Income Tax Appellate Tribunal - Amritsar
Jay Bee Industries vs Deputy Commissioner Of Income Tax on 18 December, 1997
Equivalent citations: (1998)61TTJ(ASR)403
ORDER
Phool Singh, J.M. These four appeals out of which three are from the side of assessee involving assessment year 1987-88 to 1989-90 and one cross-appeal of the Department involving assessment year 1988-89 are directed against the orders date 26-9-1990, recorded by the Commissioner (Appeals), Bathinda, by which he has disposed of assessees three appeals of assessment year 1987-88 to 1989-90. As these appeals involve common issues, these were heard together and are being disposed of by this composite order.
2. In all three appeals of the assessee, the only ground involved relates to the liability of provision for expenses on repair of transformers during the warranty periods, which have been disallowed by the authorities below. The facts, in short, are that the assessee-firm was dealing in the business of manufacture and distribution transformers and its major customers were various State Electricity Board, like Punjab State Electricity Board, U.P. State Electricity Board, Delhi Electric Supply Undertaking, etc. The assessee was supplying the distribution transformers to different electricity Boards of different States, against their orders as per their terms and conditions like, price, payments, delivery, time warranty, period etc. In the assessment year 1987-88, the assessing officer while completing assessment order noted that the assessee-firm debited an amount of Rs. 2,74,119 to P&L account under the narration Inbuilt liability, which was to be born by the assessee-firm. The assessee was called upon to show the provision as to how that amount was claimed as deduction. The assessee contended that they were dealing in the business of manufacturing and distribution transformers and against goods supplied to different State Electricity Boards, the assessee-firm was giving warranty for 12 to 18 months and in some cases even upto 60 months against manufacturing defects and the amount of Rs. 2,74,119 was claimed as provision for carrying out the necessary manufacturing defects or replacement, etc. Relying upon the decision of the Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC), the assessee submitted that case of the assessee-firm was also covered by the ratio of the decision of the Honble Supreme Court. However, the assessing officer did not agree with the contention of the assessee, who noted that facts and conditions of the case of Calcutta Co. Ltd. (supra) are quite different to the facts of the assessee. He further observed that the assessee should have claimed the actual expenses against manufacturing defects on the basis of estimation. Accordingly, the claim of the assessee about provision for warranty was not held allowable and he disallowed the claim of provision of Rs. 2,74,119 for alleged inbuilt liability under the head of Warranty.
3. In the assessment year 1988-89, the facts were identical and the amount so disallowed was Rs. 8,85,274 and on similar facts the claim of the assessee for Rs. 14,03,843 was disallowed by the assessing officer for the assessment year 1989-90.
4. The assessee preferred three different appeals against disallowances made by the assessing officer and it appears that all the appeals were taken up together for disposal by the learned Commissioner (Appeals). The contention of the assessee before the Commissioner (Appeals) was that provisions made in each assessment year constituted inbuilt liability of the assessee as per terms and conditions of the agreement with the purchaser of the transformers as transformers were sold with the warranty of 12-18 months and in some cases for 60 months against manufacturing defect. It was further submitted that on the basis of past experience, it was seen that expenses on account of warranty for goods covered upto the period 12 to 18 months was at an average of 2 per cent and for goods covered by warranty of 60 months, was on an average of 6 per cent. Accordingly, the provisions were made in all the assessment years. Reliance was again placed on the decision of the Honble Supreme Court in the case of Calcutta Co. Ltd. (supra) and further on the decision of Delhi High Court in the case of CIT v. Nav Bharat Nirman (P) Ltd. (1983) 141 ITR 723 (Del) in which the Honble court has fallowed the ratio of the Honble Supreme Court in the case of Calcutta Co. Ltd. (supra). The learned Commissioner of Income Tax(A) considered all the facts and noted that the assessee was making claim of deduction of warranty twice i.e. once on the basis of estimated provisions ranging between 2 per cent to 6 per cent depending upon the period of warranty, which was 12 to 18 months or 60 months and secondly on the basis of actual replacement carried out as the assessee itself has admitted that no separate account of warranty and current repair were being maintained. The learned Commissioner (Appeals), further noted that by adopting this method of accountancy the net effect was postponement of payment of tax on the provisions claimed for the period of warranty. Further, he noted that provisions can be made only in respect of determined liability and liability, which was contingent cannot be treated as determined liability. The case of the present assessee, in the opinion of the learned Commissioner (Appeals), was that expenses of warranty were contingent on the break-down of a transformer during the period of warranty and such provision cannot be made and no such provision can be made at the time of sale. He further concluded that the decision of the Honble Supreme Court in the case of Calcutta Co. Ltd. (supra) and that of Delhi High Court decision in the case of Nav Bharat Nirman Co. (supra) were distinguishable and rather the decision of the Honble Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC) was applicable in which their Lordships have laid down as under:
"Contingent liabilities does not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income tax purposes is towards a liability actually existing at the time but a setting apart money which might become expenditure on the happening of an event is not an expenditure."
