Income Tax Appellate Tribunal - Chennai
Novar India Limited (Now Known As ... vs Department Of Income Tax on 13 August, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'D' : CHENNAI
[BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND
SHRI HARI OM MARATHA, JUDICIAL MEMBER]
I.T.A No. 1925/Mds/2010
Assessment year : 2005-06
The ACIT vs M/s Novar India Ltd.
Company Circle II(2) (now known as Honeywell
Chennai Electrical Devices and Systems
India Ltd.)
'Crescendo'
995-B, Second Avenue
Anna Nagar,
Chennai 600 040
[PAN - AAACM4378E]
(Appellant) (Respondent)
Appellant by : Shri Anirudh Rai, CIT
Respondent by : Shri G.S.D. Babu
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
This appeal of the Revenue, for assessment year 2005-06, is directed against the order of the ld. CIT(A), dated 13.8.2010.
2. Briefly stated, the facts of the case are that the assessee- company is engaged in the business of manufacture of door bells, low voltage switches etc. For the relevant year, the assessee has declared total income of ` 3,88,23,460/- in its return of income filed on :- 2 -: ITA 1925/10 31.10.2005. Assessment order was passed u/s 143(3) on 29.12.2008. Against various additions made in the assessment order, the assessee preferred first appeal and the additions which are the subject matter of this appeal have been deleted by the ld. CIT(A), against which the Revenue is aggrieved. Following grounds have been raised:
"1. The Order of the learned Commissioner of Income Tax(Appeals) is contrary to the Law and facts of the case.
2. The learned CIT(A) has erred in deleting the disallowance made in respect of "Provision for discount" of ` 18,38,40,583/-.
2.1 It is submitted that the CIT(A) has relied upon the decision of the Hon'ble Supreme Court in the case of M/s.Rotark Controls India Pvt. Ltd. However, the above case deals with warranty provisions which were to be taken as ascertained liability arising out of sale of sophisticated equipments which necessary involves repairs, maintenance, replacement of parts etc as part of warranty. In the instant case, the issue is concerned with discounts which are merely contingent liability which may or may not follow the sale.
3. The ld. CIT(A) has erred in holding that the travel expenditure incurred in foreign currency when reduced from the export turnover should be excluded from the total turnover also.
3.1 It is submitted that the decision of the Hon'ble ITAT, Chennai, in the case of M/s Saksoft (121 TTJ 865) relied on by the CIT (A) has not become final and further appeal has been filed before the Hon'ble High Court, Chennai.
3.2 It is submitted that if the items which are to be excluded from the export turnover as per the statute are excluded from the total turnover also then the very purpose of excluding the said items from the export :- 3 -: ITA 1925/10 turnover will get defeated as the effect of exclusion of the same from the total turnover (denominator) will nullify the effect of exclusion from the export turnover (numerator).
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned Commissioner of Income-tax(Appeals) be set aside and that of the Assessing Officer be restored."
3. We have heard the rival submissions; perused the orders of the authorities below; and have also treaded through the paper book. The first issue, contained in Ground No.2 and 2.1, relates to deletion of addition of `18,38,30,583/- added on account of disallowance made in respect of 'provision for discount'. The facts apropos this issue are that during the year under appeal, assessee had debited to the Profit & Loss Account certain amounts under the head 'other expenses'. The Assessing Officer disallowed this amount of ` 18,38,40,583/- taking the view that it represented estimated 'provision for discount' and thus, it is an unascertained liability/contingent liability. The assessee filed a rectification petition u/s 154 of the Act stating that out of ` 18,38,40,583/- , only ` 3,85,17,201/- is 'provision for discount' and remaining amount of ` 14,53,23,382/- is towards liability which has actually accrued. Finding this submission of the assessee to be correct, the Assessing Officer has rectified his order by disallowing only an amount of ` 3,85,17,201/-. According to the Assessing Officer, this amount only represents 'provision for discount', for which liability :- 4 -: ITA 1925/10 has not yet accrued, so it cannot be allowed. The case of the assessee is that the company had about hundred customers [Distributors or Channel Partners] spread across all the key cities in India. The discounts, as per the assessee, are offered to the Channel Partners to stay in the competitive market. A sample copy of the discount agreement with one of the Channel Partners was also produced. These discounts are stated to be linked to Annual Performance Targets, i.e turnover discount, which is given to channel partners are based on the targets to be met by them. There are project discounts and scheme discounts which are additional discounts given to customers. The 'provision for discount' to the tune of ` 3,85,17,201/- has been made by the assessee for the following reasons:
(i) The turnover discounts are released only after receipt of relevant C Forms from the customers.
(ii) The project discounts are offered only on receipt of proof from the customers that they have supplied the same at the reduced price.
This is normally delayed as for real estate projects the consolidation of bills happens after a few months of actual execution.
