Income Tax Appellate Tribunal - Mumbai
Crompton Greaves Ltd, Mumbai vs Addl Cit 6(2), Mumbai on 28 February, 2019
IN THE INCOME-TAX APPELLATE TRIBUNAL "C" BENCH MUMBAI
BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND
SHRI PAWAN SINGH, JUDICIAL MEMBER
ITA No. 1994/Mum/2013 for (Assessment Year 2007-08)
M/s. Crompton Greaves Ltd. CIT-6,
6th Floor, C.G. House, 5th Floor, Aayakar Bhavan,
Dr. A.B. Road, Worli, Vs. M.K. Road,
Mumbai-400030. Mumbai-400020.
PAN: AAACC3840K
Appellant Respondent
Appellant by : Shri Pradeep Kapasi (AR)
Respondent by : Shri H.N. Singh & Airiju Jaikaran (DR)
Date of Hearing : 11.01.2019
Date of Pronouncement : 28.02.2019
ORDER UNDER SECTION 254(1)OF INCOME TAX ACT
PER PAWAN SINGH, JUDICIAL MEMBER;
1. This appeal by assessee is directed against the order of ld. Commissioner of Income-Tax-6 [for short the ld.CIT), Mumbai dated 06.02.2013 passed under section 263 of the Act. The assessee has raised the following grounds of appeal:
1. INVALID REVISION u/s 263 a. The Ld. CIT erred in law and facts of the case in initiating revisionary proceedings u/s 263 and thereafter in passing an order u/s 263 ignoring the fact that the order passed by the Ld. AO. u/s 143(3) dt. 28.12.2010 was neither erroneous nor prejudicial to the interest of the revenue in as much as the Ld. AO.
had applied his mind and had made proper inquiries to his satisfaction before passing the assessment order.
b. Your appellant submits that;
i. The ld. AO had completed the assessment for AY.2007-08 after detailed inquiry and appreciation of the facts, evidences and the law. The provisions made on ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
account of warranty, liquidated damages, sales tax and excise duty represented lawful business expenditures of the company and provisions were made in accordance with AS 29 of the ICAI and were allowed by the A.O. only after due consideration of the fact and of the law of allowability of such expenses and in that view of the matter the order could not have been termed as erroneous or prejudicial to the interest of the law.
ii. The company had made complete disclosure of the facts in its financial statements under schedule 16 which are duly audited, and particularly vide Note no.33 of schedule B of Notes to accounts. The adequacy of the provisions and the need and the justification thereof was ascertained by the auditors and was approved by them without any qualifications in their report. c. Your appellant pleads that such an order of CIT be held to be bad in law and be quashed.
2. SERIOUS VIOLATION OF NATURAL JUSTICE a. The Ld. CIT erred in law and on facts in completing the revisionary proceedings in a complete haste and without giving sufficient time and opportunity and erred in law in ignoring all the evidences and proofs and documents available on records and further erred in treating the order passed by AO as erroneous and prejudicial to the interest of the revenue and setting aside the same without bringing any material of whatsoever nature in record. b. Your appellant submits that proper procedure as required by law was not followed before passing of order u/s 263.
c. Your appellant pleads that an assessment made in violation of the provisions of natural justice be quashed.
3. CLAIM FOR DEDUCTION FOR EXPENSES MADE ON ACCOUNT OF WARRANTY, LIQUIDATED DAMAGES, SALES TAX AND EXCISE DUTY a. The Ld. CIT erred in law and on facts in directing ld.AO to disallow the claim for deduction for expenditures in respect of warranty, liquidated damages, sales tax and excise duty.
b. Your appellant submits that;
i. During the year the company had accounted for expenses on warranty amounting to Rs. 5,53,40,000 (Rs.8,47,60,000 - Rs.2,94,20,000) and liquidated damages amounting to Rs. 9,08,90,000. The assessee company gave warranties on 2 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
certain products and services in the nature of repairs/replacement, which fail to perform satisfactorily during the warranty period. Debited to account, represented the amount of the expected cost of meeting such obligation on account of rectification/replacement and was based upon the sales made during the year. The company regularly accounts for warranty at varied rates depending upon the product sold. The company had accounted for warranty expenses in proportion to sales. Unutilized amounts are regularly accounted as income. ii. Expenses for liquidated damages has been made on contracts which were executed by the company beyond the agreed delivery dates and the compensation payable by the company for delay was computed in reasonable and prudent manner.
iii. These expenses for warranty and liquidated damages have been quantified based on past experience of the company. In addition, the company has a policy to write back all the unused amounts and offer the same for taxation on expiry of the relevant period for warranty and liquidated damages.
iv. There is no leakage of revenue. Further, the company is being taxed at a flat rate of 30%.
v. During the year the company has accounted for sales tax amounting to Rs. 2,67,00,000 representing sales tax liability on account of non-collection of declaration forms under the Act/Rules.
vi. During the year the company has accounted for excise duty amounting to Rs. 43,00,000 representing the differential duty liability that has materialized in respect of matters contested in appeal.
vii. Without prejudice kindly note that all of the expenses under consideration were quantified and accounted by following the sound accounting principles and the policies followed were mandated by Accounting Standard 29 of the ICAI r.w.s. 209 of the Companies Act.