Applying this ratio to the facts of the case, this ground of assessee was rejected confirming the view of the assessing officer and the assessee is in appeal before us.
The facts for assessment year 1988-89 to 1989-90 were identical except the difference of amounts and Commissioner (Appeals) confirmed the view of assessing officer.
5. The learned counsel for the assessee has taken us to the facts of the case and pointed out that the assessee had been making sales of distribution transformers to different State Electricity Boards with specific warranty clause by which the assessee-firm gives specific warranty for 12 to 18 months and 60 months against manufacturing defects in the transformers so sold. Our attention was drawn to the copy of contract agreement executed in between the assessee and the Punjab State Electricity Board appearing at pp. 11 to 17 of the first paper-book of the assessee. The learned counsel took us to clause 19 of this contract agreement which provides Warranty clause in which the supplier assessee-firm has taken undertaking to replace free of cost with no transportation and insurance expenses to the purchaser whole or any part of the material, which under normal and proper use and maintenance, proves defective in material or workmanship within twelve months from the date of commissioning of material by the purchaser or 18 months from the date of dispatch whichever is earlier. According to the learned authorised representative of the assessee, this warranty clause is pre-condition of each sale and in some cases the period of warranty comes upto 60 months.
6. The learned counsel further submitted that to fulfill this responsibility undertaken by the assessee in warranty clause, the assessee started making provision for the amount probably to be spent by the assessee on day-to-day repairs or replacement, etc. to be carried out in the said warranty clause. Initially, the assessee worked out this amount of provision at 1 per cent to 2.5 per cent for repairs/replacement of damaged part of transformers being supplied to 12/18 months and 60 months warranty period respectively. The assessee noted from the experience of repairs carried out on damaged transformers during the accounting years 1983-84 to 1985-86 that the above amount was quite less and average so worked out on the basis of repairs costs for these three accounting years, which came to 1.90 per cent and 6.3 per cent for warranty period of 12/18 months and 60 months respectively. The assessees learned counsel has pointed out to the copy of the note of provision of liability for repairs of transformers damaged during the warranty period submitted to the authorities below and appearing at pp. 9 to 10 of the paper-book and contended that on the basis of this estimate of 2 per cent of the total cost of sale of transformers with warranty period of 12/18 months and 6 per cent of total cost of transformers sold with 60 months warranty period was worked out and provision was made in each year accordingly. the counsel further adds that the Department has never questioned or doubted the quantum of estimate of repairs amount to be borne by the assessee for the repairs/replacement on damaged transformers during the warranty period.
7. On the basis of these facts, the contention of the learned counsel was that claiming of such type of provision in its accounts for meeting out expenditure on replacement of part supplied to customers or carrying on the repairs of damaged part in the period of warranty was an allowable expenditure and estimate of such expenditure was based on past business experience and necessity under warranty for accurate performance. Reliance was placed on the ratio of the Tribunal Pune Bench in the case of ITO v. Wanson (India) Ltd. (1983) 5 ITD 102 (Pune-Trib), in which the Tribunal on these identical facts had allowed the expenditure so claimed by the assessee for making provision in this account for making expenditure of replacement/repairs, etc.