(iii) The scheme discount in the trade market is also settled only on receipt of proof from the distributors that they have passed on the additional discount to their customers.
:- 5 -: ITA 1925/10
4. The submission of the assessee, in nut shell, is that the assessee has made provision on scientific basis on the premise that all the distributors would achieve the target assigned to them and there would be further discounts. It was stated that the only reason for creating a provision and not charging the same as an expense is because of the fact that the exact quantification could not be done for various reasons arising only after the finalization of the accounts for every financial year. In this way, the case of the assessee-company is that the liability to provide the discount is clearly established, requiring the debit to the Profit & Loss Account. The ld. CIT(A) has accepted the version of the assessee that in accordance with the Accounting Standards issued by the Institute of Chartered accountants of India, it is under obligation to follow the same as per the provision of the Companies Act, 1956.
5. The ld.DR has disputed the finding of the ld. CIT(A) in deleting the addition by stating that this amount represents only and only a provision which tantamounts to any 'unascertained liability' which is not quantifiable during the year and is thus, a contingent liability based on estimates alone. To substantiate this version, the ld.DR has relied on the decision of Hon'ble Supreme Court rendered in the case of Metal Box Company of India Ltd vs Their Workmen, 73 ITR :- 6 -: ITA 1925/10 53 and that of Hon'ble Jurisdictional High Court rendered in the case of Dy. CIT vs Beardsell Ltd, 244 ITR 256. With regard to the decisions in the case of CIT vs Honda Siel Power Products Ltd, 312 ITR 254, and M/s Rotork Controls India (P) Ltd vs CIT, 314 ITR 62, relied on by the ld. CIT(A), it was stated that the facts of the above cases are different and are not applicable to the facts of the present case.
6. We have considered the rival submissions and have found that the assessee can claim such a 'provision' only if it satisfies the following conditions:
• An enterprise has a present obligation as a result of a past event;
• It is probable that an outflow of resources will be required to settle the obligation; and • A reliable estimate can be made of the amount of the obligation.
7. In our opinion, these are general observations made by the Hon'ble Supreme Court in the case of Honda Siel Power Products Ltd (supra). If the decision is read in toto, these conditions could be given effective meaning.
8. In the case of Metal Box Company of India Ltd (supra), the Hon'ble Supreme Court has held as under:
:- 7 -: ITA 1925/10
"Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit & loss account. This is recognized in trade circles and there is nothing in the Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a 'reserve'. Therefore, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year."
9. In the case of Dy. CIT vs Beardsell Ltd (supra), Hon'ble Jurisdictional High Court has held as under:
"Held, that if a debt had become irrecoverable the same could be written off and deducted from the profit of the business. A debt, the recovery of which was doubtful could not be termed to be an ascertained liability as mentioned under section 115J of the Act and could not be excluded from the book profits. Accordingly, the conclusion of the Tribunal in directing the Assessing Officer to rectify the alleged mistake of inclusion of the unascertained liability in the book profit could not be upheld."
10. Thus, it becomes evidentially clear that when the liability is ascertained and not quantifiable during the year and is simply a contingent based on estimates, the same cannot be allowed as deduction. In the given case, the assessee's version, as put forth in para 6.4 of the appellate order, clearly states that the only reason for creating a provision and not charging the same as an expenses is :- 8 -: ITA 1925/10 because of the fact that the exact quantification could not be undertaken for the various reasons. In our opinion, the basis for the provision is simply adhoc and arbitrary. It depends on the facts of each and every case to come to a conclusion as to whether the liability is ascertained or unascertained one and it cannot be generalised. The discounts given to meet out a particular target to the Channel Partners and further discounts given to the customers are not specifically specified and nobody knows as to what would be the exact position when transactions take place. There is no past history of this assessee. Therefore, in these circumstances, we are unable to accept the version of the assessee. We, therefore, set aside the findings of the ld. CIT(A) and reverse the same. The grounds raised by the Revenue, in this regard, are allowed.
11. The next ground is in relation to claim of the assessee that the travel expenditure, incurred in foreign currency, when reduced from the export turnover should be excluded from the total turnover also. This issue stands squarely covered by the decision of Chennai Bench in the case of M/s Saksoft (121 TTJ 865) which is mentioned in Ground No.3.1 of the appeal. This fact could not be denied by the Revenue and was found to be correct. Hence, this issue being covered by the order of the Tribunal, is decided in favour of the assessee. :- 9 -: ITA 1925/10
12. In the result, the appeal of the Revenue is partly allowed.
Order pronounced in the open court on 30.6.2011.
Sd/- Sd/-
(DR. O.K. NARAYANAN) (HARI OM MARATHA)
VICE-PRESIDENT JUDICIAL MEMBER
Dated: 30th June, 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR