Madras High Court
M/S.Laser Soft Infosystems Ltd vs The Income Tax Officer on 13 August, 2018
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam, V.Bhavani Subbaroyan
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 13.08.2018
CORAM
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
and
THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN
Tax Case (Appeal) No.1018 of 2008
M/s.Laser Soft Infosystems Ltd,
100-A, Radha Avenue,
Sri Lakshmi Nagar, Valasaravakkam,
Chennai - 600 087. ... Appellant
-vs-
The Income Tax Officer,
Company Circle-II(4), Chennai. ... Respondent
* * *
Prayer : Tax Case Appeal filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income-tax Appellate Tribunal, B Bench, Chennai, dated 02.04.2007 in ITA No.1124/Mds/2006 for the assessment year 2001-02.
* * *
For Appellant : Mr.R.Venkatanarayanan
for M/s.Subbaraya Aiyar, Padmanabhan
and Ramamani
For Respondent : Mr.D.Prabhu Mukunth Arunkumar
JUDGMENT
[Judgment of the Court was delivered by T.S.Sivagnanam, J.] This appeal by the Assessee is directed against the order passed by the Income Tax Appellate Tribunal, B Bench, Chennai, in I.T.A.No.1124/Mds/2006, dated 02.04.2007 for the Assessment Year 2001-2002.
2. The above appeal has been admitted by the order dated 24.07.2008 on the following substantial question of law :
Whether on the facts and circumstances of the case, the Tribunal was right in disallowing the provisions made towards liability for warranty for goods supplied by the appellant on the ground that it is a contingent liability?
3. The Assessee is engaged in the business of software development. For the assessment year 2000-2001, the Assessee filed a return of income on 15-10-2001 admitting an income of Rs.3,57,79,950/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short the Act) on 20.01.2003 accepting the same. Subsequently, the return was selected for scrutiny under Section 143(2) of the Act and assessment was completed under Section 143(3) of the Act vide order dated 27.02.2004 determining the total income of Rs.4,07,24,060/-. While completing the assessment, the Assessing Officer disallowed the provision made by the Assessee for warranty.
4. Aggrieved by the same, the Assessee preferred an appeal before Commissioner of Income Tax (Appeals) [in short CIT-A]. The CIT-A allowed the appeal, which has been taken on appeal by the Revenue before the Income Tax Appeallate Tribunal (in short the Tribunal). The appeal was allowed and the order passed by CIT-A was reversed and the order of the Assessing Officer was restored.
5. Learned counsel appearing for the Assessee submitted that the Tribunal was largely guided by the decision of this court in the case of CIT V. Rotork Controls India Private Limited and others (T.C.No.163 of 2003, etc. dated 05.02.2007) and allowed the appeal filed by the Revenue and in light of above decision of the Hon'ble Supreme Court of India in Rotork Controls India Private Limited V. CIT, (2009) 314 ITR 0062 (SC), the order passed by the Tribunal calls for interference. It is further submitted that it is not as if the petitioner has not placed any material before the Assessing Officer with regard to the provision for warranty in terms of the agreement for supply of software and in spite of such material being produced, the Assessing Officer failed to take note of the fact that the warranty provision was based on experience and historical trend. Therefore, it is submitted that the order passed by the CIT-A requires to be restored and the substantial question of law framed should be answered in favour of the Assessee.
6. Learned counsel appearing for the Revenue submitted that the decision of the Hon'ble Supreme Court in Rotork Controls India Private Limited V. CIT, (2009) 314 ITR 0062 (SC), lays down legal position as to when a warranty provision is allowed as a deduction. Referring to the decision of the Division Bench of this Court in the case of CIT V. Forbes Campbell Finance Limited, (2013) 352 ITR 602 (Mad), it is pointed out that unless three conditions recognising the liability, as pointed out in the said decision are satisfied, the claim could not be automatically allowed, as a provision made of historical trend. Therefore, it is submitted that the Tribunal rightly reversed the decision of the CIT-A and the order does not call for interference.
