Eicher Motors Ltd., New Delhi v. DCIT, New Delhi

ITA 2363/DEL/2011 | 2005-2006
Pronouncement Date: 16-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 236320114 RSA 2011
Assessee PAN AAACE3882D
Bench Delhi
Appeal Number ITA 2363/DEL/2011
Duration Of Justice 4 month(s) 6 day(s)
Appellant Eicher Motors Ltd., New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 16-09-2011
Date Of Final Hearing 08-08-2011
Next Hearing Date 08-08-2011
Assessment Year 2005-2006
Appeal Filed On 10-05-2011
Judgment Text
BEFORE THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER AND SHRI B.C. MEENA ACCOUNTANT MEMBER ITA NO.2363/DEL.2011 (ASSESSMENT YEAR : 2005-06) M/S. EICHER MOTORS LIMITED VS. DCIT CIRCLE 11 ( 1) EICHER HOUSE NEW DELHI. 12 COMMERCIAL COMPLEX GREATER KAILASH II NEW DELHI 110 048. (PAN NO.AAACE3882D) ITA NO.2882/DEL.2011 (ASSESSMENT YEAR : 2005-06) DCIT CIRCLE 11 (1) VS. M/S. EICHER MOTORS LIMIT ED NEW DELHI. EICHER HOUSE 12 COMMERCIAL COMPLEX GREATER KAILASH II NEW DELHI 110 048. (PAN NO.AAACE3882D) (APELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA ADVOCATE SHRI GAURAV JAIN & MS. PINKY KAPOOR CAS DEPARTMENT BY : SHRI ROHIT GARG SENIOR DR O R D E R PER B.C. MEENA ACCOUNTANT MEMBER : BOTH THE APPEALS FILED BY THE ASSESSEE AND REVENUE ARE CROSS APPEALS ARISING OUT OF THE ORDER OF THE CIT (APPEAL S)-V NEW DELHI DATED 15.03.2011 FOR THE ASSESSMENT YEAR 2005-06. THE GR OUNDS OF APPEAL TAKEN BY THE ASSESSEE IN ITA NO.2363/DEL/2011ARE AS UNDER :- ITA NOS.2363 & 2882/DEL/2011 2 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) - V NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LAW IN CONFIRMING DISALLOWANCES OF PROVISION FOR WARRANTY OF RS.91.70 LACS. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A)- V NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LAW IN CONFIRMING DISALLOWANCE OF RS.5 00 000/- U/S 14A ON ACCOUNT OF ALLEGED ADMINISTRATIVE EXPENSES RELATING TO DIVIDEND INCOME. 3. THAT THE APPELLANT MAY PLEASE BE PERMITTED TO AM END OR ALTER ANY OF THE FOREGOING GROUNDS OR TO ADDUCE ANY ADDITIONAL GROUND AT OR BEFORE THE TIME OF HEARING. THE GROUNDS OF APPEAL TAKEN BY REVENUE IN ITA NO.28 82/DEL/2011 READ AS UNDER : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT (A) HAS ERRED IN RESTRICTING THE ADDITION T O RS.5 00 000/- OUT OF TOTAL ADDITION OF RS.45 80 999 /- MADE ON ACCOUNT OF DISALLOWANCE U/S 14A OF THE I.T. ACT. 2. THE APPELLANT CRAVES LEAVE TO ADD ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARIN G. 2. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF CO MMERCIAL VEHICLES TRACTORS TWO WHEELERS AND GEARS. THE AS SESSMENT U/S 143(3) WAS COMPLETED ON 12.12.2007. 3. IN GROUND NO.1 OF ASSESSEES APPEAL THE ISSUE I NVOLVED IS AGAINST THE CONFIRMATION OF THE DISALLOWANCE OF PROVISION F OR WARRANTY OF RS.91.70 LACS. THE LEARNED AR SUBMITTED THAT THE A SSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF COMMERCIAL VEHICLES TRACTORS TWO WHEELERS AND GEARS. THESE PRODUCTS ARE SOLD WI TH WARRANTY PERIOD ITA NOS.2363 & 2882/DEL/2011 3 AND DURING THE WARRANTY PERIOD IF ANY COMPONENT BE COMES DEFECTIVE DUE TO ANY MANUFACTURING DEFECT THE COMPONENT IS REPLA CED BY DEALER FREE OF COST. THE WARRANTY CLAIMS ARE FORWARDED TO THE ASS ESSEE FOR EXAMINATION AND IF ANY MANUFACTURING DEFECT IS FOUND THE WARRA NTY CELL ISSUES A CREDIT NOTE TO THE