viii. Accounting was compulsory and statutory and in the circumstances the liability had arisen in respect of the concerned expenses and in that position, each of the expenditure for which provisions were made satisfied the test of S.37 and of S.28 for being allowed in computation of total income for the year under consideration 3 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
ix. The method of accounting followed was mercantile and in following the method the sound accounting principles and policies were applied by keeping in mind the concepts of AS 1 namely 'prudence' and 'conservatism.' x. The method followed was consistently employed from year to year and the provisions were made there under, consistently and regularly for the above mentioned expenses and liabilities.
xi. The company had made complete disclosure of the facts in its financial statements which are duly audited, under schedule 16 and particularly vide Note no.33 of schedule B of Notes to accounts. The adequacy of the provisions and the need and the justification thereof was ascertained by the auditors and was approved by them without any qualifications in their report. c. Your appellant pleads that appellant's claim for deduction on account of warranty, liquidated damages, sales tax and excise duty be allowed.
2. We have seen that this appeal was initially adjudicated vide order dated 01.02.2016, however, the order was recalled on11.05.2018, on filing Miscellaneous Application filed by the assessee vide M.A. No.151/Mum/2017 While recalling the order our predecessor directed to decide the appeal afresh. Therefore, the appeal was heard afresh.
3. Brief facts of the case are that assessee is a public limited company, engaged in manufacturing, distribution and sale of electrical/electronic items, power system, industrial system and operating turnkey project. The assessee company filed its return of income for Assessment Year 2007-08 on 29.10.2007 declaring total income of Rs. 208,87,20,974/-. Subsequently a revised return of income was filed on 24.03.2009. The assessment was completed under section 143(3) of the Act on 28.12.2010. The Assessing Officer while passing the assessment order made various additions and disallowance. The assessing 4 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
officer made various additions/ disallowances either on the basis of earlier years or by referring tax audit report. Against such additions the assessee filed appeal before appellate Commissioner i.e. first appellate authority.
4. The assessment order was revised by ld. CIT on 06.02.2013. The ld. CIT issued show-cause notice dated 06.12.2012. In the show-cause notice, the ld. CIT mentioned that the Assessing Officer failed to carry out relevant and necessary enquiry as warranted by the fact of the case and that the assessment order is prima facie erroneous and prejudicial to the interest of revenue. In the show cause notice the ld CIT mentioned that the assessee company claimed deduction for expenditure in respect of various provisions on account of warranty, liquidate damage, sales tax and excise duty of aggregate of Rs. 17.72 Crore. The assessing officer failed to make relevant and meaningful inquiry with regard to the liability has crystallized to the extent the deduction is claimed.
5. The assessee filed its reply to the notice under section 263 vide its reply dated 22.01.2013. In the reply, the assessee contended that the assessment order is neither erroneous nor prejudicial to the interest of revenue. The assessee submitted the provisions of warranty and liquidates damages are in accordance with Accounting Standard (AS-29) r.w.s. 209 of Companies Act and explained that it was not a contingent liability and was made in accordance with settled law. The assessee further contended that in earlier years, the expenditure was claimed and allowed by Assessing Officer, hence 5 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
there was no reason to take different view for the year under consideration. The assessee also relied on the decision of Hon'ble Supreme Court in Radhasoami Satsang Vs CIT, (1992) 193 ITR 321 SC and Bombay High Court in CIT Gopal Purohit, 336 ITR 237 (Bom). The assessee also relied on the decision of Calcutta Tribunal in Hamilton Research and Technology (P) Ltd Vs ACIT (2005) 142 Taxman 79 (Kol Tri) that even on estimate basis if provisions for warranty was made by assessee by following the Mercantile System of accounting, the expenditure is allowable expenditure. Therefore, there is no reason for taking a different view for the Assessment Year under consideration. The assessee prayed for dropping the proceeding under section 263 of the Act.
6. The contention of assessee was not accepted by ld. CIT. The ld. CIT concluded that the Assessing Officer was required to examine that the provision made for warrantee was based on estimate which were realistic and on past experience of the assessee. The Assessing Officer was required to examine the fact that there actual outgoing during the year and the excess provisions, if any made in earlier years was duly written back as income in following years. The Assessing Officer also not examined the sales tax and excess duty liability on which account, these provisions were justified. The ld. CIT treated the assessment order as erroneous and prejudicial to the interest of revenue and set-aside the same directing the Assessing Officer to assess the income of assessee after taking all necessary details to assess its correct income. 6
ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
Therefore, aggrieved by the order of ld. CIT, the revenue has filed the present appeal before us.
7. We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. The ld. AR of the assessee submits that he is placing ten prepositions in support of his submission that the order of revision under section 263 is invalid and bad-in-law. The ld. AR of the assessee further submits that each submission is independent to each other and would be supported by decision of superior courts.