7. We have heard the learned counsel for the parties and carefully perused the materials placed on record.
8. Admittedly, the Assessee has not placed any material before the Assessing Officer with regard to the previous experience as to how the provision has been created. The Assessing Officer found that the Assessee has deducted a sum of Rs.17,15,000/- towards provision for warranty and he found that it was made as a provision towards an unascertained liability and therefore, proposed that it is not an admissible expenditure being contingent in nature. In the light of the said provisional conclusion, the Assessee submitted a letter dated 05.12.2000 stating that the provision created in the accounts for the possible costs that may be incurred have to be borne by the Assessee company for rectification of the bugs in the software supplied to the customer and also will have to be done free of charge to customers and it is claimed that the provision for warranty is calculated based on estimate of costs from previous experience. However, the assessee failed to produce any material before the Assessing Officer to show that the estimate of costs was based on the previous experience. Therefore, in our considered view the Assessing Officer rightly held that the provision made is not crystalised or ascertained at the end of the previous year and therefore, the Assessee's claim is merely provisional in nature.
9. The CIT-A, while reversing the finding of the Assessing Officer, did not touch upon this aspect, but was largely influenced by the fact that the Assessing Officer did not fault the method of accounting followed by the Assessee. In our considered view, the CIT-A misdirected itself in not addressing the correct question, which required to be determined. The CIT-A ought to have examined the correctness of the findings of the Assessing Officer, taking note of the conduct of the Assessee that the provision made was not crystalised or ascertained at the end of the previous year and unless and until this finding was held to be non-substantiated or factually incorrect, the CIT-A could not have interfered with the order passed by the Assessing Officer.
10. The Tribunal, taking note of the law laid down by this Court in the case of CIT V. Rotork Controls India Private Limited and others (T.C.No.163 of 2003, etc. dated 05.02.2007), allowed the appeal filed by the Assessee. In our view, the decision of the Hon'ble Supreme Court in Rotork Controls India Private Limited V. CIT, (2009) 314 ITR 0062 (SC), does not in any manner improve the case of the Assessee, as the Assessee has miserably failed to establish the three conditions laid down by the Hon'ble Supreme Court in the said decision recognising the liability. Unless and until the Assessee was able to satisfy that the provision has been made based on the historical trend, the question of extending the benefit of the decision of the Hon'ble Supreme Court in Rotork Controls India Private Limited (cited supra) does not arise.
11. Learned counsel for the Assessee produced an additional typed set of papers, which contained a note on provision for warranty, terms and conditions and provisions for warranty working. From the warranty working, we find that the Assessee has stated that the average number of people in the year 2000-2001 was 277 and the total man-month available in the year was 3324 (277 X 12) and the warranty man-month required was estimated at 50 and multiplied by the average man-month charges of Rs.34,300/- and accordingly, the Assessee arrived the provision at 17,15,000/-. On a perusal of this working, we find that there is absolutely no historical trend based on which, the Assessee has made such a deduction. In fact, everything appears only to be a provision and nothing has been substantiated and as rightly pointed out by the Assessing Officer, the Assessee has failed to crystalise the said provision at the end of the previous year.
12. Faced with this situation, learned counsel for the Assessee requested that the matter may be remanded to the Assessing Officer for fresh consideration so that the Assessee will be able to produce material to substantiate the case. We find that such a plea wholly inadmissible at this juncture, especially when we are called upon to decide the substantial question of law, which has been framed for consideration.
13. Taking note of the facts and circumstances of the case, we find that the Assessee has failed to fulfil the three conditions pointed out by the Hon'ble Supreme Court in Rotork Controls India Private Limited (cited supra) and there has been no material placed before the Assessing Officer to establish that the provision in the accounts for the warranty charges was based on any scientific basis or based on the past experience. Thus, the stand taken by the Assessee was wholly non-substantiated and consequently, the Tribunal rightly allowed the appeal filed by the Revenue and restored the findings of the Assessing Officer.
14. In the light of the above reasons, this Tax Case Appeal is dismissed and the substantial question of law framed for consideration is answered against the Assessee and in favour of the Revenue.
[T.S.S., J.] [V.B.S., J.]
13.08.2018
Index : Yes / No
Internet : Yes
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To
1. The Income-tax Appellate Tribunal,
B Bench, Chennai.
2. The Income Tax Officer,
Company Circle-II(4), Chennai.
T.S.Sivagnanam, J.
and
V.Bhavani Subbaroyan, J.
gg
T.C.(A)No.1018 of 2008
13.08.2018