Income Tax Appellate Tribunal - Pune
Rohit Exhaust Systems Pvt. Ltd.,, ... vs Department Of Income Tax on 1 October, 2012
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
Before Shri Shailendra Kumar Yadav Judicial Member
and Shri R.K. Panda Accountant Member
ITA NO. 686/PN/2011 and ITA NO. 687/PN/2011
(Assessment Year 2005-06 and 2007-08)
Asst. Commissioner of Income Tax,
Circle-1, Jeevan Suman, LIC Building,
2nd Floor, Cannought Place, N-5, CIDCO,
Aurangabad. .. Appellant
Vs.
Rohit Exhaust Systems Pvt. Ltd.,
K-245, MIDC Waluj, Aurangabad .. Respondent
PAN No. AABCR 7135D
CO No. 23/PN/2011 and CO No. 26/PN/2011
(Assessment Year 2005-06 and 2007-08)
Rohit Exhaust Systems Pvt. Ltd.,
K-245, MIDC Waluj, Aurangabad .. Appellant
PAN No. AABCR 7135D
Vs.
Asst. Commissioner of Income Tax,
Circle-1, Jeevan Suman, LIC Building,
2nd Floor, Cannought Place, N-5, CIDCO,
Aurangabad. .. Respondent
Assessee by : Sri S.N. Puranik
Department by : Smt. Vinita Menon
Date of Hearing : 01-10-2012
Date of Pronouncement : 05-10-2012
ORDER
PER BENCH :
The above two appeals filed by the Revenue are directed against the separate orders dated 25-02-2011 of the CIT(A)-Aurangabad, relating to Assessment Year 2005-06 and 2007-08 respectively. The assessee has also filed Cross objections against the appeals filed by the revenue. For the sake of convenience, these were heard together and are being disposed of by this common order.ITA No.686/PN/2011 (By Revenue) (A.Y. 2005-06) :
2. Grounds of appeal Nos. 1, 2 and 3 by the revenue are under :
"1. Whether difference between the payment of net present value against the future liability of credited by the assessee under the capital reserve account in its books of account is a capital receipt or revenue receipt ?2
2. Whether such payment of net present value of the future liability can be classified as remission or cessation of the liability so as to attract the provision of section 41(1)(a) of the Income Tax Act, 1961 or not ?
3. Whether difference in payment of net present value of the future liability can be termed as gain/benefit and accordingly business income or not ?"
3. Facts of the case, in brief, are that the assessee is a Private Ltd. company engaged in the business of sheet metal press parts and assemblies for automobile manufacturers, particularly for Bajaj Auto Ltd. and also wind power generation. During the course of assessment proceedings the AO noted that the assessee has disclosed vide note 3 to the return of income that an amount of Rs.138.78 lakhs has been transferred to capital reserve being a capital receipt. The same is difference between net present value and principal value of sale tax deferral loan. For the sake of convenience the submission made by the assessee is reproduced as under :
"The company has availed Sales Tax incentive under Part I of the 1993-1998 Package Scheme of Incentive of Government of Maharastra by way of deferment of Sales Tax Liability vide eligibility Certificate No. DICA/PSI-1993/STI/DEFERRAL/763/3046, dated 01-03-2002 from D.I.C. Aurangabad for an amount of Rs.199,99 lakhs. Till 31-03-2004 company collected Rs. 196.61 lakhs as deferral loan.
Government of Maharastra vide Trade Circular No. 39T of 2002, dated 12-12-2002 has come out with a scheme of premature repayment of the amount of Sales Tax Deferral Loan by the eligible units as Net Present Value of the Sales Tax Deferral Loan. The company, under the said scheme, has repaid 57.83 lakhs towards full and final payment of the Sales Tax Deferral Loan of Rs. 196.61 lakhs in the Financial Year 2004-05.
The amount of Rs.138.78 lakhs, the difference between the Net Present Value & Principal value of Sales Tax Deferral Loan is transferred to capital reserves, being a capital receipt".
