Income Tax Appellate Tribunal - Delhi
Woodward Governor India Ltd., New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'H' NEW DELHI)
BEFORE SMT, DIVA SINGH, JUDICIAL MEMBER
AND
SHRI B.K. HALDAR, ACCOUNTANT MEMBER
I.T.A. No.4483 & 5103/Del/2010
Assessment year : 2005-06 & 2006-07
Woodward Governor Addl. CIT,
India Ltd., 101-C, Range-18,
Shiv House, Hari Nagar Ashram, New Delhi.
New Delhi. V.
I.T.A. No.4798 & 5462/Del/2010
Assessment year: 2005-06 & 2006-07
ACIT, Woodward Governor
Circle18 (1), India Ltd., Hari Nagar
New Delhi. V. Ashram, New Delhi.
(Appellant) (Respondent)
PAN /GIR/No.AAACW
/GIR/No.AAACW-
AAACW-0210-
0210-D
Appellant by : Shri K.N. Gupta &
Shri Jatin Jindal, C.As.
Respondent by : Shri A.K. Monga, Sr. DR
ORDER
PER BENCH:
These are two sets of cross appeals filed by the assessee and the revenue for assessment year 2005-06 & 2006-07 respectively against the respective orders of
2 ITA No4483,4798,5103 & 5462./Del/10 Ld CIT(A)-XXI, New Delhi. For the sake of convenience, all these appeals are being disposed off by this common order.
ITA No.- 4483 & 5103/Del/2010, A.Yr. 2005-06
2. The grounds raised by the assessee for this assessment year are as under:-
1. That the ld CIT(A) erred on facts and in law in confirming the addition to the extent of `.14,53,881/- being the amount of warranty provision for the sale made between October 2, 2003 to March 31 st, 2004 without appreciating that the amount in dispute represents the present liability of warranty obligation to be met in the subsequent year as the period of warranty have not been expired on such sale, hence it cannot be disallowed.
1.1. That the Ld CIT(A) failed to appreciate that it is not a case where a fresh provision for warranty obligation has been charged to profit & loss account for the year in dispute, rather it is case of revising the opening provision for warranty cost on the sales made during the period of October 2, 2003 to March 31 st 2004 for which the period of warranty has not been expired.
2. That all the above grounds of appeal are without prejudice to each other and are mutually exclusive.
3. The grounds raised by the revenue for assessment year 2005-06 are as under:-
3 ITA No4483,4798,5103 & 5462./Del/10
1. Whether the Ld CIT(A) is correct on facts and in law in allowing deduction to the assessee of provision for warranty liability holding that the same was accrued liability, allowable as deduction in computing profits & gains of business.
2. Whether provision for warranty on the basis of figures of past years with reference to sales made in the current year is a liability contingent in nature so as to disallow the same u/s 37(10) of the Act.
4. During the year under consideration, the assessee claimed warranty expenses as under:-
i) Warranty on actual expenses basis. `.12,53,441/-
ii) Provision for warranty expenses. `.48,54,522/-
Total `.61,07,963/-
5. The Assessing Officer, therefore, required the assessee to show cause as to why the provision for warranty expenses should not be disallowed. The Assessing Officer was of the opinion that provision for warranty was a contingent liability. The Assessing Officer also pointed out to the assessee that the warranty expenses were claimed by it both on cash as well as on accrual basis which was not permitted as per the provisions of section 145 of the Act. The assessee submitted that it provided warranty expenses on sales for a period of 18 months from the date of sales. Thus, as on the last date of the previous year i.e. 31.3.2005, it provided for warranty on goods sold from Ist October, 2003 to 31st march, 2005. The estimated warranty expenses has been worked out on the basis of average warranty expenses for assessment year 1993-94 to 2004-05, which works out to 1.18% of the sale. Thus, provision for warranty was worked out at `.52,.58,505/- which is 1.18% on the 4 ITA No4483,4798,5103 & 5462./Del/10 total sales made from Ist October, 2003 to 31st march, 2005 amounting to `.44,56,.36,026/-. Out of the above provision `.14,53,81/- related to the period October, 2003 to March, 2004. The Assessing Officer was of the opinion that this provision of `.14,53,881/- which is included in the warranty provision of `.48,54,522/- claimed by the assessee was clearly not allowable being prior period expenses.
