DCIT 1(1), MUMBAI v. DICKINSON FOWLER P. LTD, MUMBAI

ITA 2730/MUM/2010 | 2006-2007
Pronouncement Date: 16-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 273019914 RSA 2010
Assessee PAN AAACD6234A
Bench Mumbai
Appeal Number ITA 2730/MUM/2010
Duration Of Justice 1 year(s) 5 month(s) 7 day(s)
Appellant DCIT 1(1), MUMBAI
Respondent DICKINSON FOWLER P. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 16-09-2011
Date Of Final Hearing 13-09-2011
Next Hearing Date 13-09-2011
Assessment Year 2006-2007
Appeal Filed On 08-04-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI T.R.SOOD (A. M) ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) THE DCIT 19(1) ROOM NO.579 AAYKAR BHAVAN MUMBAI 20. (APPELLANT) VS. M/S.DICKINSON FOWLER PVT. LTD. RAJMAHAL BUILDING 4 TH FLOOR 84 VEER NARIMAN ROAD MUMBAI 24. PAN:AAACD 6234A (RESPONDENT) APPELLANT BY : SHRI C.G.K.NAIR RESPONDENT BY : NONE DATE OF HEARING : 13/09/2011 DATE OF PRONOUNCEMENT : /09/2011 ORDER PER N.V.VASUDEVAN J.M ITA NO.2729/M/2010 IS AN APPEAL BY THE REVENUE A GAINST THE ORDER DATED 5/11/2009 OF CIT(A)-1 MUMBAI RELATING TO ASS ESSMENT YEAR 2004-05. ITA NO.2730/M/2010 IS ALSO AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 5/11/2009 OF CIT(A) MUMBAI RELATING TO ASSES SMENT YEAR 2006-07. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN B OTH THESE APPEALS ARE IDENTICAL AND THEY READ AS FOLLOWS: GROUND ITA NO.2729/M/2010: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F RS.53 31 556/- BEING WARRANTY PROVISION WITHOUT APPRECIATING THE F ACT THAT THE PRINCIPLE LAID DOWN BY THE APEX COURT IN THE CASE O F ROTORK CONTROLS INDIA PVT. LTD. REPORTED IN 314 ITR 62 RELATED TO RELIABLE ESTIMATE OF THE PROVISION IS NOT SATISFIED BY THE ASSESSEE. ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) 2 GROUND ITA NO.2730/M/2010: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F RS.13 92 611/- BEING WARRANTY PROVISION WITHOUT APPRECIATING THE F ACT THAT THE PRINCIPLE LAID DOWN BY THE APEX COURT IN THE CASE O F ROTORK CONTROLS INDIA PVT. LTD. REPORTED IN 314 ITR 62 RELATED TO RELIABLE ESTIMATE OF THE PROVISION IS NOT SATISFIED BY THE ASSESSEE. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF TOBACCO PROCESSING MACHINERY. THE AO NOTICED IN THE COURSE OF ASSESSMENT PROCEEDINGS OF THE ASSESSEE FOR ASSESSME NT YEAR 2004-05 THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 60 15 004 /- IN THE P&L ACCOUNT UNDER THE HEAD PROVISIONS FOR WARRANTY. IN THE C OMPUTATION OF INCOME ASSESSEE HAD ADDED BACK SUM OF RS. 6 83 488/- ON AC COUNT OF PROVISION FOR WARRANTY. THUS IN EFFECT THE ASSESSEE HAD CLAIMED A SUM OF RS.53 31 556/- AS EXPENDITURE UNDER THE HEAD PROVISION FOR WARRANT Y. ACCORDING TO THE AO A MERE PROVISION IN THE BOOKS OF ACCOUNTS IS NOT AN ALLOWABLE EXPENDITURE AND ONLY EXPENDITURE WHICH HAVE BEEN ACTUALLY INCUR RED WOULD BE ALLOWABLE AS A DEDUCTION UNDER SECTION 37(1) OF THE ACT. TH E AO THEREFORE DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION. 4. BEFORE CIT(A) THE ASSESSEE RELIED ON THE DECISIO N OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS V S. CIT 245 ITR 428(SC) WHEREIN IT WAS HELD THAT PROVISION FOR WARRANTY IF MADE ON A SCIENTIFIC BASIS IS ALLOWABLE AS A DEDUCTION. THE HONBLE SUPREME C OURT HAS LAID DOWN THAT IF THE INCURRING OF THE LIABILITY IS CERTAIN THEN N OTWITHSTANDING THE FACT THAT THE LIABILITY USED TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE THE SAME IS TO BE ALLOWED AS A DEDUCTION. THE ASSESSEE FURTHER RELIED ON THE DECISIONS HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. VIN ITEC CORPORATION PVT. LTD.146 TAXAMAN 313 AND CIT VS. MODI OLIVITTI LTD. 84 TTJ 1038 (DEL)(ITAT). ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) 3 THE ASSESSEE ALSO RELIED ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. VS. CIT 31 4 ITR 62 (SC) WHEREIN IT WAS HELD AS FOLLOWS: THEREFORE THE WARRANTY BECOMES AN INTEGRAL PART O F THE SALE PRICE; IN OTHER WORDS THE WARRANTY STOOD ATTACHED TO THE SAL E PRICE OF THE PRODUCT. IN THIS CASE THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE THE ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF REVOURCES AND A R ELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF THE OBLIGATION. THE REFORE THE ASSESSEE HAD INCURRED A LIABILITY DURING THE ASSESS MENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDR SECTION 37 OF THE IN COME TAX ACT 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY LIKE T HE WARRANTY EXPENSE IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BAS