4. However, the AO was not convinced with the explanation given by the assessee by observing as under :
"3.1 I have carefully considered the submission made by the assessee. The assessee has stated that the waiver of sales tax deferral loan from Govt. of Maharastra is a capital receipt and hence, the amount of Rs.138.78 lakhs has been transferred to capital reserve. The submission of the assessee is not acceptable. It is seen that the assessee company vide Eligibility Certificate No. DICA/PSI-1993/STI/DEFERRAL/763/3046 dated 01-03- 2002 has become eligible for the sales tax deferral scheme for an amount of Rs.199.99 lakhs. It is disclosed by the assessee that the assessee has repaid 57.83 lakhs towards full and final payment of sales tax deferral loan of Rs.199.99 lakhs and the amount of Rs.138.78 lakhs has credited to the capital reserve being capital receipt. From the above said submission of the assessee, the following facts are apparent:
1. The assessee was liable to pay 199.99 lakhs as sales tax deferral loan.3
2. The sales tax loan is a revenue in nature.
3. The assessee has paid 57.83 lakhs
4. The assessee has received a benefit of Rs.138.78 lakhs as waiver of sales tax deferral loan.
5. The AO analysed Para 5.1.B of the package scheme of the incentives-1993 and the conditions prescribed by the State Government for availing of the scheme.
He also analysed proviso 4 to section 38 of the Bombay Sales Act, 1959 according to which the premature payment of the amount of tax deferred by the assessee equal to the net present value of the deferred tax is deemed to have been paid as sales tax liability. Therefore, according to him the assessee has paid nothing but the sales tax liability prematurely by getting the benefit, not of a capital receipt but of a trading receipt in the form of sales tax benefit. According to him, the assessee has made advance payment of deferred tax to get the benefit of the scheme. Therefore, it cannot be considered as capital receipt within the meaning of section 37(1) of the Act by deferring the sales tax liability. What the assessee has received, by following the same analogy, is a revenue receipt. He noted that the scheme has reduced the liability of the assessee to pay Rs.57.83 lakhs as full and final settlement of the sales tax deferral loan. Resultantly the assessee has got benefit of Rs.138.78 lakhs in the form of waiver of sales tax liability which otherwise would have been payable by the assessee to the State Government. Sales tax liability being a trading receipt of the assessee can never be a capital receipt and hence the same according to the AO needs to be offered for income. Even otherwise also according to the AO the liability of the assessee is seized to exist within the meaning of section 41(1) of the Income Tax Act. He accordingly made addition of Rs.1,38,78,000/-.
6. Before the CIT(A) the assessee submitted that :
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(i) The sales tax collected by the assessee company under 1993 package scheme of Govt. of Maharastra has been deemed to have been paid in the public interest as per proviso to section 38(4) of the Bombay Sales Tax Act.
(ii) The conversion of deferred Sales Tax into interest free loan is precondition for claiming the benefit of deduction of expenses (non disallowance u/s.43B) under the Income Tax Act, 1961. CBDT Circular 496 and 674 make it clear beyond doubt that by virtue of amendment to Sales Tax Act, in 1987 Sales tax deferral under the Package Scheme of incentives is payment to Sales Tax Department. What is liability in the books of the company is sales tax deferral loan, as appearing in the Audit Report, Final Accounts of the company with notes to Account and Tax Audit Report.
(iii) In the case under appeal the first precondition for applicability of section 41(1) of the Act that an allowance or deduction has been made in respect of loss, expenditure or trading liability incurred by the assessee in an assessment year has not been fulfilled. The outstanding amount of loan cannot be regarded as trading liability. Further, no allowance or deduction can be regarded as having been made in respect of the loan which is the item, which in fact is prepaid. In support of above contention the assessee relied on following decisions :
(a) CIT Vs. Phoolchand Jeevan Ram 135 ITR 37 (Del.)
(b) Dalchand Chittat Mal Vs. CIT 75 ITR 710 (Alla.)
(iv) The second precondition for applicability of section 41(1) of the Act that in subsequent year the assessee obtains either in cash or in any other manner what so ever any amount of 'such' loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof has also not been fulfilled in the present case. The assessee company has paid the present value in discharge of the loan to be repaid in future and has not obtained any 'benefit' by way of remission or cessation of trading liability.
(v) The said amount of Rs.138.78 lakhs is not taxable u/s.28(iv) of the Act. When the company discharges the deferred tax or the loan liability by paying the discounted amount as agreed, there is no benefit to the company or any disadvantage suffered by the lender as the company is paying the 5 present value of the liability which in its normal course had to be discharged at a future date. It is arguable that if there is a benefit, it is in monetary terms. Section 28(iv) of the Act covers the 'value' of any benefit 'whether convertible into money or not'. This term signifies that the benefit has to be in kind and that monetary benefits are not covered by the said clause [ CIT Vs. Indokem Ltd. 132 ITR 125 (Bom.), CIT Vs. Alchemic Pvt. Ltd. 130 ITR 168 (Guj) and Ravinder Singh Vs. CIT 205 ITR 353 (Del.)]. If the view is taken that the pre-payment at a discounted value has resulted in a 'benefit' covered by section 28(iv) , then section 41(1) would be rendered totally otiose as all issues falling within section 41(1) would be covered by section 28(iv)
7. The decision of the Special Bench of the Tribunal in the case of Sulzer India Ltd. Vide ITA No.2944/2871/Mumbai/2007 was brought to the notice of the CIT(A).
7.1 Based on the arguments advanced by the assessee and following the decision of the Special Bench of the Tribunal in the case of Sulzer India Ltd. (Supra) the learned CIT(A) held that the AO is not justified in making addition of Rs.138.78 lakhs u/s.41(1) of the Income Tax Act on account of difference between payment of net present value of Rs.57.83 lakhs of the sales tax deferral loan against the future liability of Rs.196.61 lakhs. He further noted that similar issue has been decided by him in the case of Rucha Engineers Pvt. Ltd. Following the same the learned CIT(A) deleted the addition made by the AO. Aggrieved with such order of the CIT(A) the revenue is in appeal before us.
8. The learned DR supported the order of the AO and submitted that in the suzler's case the learned ITAT has failed to consider that sales tax is charged on goods sold by an assessee during the course of its trading activity, hence sales tax accrued/collected on the sale of goods by the assessee becomes a trading receipt of the assessee. This is the settled position of law in view of the decision of Hon'ble Supreme Court in the cases of Chowringhee Sales Bureau P. Ltd. Vs. CIT (1993) 6 87 ITR 542 (SC) and Sinclair Murray and Co. P. Ltd. Vs. CIT (1974) 97 ITR 615 (SC). The decision of the Hon'ble High Court of Gujarat in the case of Wolkem (P) Ltd. Vs. CIT reported in 259 ITR 430 (Guj) 24 also supports the above proposition. In the present case the assessee has itself been treating the sales tax collected as part of trading and not as capital receipts in its books of account and returns of income filed by it, even during the period when it was eligible for the benefits of sales tax deferral under the "package of Incentive" schemes. In support of the above he referred to the copy of audit report u/s.44AB of the I.T. Act, 1961 for the A.Ys. 2000-01, 2001-02 & 2002-03 and submitted that in column 13(e) of the Tax Audit Report, in respect of "amounts not credited to the Profit & Loss A/c., being capital receipts, if any, the auditor has categorically stated 'NIL'. She accordingly submitted that the order of the CIT(A) be reversed and that of the AO be restored.
9. The learned counsel for the assessee on the other hand heavily relied on the order of the CIT(A).
9.1 We have considered the rival submissions made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the issue has been decided in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of Rucha Engineers Pvt. Ltd. vide ITA No. 667/PN/2006 and ITA No. 1338/PN/2007 for A.Y. 2003-04 order dated 19-01- 2011. For the sake of convenience the facts of that case including the finding of the Tribunal are reproduced as under :
"3. As far as ground No.1 is concerned, the relevant facts of the case are that the assessee has collected sales tax from customers and has claimed deduction for the said amount in P&L account. The said deduction was allowed u/s.43B taking the sales tax collected as deemed payment for the purpose of section 43B. The sales tax collected and used was to be paid to State Government in five equal instalments. The assessee settled the sales tax deferral amount of Rs.163.22 lakhs by paying Rs.51.55 lakhs as full and 7 final settlement. In this process, the assessee has gained Rs.111.67 lakhs and claimed the same as capital receipt which was not accepted by the Assessing Officer. The matte was carried in before the first appellate authority but without any success.
4. During the proceedings before us, the learned counsel for the assessee submitted that the issue raised in this appeal is squarely covered by the decision of Special Bench of the Tribunal in the case of Sulzer India Ltd. Vs. JCIT (2010) 42 SOT 457 (Bom.) which was not disputed by the learned DR except relying on the order of the CIT(A).
5. After hearing both the parties and perusing the material on record, we find that this ground is squarely covered in favour of the assessee by the decision of Special Bench of the Tribunal in the case of Sulzer India Ltd. (Supra), wherein the issue has been decided in favour of the assessee by observing as under :
"For the reasons as stated above, we hold that the deferred sales tax liability Rs.4,14,87,984/- being the difference between the payment of net present value Rs.3,37,13,393/- against the future liability of Rs.7,52,01,378/- credited by the assessee under the capital reserve account in its books of account is a capital receipt and cannot be termed as remission/cessation of liability and consequently no benefit has arisen to the assessee in terms of section 41(1)(a) of the Income Tax Act, 1961. Accordingly, the modified question as framed in para 5 of this order is answered in favour of the assessee and against the revenue".
6. So, respectfully following the aforesaid decision of Special Bench of the Tribunal in the case of Sulzer India Ltd. (Supra), we hold that the CIT(A) was not justified in confirming the addition of Rs.1,11,66,935/- made by the Assessing Officer treating the sales tax loan waiver as revenue receipt. Assessing Officer is directed accordingly." Respectfully following the decision of the Tribunal in the case of Rucha Engineers Pvt. Ltd. which has been passed after considering the decision of the Special Bench of the Tribunal in the case Sulzer India Ltd. (Supra) and in absence of any contrary material brought to our notice against the order of the Tribunal in the case of Rucha Engineers (P) Ltd. (Supra) we find no infirmity in the order of the CIT(A). Accordingly the same is upheld. The grounds raised by the revenue are accordingly dismissed.
10. Ground of appeal No.4 by the revenue reads as under :
"4. Whether provision of warranty claim without its quantification and its absence of statistical data related to actual warranty expense is an allowable expenditure u/s.37(1) of the Act ?"
11. Facts of the case, in brief, are that during the course of assessment proceedings the AO noted that the assessee has debited an amount of Rs.15,86,413/- to the profit and loss account as warranty claims. The AO asked the assessee to produce the following :
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1. The amount of the claims pending before the assessee as on 31-03-2005 along with supportive documents.
2. The amount actually spent by the assessee during F.Y. 2004-05 on warranty claims.
3. Any scientific/industrial data to support the claim of the assessee.
4. Past history of the assessee regarding the claims for warranty
5. Whether warranty claims has been insured by the assessee or not
12. Rejecting the various submissions made by the assessee and in absence of certainty of such claims the AO disallowed the warranty provision made by the assessee on the ground that the said claim is a contingent liability. He accordingly made addition of Rs.15,86,413/-. The AO subsequently restricted such disallowance to Rs.9,77,000/- vide order passed u/s.154 on 05-02-2008.
13. Before the CIT(A) the assessee made elaborate arguments. It was submitted that sales as well as warranty are inextricably linked with each other and therefore if the sale proceeds are taken note of in a year, the liability in respect of the warranty is also to be taken note of in the same year. The quantification can be based on estimate. The decision of the Pune Bench of the Tribunal in the case of Thermax Babcock and Wilcox Ltd. Vs. JCIT reported in 79 ITR 63 was brought to the notice of the learned CIT(A). It was submitted that as per provisions of section 145(1) an assessee following the mercantile system of accounting is required to provide for all known liabilities even though the amount could not be determined with certainty. It was submitted that the claim of warranty is based on rejection by Bajaj Auto Ltd. in the earlier 3 years which are as under :
Sr.No. Particulars A.Y. 04-05 A.Y. 03-04 A.Y. 02-03
1 Sales Rejection 13,13,790 5,00,986 7,28,726
2 Sales 22,58,65,643 9,19,89,549 2,55,95,448
3 Rejection as % of sale 0.58 0.54 2.85
4 Average Rate of Rejection 1.32
The assessee has further submitted statistical details as under :
Particulars Average for Average for F.Y. 2003-04
F.Y.2004-05
In PPM (%) In PPM (%)
In process 1,307 0.01 1,627 0.01
Rejection
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In process 22,110 2.21 19,320 1.93
Rework
Customer 3,803 0.03 47,194 4.72
Return
14. The decision of the Delhi Bench of the Tribunal in the case of Honda Seil Cars India Ltd. Vs. ACIT reported in 109 ITD 1 (Delhi) was also brought to the notice of the learned CIT(A) wherein it has been held that liability for warranty claims was ascertained and accrued liability and therefore the provision for warranty claims made by the assessee on the basis of actual expenses incurred in the past is an allowable deduction. The decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd Vs. CIT reported in 314 ITR 62, the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Himalay Machinery Pvt. Ltd. reported in 42 DTR 141 and various other decisions were also brought to the notice of the CIT(A) in support of the allowability of warranty claims.
15. Based on the arguments advanced by the assessee and relying on various decisions the learned CIT(A) deleted the addition made by the AO. While doing so, he noted that the assessee has sold the products manufactured by it with warranty. In the past the assessee has paid warranty claims to its customers and claimed the expenditure on actual basis. Due to introduction of AS29 w.e.f. F.Y. 2004-05 by the ICAI, the assessee company has changed its method of recognising the expenditure on warranty claims from actual basis to accrual basis. The assessee company has accordingly made provision of warranty claims on the basis of past experience/records. According to him the allowability of warranty claim accrues on the date of sale of product though the quantification and payment of the same is made on specific dates. Therefore, the liability is not unascertained liability disallowable under the provisions of Income Tax Act as claimed by the AO. Relying on the decision of the Pune Bench of the Tribunal in the case of 10 Thermax Surface Coating Ltd. Vs. JCIT reported in 104 ITD 199, the decision of the Delhi Bench of the Tribunal in the case of Honda Seil cars India Pvt. Ltd. (Supra), the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Himalay Machinery Pvt. Ltd. (Supra) reported in 62 DTR 141 and the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (Supra) the learned CIT(A) deleted the addition. Aggrieved with such order of the learned CIT(A) the revenue is in appeal before us.
16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the finding given by the CIT(A) that assessee has sold the products manufactured by it with warranty has not been disputed by the revenue. The further finding of the learned CIT(A) that the assessee has in the past paid warranty claim to its customers and claimed the same as expenditure on actual basis also remains uncontroverted. The observation of the learned CIT(A) that because of the introduction of AS29 the assessee changed its method of recognising expenditure on warranty claim from actual basis to accrual basis and accordingly made provision of warranty claims on the basis of past experience/records also could not be controverted by the learned DR.
17. We find the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. has held as under (Short notes) :
Business Expenditure - Sophisticated goods manufactured in large quantities - Statistical data indicating that some of the goods were defective - Warranty executed by assessee - Estimated provision for warranty - Reversal of Excess provision - Allowable as Business Expenditure - Income Tax Act, 1961, s.37 Accounting - Present value of contingent liability like warranty expense.
