Income Tax Appellate Tribunal - Kolkata
Hamilton Research & Technology (P) Ltd. vs Asstt. Cit on 25 August, 2003
Equivalent citations: (2004)88TTJ(KOL)891
ORDER
R.C. Sharma, A.M. These are the appeals filed by the assessee against the order of learned Commissioner under section 263 for the assessment year 1992-93 and filed by the revenue against the order of learned Commissioner (Appeals) for the same assessment year.
2. As both the appeals relate to the same assessee, same assessment year and the issues involved are also the same, therefore, for the sake of convenience, both the appeals are disposed of by this consolidated order.
3. The brief facts of the issue are that originally assessment was completed under section 143(3) which was revised by the learned Commissioner by passing order under section 263 on the ground that provision for expenses for warranty amounting to Rs. 10,50,000 debited to the P&L a/c, is an unascertained liability and, therefore, the assessing officer erred in allowing the same while computing the business income. The learned Commissioner by passing order under section 263 held that the assessing officer committed an error in allowing Rs. 10,50,000 which rendered the assessment erroneous and prejudicial to the interest of the revenue. As per the direction of the learned Commissioner under section 263, the assessment was revised and a sum of Rs. 10,50,000 claimed by the assessee under the head 'provision for expenses on warranty' was added back to the assessee's income.
4. Against the order of assessing officer, the assessee approached the learned Commissioner (Appeals), who deleted the addition by observing that the assessee was under a definite obligation at the time of sale of goods and, therefore, the provision made by the assessee was realistic and that liability although not accurately quantified was ascertained.
5. Rival contentions have been considered. The assessee-company is engaged in the business of manufacture and sale of computer components. The sale of these machines was made under the terms and conditions of free service for maintenance for one year from the date of installation. The assessee-company was maintaining its accounts on mercantile system of accounting and, therefore, made a provision of Rs. 10,50,000 towards expenses on warranty. During the year under reference, the assessee sold electronic post controller to its customers under the terms and conditions that it will provide free service for maintenance of these machines for one year, from the date of installation. Accordingly, the assessee incurred actual expenditure on this account in giving free maintenance services amounting to Rs. 10,53,203 during the immediately succeeding year. As per the method of accounting followed by the assessee in earlier years, it has debited Rs. 10.50 lakhs in the accounts on account of provision for warranty as the said liability was definite, accrued and ascertained liability during the year, although the actual payment of the expenses was made in the immediately succeeding year and, therefore, actual quantification of it was ascertained in the immediately succeeding year. The actual expenditure, in respect of which provision was made, actually incurred more or less before the date of finalisation of accounts for the year under consideration. In the order under section 263, the learned Commissioner disallowed the claim on the ground that liability was not ascertained. In the assessment order giving effect to the direction of the learned Commissioner in his order dated 5-2-1997, the assessing officer included the said sum of Rs. 10.50 lakhs in the assessee's income. The main allegation of the learned Commissioner was that even in the tax audit report, the said liability was stated to be contingent in nature. It was also stated in the order under section 263 that the expenses were estimated on the basis of past experience and that the actual expenditure was known only before the date of finalisation of the balance sheet. It was also submitted before the learned Commissioner, in the proceedings under section 263 that though the provision of Rs. 10,50,000 was made in the accounts, the assessee incurred actual expenditure on this account amounting to Rs. 10,53,203. It was also submitted that the assessee-company was maintaining accounts on mercantile basis, and as such, all the expenditures of which legal liability has arisen, are to be debited before the expenditure amounts are actually disbursed. The assessee also relied on the various orders of the Hon'ble High Courts. It was also submitted that similar expenditure was also claimed and allowed in the earlier assessment year 1991-92, in the order passed under section 143(3). The learned Commissioner did not agree with the assessee's contention and by relying on the cases of CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC) and CIT v. Jemini Cashew Corpn. (1967) 65 ITR 643 (SC), disallowed the assessee's contention regarding allowability of the provision of Rs. 10,50,000 on account of warranty expenses.