8. Further, it was also pointed out by the learned counsel that the departments contention was that the assessee was postponing the payment of tax on the amount of provision as the assessee was claiming benefit of the same amount twice as noted by the Commissioner (Appeals) that once the assessee was claiming the amount of provision and secondly the amount of repairs/replacement was being claimed as expenditure in each assessment year but this basis of the department is not tenable and the assessee is not going to get any benefit. The learned counsel has pointed out that the chart showing details of provisions created and provisions written back against the liability to repair the transformers damaged during the period of warranty which is appearing at pp. 1 to 4 and its abstract is appearing at p. 5 of the paper-book. According to the submissions of the learned authorised representative the amount of provisions created in earlier assessment years viz., 1987-88 and 1988-89 were more than the amount of provisions written back as warranty period did not expire and amount of written back was lower but in the subsequent years the assessee had written back the amount more than 300 per cent to the amount of provisions created as in the assessment year 1995-96 the assessee has written back Rs. 33,81,165 as against Rs. 15,167,760 claimed by the assessee on account of provisions, which were more than 200 per cent and in assessment year 1996-97, the amount was written back was Rs. 62,96,171 as against the provisions of Rs. 18,98,684, which is more than 350 per cent. The contention is that the assessee was not going to get any benefit in payment of taxes as noted by the Commissioner (Appeals).
9. So far as the legal position is concerned, the contention of the assessees learned representative is the same as taken before the authorities below and reliance was placed on the decision of the Honble Supreme Court in the Case of Calcutta Co. Ltd. (supra) and that of Delhi High Court decision in the case of Nav Bharat Nirman Co. (supra) and contended that the amount of provisions claimed by the assessee cannot be called contingent liability as the amount of provision was based on estimate and even that estimate was based on the assessees experience in earlier years. The contention was that the assessee was following the consistent method of accounting the liability was being definite one and there was no occasion to treat that as contingent one and the department should have allowed the claim of the assessee for the deduction.
10. As against this, the learned Departmental Representative placed reliance on the order of the Commissioner (Appeals) and submitted that the order is reasonable one and the learned Commissioner (Appeals) rightly treated the provisions of liability as contingent liability and the amount of provision meant for expenditure on account of repairs/replacement which will happen in the warranty period is not allowable expenditure as held by the Honble Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT (supra) and relied upon by the Commissioner (Appeals). The contention is that the order of the authorities below is to be confirmed.
11. We have considered the rival submissions and pursued the orders as well as case laws relied upon by the learned representative of the parties.
12. The facts of the assessees case are not in dispute as assessee had been dealing in the manufacturing of distribution transformers and supplying them to the various State Electricity Boards. It is also undisputed fact that all such sales are effected through agreements through purchase orders placed by the Electricity Boards and then contract agreement is accepted. One specimen copy of purchase order and contract agreement is appearing at pp. 11 to 17 of the paper-book. It is also not disputed from the side of the Revenue that the assessee was selling transformers with a warranty clause by which the assessee was taking responsibility to replace free of cost with no transportation and insurance expenses to the purchaser the whole or any part of the material of transformers, which under normal and proper use and maintenance proves defective in material of workmanship within 12 months from the date of commissioning of material by the purchaser or 18 months from the date of dispatch whichever is earlier. The period of warranty goes upto 60 months in some cases. In the year under consideration, the assessee claimed provision of Rs. 2,74,119 towards liability for repair/replacement of parts of transformers within the warranty period. This has been disallowed by the assessing officer on the ground that the assessee can claim the amount of actual expenses against manufacturing defects on the basis of estimation. The Commissioner (Appeals) admittedly confirmed the view and on legal point the Commissioner (Appeals) concluded that it was contingent liability and amounts, which has been set apart by the assessee to meet the liabilities is contingent liability and the same is not allowable. The other point raised by the Commissioner (Appeals) was whether that assessee was claiming the expenses twice. Now the only point requires scrutiny is whether the assessees claim for deduction on account of provisions made for carrying on the repairs/replacement of defects is allowable or not.
13. At the very beginning, it may be relevant to point out that assessee has given out the basis for arriving at the amount of provisions to be made to carry out the inbuilt liability in the warranty period and note of provision of liability for repairs of transformers damaged during warranty period was submitted to the authorities below on the basis of expenses incurred by the assessee for the accounting years 1983-84 to 1985-86, the assessee has arrived the estimated cost of repairs of 2 per cent of sale value for those transformers, which were sold with warranty of 12/18 months and 6 per cent of the total cost of those transformers, which were sold with warranty clause of 60 months. The method of estimating cost of repairs has not been challenged by the Revenue as neither the assessing officer nor the Commissioner (Appeals) have found any defect in working out such estimate. Once the assessee is coming with estimated cost of repairs of warranty clause then assessees such claim is to be allowed as in the case of Calcutta Co. Ltd. (supra), the Honble High Court has laid down that if there is estimate of accrued liability, which is to be discharged at a later date, then such an expenditure is allowable. Their Lordships have observed that expression "Profits or gains" in section 10(i) of the Income Tax Act, 1992, has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purposes of earning the receipts is deducted therefrom and it is immaterial whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. If we apply the above reasoning to the facts of the case, then undisputedly the assessee has received the complete sale price of transformers but at the same time undertook responsibility to carry out the necessary repairs or replace the part of transformers so sold in the period of warranty. The liability to carry out the necessary repairs of any part of transformers or replacement of that part accrue on the date when agreement-deed was executed regarding sale of transformers with warranty clause. It is not to be taken as material if that liability is to be discharged at some future date. Further if the department wants to work out the profits or gains of the business then it cannot treat the amount of sale of transformers alone without taking into consideration the alleged inbuilt liability to carry out or replace any part of transformer during the warranty period. It is also relevant to point out that the Honble Supreme Court in the case of Shree Sajjan Mills Ltd. (supra) relied by the learned Commissioner (Appeals) has laid down that contingent liability do not constitute expenditure and cannot be a subject matter of deduction even under the mercantile system of accounting and expenditure, which was deductible for income tax purposes is towards liability actually existing at time but setting apart the money, which may become expenditure on the happening of an event is not an expenditure. Their Lordships have also referred to the decision of Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC) with approval in which even contingent liabilities discounted and valued as necessary could be taken into account as trading expenses if those were sufficiently certain to be capable of being valued. This reasoning is fully applicable to the facts of the present case. Even if the liability undertaken by the assessee to carry out the repairs/replacement during the warranty period was contingent then such liabilities were specifically certain and capable of being valued as assessee have arrived at the estimate of such liability to be incurred on the basis of past experience and the department has not doubted the same then such estimated liabilities are to be treated as trading expenses and must be allowed. On the basis of above, legal position which emerges out is that even contingent liabilities which are capable of being valued specifically are allowable and the liability of the assessee even if treated contingent is allowable in view of the decision of the Supreme Court in the case of Calcutta Co. Ltd. (supra).
14. So far as the observations of the learned Commissioner (Appeals) that the claim of account of warranty is being claimed by the assessee twice, it is pointed out that the assessee had worked out the estimate of what is the expenses in carrying out the necessary repairs/replacement of defective/damaged transformers in warranty period and in case that estimate was somewhat erroneous, the assessing officer should have made necessary efforts to highlight this aspect of the matter. No doubt attempt was made to find out as to what were the expenses being borne by the assessee to carry out the necessary repairs/replacement of damaged transformers in the warranty period but assessee came with assertion that it is not feasible to maintain two separate accounts for maintenance of transformers and about the repairs/replacement of damaged transformers under warranty clause as assessee was having only one establishment for all the work. If the assessing officer came to know about this stand of the assessee, it was upto him to falsify this stand of the assessee and to come out with facts and figures to point out that the amounts of provisions are in anyway excess to the actual amounts of repairs/replacement but no such efforts had been made. Further, the assessee had written back the amount of provisions as soon as the period of warranty expires. This is evident from abstract of provisions created and written back because liability to repair transformers during warranty period is appearing at p. 5 of the paper-book. No doubt initially the amount of written back was less than to the amount of provisions created and that was on account of provision created for 60 months but afterwards the amount of provisions written back was more than the provisions created. For example in the assessment year 1995-96 the amount of provision written back is Rs. 33.81 lakh in comparison to the amount of