IS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ES TIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WO ULD DEPEND ON THE NATURE OF THE BUSINESS THE NATURE OF SALES THE NA TURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED O NLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS R ECOGNIZED WHEN (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION AND 9C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET N O PROVISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTUR ED IN THE PAST AND THE FACTS SHOW THAT DEFECT EXISTED IN SOME OF T HE ITEMS MANUFACTURED AND SOLD THEN PROVISION MADE FOR WARR ANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUC TION FROM THE GROSS RECEIPTS UNDER SECTION 37. 5. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE O BSERVING AS FOLLOWS: ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) 4 4.3 I HAVE CONSIDERED THE APPELLANT SUBMISSION AND ALSO THE REASONS GIVEN BY THE AO FOR MAKING THIS ADDITION. I HAVE ALSO TAKEN NOTE OF THE JUDICIAL PRONOUNCEMENTS CITED BY THE APPELLANT . IN MY CONSIDERED VIEW THE APPELLANT CASE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT REPORTED IN 314 ITR PAGE 62. TAKING FULL STRENGTH FROM THE SAID DECISION I HAVE NO HESITATI ON TO HOLD THAT THE AO WAS NOT JUSTIFIED AT ALL IN MAKING THIS ADDITION . THEREFORE I HEREBY DELETE THE ADDITION OF RS.53 31 556/-. THE APPELLA NT SUCCEEDS ON THIS GROUND. 6. IN ASSESSMENT YEAR 2006-07 THE FACTS ARE IDENTIC AL TO THE FACTS AS IT PREVAILED IN ASSESSMENT YEAR 2004-05. IN THIS YEAR THE ASSESSEE HAD DEBITED IN THE P&L ACCOUNT A SUM OF RS. 26 38 991/-. IN T HE COMPUTATION OF TOTAL INCOME THE ASSESSEE HAD REDUCED FROM THE INCOME IN THE FROM PROFIT & LOSS ACCOUNT A SUM OF RS.40 31 402/- BEING DECREATION I N WARRANTY PROVISION. THE AO THEREFORE ADDED SUM OF RS.13 92 411/- WHIC H IS EXCESS DEDUCTION CLAIMED BY THE ASSESSEE IN THE COMPUTATION OF INCOM E. ON APPEAL BY THE ASSESSEE THE CIT(A) DELETED THE ADDITION MADE BY TH E AO ACCEPTING THE VERY SAME ARGUMENTS OF THE ASSESSEE WHICH WE HAVE SET OU T WHILE DISCUSSING THE FACTS FOR A.Y 2004-05. 7. AGGRIEVED BY THE ORDERS OF THE CIT(A) THE REVENU E HAS PREFERRED THE PRESENT APPEALS BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE SUBMISSIONS OF THE LD. D.R . AS CAN BEEN SEEN FROM THE GROUNDS OF APPEAL RAISED BY THE REVENUE THE GRI EVANCE OF THE REVENUE IS THAT THERE WAS NO PROPER QUANTIFICATION OF THE LIAB ILITY ON ACCOUNT OF PROVISION FOR WARRANTY. WE ARE OF THE VIEW THAT IN PRINCIPLE THERE CAN BE NO DOUBT OR DISPUTE THAT DEDUCTION ON ACCOUNT OF PROVI SION FOR LIABILITY ON ACCOUNT OF WARRANTY CLAIM HAVE TO BE ALLOWED AS DED UCTION BUT THE CONDITION IS THAT THE QUANTIFICATION OF SUCH PROVISION SHOULD BE MADE ON A SCIENTIFIC ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) 5 BASIS AND THE ASSESSEE SHOULD FOLLOW A SYSTEM OF A CCOUNTING WHEREBY EXCESS PROVISION IS DULY REVERSED WHEN THE ACTUAL E XPENSES ARE INCURRED. PERUSAL OF THE ORDERS OF THE AO AND CIT(A) IN THE PRESENT CASE SHOWS THAT NEITHER THE ASSESSEE HAS EXPLAINED THE BASIS OF MAK ING PROVISION ON ACCOUNT OF WARRANTY EXPENSES NOR HAS THE CIT(A) FOUND THAT THE PROVISION HAS BEEN MADE ON A SCIENTIFIC BASIS. IN THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT IT WOULD BE PROPER TO SET ASIDE THE ORDERS OF THE CIT( A) AND REMAND THE ISSUE TO THE AO FOR FRESH CONSIDERATION BUT ONLY WITH REGARD TO THE QUANTUM OF EXPENDITURE TO BE ALLOWED. THE ASSESSEE WILL EXPLA IN THE BASIS ON WHICH IT HAD MADE THE PROVISION FOR EXPENSES ON ACCOUNT OF W ARRANTY LIABILITY AND THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WHEN THE ACTUAL EXPENSES ARE INCURRED ON ACCOUNT OF WARRANTY CLAIMS. THE AO WIL L CONSIDER THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE JUDICIAL PRONOUNCE MENTS REFERRED TO ABOVE AND AFTER AFFORDING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND DECIDE THE APPEAL IN ACCORDANCE WITH LAW. FOR STATISTICAL PURPOSES THESE APPEALS ARE TREATED AS ALLOWED. 9. IN THE RESULT BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 16 TH DAY OF SEPT. 2011. SD/- SD/- (T.R.SOOD ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 16 TH SEPT.2011 ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RD BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.2729/MUM/2010(A.Y. 2004-0) ITA NO.2730/MUM/2010(A.Y. 2006-07) 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 13/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 14/9/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER