Income Tax Appellate Tribunal - Ranchi
Dcit Circle-1 , Ranchi vs Hec Ltd , Ranchi on 15 March, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL FINAL
RANCHI BENCH, RANCHI
(Before Shri S. S. Godara, J.M. & Dr.A.L.Saini, A.M.)
ITA No. 176/Ran/15 : Asstt. Year : 2006-07
Heavy Engineering Corporation Vs Addl.C.I.T, Range-1, Ranchi
Ltd.PAN: AAACH4534P
(APPELLANT/ASSESSEE) (RESPONDENT/DEPARTMENT)
ITA No. 125/Ran/17 : Asstt. Year : 2012-13
D.C.I.T, Cir-1, Ranchi Vs Heavy Engineering
Corporation
Ltd.PAN: AAACH4534P
(APPELLANT) (RESPONDENT)
C.O No. 19/Ran/18
[Arising out of ITA No. 125/Ran/2017 A.Y : 2012-13
Heavy Engineering Corporation Vs Addl.C.I.T, Range-1, Ranchi
Ltd. PAN: AAACH4534P
(CROSS (RESPONDENT/DEPARTMENT)
OBJECTOR/ASSESSEE)
Assessee by : Shri S.K.Bathwal, CA, ld. AR
Department by : Shri Inderjit Singh, CIT, ld. DR
Date of Hearing : 09-01-2019 Date of Pronouncement: 15 -03-2019
ORDER
PER BENCH:
1ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
The captioned appeal filed by the assessee in ITA No. 176/Ran/2015, pertaining to assessment year 2006-07, appeal filed by the revenue in ITA No.125/Ran/2017, pertaining to assessment year 2012-13 and cross objection filed by the assesse, pertaining to assessment year 2012-13, are directed against the separate orders passed by the Commissioner of Income-tax (Appeals), Ranchi in I.T /Appeal Nos. 373/Ran/Co/08-09 & 159/Ran/Co/14-15 dated 30-09-2015 & 20-03- 201701.02.2016, 04-02-2016, which in turn arise out of separate assessment orders dated 31-12-2008/20-03-2017 passed by the Assessing Officer u/s. 143(3) of the Income-Tax Act, 1961 (in short, the Act).
2. Assessee's appeal in ITA No. 176/Ran/2015 for the A.Y 2006-07, Revenue's appeal in ITA No. 125/Ran/2017 for the A.Y 2012-13 and C. O No. 19/Ran/2018 arising out of ITA No. 125/Ran/2017 for the A.Y 2012-13, relating to same assesse and common/identical issues are involved. Therefore, these Have been clubbed and heard together and a consolidated order is being passed for the sake of convenience.
ITA No. 125/Ran/2017 for the A.Y 2012-13 ( by the revenue)3. The Revenue's appeal in ITA No. 125/Ran/2017 for the A.Y 2012-13 is taken as a lead case. Grounds raised by the revenue in ITA No. 125/Ran/2017 for the A.Y 2012-13 are as follows:-
"1. M/s. Heavy Engineering Corporation Ltd (HEC) is a Government of India undertaking and is engaged in the business of manufacturing, project work, reconditioning, execution and commissioning of machineries, equipments for steel plants, mining sectors, railways, defence etc. The assessee filed its return of income for the AY 2012-13 declaring total income of Rs. NIL. The case of assesse, for the AY 2012-13, was selected for scrutiny through CASS and the assessment was completed u/s. 143(3) of the I.T Act 1961 ( for short hereinafter 'the Act'), after making a 2 ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
disallowance of Rs.3,93,07,000/- under the head provision for warranty expenses. Being agitated, the assesse preferred an appeal before the ld. CIT(A), Ranchi. The CIT(A), Ranchi has allowed the appeal of the assesse.
