ACIT, CHENNAI v. M/s. Switzer Instruments Ltd., CHENNAI

ITA 1005/CHNY/2011 | 2007-2008
Pronouncement Date: 15-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 100521714 RSA 2011
Assessee PAN AAACS9057S
Bench Chennai
Appeal Number ITA 1005/CHNY/2011
Duration Of Justice 3 month(s) 9 day(s)
Appellant ACIT, CHENNAI
Respondent M/s. Switzer Instruments Ltd., CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 15-09-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 15-09-2011
Assessment Year 2007-2008
Appeal Filed On 06-06-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH CHENNAI BEFORE DR. O.K.NARAYANAN VICE-PRESIDENT AND SHRI HARI OM MARATHA JUDICIAL MEMBER ITA NO.1005(MDS)/2011 ASSESSMENT YEAR: 2007-08 THE ASSISTANT COMMISSIONER OF INCOME-TAX COMPANY CIRCLE VI(4) CHENNAI. VS. M/S.SWITZER INSTRUMENTS LTD. 14-THANIKACHALAM RD. T.NAGAR CHENNAI-600 017. PAN AAACS9057S. (APPELLANT) (RESPONDENT) APPELLANT BY : DR.I.VIJAYAKU MAR IRS CIT-DR. RESPONDENT BY : SHRI SAROJ KUMAR PARIDA ADVOCATE. DATE OF HEARING : 15 TH SEPTEMBER 2011 DATE OF PRONOUNCEMENT : 15 TH SEPTEMBER 2011 O R D E R PER DR.O.K.NARAYANAN VICE-PRESIDENT: THIS APPEAL IS FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2007-08. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-V AT CHENNAI DATED 21-3-2011 AND ARISES OUT OF THE ASSESSMENT CO MPLETED UNDER SECTION 143(3) OF THE INCOME-TAX ACT 1961. - - ITA NO.1005 OF 2011 2 2. THE GROUNDS RAISED BY THE REVENUE IN THIS APPEA L READ AS FOLLOWS:- 1. THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF PROVISION FOR WARRANTY UNDER NORMAL COMPUTATION THE AMOUNT OF DISALLOWANCE BEING ` 69 37 199/-. 2. SINCE THE SCIENTIFIC BASIS OF THE PROVISION FOR WARRANTY IS NOT CONCLUSIVELY ESTABLISHED BY THE ASSESSEE THE DECISION OF THE HONBLE APEX COURT REPORTED IN 314 ITR 62 (ROTORK CONTROLS LTD.) WILL NOT APPLY TO THE FACTS OF THE CASE. 3. THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF PROVISION FOR WARRANTY UNDER SEC. 115JB THE AMOUNT OF DISALLOWANCE BEING ` 69 37 199/-. - - ITA NO.1005 OF 2011 3 4. IT IS SUBMITTED THAT THIS ISSUE IS A COROLLARY T O THE PRECEDING ISSUE AND APPEAL IS PREFERRED AGAINST THA T ISSUE. 5. THE LEARNED CIT(A) ERRED IN DIRECTING THE A.O. T O DISALLOW 2% OF EXEMPT INCOME U/S 14A INSTEAD OF .5% OF AVERAGE VALUE OF INVESTMENTS WHICH WAS ADOPTED B Y THE A.O. FOR THE PURPOSE OF DISALLOWANCE U/S 14A. 6. HAVING REGARD TO THE SPECIAL BENCH DECISION OF T HE MUMBAI ITAT IN THE CASE OF ITO VS. DAGA CAPITAL INVESTMENT(P) LTD. (117 ITD 69) THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF THE A.O. 3. WE HEARD DR. I.VIJAYAKUMAR THE LEARNED COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVEN UE AND SHRI SAROJ KUMAR PARIDA THE LEARNED COUNSEL APPEAR ING FOR THE ASSESSEE. - - ITA NO.1005 OF 2011 4 4. THE FIRST ISSUE RAISED BY THE REVENUE IS THAT T HE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DE LETING THE DISALLOWANCE OF PROVISION FOR WARRANTY UNDER NORMAL COMPUTATION THE AMOUNT OF DISALLOWANCE BEING ` 69 37 199/-. 