DEALER FOR THE AMOUNT OF WARRANTY CLAIM PASSED. THIS METHOD IS BEING FOLLOWED CONSISTENTLY FROM EARLIER YEARS. ASSESSEE PROVIDES FOR LIABILITY ON ACCOUNT OF WARRANTY IN RESPECT OF THE SALES MADE DURING THE RELEVANT FINANCIAL YEAR AS SUCH LIABILITY ACCRUES D URING THE YEAR OF SALE AND SAME NEEDS TO BE ACCOUNTED FOR IN THE YEAR ITSELF I N VIEW OF FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. DURING THE RELEVA NT PERIOD THE ASSESSEE CREATED A PROVISION OF RS.1424.12 LACS AND DEBITED INTO THE PROFIT & LOSS ACCOUNT AND THE ACTUAL EXPENDITURE INCURRED WAS RS .1056 LACS WAS ALLOWED. THE AO MADE THE DISALLOWANCE OF DIFFERENC E OF RS.368.00 LACS BY HOLDING THAT THE ASSESSEE HAS MADE DOUBLE PROVIS IONS FOR SAME SET OF CONTINGENCIES WHICH HAD RESULTED INTO EXCESSIVE CLA IM AND DEFERMENT OF TAX LIABILITY. THE AO ALSO HELD THAT THE METHOD OF CALCULATION OF WARRANTY MUST BE SCIENTIFIC AND UNDULY EXHAUSTIVE A ND NOT RESULTING INTO SUPPRESSION OF TAXABLE INCOME. THE CIT A) GRANTED PART RELIEF AND CONFIRMED THE ADDITION IN RESPECT OF ADDITIONAL WAR RANTY OF RS.91.70 LACS SUPPOSEDLY FOR ENG. & TRANSMISSION OF LCV. CIT (A) ALSO HELD THAT NO EVIDENCE WAS PRODUCED OF ACTUAL INCIDENCE AND CLAIM S FROM VARIOUS CUSTOMERS AND DEALERS. ASSESSEES CHANGED STAND TH AT THERE IS INCREASING ITA NOS.2363 & 2882/DEL/2011 4 TREND IN CLAIMS FOR THIS ADDITIONAL WARRANTY WAS NO T ACCEPTED BY HOLDING THAT PROVISION FOR EARLIER YEAR WAS CALCULATED @ 0. 43% AND ACCEPTING ASSESSEES CLAIM WILL AMOUNT TO DOUBLE CLAIM. HENC E THERE WAS EXCESSIVE PROVISION RESULTING TO DEFERMENT OF TAX L IABILITY. 4. THE LEARNED AR FURTHER SUBMITTED THAT HON'BLE SU PREME COURT IN THE CASE OF ROTORK CONTROLS INDIA LIMITED 314 ITR 62 HELD THAT THE PROVISION FOR WARRANTY IS ALLOWABLE DEDUCTION WHILE COMPUTING THE TAXABLE INCOME IN ACCORDANCE WITH THE MERCANTILE SY STEM OF ACCOUNTING. HE ALSO PLEADED THAT IN THE AY 2002-03 ITAT HAD AL LOWED THE CLAIM IN ASSESSEES OWN CASE RELYING ON THE AFORESAID HON'BL E SUPREME COURT JUDGMENT. IN THAT CASE HON'BLE ITAT HAS HELD THAT THE PROVISION FOR WARRANTY HAS TO BE ESTIMATED ON SCIENTIFIC METHOD O N THE BASIS OF PAST HISTORY AND ONCE IT HAS BEEN DONE SO THE WARRANTY IS NO LONGER AN UNASCERTAINED LIABILITY HENCE IT SHOULD HAVE BEEN MADE ALLOWABLE AS DEDUCTION. THE LEARNED AR ALSO RELIED ON THE DECIS ION OF HON'BLE DELHI HIGH COURT IN ITA NO.1154 OF 2009 IN THE CASE OF CI T VS. WHIRLPOOL OF INDIA LIMITED WHEREIN THE HON'BLE HIGH COURT HAS DE CIDED AS UNDER :- 19. WE MAY ALSO POINT OUT AT THIS STAGE ITSELF THA T THE SUPREME COURT DISTINGUISHED THE JUDGMENTS IN SAJJAN MILLS (SUPRA) AS WELL AS INDIAN MOLASSES CO. (SUPRA). WE WOULD ALSO LIKE TO REFER TO THE JUDGMENT OF THE SUPREME COURT IN CIT VS. WOODWARD GOVERNOR INDIA P. LTD. 312 ITR 254 WHEREIN IT WAS HELD THAT THE ACCOUNTIN G METHOD FOLLOWED BY THE ASSESSEE CONTINUOUSLY FOR A GIVEN PERIOD OF TIME HAS TO BE PRESUMED TO BE CORRECT TILL THE AD C OMES TO THE CONCLUSION FOR THE REASONS TO BE GIVEN THAT THE EST IMATE DOES NOT REFLECT TO BE TRUE AND CORRECT PROFITS. ITA NOS.2363 & 2882/DEL/2011 5 20. THE LEGAL PRINCIPLE DELINEATED IN THE AFORESAID JUDGMENT WOULD CLEARLY DEMONSTRATE THAT WHENEVER THERE IS A WARRAN TY CLAUSE IN THE BULK PRODUCT SOLD BY THE COMPANY/ASSESSEE TO ITS CUSTOME RS WARRANTY PROVISION CAN BE MADE AND IT WOULD NOT BE TREATED AS CONTINGE NT