereas the assessee has used Rs.13.96 lakhs out of the above provision which were expended on various heads like salary, transport, etc. Therefore, the assessee has made 3 ITA No. 6515/Mum/2009 M/s. Essential Power Transmission Pvt. Ltd.
net provision of Rs.42.55 lakhs in the books of account 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 debited 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 technology was introduced and warranty period was also revised. Accordingly 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 table.
6. Referring to the paper book filed with details for various years it was submitted that on some of the items the warranty was 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 form 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 placed in paper book page No. 157 with reference to provision made for services and warrantee and how AS-29 was applicable to the assessee and also the factual aspects with reference to utilization of the provision. It was his submission that after the explanation, the A.O. in A.Y. 2007-08 allowed the provision without any disallowance. It was his submission that the A.O. during the year has misunderstood the amounts used of Rs.13.96 lakhs, the 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 established 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 is 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 the 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 Transformers Ltd. 32 ITD 260 (Bom) and Srinivasan Computers Ltd. vs. ACIT 107 ITD 357. It has his 4 ITA No. 6515/Mum/2009 M/s. Essential Power Transmission Pvt. Ltd.
submission that the provisions are not allowable deduction 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, which is as under: -
"4. Provisions for Warranties From the profit and loss account it is seen that the assessee company has made provisions for Service & Warranties of Rs.432,54,570/- during the year. The same is included 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 has not incurred any expenditure under this head during the year under consideration. The assessee was asked to provide details of provisions for warranties and expenditures incurred during the years towards service of warranties. The assessee has given the calculation of provisions 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 the assessee it is clear that the assessee is not deducting the expenditure incurred towards warranty expenses from the provisions for warranties. This shows that the assessee on one hand is claiming deduction on account of provisions for warranties and secondly the expenditures incurred for service of warranties are also claimed by the assessee. As no expenditures are allowed on provisional basis, therefore, the expenditure claimed towards provisions for warranties are disallowed and added back to the total income of the assessee. The addition on this account is Rs.42,54,570/-. Penalty proceedings u/s 271(1)(c) is initiated on account of furnishing of inaccurate particulars of income with 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 indicates that assessee's 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 5 ITA No. 6515/Mum/2009 M/s. Essential Power Transmission Pvt. Ltd.
Assessing Officer who misunderstood that the assessee was making no expenditure on the provision. The CIT(A) also, in our view, has not considered the facts in its correct perspective. The 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 provision as expenditure under section 37(1) holding as under: -
"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 event; (b) it is probable that an outflow of resources will be required 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 provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 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 enterprise that is recognized as provision. For a liability to qualify for recognition 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 probability that an outflow will be required in settlement is determined by considering 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 Srinivasan Computer Ltd. vs. ACIT 107 ITD 357 (Chennai) the facts are that the assessee made a provision towards unexpired warrantee and claimed deduction. The Assessing Officer's finding that the actual expenditure was much less than the provision made and deleted the excess amount treating the expenditure as contingent in nature. The same was upheld on the facts. However, in the present case the assessee is able to demonstrate that provisioning was made on a rational basis on the past experience and further, over a period of time the provision was reduced as assessee was able to improve the technology and offered the balance to the credit of P & L Account, after utilisation of part of the amount in later years. It is worthwhile to mention the assessee's submissions before the CIT(A), which are as under: -
6 ITA No. 6515/Mum/2009M/s. Essential Power Transmission Pvt. Ltd.
"c) The warranties/guarantees start from the date of installation and ranges from 18 to 36 months depending on the type of 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 Guarantee/ Warrantee period is 18 months from the date of installation & the estimated cost of warranty is around 2.5% of selling price. • For Aerator Gear Boxes the Guarantee/Warrantee period is 18 months from the date of installation & the estimated cost of warranty is around 4% of selling price.
• For Extruder Gear Boxes for Kabra & Special Gears Boxes for M/S Flat Products the Guarantee/Warrantee period is 36 months from the date of installation & the estimated cost of warranty is around 9% of selling price.
e) As per the terms of Warranties & guarantees the Appellant guarantees against defective design, material & faulty workmanship. The Appellant warranties free replacement of any defective parts during the period of warranty. Appellant is also required to give bank guarantee in most cases to give confidence to customer that warranty provisions given shall be honoured during the period of unexpired period of warranty.
f) The company is having a separate department for Warranty services, which identified the actual expenses incurred for a particular sale. And on the basis of their analysis along with the help of technical department the provision for warranty 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 Special Gear Units required for Steel Industries and Plastic Industries. They have manufactured Units for 1st time and design calculation is based on international standard but still feed back for performance and life of Gear Units was to be ascertained for the Special Gear Units. The Gear Units are running for 24 hrs. 365 days a year continuously and are to be design considering all the unforeseen circumstances. The ultimate customer is also demanding Warranty/Guarantee of longer duration in view of the commitments with their customers. The Gear Units made by assessee is part of the complete equipment manufactured by it's customer and also exported outside India. The ultimate customer demands warranty/Guarantee for a longer period considering the time for shipment, installation, commissioning for such a large equipment. Since the steel application was developed by them after lot of exchange of data and technical specification and hence this called for a special 7 ITA No. 6515/Mum/2009 M/s. Essential Power Transmission Pvt. Ltd.
Warranty/Guarantee for such application where the order could only be awarded if this warranty/Guarantee for 36 months and hence the provision was accordingly made. The main reason for increase in provision of warranty for Ass. Year 200720-08 is due to failure of special gear unit supplied to M/s. Flat Products and requiring to deliver new gear box free of cost as per warranty provision. Due 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 provision has increased in A.Y. 2007-2008."
12. This indicates that the assessee is able to make the provision on a systematic and scientific basis and assessee in fact fulfilled its warranty conditions also to the customers. The A.O., after examining the same in later year, has accepted the same and allowed the provision. 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 the 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 earmarking the expenditure. Moreover, the norm for gross provisioning was also not examined by the A.O. as seen from the assessment order as he misunderstood 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. disallowed the entire expenditure towards repairs of various items claimed by the assessee for two reasons; (1) complete sets of bills were not furnished, and (2) the expenditure was capital in nature.
8 ITA No. 6515/Mum/2009M/s. Essential Power Transmission Pvt. Ltd.
14. Before the CIT(A) it was submitted that the A.O. has not given proper opportunity to furnish all the details of various claims but provided some sample bills as it would increase the file with unnecessary details. Without giving opportunity the A.O. disallowed the expenditure while allowing expenditure to the extent bills were filed before him. The assessee placed the balance of the bills before the CIT(A) in support of 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 exercised discretion available to the CIT(A) to allow or not to allow. He 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 an opportunity disallowed the balance expenditure under repairs to furniture, repairs to asset pattern, etc. It is also the contention that the A.O. wrongly disallowed the repairs expenditure as capital expenditure whereas the assessee had claimed capital expenditure separately in its books of account. He referred to the Balance Sheet schedule to show that the assessee had more than 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 incurring the expenditure this year was that the factory got submerged in Bombay floods in July 2005 and the assessee incurred lot of expenditure in restoring 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 expenditure and justify the same.
16. The learned D.R., however, submitted that the assessee has not furnished the details and accordingly the A.O. is correct in disallowing the repairs.
9 ITA No. 6515/Mum/2009M/s. Essential Power Transmission Pvt. Ltd.
17. We have considered the issue. We are not convinced with the reasoning of the A.O. in disallowing the expenditure for which bills were not furnished, eventhough necessary details were furnished. The Assessing Officer's discussion of various disallowances in para 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 details of various repairs claimed on various items. It was the submission of the assessee that only sample bills were submitted in support 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 before the CIT(A) but not admitted as additional evidence, were also placed before us with a prayer for admitting all the additional evidence. On considering this, we are of the opinion that the A.O. was not justified in disallowing the expenditure. There is justification for incurring heavy expenditure due 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 capital expenditure is treated separately by the assessee. However, as submitted by the learned counsel the assessee was not given proper opportunity before making the disallowances. In view of this, the matter is restored 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 directed 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 for statistical purposes.
Order pronounced in the open court on 30th July 2010.
Sd/- Sd/-
(N.V. Vasudevan) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 30th July 2010
10 ITA No. 6515/Mum/2009
M/s. Essential Power Transmission Pvt. Ltd.
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.