Madras High Court
The Commissioner Of Income Tax vs The Deputy Commissioner Of Income Tax ... on 13 July, 2015
Author: R.Sudhakar
Bench: R.Sudhakar, K.B.K.Vasuki
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 13.07.2015 CORAM: THE HONOURABLE MR.JUSTICE R.SUDHAKAR AND THE HONOURABLE MS.JUSTICE K.B.K.VASUKI TCA.No.1339 of 2007 The Commissioner of Income Tax Chennai. .. appellant v. M/s.Faivelly Transport Ltd., (formerly known as M/s.Sab Wabco India Ltd,) Post Box.No.39 Harita, Hosur-635 109. .. Respondent (cause title accepted vide order of the court dated 11.9.2007 made in MP.No.1/2007) Prayer:- TCA is filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras D Bench, Chennai dated 30.11.2005 passed in ITA.No.372/Mds/2004. For Appellant : Mrs.R.Hemalatha for M/s.T.R.Senthil Kumar For Respondent : Mr.Vijayaraghavan for M/s.A.Subbaraya Aaiyar JUDGMENT
(Delivered by K.B.K.VASUKI, J) The Revenue is the appellant herein.
2.The assessee company filed its return of income on 30.11.2000 for the assessment year 2000-2001 declaring taxable income of Rs.1,41,37,260/-. After scrutiny of the assessment, the Assessing Officer disallowed the following items which were contested by the assessee (1)Provision for Warranty of Rs.14,00,000/- (2)General Charges of Rs.26,79,162/- (3)Obsolete inventory Claims of Rs.4,00,000/- and (4)Advance written off Rs.19,99,610/-. The Assessing Officer disallowed some of them for non furnishing the details and some of them on legal issues.
3.Aggrieved against the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) insofar as the claim for deduction under the head 'provision for warranty' is concerned, found the same to be accepted on legal principles and decided as follows :
Therefore, the AO is directed to examine whether the appellant had made any provision in the earlier years and has written off the amount back to the P&L Account after the two year warranty period was over on those amounts. With reference to the provision for this year he is also directed to examine whether the provision is at 2% on the sales or not and allow the amount to the extent of sales made during the year. Further the AO is directed to examine the nature of the warranty expenses so claimed in the year of sales in miscellaneous expenses account and examine whether there is provision made or not in earlier years and if any part of the claim pertains to this year sale, the provision should be reduced to that extent. After examining these issue, the AO can allow the amounts accordingly. On principle, as the provisions for warranty is held as eligible amount, as it is an ascertained liability the grounds are considered allowed. AO is directed to follow the above directions of examining the claim on facts before allowing the claim.
4.As far as the second issue regarding dis-allowance of miscellaneous expenses is concerned, the Assessing Officer was directed to consider, allowing the implementation charges and expenditure pertaining to purchase of software or capitalise the same accordingly, if the expenditure pertains to purchase of software and hardware in earlier year. With reference to the gifts incidental charges and other expenditure, the Assessing Officer was further directed to examine the vouchers and genuineness of the same and allow the expenditure under section 37(1) of the Act.
5.Regarding the claim of obsolete inventory, while on principle it is held that write off of obsolete inventory is allowable, the Assessing Officer was directed to re-examine this issue by calling for item wise break up and to examine whether the assessee's claim of written off obsolete inventory is correct or not.
6.Regarding claim for deduction for the written off advance to the suppliers, the amount relating to advance written off was Rs.19,99,610/-, out of which, Rs.1,07,052/- represents advance to employees and other minor advances to printers etc. The balance amount of Rs.18,92,558/- consists of 165 items consisting primarily of minor advances for repairs, travel expenses, petrol and spare parts. The Commissioner of Income Tax (Appeals) was of the view that the advance written off is allowable as revenue expenditure. It was further observed by him that the advance for purchase of machinery or any fixed asset or loans not in the course of money lending activity is not allowable as they fall under the capital loss. The Commissioner of Income Tax (Appeals), having found that the amount was disallowed without examining any details and the nature of advance, directed the Assessing Officer to examine each and every item of the advance written off and the year of advance and the nature of advance and if they are advanced to employees, who are not in service at present or trade debts etc., and accordingly to decide the issue. The Commissioner of Income Tax (Appeals) has thus partly allowed the appeal filed by the assessee.
7.The assessee did not prefer any appeal against the order of the Commissioner of Income Tax (Appeals), whereas the Revenue preferred an appeal before the Income Tax Appellate Tribunal against the remand order regarding dis-allowance of provision for warranty of Rs.14,00,000/-. The appeal was dismissed by holding that provision made for warranty on the basis of previous expenditure is an allowable claim. It is held so by relying on the judgment of the Delhi High Court reported in CIT v. Vinitee Corporation Pvt Ltd., (2005) (278 ITR 337). Challenging the same, the Revenue has come forward with the present appeal before this Court.
8.The appeal is admitted on the following substantial questions of law :
(i)Whether in the facts and in the circumstances of the case, the Tribunal was right in holding that the warranty provision is an allowable deduction? and
(ii)Whether in the facts and circumstances of the case, the Tribunal was right in holding that a provision made in respect of future claims that may not arise at all, is a deductible expenditure in the current year?
9.Heard the rival submissions made on both sides and perused the records.
10.As far as the present case is concerned, the assessee company was engaged in the manufacture and sale of safety equipments and spares mainly for the railway rolling staff and more than 95% of the sales is to the railways. The products are safety related and made to railways orders and specifications and as the products are constantly in motion and are prone to develop problem even within the warranty period as the products sold by the company is not standard products, they are sold with provisioning based on past warranty cost realized. The products namely wagon brake system, electronic brake system and loco brake system are supplied to the railways incorporating various changes. These products are supplied to the railways under a warranty clause under which the company would be liable to repair/replace the defective products over a period of 24months. The warranty provision is assessed on a scientific method, having regard to various operating problem with the products in the field. While making the warranty provision the following criteria is adopted.
1)An assessment of the warranty claims received and accepted by the company for various products.
2)Anticipated warranty related claims by the customers based on the inputs provided by the field technical staff.
3)Contractual obligations relating to warranty, especially with reference to the period of warranty.
4)Performance of various products as assessed during periodical meetings and discussions with the customers that may indicate potential warranty claims.
11.The warranty provision is reviewed and recast at the end of every financial year and any provision that is computed as excess based on the above criteria is reversed and the same is credited to the profit/loss account and accordingly becomes part of the taxable income. Actual warranty costs incurred during a year are set off against the provisions available at the beginning of the financial year. Based on the same, the likely warranty claims were estimated at Rs.14Lakhs for the financial year 1999-2000 and the above works out to a mere 0.6% of the sales for the said year as against Rs.33.30lakhs during the financial year 2000-01 and Rs.47.28Lakhs during financial year 2001-2002. There is no double deduction in claim of warranty-once on provision and again on actual expenditure.
12.Whereas, the Assessing Officer and Commissioner of Income Tax (Appeals) disallowed the same by treating it as double deduction. The Assessing Officer and the Commissioner of Income Tax (Appeals) while doing so, failed to consider that there is no disallowance under the head 'provision for warranty' for the previous years and the provision for warranty in respect of which deduction claimed based on actual expenditure incurred on the previous years is again part of the sale agreement and is contractual in nature.
13.The Division Bench of our High Court headed by His Lordship Hon'ble Mr. Justice R.Sudhakar in TCA.No.379 of 2008 dated 08.07.2015 in Erbis Engineering Company Ltd., V. The Deputy Commissioner of Income Tax Company Circle II(1) by relying on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd, V. Commissioner of Income Tax (2009) 314 ITR 62 allowed the appeal by way of remand to the Assessing Officer. For better appreciation, the order of the Division Bench of this Court referring to the order of the Hon'ble Supreme Court is extracted below :
3. At the time of hearing of the appeal, the learned counsel on either side submitted a decision of the Supreme Court in the case of Rotork Controls India (P) Ltd. v. Commissioner of Income Tax, Chennai, (2009) 314 ITR 62 (SC) and stated that the decision of this Court in Commissioner of Income Tax v. Rotork Controls India Ltd. [2007] 293 ITR 311 (Mad), on which heavy reliance was placed by the Tribunal, was reversed by the Supreme Court in the aforesaid decision. The principles enunciated in the said decision reads as under :
The principle which emerges from these decisions is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the 1961 Act. In the said decision, the Supreme Court also laid down certain conditions, which read as under:
11. What is a provision? This is the question which needs to be answered. 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 settle 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.
12. 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.
4. In the light of the decision of the Supreme Court in Rotork Controls India (P) Ltd., referred supra, the order of the Tribunal stands set aside and the matter is remanded to the Assessing Officer to pass appropriate orders in the light of the decision of the Supreme Court cited supra.
14.Applying the same view, herein the order of the Income Tax Appellate Tribunal remanding the matter to the Assessing Officer to pass appropriate orders need not be found fault with and the Assessing Officer is directed to comply with the order of remand and to pass appropriate orders in the light of the decision of the Hon'ble Supreme Court (cited supra). In view of the same, the substantial questions of law raised herein need not be answered.
15.In the result, the tax case appeal is dismissed. No costs.
[R.S.J.] & [ K.B.K.V.J.] 13.07.2015 Index:Yes/No Internet :Yes/No tsh/rk R.SUDHAKAR, J.
AND K.B.K.VASUKI, J.
tsh To The Commissioner of Income Tax Chennai.
TCA.1339 of 2007 13.07.2015