LIABILITY. THERE IS NO QUARREL TO THIS PROPOSITION AND IN FACT IN THIS VER Y CASE THE ASSESSEE HAS BEEN MAKING THE PROVISIONS FOR WARRANTY EVERY YEAR WHICH WAS ACCEPTED BY THE AD. THE QUESTION THAT REALLY CALLS FOR AN ANSWER IS AS TO WHETHER SUCH A PROVISION WHICH HAS ALREADY BEEN MADE IN THE PREVIO US YEARS CAN BE REVISED LATER ON IN A PARTICULAR YEAR AS SOUGHT TO BE DONE BY THE ASSESSEE IN THE PRESENT CASE. GOING BY THE REASONS WHICH JUSTIFIES MAKING OF SUCH A PROVISION AND TREATING THEM AS EXPENDITURE UNDER SECTION 37 O F THE ACT MORE PARTICULARLY WHEN IT FULFILLS THE ACCRUAL CONCEPT A S WELL THE MATCHING CONCEPT WE SEE NO REASON AS TO WHY THE ASSESSEE COULD BE PR ECLUDED FROM REVISING THIS PROVISION AFTER TAKING INTO CONSIDERATION THAT WARRANTY PERIOD OF THE GOODS SOLD UNDER WARRANTY WAS EXISTING PROVISION AL READY PROVIDED IN A PARTICULAR IS FALLING SHORT OF THE EXPECTED CLAIMS THAT MAY BE RECEIVED. IT IS HOWEVER TO BE KEPT IN MIND THAT SUCH A PROVISION I S BASED ON SCIENTIFIC STUDY AND ACTUARIAL BASIS THAT IS PRECISELY DONE BY THE A SSESSEE IN THE INSTANT CASE AND THEREFORE WE SEE NO REASON TO DIFFER WITH THE VIEW TAKEN BY THE TRIBUNAL IN THE IMPUGNED ORDER. WE THEREFORE ANSWER THIS Q UESTION NO. '(A)' IN THE AFFIRMATIVE. HE FURTHER PLEADED THAT ASSESSEE IS ENGAGED IN THE SALE OF BULK PRODUCT TO ITS CUSTOMERS HENCE THE WARRANTY PROVISIONS ARE MU ST AND IT CANNOT BE TREATED AS CONTINGENT LIABILITY AS THE PROVISIONS A RE BASED ON SCIENTIFIC BASIS PLEADED TO ALLOW THE CLAIM. 5. ON THE OTHER HAND LEARNED DR SUBMITTED THAT THE CIT (A) HAS CONSIDERED ALL THE DECISIONS RELIED UPON BY THE ASS ESSEE AND AFTER CONSIDERING ALL THE DECISIONS HE HAS PASSED THE OR DER. THERE IS NO QUARREL IN ACCEPTING THE PROPOSITION OF LAW AS LAID OUT BY VARIOUS HIGH COURTS AND ALSO HON'BLE SUPREME COURT THAT PROVISION FOR WARRA NTY BASED ON SCIENTIFIC STUDY AND ACTUARIAL BASIS IS ALLOWABLE I N MERCANTILE METHOD OF ACCOUNTING. CIT (A) HAD ALLOWED THE CLAIM UPTO THA T LEVEL. BUT THIS ADDITIONAL WARRANTY CLAIM ON LCV WAS MADE FIRST TIM E AND IT IS NOT BASED ON PAST HISTORY OF CASE. THIS WARRANTY CLAIM IS NO T COVERED BY THE ITA NOS.2363 & 2882/DEL/2011 6 DECISION OF ITAT IN ASSESSEES CASE IN EARLIER YEAR S AS STATED BY LD. AR. SUCH CLAIM HAD BEEN MADE FIRST TIME IN THIS YEAR. HE ALSO SUBMITTED THAT THE ASSESSEE HAD FAILED TO FILE ANY EVIDENCE WHICH COULD PROVE THAT ACTUAL INSTANCES OF CLAIM FROM CUSTOMERS AND DEALERS HAVE BEEN INCREASED PRIOR TO ENHANCE THE PROVISION FOR ADDITIONAL WARRANTY. THE ASSESSEES CLAIM THAT ADDITIONAL PROVISION WAS MADE FOR INCREASING T REND IN THE CLAIM IS NOT BASED ON ANY SCIENTIFIC STUDY AND ACTUARIAL BASIS. PAST HISTORY IN THIS REGARD ALSO HAD NO ROLE FOR THIS CLAIM. THE PROVI SION FOR WARRANTY HAS BEEN ALREADY CALCULATED @ 0.43% WHICH IS BASED ON P AST HISTORY OF CASE THEREFORE ALLOWING THE PROVISION FOR ADDITIONAL WA RRANTY ON LCV (ENGINE AND TRANS) FOR EARLIER YEARS SHALL AMOUNT TO BE THE DOUBLE CLAIM. HE PLEADED TO SUSTAIN THE ORDER OF CIT (A) ON THIS ISS UE. 5. WE HAVE HEARD BOTH THE SIDES AND ALSO CONSIDERED THE FACTS OF THE CASE. THE RELEVANT PART OF CIT (A) ORDER IS AS UND ER :- 3.13 I HAVE CONSIDERED THE FACTS OF THE CASE ASSES SMENT ORDER OF THE ASSESSING OFFICER AND SUBMISSIONS MADE BY THE A SSESSEE. THE SUPREME COURT IN THE CASE OF ROTORK CONTROLS (SUPRA ) AFTER