6. Relying on various case laws as discussed in pages 3 to 5 of the assessment order the Assessing Officer opined as under:-
(i) Accountancy practice cannot be followed for allowing of expenditure under the Act if the same is contrary to the provision of the Act.
(ii) Liability in presenti is only allowable as accrued liability whereas liability de futuro is contingent liability. Expenditure which depend on happening of an event in future cannot be considered as a present liability.
7. The Assessing Officer specifically relied on the following Tribunal decisions in favour of the revenue:-
1.Babcock & Willcocox Ltd. v. DCIT 79 ITD 63.
2. ITO v. Amco Transformers Ltd. 32 ITD 260 &
3. ITO v. Alena Auto Industries 39 TTJ 439 (Del.).
The Assessing Officer, therefore, disallowed the whole warranty provision amounting to `.48,54,522/- and allowed the actual expenditure incurred by the assessee amounting to Rs.12,53,441..
5 ITA No4483,4798,5103 & 5462./Del/10
8. On appeal before the Ld CIT(A), it was submitted by the assessee that movement in provision for warranty account and warranty expenses debited to P&L A/c were as under:-
Movement for provision for warranty account Particulars Amount in `.
Opening balance as on 1.4.2004 31,35,150/- Add; Provision created during the year. 48,,54,522/-
Less: Expenses charged off out of provision. 27,31,167/-
Closing balance as on 31.3.2005 52,58,505/- Warranty Expenses debited to P&L A/c Actual warranty expenses 12,53,441/- Warranty provided during the year. 48,54,522/- Amount debited to P&L A/c. 61,07,963/-
9. It was submitted that provision of `.52,58,505/- on account of warranty expenses was made by following mercantile system of accounting to meet its future liability of warranty expenses on the sales made by it. The actual amount of provision charged to P&L A/c was `.48,54,522/- after reducing the excess provision of `.4,03,983/- carried forward from assessment year 2004-05.
10. The Hon'ble ITAT in assessee's own case for assessment year 2004-05, in I.T.A. No. 1973/Del/2008 held that provision for warranty was an ascertained liability and the same was allowable. The Hon'ble Delhi High Court vide their order 6 ITA No4483,4798,5103 & 5462./Del/10 dated 19.2.2010 in I.T.A. No.82 of 2010 dismissed the revenue's appeal against the said order of the tribunal. Further reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. v. CIT (2009) 314 ITR 62.
11. It was further submitted that the estimation of provision for warranty was based on the historical data of actual warranty cost incurred in past several years starting from financial year 1993-94 to 2003-04. Thus, the provision for warranty made during the year was a realistic estimate of the future cost which is likely to be incurred on account of standard warranty obligation. The same was allowable u/s 37 of the Act. It was also inconsonance with the requirement of the Companies Act and the accounting standard notified u/s 145 of the Act. It was also in accordance with the accounting standard prescribed by ICAI.
12. As regards the provision for warranty for sale of goods during the period October, 2003 to March, 2004 amounting to `.14,53,881/-, it was submitted that as the assessee provides warranty for 18 months, the assessee was required to make such provision during the year under consideration. Reliance was placed on the decision of the Hon'ble Delhi Tribunal in the case of CIT v. Whirlpool India Ltd.
reported in 22 SOT 103. It was further submitted that the sum of `.14,53,881/- consist of opening provision of `.13,55,311/- made in earlier year on the same sale base and incremental value of the provision for warranty of `.98,570/- computed with the variance of 0.08% of sale.
13. The Ld CIT(A) bifurcated assessee's claim with reference to provision of warranty as under:-
Warranty provision for April 1, Being contingent in 7 ITA No4483,4798,5103 & 5462./Del/10 2004 to March 31,2005. 3,400,641 nature.
Warranty provision for the Being contingent in Period Oct., 2, 2003 to nature as well as March 31, 2004. 1,453,881 prior period expenses Total 4,854,522
14. In view of the order of the Hon'ble ITAT and the judgment of Hon'ble Delhi High Court in assessee's own case for assessment year 2004-05, it was held by the Ld CIT(A) that provision for warranty was an allowable expenditure u/s 37(1) of the Act.
15. The Ld CIT(A) noted that the Tribunal in assessee's own case for assessment year 2004-05 held as under:-
"In the light of the above discussion made above, we, therefore, reduce the disallowance of `.31,35,150/- made by the Assessing Officer and further confirmed by the CIT(A) to `.10,41,476/- and the balance is held to allowable as deduction while computing the profits and gains of the business in the year under consideration. We order accordingly. Thus this issue is partly allowed decided in favour of the assessee."
16. As in the earlier year, provision for warranty only for the relevant previous year was allowed by the Tribunal, the Ld CIT(A) held that the assessee was only entitled to deduction on this account amounting to `.34,00,641/-. It was not entitled to claim deduction relating to the period October, 2003 to March, 2004 amounting to `.14,53,881/-. Aggrieved by the above order both the assessee as well as the revenue has filed appeal before the Tribunal.
8 ITA No4483,4798,5103 & 5462./Del/10
17. Before us the Ld DR submitted that the issues agitated by the revenue as well as the assessee are covered by the decision of the Tribunal and the Hon'ble jurisdictional High Court in assessee's own case for assessment year 2004-05.
18. The ld AR for the assessee, in addition to submissions made before the authorities below submitted that in view of the decision of the Tribunal in the case of Whirlpool India Ltd. the assessee was entitled to revise the original provision made in the earlier year in the subsequent assessment year and the additional claim made on this basis could be allowed. It was contended by him that the above decision of the Tribunal has upheld by the Hon'ble jurisdictional High Court in I.T.A. No.1154 of 2009 . judgment delivered on 24.,1.2011 (Assessee's paper book pages 46 to 67). He specifically relied on para 20 of the Hon'ble High Court's judgment which reads as under:-
"20. The legal principle delineated in the aforesaid judgment would clearly demonstrate that whenever there is warranty clause in the bulk, product sold by the company/assessee to its customers, warranty provision can be made and it would not be treated as contingent liability. There is no quarrel to this proposition and in fact in this very case the assessee has been making the provisions for warranty every year which was accepted by the Assessing Officer. The question othat really calls for an answer is as to whether such a provision which has already been made in the previous years can be revised later on in a particular year as sought to be done by the assessee in the present case. Going by the reasons which justifies making of such a provision and treating them as expenditure u/s 37 of the Act, more particularly when it fulfills the accrual concept as well as the matching concept, we see no 9 ITA No4483,4798,5103 & 5462./Del/10 reason as to why the assessee could be precluded from revising this provision after taking into consideration that warranty period of the goods sold under warranty was existing provision already provided in a particular is falling short of the expected claims that may be received. It is, however, to be kept in mind that such a provision is based on scientific study and actuarial basis that is precisely done by the assessee in the instant case and, therefore, we see no reason to differ with the view taken by the Tribunal in the impugned order. We, therefore, answer this question No. (a) in the affirmative."
19. On being asked by the Bench as to whether AS-29 is binding for the assessment year under consideration, the Ld AR for the assessee has submitted that the same was binding for assessment year 2005-06. For the above proposition , the Ld AR for the assessee relied on the jurisdictional High Court's decision in the case of CIT v. Dinesh Kumar Goel reported in 331 ITR 10 wherein the Hon'ble High Court in para 21 & 22 of the said judgment held as under:-
"21. Section 145 of the Act deals with the method of accounting and states that in case of business income, inter alia, the same is to be computed in accordance with the cash or mercantile system of the company. Sub section (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. Section 211 of the Companies Act on the other hand, prescribes the form and contents of balance sheet and profit and loss account, which are to be maintained by the companies under the said Act. Sub section (2) castes a duty on a company to give true and fair view of a profit and loss of a company for the 10ITA No4483,4798,5103 & 5462./Del/10 financial year in its profit and loss accounts. Sub section (3A) adheres to the accounting standards for preparing profit & loss balance sheet. Sub section (3C) defines accounting standards as under:-
(3C)..........