8. In first submission, the ld. AR of the assessee submits that claim of expenses, claimed by assessee otherwise allowable in law and there is no error in order of Assessing Officer. No prejudice was caused to the revenue. The assessment order is neither prejudice to the interest of revenue nor it is erroneous. There is no leakage of revenue where a deduction was allowed for a claim which is otherwise allowable under the provisions of Income-Tax Act. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon'ble Apex Court in G.M. Mittal Stainless Steel (P) [263 ITR 255(SC)] and Russell properties [100 ITR 229 (Cal). The ld. AR of the assessee submits that assessment order was passed by Assessing Officer on merits and based on the understanding developed on the basis of judicial proceeding. The assessee- company was under obligation involving the following expenditure for which the company had made provision in accordance with AS-29 of ICAI, provision 7 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
of warranty, provision of liquidated damage, provision for sales tax and for excise duty. The said provisions were made in respect of present obligation of the assessee-company. There were liabilities of the company and had arising out of obligating event i.e. sales. It involved outflow resources for settling the obligation i.e. money. Thus provisions involved reliable estimation of obligation. The liability was qualified by relying on evidence and was ascertained on scientific basis. The method of accounting followed for making provisions were mercantile and in following the method the sound accounting principles and policies were applied by keeping in mind the concept of AS-1 namely 'prudence' and 'conservatism'. The adequacy of the provisions and the need and the justification thereof was ascertained by the auditors and was approved by them without any qualifications in their report, which was prepared on examining the issue of allowance under the Act and not adversely commented on the claim thereof in Tax Audit Report. The ld. AR of the assessee submits that the Assessing Officer in his order passed under section 143(3) r.w.s. 263 dated 25.04.2014 accepted (allowed) the claim for provision of warranty expenses. The claim for deduction of provision for liquidated damages was also allowable as per the decision of Special Bench of Hyderabad Tribunal in case of K.C.P. Ltd., 34 ITD 50 (Hyd) (SB), which was confirmed by the Hon'ble Andhra Pradesh High Court and SLP against the said decision was dismissed. The ld. AR of the assessee submits that it is a settled law that the provision for expenditure wholly and exclusively incurred 8 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
for the purposes of business as allowable deduction to buttress his submission, the ld. AR of the assessee relied upon the following decision:
1. K.C.P. Ltd. 34 ITD 50 (Hyd.)(SB) confirmed by Andhra Pradesh High Court Case No. 71 of 1993 and Supreme Court ITA No. 5509-5510 of 2003.- Liquidated damages.
2. Vinitech Corpn. (P.) Ltd. 146 Taxmann 313 (Delhi)(HC)-Warranty liability.
3. Rotork Controls India P. Ltd. 314 ITR 62 (SC)-Warranty
4. Infosys Technologies Ltd. 349 ITR 610 (Karn) (HC)-Damages
5. Nokia Siemens Networks India P. Ltd. 14 taxmann.com 84 (Kar)(HC) - Warranty
6. Bharat Earth Movers vs. CIT (245 ITR 428)(SC) - Leave encashment
9. In second alternative submission, the ld. AR of the assessee submits that when claim was otherwise allowable in law, inadequate inquiry by itself not sufficient for revision under section 263. In adequate inquiry or no inquiry is not a sufficient ground for making revision under section 263. There is no finding of error in the assessment order or no such error was pointed out in notice under section 263. There is no finding of ld. CIT that expenses are not allowable. The assessment order passed by Assessing Officer was in confirmation and on the lines of decision of Court cannot be held to be erroneous whether enquiry was made or not. In support of submission, the ld. AR relied upon the decision of Hon'ble Supreme Court in G.M. Mittal Stainless Steel (P)(supra) and Russell properties (supra), decision of Hon'ble Delhi High Court in CIT vs. Vikas Polymers 920100 194 Taxmann 57 (Delhi)(HC) and Hon'ble Gujarat High Court in Amit Corporation 213 9 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
Taxman 19 (Guj) wherein it was held that when during the course of assessment, the Assessing Officer had assessed to all the records of the assessee, after pursuing such record, the Assessing Officer framed the assessment, such assessment could not have been re-opened in exercise of revision power under section 263 for making further enquiries. Further, in support of his submission, the ld. AR of the assessee relied upon the decision Karnataka High Court in D.G. Gopala Gowda 354 ITR 501(Karn), decision of Delhi Tribunal in Gupta Spinning Mills 31 CCH 368 (Del.Trib.), IBM India (P.) Ltd. 216 Taxman 170 (Karn), Delhi High Court in Jyoti Foundation 357 ITR 388 (Del.HC), Malabar Industrial Company 243 ITR 83, decision in Kolkata Tribunal in Hamilton Research and Technologies (P.) Ltd. 142 Taxman 79 (Mag) (Kol. Trib.).
10. In third alternative submission, the ld. AR of the assessee submits that while filing return of income, the assessee furnished financial statement and their schedule, books of account, vouchers and details were examined in depth and the explanation furnished were taken into due consideration while passing the assessment order. It was explained with regard to notes of accounts that assessee-company continued to follow the same accounting policies and principles and the method of accounting. The books of account were produced together with the vouchers for verification, thereby made complete disclosure of the fact, which are duly audited under Schedule-16 and particularly vide Note No.33 of Schedule B of Notes of Accounts. All were furnished to the 10 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
Assessing Officer. Again all information were furnished to CIT along with reply dated 22.01.2013. The assessee has fully and truly disclosed all material facts; therefore, there cannot be any ground for making re-opening by passing revision order. In support of his submission, the ld. AR of the assessee relied on the decision of Atul Kumar Swami 362 ITR 693, Bombay Stock Exchange 365 ITR 160 (Bom) and Hon'ble Gujarat High Court in Gujarat Carbon and Industries Ltd. 365 ITR 464 (Guj). It was submitted that the same provisions were not disallowed for financial year 2007-8 to 2009-10. The ld AR also relied on the decision of Delhi Tribunal in ICAI Vs DIT (2011) 50 DTR 409/ 136 TTJ 548 (Delhi), which is confirmed by Delhi High Court in WP (C) No.3147/2012, wherein it was held that non-examination of issue by AO does not per se make assessment order erroneous or prejudicial to the interest of revenue.