CONSIDERING THE VARIOUS EARLIER DECISIONS RENDERED IN THE CONTEXT OF ACCRUAL OF LIABILITY AND ALLOWABILITY THEREOF UNDER SECTION 37 OF THE ACT HELD THAT PROVISION FOR WARRANTY MADE IN RESPEC T OF SALES OCCURRED DURING THE YEAR WHICH MAY NEED TO BE DISC HARGED ON A FUTURE DATE IS ALLOWABLE DEDUCTION IN THE YEAR OF SALE ITSELF PROVIDED A RELIABLE ESTIMATE OF THE SAME CAN BE MAD E IN THAT YEAR. THE SUPREME COURT ALSO NOTED THAT WARRANTY PROVISIO N SHOULD ORDINARILY BE BASED ON THE PAST EXPERIENCE OF A COM PANY. 3.14 IN VIEW OF THE AFORESAID DECISION OF THE SUPRE ME COURT THERE IS NO DOUBT THAT PROVISION FOR WARRANTY WOULD BE AN ALLOWABLE DEDUCTION. THE ONLY ISSUE THAT NEEDS CONSIDERATION IS WHETHER THE ITA NOS.2363 & 2882/DEL/2011 7 METHOD OF CREATING PROVISION FOLLOWED BY THE ASSESS EE IS ACCEPTABLE OR CAN BE SAID TO BE RATIONAL OR SCIENTIFIC. THE AS SESSEE IT IS NOTED HAS BEEN FOLLOWING THE SAME METHOD OF CALCULATING T HE PROVISION FOR WARRANTY SINCE PAST SEVERAL YEARS WHICH IS BAS ED ON ACTUAL WARRANTY CLAIMS SETTLED BY THE ASSESSEE IN THE EARL IER YEARS. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE HAS ACCOR DINGLY CALCULATED NORMAL PROVISION AT 0.43% BEING LAST THREE YEAR AV ERAGE OF ACTUAL WARRANTY CLAIMS TO ACTUAL DOMESTIC AND EXPORT SALES MADE DURING THOSE YEARS RESPECTIVELY ON SALES MADE DURING THE RELEVANT YEAR. THE FOLLOWING CHART SHOWING THE CALCULATION WAS SUB MITTED BEFORE THE A.O AS UNDER : RS.IN LACS AVERAGE WARRANT COST 0.43% SALES FY 2004-05 2 21 158 EXPECTED NORMAL WARRANTY COST @ 0.43% 951 ADDITIONAL WARRANTY (ENG.+ TRANS) ON LCV FOR CURRENT YEAR 285.69 PROVISION FOR HCV 95.73 ADDITIONAL WARRANT (ENG + TRANS) ON LCV FOR EARLIER YEARS 91.70 TOTAL 1424.12 COMPUTATION OF WARRANTY CLAIMS AS A PERCENTAGE OF SALES FOR LAST THREE YEARS HAS BEEN WORKED AS UNDER:- RS.IN LACS PARTICULARS FY 2001-02 FY 2002-03 FY 2003-04 TOTAL SALES- DOMESTIC 43847.98 59724.68 79397.12 182969.78 SALES- EXPORT 5588.82 5264.13 5461.19 16314.14 TOTAL 49436.80 64988.81 84858.31 199283.92 WARRANTY CLAIMS ON DOMESTIC SALES WARRANTY CLAIMS ON EXPORT SALES 117.73 68.72 229.75 39.69 375.80 36.67 723.28 145.08 TOTAL WARRANTY 868.08 WARRANTY CLAIMS AS A PERCENTAGE OF SALES 0.43% ITA NOS.2363 & 2882/DEL/2011 8 3.15 THE PROVISION MADE FOR ADDITIONAL WARRANTY PRO VIDED ON SPECIAL COMPONENTS OF LIGHT COMMERCIAL VEHICLES HAS ALSO BEEN PROVIDED ON THE BASIS OF AVERAGE PERCENTAGE OF ACTU AL WARRANTY CLAIMS SETTLED ON THESE TWO PARTS IN THE EARLIER YE ARS WHICH HAS BEEN APPLIED TO SALES OF THE LCVS VEHICLE SOLD DURI NG THE YEAR. SIMILARLY THE ADDITIONAL ONE YEAR WARRANTY ON HCVS HAS BEEN COMPUTED ON THE BASIS OF ACTUAL AVERAGE CLAIM OF WA RRANTY MADE IN THE EARLIER YEARS WHICH HAS BEEN APPLIED TO THE PE RCENTAGE OF HEAVY COMMERCIAL VEHICLES SOLD DURING THE RELEVANT YEAR. THE AFORESAID METHOD OF COMPUTING WARRANTY HAS BEEN UPHELD BY THE TRIBUNAL IN THE ASSESSMENT YEAR 2002-03 AND BY MY PREDECESSOR I N THE ASSESSMENT YEAR 2003-04. 