Words and Phrases - " Provision", meaning of The assessee sold valve actuators. At the time of sale the assessee provided a standard warranty whereby in the event of any actuator or part thereof becoming defective within 11 12 months from the date of commissioning or 18 months from the date of dispatch, whichever was earlier, it undertook to rectify or replace the defective part free of charge.
Right from the assessment year 1983-84 the claim for allowance of this warranty had been allowed. For the assessment year 1991-92, it had made a provision for warranty of Rs.10,18,800/- at the rate of 1.5 per cent, of the turnover. Since this provision exceeded the actual expenditure, the assessee reversed Rs.5,00,246 as reversal of excess provision, and claimed deduction of the net provision of Rs.5,18,554/-. But the Assessing Officer disallowed the claim on the ground that it was merely a contingent liability. The High Court on appeal held that no obligation was cast on the date of sale and consequently there was no accrued liability. On appeal to the Supreme Court :
Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated item no customer was prepared to buy a value actuator without a warranty. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income Tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section
37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee.
It would also depend upon the historical trend and upon the number of articles produced. 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 provisions can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37.
18. We find the Delhi Bench of the Tribunal in the case of Honda Seil Cars India Pvt. Ltd. has held as under (Short notes) :
"There was no dispute about the fact that the cars sold to the customers were covered by warranty and after sale services for repair and replacement for a period of one year. The assessee had been following the same method of accounting and had been making provision for the same on the basis of actual expenses incurred in the past. It was a fact that in the past such expenses had been allowed by the revenue. Even such claim of the assessee was allowed for the assessment year 2001-02. It was not the case of the revenue that the provisions made far exceeded the actual expenses incurred. The very fact that the assessee had made provision only did not mean that the liability was not ascertained and contingent in nature.
The liability was incurred on the date when sales were made. Therefore, that was ascertained and accrued liability of the assessee, and accordingly, the same was to be allowable. Therefore, order of the Commissioner (Appeals) was to be set aside and the impugned disallowance was to be deleted."12
19. We find the Pune Bench of the Tribunal in the case of Thermax Surface Coating Ltd. (Supra) which has been reproduced by the CIT(A) in his order has held as under :
"2.1 In Ground No.1 is against the finding of the learned CIT(A) in which disallowance of Rs.1,33,400/- made by the AO, representing the provision for warranty obligation, was upheld. It was mentioned in the ground that the liability had crystallized in the year and the provision was made with reference to the available data. On perusal of the order it is found that the learned CIT(A) came to the conclusion that the liability was a contingent liability and it did not accrue in the relevant previous year. Before us, the learned counsel of the assessee pointed out that the liability for warranty arose on account of sale of goods. Under the contract the assessee was under obligation to set right the defects within the prescribed period. Thus, the liability was fastened to the event of sale and since the sales were effected in this year, the liability had accrued. As against the aforesaid, the learned Departmental Representative did not make any specific argument, but relied on the decision of the learned CIT(A).
2.2 We have considered the arguments placed before us in the context of the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT (2000) 162 CTR (SC) 325; (2000) 245 ITR 428 (SC); in which it was inter alia held that if the business liability had definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged in a subsequent year. Thus, the ratio of the case was that if incurring of the liability is certain, the same is not a contingent liability but it is a liability in praesenti, though it may have to be discharged at a future date. The factum of discharge at a later date does not make any difference in coming to the conclusion that the liability has arisen in the previous year. In that case, the Hon'ble Court also pointed out that if such a liability can be worked out on a scientific basis, the amount so determined has to be allowed in computing the income. The assessee was required to state its case regarding the quantification of the liability. No argument was made. Therefore, the matter is restored to the file of the AO to examine whether the quantification of the liability was made keeping in mind the past record of the assessee and a reasonable amount worked out on that basis may be allowed in computation of income. Thus, this ground of appeal is treated as allowed for statistical purposes. (emphasis supplied)".