5. THE ASSESSEE HAS MADE A PROVISION FOR WARRANTY LIABILITY FOR A SUM OF ` 69 37 199/-. THE ASSESSEE IS CARRYING ON THE BUSINESS OF MANUFACTURE OF PROCESS CONTROL EQUI PMENTS AND REAL ESTATE. THE TERMS OF SALE IN THE CASE OF PROC ESS CONTROL EQUIPMENTS CONTAIN A CLAUSE CREATING A LIABILITY ON THE ASSESSEE TOWARDS WARRANTY OBLIGATION. IT WAS ON THE BASIS O F THE ABOVE CONTRACT OBLIGATION THAT THE ASSESSEE HAS CREATED T HE PROVISION OF ` 69 37 199/-. THE ASSESSING AUTHORITY DISALLOWED T HE PROVISION FOR WARRANTY AS A DEDUCTION ON THE GROUND THAT THE LIABILITY WAS CONTINGENT IN NATURE. THE COMMISSIONER OF INCOME-T AX(APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE. THIS IS THE FIR ST GRIEVANCE OF THE REVENUE IN THE PRESENT APPEAL. 6. WE CONSIDERED THIS ISSUE. THE ASSESSEE EXTENDS A WARRANTY OF 18/24 MONTHS ON THE PRODUCTS SOLD TO TH E CUSTOMERS. - - ITA NO.1005 OF 2011 5 WHEREVER WARRANTY OBLIGATION IS SATISFIED THE ASSE SSEE REPLACES THE FAILED PRODUCTS DURING THE WARRANTY PERIOD. TH E COMMISSIONER OF INCOME-TAX(APPEALS) HAS EXAMINED TH E EXPENDITURE INCURRED BY THE ASSESSEE IN DISCHARGING ITS WARRANTY OBLIGATION FOR A PERIOD FROM APRIL 2006 TO MARCH 2007 THAT IS THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER APPEAL. THE ASSESSEE HAS SPENT A TOTAL SUM OF ` 76 98 322/- IN THE RELEVANT PREVIOUS YEAR IN MEETING ITS WARRANTY OBLI GATION. THERE WAS A BALANCE OF ` . 51 79 841/- IN THE PROVISION FOR WARRANTY ACCOUNT BROUGHT DOWN FROM THE EARLIER YEARS AND THE SAME WAS DEDUCTED FROM THE EXPENDITURE INCURRED IN THE RELEV ANT PREVIOUS YEAR. THE BALANCE OF ` 25 18 481/- WAS CLAIMED AS DEDUCTION BY THE ASSESSEE TOWARDS ACTUAL EXPENSES. IN ADDITION TO THAT THE ASSESSEE MADE A PROVISION FOR ITS LIABILITY FOR THE SUBSEQUENT PERIOD OF A SUM OF ` 69 37 199/-. ALTOGETHER THE PROVISION SHOWED A CREDIT BALANCE OF ` 94 55 680/- AS ON THE LAST DAY OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER APPEAL. 7. IF THE CLAIM OF WARRANTY EXPENDITURE MADE BY AN ASSESSEE IS FOUND TO BE GENUINE THE ASSESSEE IS EN TITLED TO - - ITA NO.1005 OF 2011 6 CLAIM THE SAME AS DEDUCTION IN COMPUTING ITS TAXABL E INCOME. IN THAT WAY WARRANTY IS A DEDUCTIBLE BUSINESS EXPENDIT URE. THERE IS NO DOUBT ON THIS LEGAL POSITION. 8. THE NEXT STEP IS TO EXAMINE THE FACTS OF THE CA SE. IT IS TO BE SEEN WHETHER THE ASSESSEE IS ACTUALLY BOU ND TO PROVIDE WARRANTY SERVICE TO ITS CUSTOMERS. THEREAFTER IT I S TO BE SEEN WHETHER THE ASSESSEE HAS ACTUALLY INCURRED ANY EXPE NDITURE IN DISCHARGING SUCH OBLIGATION. THE THIRD STEP IS TO E XAMINE WHETHER ANY WARRANTY PERIOD SURVIVES BEYOND THE CLOSE OF TH E RELEVANT PREVIOUS YEAR SO THAT THE ASSESSEE MAY BE CALLED UP ON TO DISCHARGE ITS OBLIGATION EVEN IN THE SUCCEEDING PRE VIOUS YEARS. IF ALL THE ABOVE OPERATING FACTS ARE SATISFIED IT IS NECESSARY TO EXAMINE THE METHOD OF