11. In fourth alternative submissions the ld. AR for the assessee submits that the assessing officer made sufficient inquiry for 27 months. The Assessing Officer during the course of hearings had made extensive inquiries of all the expenses. The assessment proceedings had begun vide issue of notice u/s. 143(2) with questionnaire dated 18.09.2008 and were completed on 28.12.2010 by passing of order after a long gap of 27 months which clearly established that complete enquiries were made during the time available to the satisfaction of the A.O. The assessee company in response to notice u/s 143(2) submitted various details, evidences and explanations during the course of assessment 11 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
proceedings and had produced books of accounts and vouchers for verification by the Id. A.O. The AO while passing the assessment order have gone through all the substantial details submitted by assessee, the Assessing Officer accepted the treatment of deduction for expenditure in respect of provisions on account of Warranty, Sales Tax, Excise and Liquidated Damages. This fact is confirmed by the fact that AO has disallowed not only various expenses but has also disallowed provisions for expenditure - Leave encashment and Death benealtent fund. No revision is possible where inquiries have been made. In support of his submissions the ld AR relied on the decision of Hon'ble Apex Court in Malabar Industrial Co. Ltd, 243 ITR 83 (SC) and Greenworld Cooperation, 314 ITR 811(SC), where it was held that an assessment completed after full inquiry and application of mind cannot be revised under section 263. It was further held that without even laying foundation for holding that assessment order was erroneous and prejudicial to interest in any matter and merely on the ground that A.O. was required to make an inquiry could not be held to satisfy the test of existing necessary condition for invoking jurisdiction under section 263. Therefore, the order of CIT under section 263 was bad in law. It was argued that Hon'ble Bombay High Court in Gabriel India Ltd. 203 ITR 108 (Bom) held that it is not necessary for the A.O. to have recorded the fact of inquiry in detail in order and discuss the same in order.
12. In fifth alternative submissions the ld. AR submits that no independent inquiry or conclusions were given by ld. CIT, in fact he has directed the AO to 12 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
examine the facts and law and passed appropriate orders. In para 4, the ld. CIT simply directed the AO to carry out adequate inquiry and examine the facts about allowability or otherwise of the claims for deduction of expenses for which provisions were made. A bare reading of the impugned order made it clear that the ld. CIT had not conducted any independent inquiry and has not arrived at his own conclusion to the effect that the claims in question were not allowable in law and on facts to enable him to concluded that the Assessment order was prejudicial to the interest of the revenue and was erroneous. Having failed to do so, the ld. CIT has simply ordered the revision on the ground of lack of inquiry. In support of his contention the ld. AR relied on various decisions, wherein it has been held that the Commissioner was duty bound to conduct inquiry and to come to his own conclusion that the order in question was prejudicial and erroneous that any order directing the AO to carry out inquires without lawful conviction was bad in law. The ld AR relied on the decision of Delhi High Court in DG Housing Projects Ltd, 20 taxmann.com 587,343 ITR 329 (Delhi),Shri Manjunathesware Packing Products, 231 ITR 53 (SC),Sunbeam Auto Ltd 332 ITR 167 (Delhi), CLP India (P) Ltd, 85 taxmann.com 103 (Guj) and in Poonam Bhotika ITA No.665/KoI/2017 (Kol. Trib).
13. In sixth alternative submissions the ld. AR submits that the order under section 263 passed on 06.02.2013 cannot be cured by Explanation 2 to section
263. The effect of Explanation 2 is prospective. The amendment of 2015 in 13 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
section 263 for insertion of Explanation 2 is not retrospective and is applicable only from 01.06.2015. The order of assessment was passed on 28.12.2010 and even the order of revision under section 263 was passed on 06.02.2013, which order was also passed before 01.06.2015 i.e the date of introduction of Explanation 2 to section 263. The ld. CIT; therefore, could not have passed an order of revision simply on the ground that no inquiry was made. The said Explanation 2 is specifically introduced w.e.f 01.06.2015 and therefore has a prospective application only. The Hon'ble Supreme Court in the case of Vatika Townships (P) Ltd 367 ITR 466 (SC) has clearly held that an amendment will have effect from the date of its introduction and will have should not be used to justify an order of revision passed on 06.12.2013. In support the ld AR also relied on Essar Technology Ltd 401 ITR 445(SC). It was argued that the issue whether the said Explanation 2 has a retrospective effect or not has been specifically examined in the following cases where in it has been held that the said explanation is applicable only w.e.f 01.06.2015 and should not apply to the proceedings initiated and orders passed before that date.