20. Since the learned CIT(A) has passed the order following the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. and the decision of the Pune Bench of the Tribunal and the Delhi Bench of the Tribunal, therefore, in absence of any contrary material brought to our notice against these decisions we find no infirmity in the order of the CIT(A) on this issue. Accordingly the order of the CIT(A) allowing the provision for warranty claim is upheld and the ground raised by the revenue on this issue is dismissed. 20.1 The other grounds by the revenue being general in nature are dismissed. 13 CO No. 23/PN/2011 (By Assessee-A.Y. 2005-06) (Arising out of ITA No.686/PN/2011) :
21. After hearing both the sides we find the CO filed by the assessee is merely in support of the order of the learned CIT(A). We have already dismissed the grounds raised by the revenue by upholding the order of the CIT(A). Therefore, the grounds filed by the assessee in the CO become infructuous. Accordingly the SO filed by the assessee is dismissed.
ITA No.687/PN/2011 (By Revenue) (A.Y. 2007-08) :
22. The only effective ground raised by the revenue in this appeal relates to the order of the CIT(A) in allowing the interest on share application money which was disallowed by the AO u/s.37(1) of the Income Tax Act.
23. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that the assessee company is a closely held company and only the family members are share holders of this company. The total number of shares of this company is 7,13,752 of the value of Rs.10/- each. The assessee has received share application many from Vax Infradeveloper Ltd. during A.Y. 2004- 05 and 2005-06. However, shares were not allotted and the share application money pending allotment for the impugned assessment year as on 31-03-2007 was shown at Rs.1,43,74,942/-. The assessee for the impugned assessment year has paid interest of Rs.14,59,440/- being interest @8% per annum on share application money pending allotment. The assessee claimed the same as business expenditure treating it as borrowed capital/loan on the ground that the same is used for day-to- day business. For the above proposition the assessee relied on the following decisions :
1. CIT Vs. Hindustan Conductor Pvt. Ltd. 240 ITR 762.
2. Kejariwal Enterprises Vs. CIT 260 ITR 341
3. India Cements Ltd. Vs. CIT 60 ITR 52
4. Challapalli Sugard Ltd. Vs. CIT 98 ITR 167 14 23.1. However, the AO was not satisfied with the explanation given by the assessee. Distinguishing the various decisions cited before him and relying on the various decisions the AO disallowed the interest so paid on share application money.
24. Before the CIT(A) it was submitted that the assessee has utilised the share application money pending allotment for the day-to-day business which includes payments to suppliers of materials, labour etc. thereby reducing working capital exposures from banks. The decision of the Hon'ble Bombay High Court in the case of Hindustan Conductors Pvt. Ltd. 240 ITR 762 and the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. vide ITA No.419/PN/2002 were brought to the notice of the learned CIT(A).
25. Based on the arguments advanced by the assessee and relying on the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. (Supra) the learned CIT(A) deleted the addition by holding as under :
"4.3 I have carefully considered facts of the case, assessment order and the submission of the appellant. The AO has disallowed the interest on share application money pending allotment for the reason that the same cannot be treated as a loan or amount borrowed. In support of this proposition, the AO has relied on the decisions in the cases of Shivalik Fuel (P) Ltd. Vs. CIT (2005) 276 ITR 638, Travancore Titanium Products Ltd. Vs. CIT (1978) 114 ITR 626 and Addl. CIT Vs. Bangalore Soft Drinks (P) Ltd. (1980) 126 ITR 38.