COMPUTING THE QUANTUM TO BE P ROVIDED AS PROVISION FOR WARRANTY. THE QUANTUM MAY BE DETE RMINED BY AN ASSESSEE ON THE BASIS OF ITS PAST EXPERIENCE SUP PORTED BY HISTORICAL DATA. IT IS ALSO POSSIBLE TO PROVIDE FO R SUCH LIABILITIES ON ACCEPTED TECHNICAL METHODS INCLUDING USING STATISTI CAL TOOLS OR ANY OTHER SCIENTIFIC EVALUATION METHOD. - - ITA NO.1005 OF 2011 7 9. IF A CASE DOES NOT FALL IN THE FRAMEWORK OF THE ABOVE INGREDIENTS THEN ONLY THE QUESTION OF DISALLOWANCE OF WARRANTY EXPENDITURE/PROVISION FOR WARRANTY ARISES. 10. IN THE PRESENT CASE IT IS VERY CLEAR THAT THE ASSESSEE HAD INCURRED WARRANTY EXPENDITURE IN THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. IT I S TO BE SEEN THAT THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSE E IN THE RELEVANT PREVIOUS YEAR WAS HIGHER THAN THE PROVISIO N AVAILABLE IN ITS ACCOUNTS AT THE BEGINNING OF THE PREVIOUS YEAR. THIS FACT ESTABLISHES THAT THE WARRANTY OBLIGATION OF THE ASS ESSEE IS NOT A CONTINGENT LIABILITY BUT IN FACT IT IS AN ACTUAL LI ABILITY. ACTUAL LIABILITY IS TO BE PROVIDED IN THE ACCOUNTS IN THE FORM OF A PROVISION. THE ASSESSEE HAS MADE A PROVISION OF ` 69 37 199/- FOR THE IMPUGNED ASSESSMENT YEAR. THIS SHOULD BE VIEWED AG AINST THE ACTUAL EXPENDITURE INCURRED IN THE RELEVANT PREVIOU S YEAR AT ` 76 98 322/-. THIS SIMPLE FIGURE ITSELF MAKES OUT A PRIMA FACIE CASE THAT THE ASSESSEE HAS PROVIDED FOR ACTUAL LIAB ILITY AND THE LIABILITY CANNOT BE TREATED AS CONTINGENT IN NATURE AND ALSO THE QUANTUM PROVIDED BY THE ASSESSEE IS FAIRLY REASONAB LE. - - ITA NO.1005 OF 2011 8 11. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS RI GHTLY DELETED THE DISALLOWANCE MADE BY THE ASSESSING AUTH ORITY. ACCORDINGLY THE GROUND RELATING TO THE ISSUE OF PR OVISION FOR WARRANTY IS DECIDED AGAINST THE REVENUE. 12. THE SECOND ISSUE RAISED BY THE REVENUE IS REGARDING THE DISALLOWANCE OF 2% BY WAY OF EXPENDIT URE FROM EXEMPTED INCOME UNDER THE PROVISIONS OF LAW STATED IN SECTION 14A OF THE ACT. THE ASSESSING AUTHORITY HAS MADE A DISALLOWANCE AT 0.5% OF THE AVERAGE VALUE OF INVEST MENTS ADOPTED ON THE BASIS OF RULE 8D. BUT THE COMMISSIO NER OF INCOME-TAX(APPEALS) HAS RIGHTLY HELD THAT THE OPERA TION OF RULE 8D IS ONLY PROSPECTIVE AND THEREFORE IT WOULD NOT A PPLY TO THE ASSESSMENT YEAR UNDER APPEAL. 13. ALTERNATIVELY THE COMMISSIONER OF INCOME- TAX(APPEALS) HAS MADE AN ESTIMATED DISALLOWANCE AT 2% OF THE EXEMPTED INCOME. WE ARE OF THE CONSIDERED VIEW THA T THE RATE OF 2% ADOPTED BY THE COMMISSIONER OF INCOME-TAX(APP EALS) IS - - ITA NO.1005 OF 2011 9 VERY LOW. TO BE FAIR AND REASONABLE WE FIX THE RA TE OF DISALLOWANCE AT 5%. THIS POINT IS DECIDED PARTLY I N FAVOUR OF THE REVENUE. 14. IN RESULT THIS APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON THURSDAY THE 15 TH OF SEPTEMBER 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI DATED THE 15 TH SEPTEMBER 2011. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.