provisions created, which is Rs. 15.16 lakhs and in the same way the amount of provision written back in the assessment year 1996-97 is Rs. 62.96 lakh than to the amount of provision created, which is Rs. 1898 lakh. So the fact remains that there is no evasion of payment of due taxes in the method of accounting relied by the assessee, which is being consistently followed. The only thing if it is examined in detail will be that there was deferment of some amount for some period and that too will not be so significant. If there was a difference in the amount of provision created by the assessee in the end of particular year and the amount actually incurred by the assessee then the assessing officer should have pointed out, which he failed to do so. Even if that would have been the basis, the reasoning of the Tribunal, Pune Bench in the case of ITO v. Wanson (India) Ltd. (supra) would have applied in which facts were identical as the assessee was supplying industrial machines along with guarantees by way of warranties for their performance. The guarantee was in the shape of warranty. On the basis of past experience, the company started following the method of accounting of providing some provision to meet the expenditure consequent to the warranty. The provision was of Rs. 1,89,,787 while the actual amount of expenditure incurred was Rs. 1,33,562 and the assessing officer disallowed the excess provision of Rs. 56,225. The Commissioner (Appeals) deleted the addition and the Tribunal confirmed that view on the basis that assessee has given out an estimate of such expenses for which provision was made and such estimate was based on assessees experience in the earlier year. The accounting method followed by the assessee was contingent one and the Tribunal concluded that in such type of cases the department should not disallow the provisions so made by the assessee on being too technical rather should adopt a pragmatic approach. Even if the assessing officer would have arrived at the conclusion after making necessary investigations that estimate was arrived at by the assessee was in anyway excess in any particular year then such expenses were to be allowed on the reasoning of above case but certainly it is not a case before us as the department has not questioned the estimate arrived at by the assessee and as assessee had been writing back the amount of provisions after expiry of warranty period then the department is not going to lose anything except deferment of taxes of provisional amount for some period, which is not so relevant unless necessary enquiries about the actual expenses borne by the assessee were made in any particular year. So the result of the above discussion is that liability undertaken by the assessee to carry out the repairs/replacement of damaged parts of transformers during the warranty period was existing liability at the time of sale and estimate arrived at by the assessee for making provision was based on its past experience and thus following the decision of the Honble Supreme Court in the case of Calcutta Co. Ltd. (supra) and that of Tribunal Pune Bench in the case of ITO v. Wanson (India) Ltd. (supra), we conclude that the amount of provision was allowable and the claim of assessee for all the assessment years stands allowed.
15. The only ground involved in the Revenues appeal relates to the addition made at Rs. 1,52,229 by the assessing officer which is found in the credit of modvat account, which has been deleted by the Commissioner (Appeals).
16. During the assessment proceedings for the assessment year 1988-89, the assessing officer noted that as per p. 4 of Form No. 3CD an amount of Rs. 1,52,229 stood as modvat credit and the assessee has not credited that amount in P&L account. He made the addition of that amount to the total income. The assessee challenged this addition and it was contended before the Commissioner (Appeals) that modvat credit remained unutilised as the same can be utilised under statutory conditions and limitations. That amount was not available to the assessee and the same cannot be withdrawn in cash and this unutilised amount of modvat account cannot be treated as income of the assessee. Attention of the learned Commissioner of Income Tax(A) was also drawn to the query, which appeared in Excise Law Times in November, 1987, in which it was questioned as to whether modvat credit lying unutilised in the books of the account was to be treated as profits for accounting purposes. Reply to the query was that modvat credit lying untuilised in assessees account books was not profit for accounting purposes. In fact that amount was held under statutory scheme. Utilisation of such modvat credit was subject to statutory conditions and limitations and that cannot be withdrawn in cash. The plea of the assessee was that the amount cannot be added to the total income of the assessee. On the basis of the above the Commissioner (Appeals) found force in the plea of the assessee and deleted the addition. The Revenue is in appeal before us.
17. The learned Departmental Representative has placed reliance on the order of the assessing officer and the learned counsel for the assessee placed reliance on the order of the Commissioner (Appeals).
18. At the very beginning, it may be pointed out that the learned Departmental Representative failed to argue as to how the amount of unutilised credit in the modvat account of the assessee can be treated as the income of the assessee because that amount cannot be encashed by the assessee and utilisation thereof was subject to statutory limitations. In the absence of reply to the query, we conclude that this amount of modvat credit cannot be treated as total income of the assessee and the Commissioner (Appeals) rightly deleted the same after following the answer to query published in Excise Law Times, November, 1987.
19. The result is that all the appeals of the assessee are allowed and that of revenue is dismissed.