On perusal of the decisions it has been noticed that the decision in the case of Shivalik Fuel (P) Ltd. Vs. CIT (2005) 276 ITR 638 is in respect of computation of capital employed u/s.80J and hence not relevant for deciding the issue under appeal. The issue decided in the case of Travancore Titanium Products Ltd. Vs. CIT (1978) 114 ITR 626 is
- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs.26.5 lakhs is not monies borrowed within the meaning of sub- rule (v) of r.1 of Schedule II of the Companies (profits) Surtax Act, 1964 ?." The issue decided in the above decision is under Companies (Profits) Surtax Act, 1964 and the same is not relevant for deciding the issue under appeal. In the case of Addl. CIT Vs. Bangalore Soft Drinks (P) Ltd. (1980) 126 ITR 38 the issue decided was in respect of deduction u/s.80J and computation of capital employed for the said deduction u/s.80J and applicability of Rule-19A(3) etc. The issue decided in this case is also not relevant for deciding the issue under appeal.
The identical issue has been decided by Hon'ble ITAT, Pune in the case of Western India Forging Ltd. ITA No. 419/PN/2002 dated 24-07-2007 (PCAS journal February, 2008 Page No. 49 to 52). It has been held that following the principle of commercial expediency, interest on share application money pending allotment is allowable. In the said case also, the share application money was used as working capital of business. On perusal of the said case, it has been noticed that as per provisions of section 69(5) of the Companies Act, a company has to pay interest @6% 15 per annum and as per provisions of section 73(2) of the Companies Act, the maximum interest rate prescribed is 15% on return of share application money in the circumstances cited u/s.73 of the Companies Act. The appellant has paid interest @8% per annum which cannot be regarded as excessive.
Another reason stated by the AO for disallowance of interest is that it was not obligatory for the appellant company to pay interest on share application money pending allotment. The Hon'ble ITAT Pune, in the case of Western India Forging Ltd ITA No.419/PN/2002 dated 24-07-2007 has considered this reason stated by the AO that it was not obligatory on the part of the appellant company to pay the interest on share application money pending allotment. The Hon'ble ITAT, Pune has rejected the above contention relying on the decision of Hon'ble Bombay High Court in the case of Sales Magnesite 214 ITR 1, wherein it has been held that even expenditure incurred voluntarily on the ground of commercial expediency to facilitate carrying on of the business would be deductible u/s.37.
In view of the above facts and discussion and the ratio laid down by the decisions relied on by the appellant and particularly following the decision of Hon'ble Jurisdictional Tribunal on identical issue, the addition made by the AO on account of disallowance of interest on share application money pending allotment is deleted. The AO is, therefore, directed to delete the addition of Rs.14,59,440/-. Ground No. 1&2 stands allowed."
25.1 Aggrieved with such order of the CIT(A) the revenue is in appeal before us.
26. We have considered the rival submissions made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited by both the sides. There is no dispute to the genuineness of the share application money received by the company from Vax Infradeveloper Ltd. The only question is regarding the allowability of interest on such share application money pending allotment which according to the assessee should be allowed u/s.36(1) (iii) of the Income Tax Act and which according to the AO is not an allowable expenditure. We find in appeal the CIT(A) following the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. (Supra) allowed the claim of the assessee wherein it has been held that interest on share application money is allowable on the principles of commercial expediency.
27. Since the learned CIT(A) while deciding the issue has relied on the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. and since nothing contrary was brought to our notice against the order of the Tribunal, 16 therefore, we find no infirmity in the order of the CIT(A) allowing the claim of the assessee. Accordingly the ground raised by the revenue is dismissed. CO No. 26/PN/2011 (By Assessee-A.Y. 2007-08) (Arising out of ITA No.687/PN/2011 :
28. After hearing both the sides, we find the CO filed by the assessee is in support of the CIT(A). Since we have dismissed the grounds raised by the revenue, therefore, the CO filed by the assessee becomes infructuous and accordingly the same is dismissed.
29. In the result, both the appeals filed by the revenue and the COs filed by the assessee are dismissed.
Pronounced in the open court on this the 5th day of October 2012 Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune Dated: the 5th October 2012
satish
Copy of the order forwarded to :
1. Assessee
2. Department
3. CIT(A)-Aurangabad.
4. The D.R, "B" Pune Bench
5. Guard File
By order
// True Copy //
Senior Private Secretary
ITAT, Pune Benches, Pune