6. In the order passed by the learned Commissioner (Appeals) dated 30-7-1997 against the order passed by the assessing officer under section 143(3)/263, the learned Commissioner (Appeals) observed that the controllers supplied by the assessee were guaranteed against defective materials' poor workmanship, faulty design and for trouble-free work for a period of 12 months from the date of installation. In case any defect or deficiency arises during the period the supplier had to set right the defects/deficiency within 48 hours. It was further found that, as per the condition of after-sale service, the assessee was required to do free servicing of entire system supplied by it, for a period of one year form the date of commissioning of the controllers. The assessee was also required to depute one engineer at Benukoot (at the site of the purchaser) for one year at assessee's cost. Expenses were borne by the assessee except the bachelor accommodation to be provided by the buyer. In view of the various clauses, the learned Commissioner (Appeals) observed that the appellant made provision for its known liability of which the amount could not be determined with substantial accuracy during the financial year relevant to assessment year 1992-93 under consideration. The learned Commissioner (Appeals) also found that in the immediately preceding year, the provision of Rs. 18 lakhs was made, against which the actual expenditure was Rs. 18,05,464. As per learned Commissioner (Appeals), all these facts and figures prove that the provision was made by the assessee- company is realistic and that liability, although not accurately quantified, was ascertained. For arriving at the conclusion, the learned Commissioner (Appeals) relied on the judgment of the Hon'ble Supreme Court in the case of Kedar Alath Jute Mfg. Co. v. CIT (1971) 82 ITR 363 (SC), in which it was held that the moment a dealer made either purchases or sales which were subject to sales-tax, the obligation to pay tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of assessment. The assessee, which followed mercantile system of accounting was entitled to deduct from the profits and gains of its business, liability to sales-tax which arose on sales made by it during the relevant previous year.
7. The learned Commissioner (Appeals), further found that in assessee's case, the liability was ascertained as soon as sales were made under terms and conditions of purchase order, as the appellant was under definite obligation to undertake the responsibility of maintaining the machines already sold.
The learned Commissioner (Appeals) also relied on the ratio laid down by the Hon'ble Allahabad High Court in the case of CIT v. Burhwal Sugar Mills Co. Ltd. (1971) 82 ITR 784 (All) in which it was held that-
"It is settled law that when an assessee maintains his account books on the mercantile system of accounting, the date on which the liability accrues is the date to be considered for the purpose of entering that liability in the accounts. That is so even though the liability is capable of estimate only and its actual quantification has to be postponed. The difficulty in making the estimate did not convert the accrued liability into a conditional one, because it was always opened to the Income Tax authorities to arrive at a proper estimate thereof having regard to all the circumstances of the case."
The learned Commissioner (Appeals) also found that the judgments relied on by the learned Commissioner while passing order under section 263 was not applicable to the facts and circumstances of the case and he had also dealt with in detail the cases so relied on.
8. In view of the above discussion and on the basis of material placed on the record, we can reach to the conclusion that the assessee sold the goods with a condition that all the expenditures on account of maintenance of items sold would be borne by it and that the assessee was under a definite obligation to maintain the machines sold to the customers. The buyers were not under obligation to reimburse the expenses to the assessee and it was the assessee only who by way of obligation, under the terms of the supply, bound to incur such maintenance expenses. Thus the provision for warranty was made for a definite and accrued liability, the exact quantification of which was ascertained in the subsequent year and on the basis of actual expenditure incurred by the assessee. The assessee was following mercantile system of accounting, on the basis of standard practice followed in the computer industry, it made provision for expenditure on account of warranty. The liability of expenditure had accrued as soon as the sales were made with warranty clause in the purchase order. Mere fact that actual expenditure for maintenance was incurred in the next year and the exact quantification was also made in the next year, did not postpone the accrual of the liability during the year under consideration. The assessing officer was, therefore, not justified in rejecting the assessee's claim under section 143(3)/263 on the ground that the claim was made only on estimate basis and actual quantification could not be ascertained during the year. From the record, we find that the quantification of the liability was accurately made as per the actual expenditure incurred by the assessee in the very next year and more or less were to the finalisation of the account of the relevant assessment year 1992-93. As the expenditure for which provision was made was correctly quantified by way of actual expenditure incurred by the time, it should be allowed in the year to which it relates. From the record, we also find that in the immediately preceding assessment year 1991-92, the assessee made provision of Rs. 18 lakhs in respect of computer controllers sold to M/s Hindalco Industries Ltd. The provision of Rs. 18 lakhs for expenses to be incurred against the warranty period was allowed by the assessing officer while completing the assessment under section 143(3).
We are, therefore, of the view that the appellant's method of accounting was duly accepted by the department and on the basis of same method, provision of Rs. 10.50 lakhs made for the year under consideration is to be allowed as business expenditure. Without considering such a liability of expenditure on account of conditional sale, the correct profit or loss on the sale transactions could not be determined. The assessee would be put to hardship if any deviation was made from the method of accounting followed in earlier years.
9. Let us now examine the ratios of judgment laid down in the cases relied on by the learned Commissioner in his order under section 263. In the case of Jemini Cashew Corpn. (supra), it was held that the business of assessee, which was dissolved, constituted of two partners, by the death of one of them, having been taken over and continued by the surviving partner without any interruption in the services of the employees or alteration in the terms of their employment, provision made for retrenchment compensation was held to be not allowable deduction. Thus it was held that where the liability is wholly contingent and does not raise any definite obligation during the time when the business is carried on, it cannot fall within the expression "expenditure laid out or expended wholly and exclusively for the purpose of the business".
However, in the instant case, liability has accrued or arisen on account of the warranty being conditional sale which is clearly ascertained even though quantified in the next year. Thus the case relied on by the learned Commissioner (Appeals) is not applicable to the facts and circumstances of the case.
10. In the case of Swadeshi Cotton & Flour Mills (P) Ltd. (supra), bonus relating to the earlier years when paid subsequently in the year, the liability arose by way of award and it was held that bonus was eligible for deduction in the year the payment was made. Thus it was held that a liability for an assessee maintaining mercantile system of accounting is to be claimed and deducted in the year, it became ascertained either by arrangement or by adjudication. In the instant case before us, the assessee having maintaining mercantile system of accounting, the liability on account of warranty was ascertained by arrangement itself and the assessee was under definite obligation at the time of sale of the goods. Thus the case relied on by the learned Commissioner in his order under section 263 is not applicable to the facts and circumstances of the present case.
11. Let us now examine the ratios of judgments relied on by the learned Authorised Representative.
12. In the case of CIT v. Swarup Vegetable Products (1994) 210 ITR 716 (All), the Hon'ble Allahabad High Court held that the assessee engaged in manufacture and sale of sugar claimed deduction in respect of a business liability, following mercantile system of accounting, before it was quantified and even when such liability was disputed, the Tribunal was held to be justified in allowing the assessee's claim. It was, therefore, held that no question of law arose out of the Tribunal's decision to the effect that the assessee was eligible for deduction of liability before it was quantified and even when such liability was disputed.
13. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) held that liability for sales-tax incurred by issue of notice was deductible notwithstanding the fact that the liability was disputed by the assessee and no provision for the same has been made in the accounts, which was maintained as per mercantile system of accounting. Thus the assessee was held to be eligible to claim deduction in respect of expenses on sales-tax for which liability was incurred even though the assessee himself was disputing the same and no entry was made in the books of accounts.
14. The Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC) held that provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against cross receipt in the P&L a/c and the balance sheet. Similarly, in the case of Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC), the Hon'ble Apex Court observed that it is a well settled law that 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.
15. The Hon'ble Kerala High Court in the case of CIT v. Malayala Manorama Co. Ltd. (2000) 242 ITR 144 (Ker) observed that provision is a charge against profit. It is created by way of appropriation of profits to meet liabilities, which are known and foreseeable but whose exact timing and hence, whose quantification alone are uncertain at the moment. In contrast to the provision, a reserve is a stand-by created out of profits of a business to meet contingencies which are unknown and which cannot be foretold on the basis of knowledge of current facts. The reserve is created by way of appropriation of profits and, therefore, it is not a charge against profits and it does not go out of the business but is retained in the business as a part of the capital.