22. A conjoint reading of the aforesaid provisions of the Income Tax Act and the Companies Act shows that those assessees which are companies and showing income, inter alia, under the head "business or profession"
have to follow the accounting standards prescribed."
20. The Ld AR for the assessee referred to Note No.4 of Notes on Account available on assessee's paper book -I, page 5 which reads as under:-
"The assessee has provided a sum of `.4,854.522 on account of warranty following mercantile system of accounting. The provision for warranty represents an ascertained liability which is computed on a scientific basis. Accordingly, the same is claimed deductible while computing the total income. Reliance in this regard has been placed on the judgment of Bharat Earth Movers v. CIT (SC) (2000) 245 ITR 428. Calcutta Company Ltd. v. CIT (SC) (1959) 37 ITR 1, Commissioner of inland Revenue v. Mitsubishi Motors NewZealand Ltd. (Priv. Council) 222 ITR 697, ITO v. Wanson India Ltd.
(ITAT Pune) (1982) 5 ITD 102, Kevin Enterprises v. JCIT 79 ITD 196 (2001) (ITAT Ahmedabad) and CIT v. Vinitee Corporation (P) Ltd. (2005) 146 Taxman 313 (Delhi). Further during the current year, the assessee has actually incurred a total sum of `.3,984.607 on warranty claims. Out of the above sum of `.3,984.607, a sum of `.2,731.167 has been charged from provisions 11ITA No4483,4798,5103 & 5462./Del/10 for warranty account and a net balance of `.6.107.962 (i.e. `.4.854.522 + `.3.984.607 - `.2.731.167) has been debited to the profit & loss account and claimed as tax deduction."
21. It was further submitted by him that as per clause 14(a), (b) & (c ) of AS-29, provision for warranty would be a present liability of the assessee.
22. It was noted by the Bench that the assessee deals in manufactured as well as trading goods. The Ld AR for the assessee was, therefore, asked to explain as to whether it was the responsibility of the assessee to meet out the warranty claim with reference to trading goods. He was also asked to clarify as to whether the rate of warranty claim worked out by the assessee was on the basis of actual expenditure incurred by the assessee on such claim or on the basis of warranty claim charged to P&L A/c.
23. The Ld AR for the assessee has submitted that imported goods which are covered under the global warranty of the original manufacturer were repaired free of cost by the original manufacturer and not by the appellant. Only incidental charges such as freight, custom duty etc. are borne by the appellant due to Govt. Regulation for import of machines for repair and replacement. It was also submitted that after sale services and replacements with reference to goods manufactured by the assessee is an integral part of manufacturing activity of the appellant company. Profits derived from the sale of such imported spare parts and goods is eligible for deduction u/s 80IB of the Act. It has been so held by the Tribunal in assessee's own case for assessment year 2001-02 to 2004-05.
12ITA No4483,4798,5103 & 5462./Del/10
24. As regards the rate of warranty claim, it was submitted by the Ld AR for the assessee that the same was worked out on the basis of actual expenses incurred by the assessee towards warranty claim in each previous year.
25. We have heard the parties and perused the record. We have also gone through the case laws cited by the Ld AR for the assessee and the revenue. In view of the Hon'ble Apex Court's decision in the case of Rotork Controls (supra), we hold that provision for warranty on eligible sales made during the relevant previous year is an ascertained liability and allowable as a deduction.
26. We find that in assessment year 2004-05, the assessee for the first time claimed expenditure towards warranty on accrual basis. It claimed expenditure relating to earlier year's sales amounting to `.35,69,999/- and the provision towards warranty for sale of 18 months from October, 2002 to March, 2004 @ 1.10% of sale. As in earlier year, the assessee did not claim warranty expenses on accrual basis, the Tribunal allowed expenditure actually incurred by the assessee on account of sale of earlier year and the provision made for the current year's sales @ 1.10% of the sale ( refer to para- 35 of the order). This view of the Tribunal has been upheld by the Hon'ble jurisdictional High Court. The Tribunal did not allow the actual expenditure incurred on this account with reference to sale made during the year as well as the provisions made at the applicable rate. Thus, the assessee is not entitled to the actual warranty expenses incurred by it with reference to sales made during the year under consideration. Only the provision of warranty expenses on the current sale is admissible expenditure.