(i) Narayan Tatu Rane, 70 taxmann.com 227 (Mum),
(ii) Metacaps Engineering & Mahendra Construction co/mann.com 128 (Mum),
(iii) DG Housing Projects Ltd, 343 ITR 329 (Delhi),
(iv) CLP India(P) Ltd., 95 taxmann.com 103(Ahd) and approved in 85 taxmann.com 103 (Guj),
(v) M/s. A.V. Industries, ITA 3469/M/2010 dt. 06.11.2015,
(vi) Jayant Murthy, ITA No.s 870and 1234/Ahd/2014 dt. 20.05.2016 14 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
14. In seventh alternative preposition the ld AR submits that the assessment order u/s 143(3) is not open for revision as it has been replaced by Orders giving appeal effect dt 30.08.2011 and 10.09.2012. In assessee's case the original assessment order u/s 143(3) was passed on 28.12.2010. The assessee company had filed an appeal before CIT(A) against order u/s 143(3) on 25.01.2011. The CIT(A)'s order was passed on 19.05.2011 and the order giving effect to CIT(A) order was passed on 30.08.2011. The assessee company had filed an appeal before ITA T on 19.08.2011. The ITA T's order was passed on 13.04.2012 and the order giving effect to Tribunal's order was passed on 10.09.2012. The ld CIT had issued a notice under section 263 on 06.12.2012 which is after the date of passing of appeal effect orders dt 30.08.20 II [CIT(A)] and dt 10.09.2012 of Tribunal. When the ld CIT issued a notice u/s 263 he sought to revise the assessment order dt. 28.12.2010 which had already been superseded by the abovementioned appeal effect orders. The above facts were furnished to CIT through letter dt 22.01.2013. Attention is invited to sub-section 3 which confirm that it is the 'Order Giving Appeal Effect' which should be revised and not the original order. It was argued that on initiation of proceedings u/s 154 the order of assessment was merged with order u/s 154 and therefore the original order could not have been revised and the order u/s 154 could not be revised as the same was passed after due inquiry. In Varma Industrial Ltd, 250 ITR 472 (Kar.) held that, it was evident from the reading of the order of the Tribunal that the order of the 15 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
assessing authority regarding valuation of the property had merged with the order of the CIT(A), dated 3rd May, 1991. The order of the assessing authority having merged with the order of the CIT(A), the Commissioner of Income-tax did not have the jurisdiction to revise the order of the assessing authority. Under s. 263 of the Act, the Commissioner has powers to revise orders of the assessing authority which are erroneous and prejudicial to the interest of the Revenue. He has no jurisdiction to revise orders of the Appellate Commissioner. The Tribunal was right in law in holding that the order of the assessing authority having merged with the appellate order of the CIT(A) could not be revised by the Commissioner of Income-tax. The assumption of jurisdiction by the Commissioner of Income-tax to revise under section 263 of the Act was bad in law.
15. In eighth alternative submission the ld. AR for the assessee submits that the revision order is unsustainable where issue of allowances or otherwise is debatable. The assessee company was under an obligation involving the following expenditure for which the company had made provisions in accordance with AS-29 of the ICAI. The provision for warranty, provision for liquidated damages, provision for sales tax and provision for excise duty. The ld. AR submitted the copies of the following decisions on the ratio on debatable issues.
(i) Vinitec Corpn. (P.) Ltd. 146 Taxmann 313 (Delhi) (HC),
(ii) Rotork Controls India P. Ltd. 314 ITR 62 (SC) ,
(iii) Infosys Technologies Ltd. 349 ITR 610 (Karn) (HC), 16 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
(iv) Nokia Siemens Networks India P. Ltd. 14 taxmann.com 84 (Kar) (HC),
(v) Bharat Earth Movers vs. CIT (245 ITR 428) (SC),
(vi) Renowned Auto Products, 354 ITR 127 (Madras HC),
(vii) Hamilton Research and Technologies 142 Taman 79 (Mag) (Kol) (Trib)
16. In ninth alternative submissions the ld. AR for the assessee submits that claim reversed in subsequent years and income was offered and taxed in next year's at uniform rates. The assessee company has a policy to write back all the unused amounts and offer the same for taxation on expiry of the relevant period for liquidated damages, sales tax and excise duty. (details are provided at Page Nos. 286-288 of PB II). There is no leakage of revenue. The company is being taxed at a uniform rate of 30%. Without prejudice to the above contention the ld. AR submits that if the impugned expenses are disallowed in the relevant assessment year, the assessment of subsequent assessment years be modified to exclude income included in those years. In support ld. AR relied on the following cases;
(i) CIT vs. Nagri Mills Co. Ltd., 33 ITR 681 (Born),
(ii) CIT vs. Vishnu Industrial Gases P. Ltd., (ITR No.229 of 1988 (06.05.2008) (Del),
(iii) Excel Industries Ltd, 358 ITR 295 (SC)
17. In tenth alternative submissions the ld. AR for the assessee submits that non- Inquiry is not a ground enough for ordering revision under section 263 where the claim was otherwise allowable in law. The order cannot be erroneous simply because inquiry was not made especially where the claim was otherwise allowable and such allowability was confirmed by the past and future claims and the decisions of the courts. An allowance in assessment 17 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
otherwise in confirmation of and on the lines of decisions of courts cannot be held to be erroneous, whether inquiry was made or not. In support of his submissions the ld. AR for the assessee relied on the decision on G.M. Mittal Stainless Steel (P) 263 ITR 255 (SC) and Russell Properties 109 ITR 229 (Cal). It was submitted that the A.O. had applied his mind and had made proper inquiries to his satisfaction before passing the assessment order and accepting the treatment of deduction of expenditure in respect of provisions on account of liquidated damages, sales tax and excise duty.