16. Applying the ratios laid down in the above judgments, we can conclude that in the instant case before us, a provision was made for the expenses which were bound to be incurred on maintenance of the items sold with the condition of free maintenance for one year. Such expenses were not to be reimbursed by buyers. Thus the provision for warranty was made for a definite and accrued liability, the exact quantification of which was ascertained in the subsequent year on the basis of actual expenditure incurred by the appellant. Thus the appellant was under a definite obligation at the time of sale of the goods for incurring of the proposed expenses on maintenance, as warranted at the time of sale during the relevant assessment year under consideration. It was not the case of the revenue that the liability did not arise at all. Its claim was only that, the liability was not clearly quantified. In the commercial world whenever sales are effected, profit relatable thereto are booked in that year, therefore, the expenses which are required to be undertaken in terms of the warranty given along with the sales have to be accounted for in the very same year, in which profit is booked, even though actually payment of expenditure may be done in the subsequent year. Moreover, the provision was made as per the standard practice followed by the assessee in the earlier year and which has been accepted by the department in the scrutiny assessment order passed under section 143(3).
17. In view of the above discussion, we are of the considered view that provision made by the assessee was deductible as business expenditure under section 37(1) and the assessing officer was justified in allowing the claim while passing original order under section 143(3) dated 8-3-1995.
18. Now coming to the validity of learned Commissioner's action under section 263, the provisions of section 263 makes it clear that the pre-requisite to exercise jurisdiction of Commissioner suo motu under it, is that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interest of revenue. The learned Commissioner has to be satisfied of twin condition namely (i) the order of the assessing officer sought to be revised is erroneous, and (ii) it is prejudicial to the interest of the revenue. If one of them is absent, i.e. if the order of the Income Tax Officer is erroneous but it is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue, recourse cannot be had to section 263. There can be no doubt that the provisions cannot be invoked to correct each and every type of mistake or error committed by the assessing officer and that it is only when an order is erroneous as well as prejudicial, this action will be attracted. In the instant case, the provision for expenses made on account of warranty allowed by the assessing officer in the original assessment was not an erroneous view but it was supported by the standard accounting practices followed by the assessee as well as accepted by the department itself in earlier years. The action of the assessing officer was also supported by the judgments of the Hon'ble Supreme Court and High Courts as discussed above, therefore, cannot be treated as an erroneous view. Furthermore, the Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) observed that the power of suo motu revision under section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order, unless the decision is held to be erroneous. It is because the Income Tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. In such cases, it can be said that, in the opinion of Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself would not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. It was further observed that any and every erroneous order cannot be the subject-matter of revision because the second requirement must be fulfilled. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. Any other view in the matter will amount to giving unbriddled and arbitrary power of revising authority to initiate proceedings for revision in every case and start examination and fresh enquiries in matters which have already been concluded under the law. Power under section 263 is quasi-judicial power hedged with limitation and hedged to be exercised subject to the same and within its scope and ambit.
19. Hon'ble jurisdictional High Court in the case of Subhas Projects & Marketing Ltd. in ITA No. 448/Cal/2000 vide its order, dated 19-10-2001, observed that "when a possible view has been taken by the assessing officer, it cannot be said that the order of the assessing officer is erroneous. Their Lordships have further observed that in exercise of power under section 263, the order of the assessing officer can be said to be erroneous only when impossible view has been taken and that if a possible view has been taken by the assessing officer, the order of the assessing officer cannot be said to be erroneous.
20. In view of the above, we have to proceed on the terms and conditions that unless it can be established that the view taken by the assessing officer is unsustainable in law or two views are possible and the Income Tax Officer has taken one view with which learned Commissioner does not agree, it cannot be treated as erroneous or prejudicial to the interests of the revenue, unless the same is not sustainable in law.
We are, therefore, of the considered view that the learned Commissioner has exceeded his jurisdiction while invoking the provision of section 263 as the stand taken by the assessing officer was well justified and as per provision of the Act.
21. In the result, the appeal filed by the assessee in ITA No. 635/Cal/1997 is allowed, whereas the appeal filed by the revenue in ITA No. 2480,/Cal/1997 is dismissed.