27. The total sales/gross turnover of the assessee during the year under considaration was `.347.737.769/-. As per Schedule-15, Notes to Account, Note No.6, the sales relating to manufactured goods was `.17,62,14,900/- and sales of 13ITA No4483,4798,5103 & 5462./Del/10 trading goods was `.17,15,22,869/-. If on the gross sales including the trading sales rate of 1.18% is applied, the allowable expenditure on this account works out to `.41,03,305/- . Thus, at the most , on account of the current year's sales the assessee is entitled to an expenditure of `.41,03,305/- only. However, we find that the rate of warranty as a percentage of sales has been worked out by taking the total of manufactured goods sale and the trading goods sale. Also the provision has been worked out on the basis that the assessee is fastened with the warranty liability in respect of trading sale. There is nothing on record to justify the same. It has been stated by the Ld. AR for the assessee that warranty liability is that of the manufacturer and not of the trader. This is also clear from the copy of Global Warranty Policy of Woodward products available on record. Thus, the whole of the factual matrix for working out the warranty claim is required to be adjudicated. The quantum of sale, out of the total sale , made by the assessee on which it has provided manufacturer's warranty is required to be determined. Only then the warranty liability on accrual basis can be worked out. We, therefore, set aside the orders of the authorities bellow only on this issue and remit the matter back to the file of the assessing officer for fresh consideration and adjudication after giving the assessee adequate opportunity of being heard.
28. The warranty expenses relating to the period from October, 2003 to March, 2004 has already been allowed to the assessee in the assessment year 2004-05 on accrual basis. Thus, the assessee is not entitled to actual expenditure incurred as well as the provision relating to the sale of the same period in assessment year 2005-06. However, in view of the judgment in the case of Whirlpool India Ltd. (supra), the assessee is entitled to additional deduction if the applicable rate for the current year is more than that applicable for the earlier year, that too on the eligible of that period. As we have remitted back the matter of quantification of provision for 14ITA No4483,4798,5103 & 5462./Del/10 warranty for the sale made during the year under consideration to the file of the AO, we also remit back to the AO the matter of quantification of additional allowable claim , if any, on this account. The AO will pass a fresh order in the light of our direction after obtaining the necessary details from the assessee and giving the assessee adequate opportunity of being heard.
I.T.A.No.5103/Del/20010I.T.A.No.5103/Del/20010 (A.Y (A.Y :06- 06-07(Assessee' 07(Assessee's appeal):-
appeal):-
29. The assessee has taken following grounds of appeals:-
1. That the ld CIT(A) erred on facts and in law in confirming the addition to the extent of `.11,12,269/- being the amount of warranty provision for the sale made between October 2, 2004 to March 31st, 2005 without appreciating that the amount in dispute represents the present liability of warranty obligation to be met in the subsequent year as the period of warranty have not been expired on such sale, hence it cannot be disallowed.
1.1. That the Ld CIT(A) failed to appreciate that it is not a case where a fresh provision for warranty obligation has been charged to profit & loss account for the year in dispute, rather it is case of revising the opening provision for warranty cost on the sales made during the period of October 2, 2004 to March 31st 2005 for which the period of warranty has not been expired.
2. Without prejudice to above and in alternate that on the facts and circumstances of the case and in law, the Ld CIT(A) erred in not accepting the proposition that a sum of provision for warranty which was disallowed in 15ITA No4483,4798,5103 & 5462./Del/10 assessment year 2005-06 should not be considered while computing the total warranty cost to be allowed in the year in question."
I.T.A.No.5462/D/2010: AY: 06- 06-07 (Revenue's appeal):
30. The revenue has taken the following grounds:-
1. Whether the Ld CIT(A) is correct on facts and in law in allowing deduction to the assessee of provision for warranty liability holding that the same was accrued liability, allowable as deduction in computing profits & gains of business.
2. Whether provision for warranty on the basis of figures of past years with reference to sales made in the current year is a liability contingent in nature so as to disallow the same u/s 37(1) of the Act.