18. For Ground No. 2, relates to violation of natural justice. The ld AR for the assessee submits that the ld. CIT completed the revisionary proceedings in a complete haste and without giving sufficient time and opportunity and ignored all the evidences and proofs and documents available on records and treated the order passed by A.O. as erroneous and prejudicial to the interest of the revenue and set aside the same without bringing any material in record. The ld. AR for the assessee company submitted that proper procedure as required by law was not followed before passing of order under section 263. The ld. CIT granted only one hearing to the appellant to present his case. Therefore, considering the facts of the case the assessment made in violation of the provisions of natural justice should be quashed.
19. For Ground 3, relates to claims of deductions of expenses on account of liquidated damage, Sales tax and Excise duty. The ld. AR for the assessee submits that the provisions for liquidated damages, sales tax and excise duty 18 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
were made in respect of the present obligations of the company. They were liabilities of the company and they had arisen out of an obligating event i.e. sales. It involved outflow of resources for settling the obligation i.e. money. These provisions involved reliable estimate of obligation. The liability like in the past was quantified by relying on evidences and was ascertained on scientific basis. The expenses for liquidated damages has been made on contracts which were executed by the company beyond the agreed delivery dates and the compensation payable by the company for delay was computed in reasonable and prudent manner. These expenses have been quantified based on past experience of the company. The assessee company has a policy to write back all the unused amounts and offer the same for taxation on expiry of the relevant period for liquidated damages. There is no leakage of revenue. The company is being taxed at a flat rate of 30%. Without prejudice to the ld AR submits that if the impugned expenses are disallowed in the relevant assessment year, that the benefit of such expenses should be allowed in subsequent assessment years on them being found to be allowable and the income of the years in which provisions are written back and offered for tax and assessed be correspondingly reduced.
20. It was submitted that during the year the company has accounted for sales tax amounting to Rs. 2,67,00,000/- representing sales tax liability on account of non-collection of declaration forms under the Act/ Rules and excise duty amounting Rs. 43,00,000/- representing the differential duty liability that has 19 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
materialized in respect of matters contested in appeal. The method of accounting followed for making provisions was mercantile and was consistently employed from year to year. In following the method the sound accounting principles and policies were applied by keeping in mind the concepts of AS 1 namely 'prudence' and 'conservatism'. In support of submissions the ld AR relied on decision of Hyderabad Special Bench in K.C.P Ltd 34 ITD 50 (Hyd) (SB), wherein it was held that provisions for liquidated damages was allowable expenditure. The decision was sustained by Andhra Pradesh High Court and Confirmed by Supreme Court.
21. On the other hand the ld. CIT- DR for the revenue supported the order of the ld CIT. The ld DR further submits that the Assessing Officer passed the assessment order without making necessary enquiry in respect of provisions for warranty, liquidated damage, sale tax and excise duty. The Assessing Officer failed to carry out relevant and necessary enquiry as warranted by the facts of the case. Thus, the order passed by Assessing Officer is not only erroneous but prejudicial to the interest of revenue. The ld. DR for the revenue also relied upon the decision of Hon'ble Apex Court in Malabar Industrial Company (supra).
22. We have considered the rival submissions of the parties and have gone through the order of the ld. CIT passed under section 263 of the Act. We have also deliberated on the various decision referred by ld. CIT in the impugned order. Before, taking the issues of disallowances in the present 20 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
case, we may refer the scope of section 263 of the Act and settled by superior courts.
23. The Hon'ble Supreme Court in Malabar Industrial Co Ltd (supra) has laid down the principal that for the exercise of suo moto jurisdiction under section 263 by the CIT that the order of AO is erroneous, so far as it is prejudicial to the interest of revenue. The CIT has to be satisfied twin conditions, namely (i), the order of AO sought to be revised is erroneous and (ii) it is prejudicial to the interest of revenue. If one of them is absent- if the order of AO is erroneous but 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 (1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the A.O. , it is only when an order is erroneous and prejudicial to the interest of revenue that the section will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principle of natural Justice or without application of mind. The 'phrase prejudicial to the interest of revenue' is not an expression of art and is not defined in the Act. Its ordinary meaning is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provision of the Act and this task is entrusted to the 21 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of revenue. The phrase prejudicial to the interest of revenue has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO, cannot be treated as prejudicial to the interest of revenue, for example, when an ITO, adopted one of the course permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue. Unless the view taken by ITO is unsustainable in law.
24. The Hon'ble Jurisdictional High Court in case of CIT Ss Gabriel India Ltd 203 ITR 108 (Bom), held that the power of suo moto revision under subsection (1) of section 263 of the Act is in the nature of supervisory direction and can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the CIT to exercise the power of revision under this sub section viz (i) the order should be erroneous and (ii) by virtue of the order being erroneous prejudice must have been caused to the interest of the revenue. And order cannot be termed as erroneous unless it is not in accordance with law. If ITO Act in accordance with law makes certain assessment; the same cannot be 22 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
branded as erroneous by the CIT simply because according to him, the order should have been written more celebratory. This section does not visualise a case of substitution of the judgement of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. This is may be visualised where the ITO while making the assessment examines the accounts, makes enquiries, applied his mind to the facts and circumstances of the case and determine the income either by accepting the accounts for by making some estimate himself. The CIT on perusal of records, may be of opinion that the estimate made by the officer concerned was on the lower side and left to the CIT, he would have estimated the income at a higher figure than one determine by the ITO. That would not vest the CIT with power to re-examine the accounts and determine the income himself at the higher figure. This is because ITO 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 CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interest of revenue. But that by itself would not be enough to vest the CIT with the power to suo moto revision because the first requirement, namely that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interest of the revenue, then the power of suo moto revision cannot be exercised. And every erroneous 23 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
order cannot be subject matter of revision because the second requirement must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully eligible has not been imposed or that by the application of the relevant statue, on an incorrect or incomplete interpretation, a lesser tax than what was just has been imposed. When exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have material on record to satisfy in that regard. If the action of the authorities challenged before the court, it would be open to the courts to examine whether relevant objective factors were available from the records called for and examined by such authority.