3.16 FROM THE CHART EXTRACTED ABOVE IT IS SEEN THA T ADDITIONAL WARRANTY HAS BEEN CLAIMED (ENG+ TRAN) ON LCV FOR EA RLIER YEARS OF RS.91.70. THIS CLAIM HAS BEEN MADE FOR THE FIRST T IME THIS YEAR AND IS NOT COVERED BY THE DECISION OF CIT(A) NOR THE HO N'BLE ITAT. IT WAS SUBMITTED BEFORE THE A.O THAT THIS ADDITIONAL W ARRANTY WAS CLAIMED BECAUSE OF ACTUAL PROBLEMS FACED DURING THE YEAR BUT NO EVIDENCES OF SUCH ACTUAL INCIDENCES OF SUCH PROBLEM S COULD BE FILED BEFORE THE A.O NOR WAS THERE ANY MENTION OF SUCH RE MARKS IN THE AUDIT REPORT. BEFORE ME IT WAS SUBMITTED THAT THE A DDITIONAL WARRANTY OF 91.70 WAS MADE IN THIS A.Y ON ACCOUNT O F INCREASING TREND IN ACTUAL SETTLEMENT OF WARRANTY CLAIMS AS OB SERVED IN THE PAST YEARS. CONSIDERING THE INCREASING TREND THE AP PELLANT ESTIMATED THE NORMAL PROVISION COST IN RESPECT OF SALES RENDE RED DURING THE YEAR AT 0.43% AS AGAINST 0.39% ARRIVED AT ON THE BA SIS OF AVERAGE CLAIMS SETTLED IN LAST THREE YEARS. THE APPELLANT A LSO SUBMITTED THAT THIS WAS EXPLAINED TO THE A.O AND REFERRED TO WRITT EN SUBMISSION DATED 5/12/07 WHICH WAS SUBMITTED BEFORE ME IN PAPE R BOOK PAGE NO 18. ON GOING THROUGH THIS SUBMISSION I FIND THAT THE CLAIM OF THE APPELLANT IS NOT CORRECT AND IN FACT THE ASSESSEE H AS SUBMITTED THAT THE ADD I. WARRANTY OF RS 91.70 WAS PROVIDED ON ENG INE AND TRANSMISSION OF LCV AND THE SAME WAS PROVIDED TO CO VER FOR PERIOD PRECEDING TO THE CURRENT F.Y DURING WHICH TH E CO HAD OBSERVED THE FAILURES AND PROBLEMS AND THESE ARE TH E CLAIMS RECEIVED FROM VARIOUS CUSTOMERS AND DEALERSHIPS TOW ARDS CLAIMS ON ENGINE AND TRANSMISSION THUS ABOVE AMOUNT OF RS 91 .70 WAS PROVIDED DURING THE YEAR. THEREFORE THE APPELLANTS CHANGE IN STAND THAT THIS ADDITIONAL WARRANTY OF RS 91. 70 IS ON BO TH LCV AND HCV ON ACCOUNT OF THE % BEING INCREASED FROM .39% TO .4 3% IS ITA NOS.2363 & 2882/DEL/2011 9 UNACCEPTABLE AND WITHOUT ANY BASIS. FROM THE CHART EXTRACTED ABOVE IT IS SEEN THAT THE PROVISION FOR WARRANTY HAS ALRE ADY BEEN PROVIDED AT .43% FOR ALL TYPES OF VEHICLE BASED ON THE AVERA GE OF PAST THREE YEARS AS BELOW ; A) NORMAL WARRANTY RS.951 B) EXTENDED WARRANTY ON ENGINE AND TRANSMISSION RS. 285.69. C) EXTENDED WARRANTY FOR 1 YEAR ON HCV RS.95.70 3.17 THE APPELLANT HAS CREATED PROVISION ON THE BAS IS OF ACTUAL WARRANTY CLAIMS SETTLED IN THE EARLIER YEARS WHICH ARE REQUIRED TO BE DISCHARGED IN FUTURE IN RESPECT OF SALES MADE DU RING THE YEAR IN ACCORDANCE WITH THE TERMS OF WARRANTY PROVIDED TO T HE CUSTOMERS. THERE IS NOTHING WRONG IN CALCULATING THE PROVISION FOR WARRANTY ON THE AFORESAID BASIS. THE SUPREME COURT IN THE CASE OF ROTORK CONTROLS (SUPRA) HAS ALSO OBSERVED THAT PROVISION F OR WARRANTY ON THE BASIS OF ACTUAL HISTORICAL DATA OF SUCH CLAIMS IN EARLIER YEAR IS A REASONABLE BASIS FOR MAKING PROVISION. THE AFORESAI D METHOD OF CREATING PROVISION FOR WARRANTIES INCLUDING ADDITIO NAL PROVISIONS FOR EXTENDED PERIOD OF WARRANTIES OR WARRANTY PROVI DED FOR REPLACING OF CERTAIN SPECIFIC PARTS IS IN LINE WIT H THE PROVISION FOR WARRANTY CREATED IN THE EARLIER YEAR 2002-03 WHICH HAS BEEN UPHELD BY MY PREDECESSOR AS WELL AS HON'BLE ITAT. I N VIEW OF THE AFORESAID DISCUSSION I HOLD THAT THE TOTAL AMOUNT OF PROVISION FOR WARRANTY AMOUNTING TO RS.1332.42 ARE ALLOWABLE DEDU CTION. 3.18 HOWEVER AS DISCUSSED ABOVE I AM UNABLE TO ACC EPT THE STAND OF THE APPELLANT FOR THE ADDITIONAL WARRANTY TO THE EXTENT OF RS 91.70 SUPPOSEDLY FOR ENG AND TRANSMISSION FOR LCV. WHEN NO EVIDENCE COULD BE PRODUCED OF ACTUAL INCIDENCES AND CLAIMS FROM VARIOUS CUSTOMERS AND DEALERSHIP IT HAS CHANGED IT S STAND AND ARGUED THAT THE ADDITIONAL PROVISION WAS ON ACCOUNT OF INCREASING TREND IN CLAIM AND HENCE PROVISION WAS INCREASED FR OM .39% TO .43%.FROM THE CHART EXTRACTED AND REFERRED TO ABOVE AND FOUND IN PAGE 2 OF ASSESSMENT ORDER THE PROVISION FOR WARRAN TY CALCULATED AT RS 1424.12 (INCLUDING ADDLL WARRANTY PROVISION ON L CV( ENGINE AND TRANS) FOR EARLIER YEARS) HAS ALREADY BEEN CALC ULATED AT .43%.THEREFORE IF THE APPELLANTS CLAIM IS ACCEPTED IT WILL AMOUNT TO ALLOWING THE DOUBLE CLAIM OF THE APPELLANT. ITA NOS.2363 & 2882/DEL/2011 10 3.19 ACCORDINGLY THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER IS PARTLY DELETED AND THE AMOUNT TO THE EXTENT OF R S 91.70 IS CONFIRMED. THEREFORE THE APPELLANT PARTLY SUCCEEDS IN THIS GROUND. THUS THE CIT (A) HAS GRANTED THE PART RELIEF. THE CIT (A) HAS ACCEPTED THE SETTLED LEGAL POSITION. PROVISIONS FOR WARRANT Y BASED ON SCIENTIFIC STUDY AND CALCULATED ON THE BASIS OF ACTUARIAL AND PAST HISTORY OF CASE IS ALLOWABLE. IN ALL CASES RELIED UPON BY LEARNED AR IT HAS BEEN HELD THAT PROVISION FOR WARRANTY IS ALLOWABLE ONLY WHEN IT IS BASED ON SCIENTIFIC STUDY BASIS AND PAST HISTORY OF CASE. PROVISION OF WARRANTY IS A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF OBLIGATION. AS STATED ABOVE ASSESSEE HAS BEEN GRANTED PART RELIEF BY CIT (A) ON THE ESTIMATE FOR PROVISION BASED ON PAST HISTORY. THE M ETHOD OF ACCOUNTING FOR SUCH LIABILITY MUST BE SCIENTIFIC. THE TREND F OR INCREASE IN CLAIMS MUST BE BASED ON REALITY. THE TREND MUST BE BASED ON AC TUAL INCIDENCES. SINCE ASSESSEE HAS FAILED TO SHOW OR ESTABLISH THAT CLAIM HAD BEEN INCREASED. THEREFORE ADDITIONAL WARRANTY OF RS.91.70 LACS SUP POSEDLY FOR ENG. & TRANSMISSION FOR LCV COULD NOT BE ALLOWED. THE ADD ITIONAL CLAIM FOR PROVISION OF WARRANTY WHICH IS NOT BASED ON THE PAS T HISTORY OF CASE IS UNJUSTIFIED AND CONTINGENT. THE ASSESSEES CLAIM T HAT THERE IS INCREASING TREND IN THE WARRANTY HAS BEEN TAKEN CARE OF BY THE PROVISION FOR WARRANTY WHICH IS BASED ON PAST HISTORY. IN ABSENCE OF ANY FURTHER ASCERTAINABLE LIABILITY BASED ON SCIENTIFIC STUDY AND RELIABLE ES TIMATE CANNOT BE AN ITA NOS.2363 & 2882/DEL/2011 11 ALLOWABLE PROVISION FOR WARRANTY IN VIEW OF THE DEC ISION OF HON'BLE SUPREME COURT AND ALSO IN VIEW OF THE DECISION OF H ON'BLE DELHI HIGH COURT IN THE CASE OF WHIRLPOOL OF INDIA LIMITED (CI TED SUPRA) WHEREIN THE HON'BLE COURT HAS CLEARLY HELD THAT SUCH PROVISION SHOULD BE BASED ON SCIENTIFIC STUDY AND ACTUARIAL BASIS. IN VIEW OF T HESE FACTS WE SEE NO REASON TO DEVIATE FROM THE DECISION TAKEN BY THE CI T (A) ON THIS ISSUE. THIS GROUND OF ASSESSEES APPEAL IS DISMISSED. 6. IN THE GROUND NO.2 OF ASSESSEES APPEAL AND IN G ROUND NO.1 OF REVENUES APPEAL THE ISSUE INVOLVED IS ALLOCATION OF EXPENSES OUT OF INTEREST EXPENSES AND ADMINISTRATIVE EXPENSES PERTA INING TO DIVIDEND EXEMPTED INCOME BY INVOLVING THE PROVISIONS OF SECT ION14A OF THE INCOME-TAX ACT 1961. 7. THE AO DISALLOWED RS.45 80 999/- U/S 14A. THE C IT (A) RESTRICTED THE DISALLOWANCE TO RS.5 LACS. THE CIT (A) GRANTED PART RELIEF BY HOLDING THAT THE ASSESSEE IS NOT MAINTAINING SEP ARATE BOOKS OF ACCOUNT IN RESPECT OF THE FUNDS UTILIZED FOR EARNING THE EX EMPTED INCOME. GENERAL FUNDS OF COMPANY ON WHICH INTEREST PAID ARE UTILIZE D FOR INVESTMENT FROM WHICH EXEMPTED INCOME IS EARNED. THE DECISION OF I NVESTMENT IS TAKEN AT HIGHEST LEVEL. THE SUSTENANCE OF PART OF DISALLOWA NCE WAS BASED ON AN ESTIMATE. LEARNED AR SUBMITTED THAT THE MUTUAL FUN DS WERE PURCHASED AND SOLD DURING THE YEAR AND