2. The relief of Rs.3,93,07,000/- allowed by the CIT(A) is bad in both law & facts. It is observed from the material placed on record that during the relevant AY, the assesse Company has made the provision for warranty expenses of Rs. 3,93,07,000/- and the same has been claimed as an expenditure, due to which it has been debited in the P/L. But it is observed from the careful scrutiny of the materials placed on record, and also from the order of the ld. AO, that the said expenses of Rs. 3,93,07,000/- was not actually incurred, but it is a mere provision in the books of accounts of the assesse. Since the liability has not been ascertained or incurred, the assesse company cannot claim the same as an expenditure during the year under consideration. This is one type of an expenditure which is not allowed as per the provisions of Income Tax Act, hence, the same is correctly disallowed and added back to the total income of the assessee."
4. The brief facts qua the issue are that in these two appeals and cross objection of the assessee, a common issue is disputed, which relates to disallowance of warranty expenses booked by the assessee under the head 'provisions for warranty expenses'.
5. We heard both the parties and perused the material on record. We note that the assessee is a Govt. of India undertaking engaged in manufacturing of heavy machines, equipment etc and registered under the provisions of Indian Companies Act, 1956. The assesse company manufactures and sells capital goods/heavy equipment to customers. In compliance with its contractual obligation " Warranty"
for replacement of spare parts and maintenance for certain specified period at free of cost are provided. To provide after sales services is an obligation under any contract 3 ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
of sale for the assessee company. Incurring of liability, therefore, is certain, based on its past experience and technical estimate for warranty, expenses are provided in accounts on accrual basis. This is done while crediting our Profit and Loss Account for its Sales Revenue and along with this manufacturing and other expenses and Warranty Expenses are charged in the accounts as expenses.
6. Before us the ld. Counsel for the assesse submitted that to provide after sales service is an obligation under any contract of sale for the assesse company. Therefore, incurring of the liability is certain. Hence, the assesse company provides for its ' After Sale Service/Warranty' obligation on accrual basis in its Profit & Loss account. The assessee company provides for 0.5% on sales for liabilities under contractual obligations/warranties. This was stated at Clause 6 of the Statement of Accounting Policies of the Company forming part of the balance sheet and Profit and Loss account. The assesse company follows this policy uniformly and consistently every year in the preparation of the balance sheet and Profit and Loss account. The company has worked the percentage on sale on the basis of past factor of actual expenses incurred by it towards warranty liability. This provision of ' After Sale Service' is then reversed back by the company on the expiration of the Guarantee/Warranty Period and the amount of such expiration is then offered for taxation as income. Therefore, we note when it is well settled that a business liability had definitely arisen in the accounting year and incurring of the liability was certain. The liability so accrued was estimated scientifically. For that we rely on the following Judgments:-
1. Haden International Group India (P) Ltd Vs. ACIT, Cir-3, Than (2008) 20 SOT 305(Mum)-ITAT Mumbai Bench ' H '.
2. Siemens Public Communication Networks Ltd Vs. CIT, Bangalore-III, Bangalore (2010) 126 SOT 141 (Bang)-ITAT Bangalore Bench ' B '.4
ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
3. DCIT, Cir-4(1), New Delhi vs. L.G Electronics (I) Ltd [2009] 29 SOT 167 (Del), ITAT Delhi Bench ' D '.
7. We note that the AO has held that these expenses were not ascertained and were adhoc in nature which could not be claimed as expenses for the year under consideration. This was only a provision and had not actually accrued. The AO relied on the judgment of the Hon'ble Supreme Court in the case of Bharat Earth Mover Vs. CIT (2000) 245 ITR 428 (SC). , wherein it was held that, since this liability had not been ascertained or incurred, the assessee company could not claim the same as expenditure during the year under consideration. The AO also noted that the requirement of Accounting Standard (AS) should be ignored because I.T Act, 1961 prevails on accounting standards. When a particular type of expenditure was not to be allowed as per provisions of the I.T Act, 1961, the same ought to be disallowed added back. Therefore, the AO made the addition.