25. Further, the Hon'ble Delhi High Court in CIT Versus Anil Kumar Sharma (335 ITR 83 Delhi ) held that the AO had examined every aspect and applied his mind on all facts before accepting the computation of income submitted by the assessee and passed the assessment order. It was the assessee's contention that a specific reply had been submitted by the assessee with regard to the purchase of land at village Tugalkabad and the copy of the award passed by Hon'ble High Court in respect of this land was also submitted to the AO. The Tribunal after examining the fact of the case observed that although it is not discernible from the assessment order whether the assessing officer had applied his mind or not, it was the prerogative of the AO to draft his order, and if he failed to record certain finding the assessee could not be 24 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
penalised. Therefore, what has to be ascertained is, whether assessing officer had investigated the issue and applied his mind to the whole record. In this behalf it is noted that AO had asked the assessee to submit the purchase date in respect of purchase of land at village Tugalkabad was and that assessee in response thereto had supplied requisite details and submitted a copy of high court decision in relation to the award of compensation, etc. The Tribunal therefore came to the conclusion that the complete detail filed before the AO and he applied his mind to the relevant material and facts, although such application of mind is not discernible from the assessment order. The tribunal held that the Commissioner in proceedings under section 263 also had all these details and materials available before it, but had not able to point out defects conclusively in the said material, for arriving at a conclusion that particular income had escaped assessment on account of non-application of mind by the assessing officer. The Tribunal, therefore, allowed the appeal of the assessee and quashed the order of the Commissioner passed under section 263of the Act.
26. Further Hon'ble Delhi High Court in case of DG Housing Projects Ltd (supra) held that the order is erroneous is a condition which must be satisfied for exercise of jurisdiction under section 263 of Income-tax Act. The matter cannot be remitted back for fresh decision to the assessing officer to conduct further inquires without a finding that order is erroneous. The commissioner must after recording reasons hold that order is erroneous. The 25 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
Commissioner cannot direct reconsideration only when the order is erroneous. An order of remit cannot be passed by the commissioner to ask the assessing officer to decide whether the order was erroneous, which is not permissible. In Jyoti Foundation (supra) the Hon'ble Delhi High Court while distinguishing the order passed after proper inquiry and without inquiry held that the orders which are passed without inquiry or investigation are treated as erroneous and prejudicial to the interest of revenue, but orders which are passed after inquiry or investigation on the issues are not per se or normally treated as erroneous and prejudicial to the interest of revenue. Because the revisionary authority feels and opines that further inquiry or investigation was required or deeper or further scrutiny should be undertaken, the Commissioner must record a finding that the order made is erroneous. This can happen if an inquiry and verification is conducted by Commissioner and he is able to establish and show the error or mistake made by assessing officer, making the order unsustainable in law. An order of remit cannot be passed by ld. Commissioner to ask the assessing officer to decide if the order is erroneous.
27. We have noted that ld. CIT revised the assessment order on following items which have been debited to the P&L A/c by the assessee, (i) Provision for Warranty Rs. 5.53 Crore (ii) Provision for Liquidated Damage of Rs. 9.08 Crore (iii) Provision for Sale Tax of Rs. 2.67 Crore and (iv) Provision for Excise Duty of Rs. 43 Lakhs. The ld. AR of the assessee submits that the claim 26 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
of warranty was accepted by Assessing Officer while giving effect to the revision order. This fact is not disputed by revenue ld. DR.
28. The perusal of assessment order passed under section 143(3) on 28.12.2010 reveals that notice under section 143(2) was issued on 18.09.2008 and assessment was completed on 28.12.2010. The assessment order was passed after 27 month of notice under section 143(2). There is no dispute that the Assessing Officer allowed the Provision for Warranty, Provision for Liquidated Damage, Provision for Sale Tax and Provision for Excise Duty, without making any reference in the assessment order. Though, the Assessing Officer passed a very detailed and exhaustive order. We have noted that in response to the notice under section 143(2), 142(1), the assessee furnished details, evidence and explanation and books of account. All the details relating to Provision for Warranty, Provision for Liquidated Damage, Provision for Sale Tax and Provision for Excise Duty were furnished to the Assessing Officer. The assessing officer while making other additions referred tax audit report. The assessee placed on record the copy of Annexure-7, being details of expenses debited to P&L A/c and details of which were furnished to Assessing Officer as per page no. 245 & 246 of Paper Book. The assessee has given the nature of provisions and the amount quantified and debited to the P&L A/c. In the reply to the show-cause notice under section 263, the assessee contended that the books of account, voucher and details were examined by the Assessing Officer and after examining and considering the explanation furnished by 27 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
assessee that assessee company continued to follow the same accounting policies and principle, the Assessing Officer accepted the provisions made by assessee and passed the assessment order.