31. In this year the assessee claimed warranty expenses by following mercantile method of accounting amounting to `.60,66,762/- consisting of warranty expenditure on actual basis of `.21,07,644/- and provision for warranty expenditure amounting to `.39,59,118/-. The Assessing Officer disallowed provision for warranty amounting to `.39,59,118/-.
32. Before the Ld CIT(A), the assessee made additional claim. However, the Ld CIT(A) did not allow the additional claim of the assessee but allowed the whole of the expenditure claimed as provision for warranty. Aggrieved, both the assessee as well as the revenue has filed the appeal before the Tribunal.
16ITA No4483,4798,5103 & 5462./Del/10
33. Before us, both the parties relied on the arguments advanced for assessment year 2005-06. Thus, the allowance of the expenditure with reference to warranty claim is decided on the basis of conclusion reached by us in assessment year 2005-
06.
34. In this year, the notes to the computation of income forming integral part of the return of income states as under:-
"The assessee has during the year provided a sum of `.39,59,118/- on account of warranty following mercantile system of accounting. The provision for warranty represents as ascertained liability which is computed on a scientific basis. Accordingly, the same is claimed deductible while computing the total income. Reliance in this regard is placed on the judgment of Bharat Earth Movers v. CIT (SC) (2000) 245 ITR 428, Calcutta Company Ltd. v. CIT (SC) 1959 37 ITR 1, Commissioner of Inland Revenue v. Mitsubsbishi Motors New Zealand Ltd. (Priv. Council) 222 ITR 697, ITO v. Wanson India Ltd. (ITAT Pune) (1982) 5 ITD 102, Kevin Enterprises v. JCIT 79 ITD 196 (2001) (ITAT Ahmedabad) and CIT v. Vinitee Corpon. Ltd. (2005) 146 Taxman 313 (Del.). Further during the current year the assessee has actually incurred a total sum of `.5,443,149/- on warranty claims. Out of the above sum of `.5,443,149 a sum of `.3,335,506/- has been charged from the provisions for warranty account and a net balance of `.6,066,761/- (i.e. `.39,59,118/- + `.54,43,149/- - `.3,335,505/- has been debited to the profit & loss account and claimed as tax deduction."
17ITA No4483,4798,5103 & 5462./Del/10
35. The total sales of the year under consideration is `.50,10,59,515/- consisting of manufactured goods sale of `.27,,42,57,466/- and trading goods sale of `.22,68,02,049/-.
36. For the reasons mentioned in the appeals for assessment year 2005-06, we hold that provision for warranty made on scientific basis on the quantum of sale made during the year under consideration on which warranty liability is fastened on the assessee is admissible deduction. The quantum of the same will be worked out by the Assessing Officer as per the direction issued by us in the appeals for assessment year 2005-06. Only the issue of quantification of the admissible expenditure is remitted back to the file of the Assessing Officer for passing a fresh order after giving the assessee adequate opportunity of being heard.
37. We also hold that the assessee is entitled to revise it's provision for warranty with reference to eligible sales made by it for the period October, 2004 to March, 2005. It is entitled to claim a deduction of the incremental increase in the provision, if any, on this account. The issue of quantification of such allowable claim is remitted back to the file of the Assessing Officer. The Assessing Officer will pass a fresh order after determining the same in consonance with the direction in the appeals for assessment year 2005-06.
38. In the result, the appeal of the assessee and the revenue are allowed to the extent mentioned above.
39. In the result, all the four appeals of the assessee and the revenue are allowed to the extent mentioned above.
18ITA No4483,4798,5103 & 5462./Del/10
40. Order pronounced in the open court on the 16th day of September, 2011.
Sd/- Sd/- (DIVA SINGH) (B.K. HALDAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dt. 16.9.2011. HMS Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.
By Order (ITAT, New Delhi).
Date of hearing 11.08.2011 Date of Dictation 07.09.2011 Date of order signed by the Hon'ble" 0.9.2011 Member. Date of order Sent to the concerned 0.09.2011 Bench 19ITA No4483,4798,5103 & 5462./Del/10