THE LOAN AMOUNT HAS BE EN REDUCED IN COMPARISON TO THE PAST YEAR. THE INVESTMENT AND TH E MUTUAL FUNDS IS NOT ITA NOS.2363 & 2882/DEL/2011 12 THE MAIN BUSINESS OF THE ASSESSEE AND ONLY SURPLUS FUNDS ARE INVESTED IN THESE FUNDS. THERE IS NO NEXUS BETWEEN BORROWED FU NDS AND INVESTMENTS HENCE NOTHING SHOULD BE DISALLOWED AND HE RELIED ON THE DECISION OF HON'BLE HIGH COURT OF KERALA IN ITA NO.467 OF 2009 IN THE CASE OF CIT VS. THE CATHOLIC SYRIAN BANK LIMITED REPORTED IN 31 3 ITR 303. LD. DR PLEADED THAT IT IS ON ASSESSEE TO ESTABLISH THAT NO BORROWED FUND WAS UTILIZED FOR INVESTMENT IN ASSETS WHICH GENERATED T AX FREE INCOME. SINCE ASSESSEE IS NOT ABLE TO SHOW THAT NO BORROWED FUND WAS UTILIZED THE AO HAD CORRECTLY WORKED OUT THE INTEREST SPENT ON THE EARNING OF TAX FREE INCOME. HE PLEADED THAT THE ORDER OF CIT (A) MAY B E SET ASIDE AND RESTORED THE ORDER. 8. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. THE CIT (A) HAS REDUCED THE DISALLOWANCE ON ESTIMATE BASIS TREATING THE SAME AS FAIR AND REASONABLE. WE HAVE CONSIDERED ASSESSEES RELIANCE ON CATHOLIC SYRIAN BANK LTD CITED SUPRA IN WHICH THE HIGH COURT HELD VIDE PARA 5 AS UNDER:- 5. WHAT WE HAVE STATED ABOVE IS ONLY A REASONABLE SUGGESTION FOR THE ASSESSING OFFICER TO ADOPT WHICH ARISES ONL Y IF ASSESSEE IS NOT ABLE TO ESTABLISH MORE ACCURATELY THE INTEREST SPEN T ON EARNING TAX FREE INCOME. WE THEREFORE LEAVE THIS MATTER TO BE DECIDED BY THE ASSESSING OFFICER WITH REFERENCE TO THE ACCOUNTS OF THE ASSESSEE- BANKS FOR EACH YEAR. SINCE WE FIND THAT THE RATIONA L ADOPTED BY THE ASSESSING OFFICER TO ESTIMATE THE EXPENDITURE FOR T HE PURPOSE OF DISALLOWANCE UNDER SECTION 14A IS NOT TENABLE WE F EEL THE MATTER SHOULD BE RESTORED TO THE ASSESSING OFFICER FOR MAK ING DISALLOWANCE UNDER SECTION 14A BY REASONABLY ESTIMATING AS NEARL Y AS POSSIBLE THE EXPENDITURE' INCURRED FOR EARNING THE TAX FREE INCO ME. THIS SHOULD BE DONE AFTER GIVING OPPORTUNITY TO THE ASSESSEE-BANKS TO SUGGEST THEIR OWN FORMULA WITH REFERENCE TO ACCOUNTS FOR THE PURP OSE OF ARRIVING AT ITA NOS.2363 & 2882/DEL/2011 13 THE ACTUAL AMOUNT OR NEAR ACTUAL AMOUNT. THE DISALL OWANCE ON ESTIMATED BASIS HAS TO BE DONE AS ABOVE UNTIL RULE 8D WAS FRAMED AND THEREAFTER IT IS FOR THE ASSESSING OFFICER TO M AKE DISALLOWANCE BY FOLLOWING SUB-SECTION (2) OF SECTION 14A AND RULE 8 D OF THE INCOME TAX RULES. THE HON'BLE MUMBAI HIGH COURTS DECISION IN THE CAS E OF GODREJ & BOYCE VS. DCIT 328 ITR 81 (MUM.) HAD OBSERVED AS UNDER :- RULE 8D R.W. S. 14A (2) IS NOT ARBITRARY OR UNREASONABLE BUT CAN BE APPLIED ONLY IF ASSESSEES METHOD NOT SATISFACTORY. RULE 8D IS NOT RETROSPECTI VE AND APPLIES FROM AY 2008-09. FOR EARLIER YEARS DISALLOWANCE HAS TO BE WORKED OUT ON REASONABLE BASIS U/S 14A (1) IN AY 2002-03 THE ASSESSEE CLAIMED THAT NO DISALLO WANCE U/S 14A IN RESPECT OF THE TAX-FREE DIVIDEND EARNED BY IT COULD BE MADE AS IT HAD NOT INCURRED ANY EXPENDITUR E TO EARN THE DIVIDEND. THE AO REJECTED THE CLAIM AND MA DE A DISALLOWANCE U/S 14A. THIS WAS DELETED BY THE CIT ( A). ON APPEAL BY THE DEPARTMENT THE TRIBUNAL FOLLOWED THE JUDGEMENT OF THE SPECIAL BENCH IN DAGA CAPITAL 117 ITD 169 (MUM) (WHERE IT HAD BEEN HELD THAT S. 14A(2) & (3) & RULE 8D ARE PROCEDURAL IN NATURE AND HAVE RETROSPEC TIVE EFFECT) AND REMANDED THE MATTER TO THE AO FOR RE-CO MPUTING THE DISALLOWANCE. THE ASSESSEE CHALLENGED THE DECIS ION OF THE TRIBUNAL. HELD: (1) THE ARGUMENT THAT DIVIDEND ON SHARES / UNITS IS NOT TAX- FREE IN VIEW OF THE DIVIDEND-DISTRIBUTION TAX PAID BY THE PAYER U/S 115-O IS NOT ACCEPTABLE BECAUSE SUCH TAX IS NOT PAID ON BEHALF OF THE SHAREHOLDER BUT IS PAID IN RE SPECT OF THE PAYERS OWN LIABILITY; (2) S. 