29. As we have already noted that provision of warranty was accepted by Assessing Officer in order giving effect. Thus, the assessment order qua provision of warranty was not considered as erroneous or prejudicial to the interest of revenue by Assessing Officer. Now coming to the second issue which relates to provisions for Liquidated Damage, the assessee contended that liability of liquidated damage had arisen out of the obligation of various contracts, wherein the delivery of goods were made beyond the agreed dates of delivery. The provision of expenses was quantified on the past experience of the assessee company. The assessee has placed on record the copy of the contracts which were executed beyond the agreed date of delivery and the compensation was computed on the basis in a reasonable basis, the copies of the purchases order of M/s ALSTOM (Switzerland) ltd, dated 18.04.2005 (page No. 247 to 253), copy of purchase order from Civil Contracting Co LLC of Sultanate of Oman dated 20.05.2005, (page No. 254 to 256), copy of Purchase order from AMBC Transmission Sdn Bhd of Kuala Lampur dated 09.03.2006 (page No. 257 to 270) and copy of purchase order from ISOLUX WAT dated 12.07.2006 (page No. 274 to 285). The assessee has certified that all these documents were furnished to the lower authorities. We have noted that the Special Bench of Hyderabad Tribunal in K.C.P. Ltd. vs. ITO (supra) 28 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
held that the provision in accounts for payment of liquidated damage in respect of contract of assessee to supply machinery manufactured by it is allowable deduction. The decision of Special Bench is confirmed by Andhra Pradesh High Court in Tax Appeal no. 71 of 1993 and affirmed by Hon'ble Apex Court. Therefore, in our view, the assessment order in allowing the provisions for liquidated damage is not erroneous, thus, the twin conditions required for revision is not fulfilled. The ld. CIT has not conducted any inquiry before revising the assessment on this issue.
30. The third issue relates to Provisions for Sale Tax and fourth issue relates to Provision of Excise Duty. The contention of ld. AR of the assessee is that the provision which were not utilized were reversed in the subsequent years and income offered and taxed in the subsequent Assessment Year and there is no revenue leakage/prejudice to the revenue as assessee is being taxed at flat rate of 30%. The Hon'ble Apex Court in Excel Industries Ltd. (supra) held that when the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. Thus, the allowances of such provision are not prejudicial to the interest of justice. The We have further noted that the assessee has filed assessment order for Assessment Year 2008-2009 passed under section 143(3) dated 30.12.2011 & for assessment year 2010-11 under section 143(3) dated 27.02.2014 (at page no. 289 to 324 of Paper Book), wherein no such disallowance is made. The assessee has offered 29 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
taxable income for assessment year 2008-09 of Rs. 456.61 Crore and for assessment year 2010-11 of Rs. 845.62 Crore. Even on these two issues the ld. CIT has not carried out any inquiry before revising these issues has not given conclusion that the expenses were not allowable. Even otherwise the provisions for both the expenses relates to statutory obligation. Thus, the assessment order is also not erroneous on these two issues.
31. In PCIT Vs CLP India (P) Ltd (supra) held that if Commissioner was of opinion that either of two contentions raised by assessee were invalid in facts or law, he ought to have come to such a conclusion but, since he merely brushed aside assessee's contentions holding that Assessing Officer had not made proper inquiries, impugned revisional order is not sustainable. Similarly, Delhi High Court in case of DG Housing Projects Ltd (supra) also held that the order is erroneous is a condition which must be satisfied for exercise of jurisdiction under section 263 of Income-tax Act. The matter cannot be remitted back for fresh decision to the assessing officer to conduct further inquires without a finding that order is erroneous. The commissioner must after recording reasons hold that order is erroneous. The Commissioner cannot direct reconsideration only when the order is erroneous. The order of remitting to the assessing cannot be passed by the commissioner to ask the assessing officer to decide whether the order was erroneous, which is not permissible. Further, Hon'ble Bombay High Court in Gabriel India Ltd (supra) held that assessment order cannot be termed as erroneous unless it is not in accordance 30 ITA No. 1994 Mum 2013-M/s. Crompton Greaves Ltd.
with law. If assessing officer act in accordance with law makes certain assessment; the same cannot be branded as erroneous by the ld.CIT simply because according to him, the order should have been written more celebratory. Section 263 does not visualise a case of substitution of the judgement of the CIT for that of the AO, who passed the order, unless the decision is held to be erroneous.
32. In view of the above discussion on facts of the present case and the legal discussion, we find that the order passed by ld. CIT by invoking the provisions of section 263 is not sustainable, which the set-aside. In the result the grounds of appeal raised by the assessee are allowed.
33. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 28/02/2019.
Sd/- Sd/-
G.S. PANNU PAWAN SINGH
VICE-PRESIDENT JUDICIAL MEMBER
Mumbai, Date: 28.02.2019
SK
Copy of the Order forwarded to :
1. Assessee
2. Respondent
3. The concerned CIT (A)
4. The concerned CIT
5. DR "C" Bench, ITAT, Mumbai
6. Guard File
BY ORDER,
Dy./Asst. Registrar
ITAT, Mumbai
31