8. We further note that it is undisputed fact that the expenses had been claimed under the head' warranty expenses' and the assesse had been claiming this consistently on the same basis as a contractual liability. In support of this, the assessee submitted a sample order placed Central Coalfield Limited. Clause 14 of the order states:-
" Performance Guarantee (PBG)- You shall guarantee that the availability of the equipment shall not be less than 85% for a period of 12 months from the accepted date of commissioning measured over each 12 month period. A performance guarantee valid for 15 months from the date of commissioning for 10% value of equipment ( along with accessories) including taxes and duties etc to the FOR destination price of the materials on order must be submitted within 20 days of the placement of the order. No payment will be done without submission of Performance Gurantee."5
ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
9. We note that the claim of excess liability and written back of the assessee company are as follows:-
S.No. Narration Amount
1 Provision made in earlier years withdrawn during Rs.2,11,05,569.40
the year
2. Provisions for after sales made during the year Rs.3,65,53,474.49
3. The net increase in provision for after sales service Rs.1,54,47,905.09
10. We note that the provision was made as per Note 27(D) to the balance sheet. The assessee company had written back Rs.8,36,74,000/- under the head ' Excess Provision Written back and shown as ' Other income' for the impugned assessment year.
11. Coming to the judgment in the case of Bharat Earthmovers (supra) as relied on , it would be relevant to quote the entire portion of the ratio. Relevant portion of the said judgment in the case of supra is reproduced herein below:-
"The law is settled: 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.
Applying the principles laid down in Metal Box Co. of India Ltd v. Their Workmen [1963] 73 ITR 53 (SC) and Calcutta Co. Ltd v. CIT [1959] 37 ITR 1 (SC), it must be held that the provision made by the assesse-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, would be allowable as deduction out of the 6 ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
gross receipts for the accounting year dealing which the provision was made for the liability. The liability was not a contingent liability. The High Court was not right in taking a view to the contrary."
12. It is evidently clear from the judgment that the allowability of a liability has to be judged on the following:-
1. a business liability has to definitely arise in the accounting year.
2. there should be certainly about the incurring of the liability.
3. it should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible.
4. the liability has to be allowed although the liability may have to be quantified and discharged at a future date.
13. It would have to be seen whether the facts of the case of the assesse meets with the criteria settled by the Hon'ble Supreme Court. On perusal of the facts of the case it is seen that the liability had definitely arisen in the accounting year and there was certainty about this. The appellant company had made a reasonable estimate of claiming at 0.5% of sales based on past expenses and technical estimates. The appellant company also stated that on the expiration of the warranty period the balance amount is offered for tax as income.
14. Based on the entirety of the facts and circumstanes of the case as explained above, we dismiss the grounds raised by the revenue. The appeal of revenue in ITA No. 125/Ran/2017 for the A.Y 2012-13 is dismissed. We allow the grounds raised by the assessee. Therefore, the appeal of assessee in 176/Ran/2017 for the A.Y 2006-07 is allowed.
15. We note that the C.O raised by the assessee ( No.19/Ran/2018 arising out of ITA No. 125/Ran/2017 for the A.Y 2012-13) is in support of the order of the ld. 7 ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.
CIT(A). Since we have confirmed the impugned order of the ld. CIT(A), the C.O filed by the assesse become infructuous.
16. In the result, the appeal filed by the assessee is allowed, appeal & corresponding cross objection filed by the revenue and assessee respectively both are dismissed.
Order Pronounced in the Open Court on 15-03-2019
Sd/- Sd/-
(S. S. Godara) (Dr. A.L.Saini)
Judicial Member Accountant Member
Dated: 15-03-2019
*PRADIP (Sr.PS)
Copy of the order forwarded to:
1. The Appellant/Assessee: The Director-Finance, Finance & Accounts Department (HQ), M/s. Heavy Engineering Corporation Ltd, Plant Plaza Road, P.O Dhurwa, Ranchi-834004.
2 The Respondent/Department: The Addl. CIT, Range-2Cir-2, Ranchi/DCIT, Cir-1, 4th Floor, Central Revenue Building (Annexe), Main Road, Ranchi-834001.
3. The CIT-, 4. The CIT(A)-,
5. DR, Ranchi Benches, Ranchi True Copy, By order, Senior P.S ITAT, Ranchi Benches 8 ITA Nos. 176/ Ran/2015, 125/Ran/2017 & CO No.19/Ran/2018 M/s. Heavy Engineerin Corporation Ltd.