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARD S TAX- FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATE S AN ITA NOS.2363 & 2882/DEL/2011 14 IMPLICIT THEORY OF APPORTIONMENT OF EXPENDITURE BET WEEN TAXABLE AND NON-TAXABLE INCOME. ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLISHED WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME A DISALLOWANCE U/S 14A HAS TO BE EFFECTED ; (3) THE ARGUMENT THAT A LITERAL INTERPRETATION OF S . 14A LEADS TO ABSURD CONSEQUENCES IS NOT ACCEPTABLE. S 14A IS FOUNDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME I.E GROSS INCOME MINU S EXPENDITURE; (4) THE ARGUMENT THAT THE METHOD IN RULE 8D R.W.S 1 4A (2) FOR DETERMINING EXPENDITURE RELATING TO THE TAX-FRE E INCOME IS ARBITRARY AND VIOLATIVE OF ARTICLE 14 IS NOT ACC EPTABLE BECAUSE THERE IS AN ADEQUATE SAFEGUARD BEFORE RULE 8D CAN BE INVOKED. THE AO CANNOT IPSO FACTO APPLY RULE 8D BUT CAN DO SO ONLY WHERE HE RECORDS SATISFACTION ON AN OBJECTIVE BASIS THAT THE ASSESSEE IS UNABLE TO ESTA BLISH THE CORRECTNESS OF ITS CLAIM . ALSO A UNIFORM METHOD PRESCRIBED TO RESOLVE DISPUTES BETWEEN ASSESSEES AN D THE DEPARTMENT CANNOT BE SAID TO BE ARBITRARY OR OPPRES SIVE. THERE IS A RATIONALE IN RULE 8D AND ITS METHOD IS FAIR & REASONABLE. IT CANNOT BE SAID THAT THERE IS MADNE SS IN THE METHOD OF RULE 8D SO AS TO RENDER IT UNCONSTITUTION AL; (5) RULE 8D INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATING EXPENDITURE RELATABLE TO TAX-FREE INCOME . IT APPLIES W.E.F AY 2008-09 ; (6) FOR THE AYS WHERE RULE 8D DOES NOT APPLY THE A O WILL HAVE TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPEN DITURE BY A REASONABLE METHOD HAVING REGARD TO ALL FACTS AND CIRCUMSTANCES; ITA NOS.2363 & 2882/DEL/2011 15 (7) ON FACTS THOUGH IN THE EARLIER YEARS THE TRIB UNAL HAD HELD THAT THE TAX-FREE INVESTMENTS HAD BEEN MADE OU T OF THE ASSESSEES OWN FUNDS THIS DID NOT MEAN THAT THERE WAS NO EXPENDITURE INCURRED TO EARN TAX-FREE INCOME. EVEN THOUGH RULE 8D DID NOT APPLY TO AY 02-03 THE AO HAD TO CONSIDER WHETHER DISALLOWANCE COULD BE MADE U/S 14A (1) . ALSO THE PRINCIPLE OF CONSISTENCY WOULD NOT APPL Y AS S. 14A HAD INTRODUCED A MATERIAL CHANGE IN THE LAW. CONSIDERING THE FACTS OF THE CASE AND THE ABOVE DEC ISIONS OF HON'BLE HIGH COURT WE FIND IT APPROPRIATE TO RESTORE THE ISSUE TO THE FILE OF ASSESSING OFFICER TO DECIDE DE NOVO THE DISALLOWANCES U/S 14A . ASSESSEE SHALL BE PROVIDED AN OPPORTUNITY WHILE DECIDING THE ISSUE. GROUND NO.2 OF ASSESSEES APPEAL AND GROUND NO.1 OF REVENUES APPE AL ARE ALLOWED FOR STATISTICAL PURPOSES. 9. GROUND NO.3 OF ASSESSEES APPEAL AND GROUND NO.2 OF REVENUES APPEAL ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE AND R EVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THE 16 TH DAY OF SEPTEMBER 2011. SD/- SD/- (RAJPAL YADAV) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : THE 16 TH DAY OF SEPTEMBER 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT ITA NOS.2363 & 2882/DEL/2011 16 3.CIT 4.CIT (A)-V NEW DELHI. 5.CIT(ITAT) NEW DELHI. AR/ITAT