Inductotherm (India) Private Ltd., Ahmedabad v. The Dy.CIT- Circle- 4, Ahmedabad

ITA 4153/AHD/2007 | 2004-2005
Pronouncement Date: 22-03-2010 | Result: Allowed

Appeal Details

RSA Number 415320514 RSA 2007
Assessee PAN AAACI3672B
Bench Ahmedabad
Appeal Number ITA 4153/AHD/2007
Duration Of Justice 2 year(s) 4 month(s) 3 day(s)
Appellant Inductotherm (India) Private Ltd., Ahmedabad
Respondent The Dy.CIT- Circle- 4, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 22-03-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 22-03-2010
Date Of Final Hearing 22-03-2010
Next Hearing Date 22-03-2010
Assessment Year 2004-2005
Appeal Filed On 19-11-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'B' (BEFORE S/SHRI D T GARASIA JM AND A N PAHUJA AM) ITA NO.4153/AHD/2007 (ASSESSMENT YEAR:- 2003-04) INDUCTOTHERM (INDIA) PRIVATE LIMITED AMBLI BOPAL ROAD BOPAL AHMEDABAD [PAN:AAACI3672B] V/S THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-4 AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI MEHUL K PATEL AR REVENUE BY:- SHRI SMITI SAMANT DR O R D E R A N PAHUJA: THIS APPEAL FILED BY THE ASSESSEE AGAINST AN ORDE R DATED 17-09-2007 OF THE LD.CIT(APPEALS)-VIII AHMED ABAD RAISES THE FOLLOWING GROUNDS :- 1.1 THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF WARRANTY PROVISION EXPENSES TREATIN G THE SAME AS CONTINGENT LIABILITY. 1.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT (A) THE WARRANTY PROVISION IS MADE IN ACCOUNTS ON T HE BASIS OF TECHNICAL EVALUATION AND THE PREVIOUS EXPERIENCE BASED ON THE CATEGORY WISE ACTUAL WARRANTY EXPENSES IN THE LAST PRECEDING THRE E YEARS. (B) THE WARRANTY IS A SIMULTANEOUS OBLIGATION UNDER TAKEN IN THE YEAR OF SALE THE PURCHASE ORDER INCLUDES WARRANTY AS PART OF THE SALES CONTRACT AND THE APPELLANT ALSO CONSIDERS ESTIMATED WARRANTY COST IN THE SALES PRICE QUOTED. 2 ADVERTING TO THE ONLY ISSUE IN GROUND NOS.1. 1 & 1.2 RELATING TO THE DISALLOWANCE OF PROVISION FOR WARRANTY EXPENSES IN THIS APPEAL OF THE ASSESSEE FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT RE TURN DECLARING INCOME OF RS.27 66 82 074/- FILED ON 27.10.2004 BY THE ASSE SSEE MANUFACTURING INDUCTION FURNACES AFTER BEING PROCESSED ON 28.3.2005 U/S 14 3(1) OF THE INCOME TAX ACT ITA NO.4153/AHD/2007 2 1961 (HEREINAFTER REFERRED TO AS THE ACT) WAS SEL ECTED FOR SCRUTINY WITH THE ISSUE OF NOTICE UNDER SECTION 143(2) OF THE ACT ON 27.7.2 005 . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE CLAIMED WARRANTY EXPENSES OF RS.2 31 83 55 3/-. IN RESPONSE TO A SHOWCAUSE NOTICE ISSUED BY THE AO SEEKING DIS ALLOWANCE OF EXPENSES NOT PERTAINING TO THE YEAR UNDER CONSIDERA TION THE ASSESSEE SUBMITTED A DETAILED REPLY VIDE LETTER DAT ED 26.12.2006 AS REPRODUCED IN THE ASSESSMENT ORDER.AFTER CONSIDERIN G THE SUBMISSIONS OF THE ASSESSEE THE AO OBSERVED IN HIS ORDER THAT THE ASSESSEE PROVIDED WARRANTY FOR 18 MONTHS PERIOD AND THAT THE EQUIPMENTS SOLD BY THE ASSESSEE WERE DEFECT FREE AN D AFTER SALES EXPENSES IF AT ALL WILL BE REQUIRED ONLY IN SOME EQUIPMENTS AND HENCE THE WARRANTY PROVISION MADE IN THE ACCOUNTS W AS ONLY CONTINGENT AND DEPENDING ON FUTURE HAPPENINGS. SINC E THE SAID PROVISION WAS NOT FOR AN ASCERTAINED LIABILITY IT WAS NOT ALLOWABLE IN THE COMPUTATION OF BUSINESS INCOME AND THE ACTUAL L IABILITY ON CRYSTALLIZATION IN THE YEAR UNDER CONSIDERATION ALO NE WILL BE ALLOWED THE AO CONCLUDED.. ACCORDINGLY THE AO DISALLOWED A SUM OF RS.1 83 15 989/- AFTER REDUCING THE ACTUAL EXPENSES OF RS.48 67 564/- RELATABLE TO SALES OF THE CURRENT YE AR. 3 ON APPEAL THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT WARRANTY PROVISION AND EXPENSES WERE BEING DIS ALLOWED FROM THE A.Y. 2000-01 ONWARDS AND EXCESS WARRANTY PROVIS ION WRITTEN BACK IN THE ACCOUNTS FOR RS.20 38 209/- OUT OF PROV ISIONS FOR A.Y. 2002-03 AND RS.39 28 448/- FOR THE A.Y. 2003-04 AGG REGATING TO RS.59 66 657/- WERE NOT ELIMINATED THEREBY AMOUNTI NG TO DOUBLE ADDITION. IT WAS ALSO CONTENDED THAT THE MATERIAL C ONSUMPTION AND EXPENSES AGGREGATING TO RS.38 16 038/- INCURRED IN CONNECTION WITH SALES FOR A.Y. 2002-03 AND 2003-04 BUT CHARGED TO W ARRANTY PROVISION ACCOUNT AND NOT TO CURRENT YEAR PROFIT AN D LOSS ACCOUNT SHOULD BE ALLOWED ON THE BASIS OF INCURRING ACTUAL EXPENSES AND THIS ITA NO.4153/AHD/2007 3 WAS NOT DONE BY THE AO. IN THE LIGHT OF THESE SUBM ISSIONS THE LD. CIT(A) CONCLUDED IN THE FOLLOWING TERMS: 3.2 I HAVE PERUSED THE RELEVANT PORTION OF THE ASS ESSMENT ORDER AND ALSO CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLA NT. FOR THE A.Y. 2001- 02 AND 2003-04 SIMILAR ISSUE CAME TO BE CONSIDERED BY MY PREDECESSOR WHEREIN SUCH WARRANTY PROVISION DISALLOWED BY THE A O WAS SUSTAINED. FOR THE ASSESSMENT YEAR IN APPEAL THE FACTS ARE IDENTI CAL AND CONSISTENT WITH THE DECISION TAKEN BY MY PREDECESSORS I FIND THE O RDER OF THE AO ON THIS ISSUE AS TENABLE AND THE DISALLOWANCE IS THEREFORE UPHELD FOR THIS YEAR ALSO. 3.3 HOWEVER AS STATED IN THE PRECEDING PARAGRAPHS EXPENSES ACTUALLY INCURRED DURING THE YEAR BUT CHARGED TO PROVISION A CCOUNT AND NOT TO THE PROFIT AND LOSS ACCOUNT SHALL BE ALLOWED AS CURRENT YEAR EXPENSES. ALSO EXCESS WARRANTY PROVISION WRITTEN BACK AND CREDITED TO THE PROFIT AND LOSS ACCOUNT OUT OF EARLIER YEARS PROVISIONS WHICH WERE DISALLOWED IN THE RESPECTIVE ASSESSMENT YEARS SHOULD BE EXCLUDED IF T HEY WERE PART OF THE INCOME RETURNED AS PER THE COMPUTATION STATEMENT. T HE APPELLANT SHALL GIVE COMPLETE WORKING TO ENABLE THE AO TO COMPLY WI TH THESE DIRECTIONS AND TO ENSURE THAT THERE IS NEITHER DOUBLE CLAIM NO R DOUBLE ADDITION. 4 THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). AT THE OUTSET THE LD. AR ON BEHALF OF THE ASSESSEE WHILE INVITING OUR ATTENTION TO AN ORDER D ATED 22.1.2010 OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE AYS 200 0-01 2001-02 & 2003-04 IN ITA NOS. 3305/AHD./2004 988/AHD./2005 & 2236/AHD./2006 CONTENDED THAT ISSUE OF PROVISION FOR WARRANTY EXPENSES IS SQUARELY COVERED IN FAVOUR OF THE ASSES SEE. THE LD. DR DID NOT OPPOSE THESE SUBMISSIONS OF THE LD. AR ON B EHALF OF THE ASSESSEE. 5 WE HAVE HEARD BOTH THE PATIES AND GONE THROUGH T HE FACTS OF THE CASE AS ALSO THE DECISION RELIED UPON. A CO-ORDINATE BENCH OF THE ITAT IN THEIR AFORESAID ORDER DATED 22 -01-2010 IN THE ASSESSEES OWN CASE FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P LTD. V S. CIT 314 ITR 62 ITA NO.4153/AHD/2007 4 (SC) ALLOWED THE CLAIM OF PROVISION FOR WARRANTY EX PENSES IN THE FOLLOWING TERMS:- 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISION RELIED UPON. UNDISPUTEDLY THE PR OVISION FOR WARRANTY EXPENSES HAS CONTINUOUSLY BEEN ALLOWED BY THE AO HIMSELF RI GHT FROM AY 1987-88 UNTIL AY 1999-2000. THIS WAS FOR THE FIRST TIME THAT THE AO DISALLOWED THE CLAIM ON THE GROUND THAT THE LIABILITY IS CONTINGENT. THE LD. DR APPEARING ON BEHALF OF THE REVENUE DID NOT PLACE ANY MATERIAL BEFORE US WHICH COULD CONTROVERT THE SUBMISSIONS ON BEHALF OF THE ASSESSEE THAT THE PROV ISION HAS BEEN MADE ON THE TECHNICAL EVALUATION AND PREVIOUS EXPERIENCE BASED ON CATEGORY-WISE EXPENSES INCURRED TOWARDS THE ACTUAL WARRANTY IN THE PRECEDI NG THREE YEARS. IN THIS CONNECTION WE MAY REFER TO A DECISION OF THE HON'B LE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P LTD.(SUPRA) WHEREIN WHIL E ADJUDICATING A SIMILAR ISSUE HONBLE APEX COURT HELD THAT I) A PROVISION IS A LIABILITY WHICH CAN BE ME ASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHE N: (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 REQUIRED TO SETTLE THE OBLIGATION ; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE C ONDITIONS ARE NOT MET NO PROVISION CAN BE RECOGNIZED; II) A LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUT FLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS; III) A PAST EVENT THAT LEADS TO A PRESENT OBLIGATI ON IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATE S AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIO NS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNIZED AS PROVISION . FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MU ST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABI LITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY TH AT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT IS DETERMINED BY CONSIDERING THE SAID O BLIGATIONS AS A WHOLE ; IV) IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NO T ENTITLED TO DEDUCTION U/S 37 OF THE SAID ACT. HOWEVER WHEN THERE IS MANUFACTURE AN D SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GO ODS THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRE SENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION ; V) ON FACTS THE ASSESSEE HAS BEEN MANUFACTURING AN D SELLING VALVE ACTUATORS IN LARGE NUMBERS SINCE 1983-84 ONWARDS. STATISTICAL DA TA INDICATES THAT EVERY YEAR ITA NO.4153/AHD/2007 5 SOME ACTUATORS ARE FOUND TO BE DEFECTIVE. THE DATA OVER THE YEARS ALSO INDICATES THAT BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPAR ED TO BUY THE VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE WARRANTY BECAME INTEGRAL PART OF THE SAL E PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS WARRANTY STO OD ATTACHED TO THE SALE PRICE OF THE PRODUCT AND A RELIABLE ESTIMATE OF THE EXPEN DITURE TOWARDS SUCH WARRANTY WAS ALLOWABLE . 5.1 . SINCE UNDISPUTEDLY THE ASSESSEE HAS PROVIDED FOR THE WARRANTY EXPENSES BASED ON TECHNICAL EVALUATION AND PAST EXP ERIENCE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT AND A REL IABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH WARRANTY IS ALLOWABLE. MO REOVER THE AO HIMSELF ALLOWED A SIMILAR CLAIM U/S 143(1) OF THE ACT IN TH E AYS. 1987-88 & 1999-2000 AND U/S 143(3) OF THE ACT IN THE AYS 1988-89 TO 199 7-98..CONSIDERING THE AFORESAID FACTS AND CIRCUMSTANCES OF THE CASE IN LIGHT OF THE VIEW TAKEN BY THE HON'BLE APEX COURT IN THE AFORESAID DECISION WE HA VE NO ALTERNATIVE BUT TO ALLOW THE CLAIM OF THE ASSESSEE. THEREFORE GROUND NOS.1. 1 & 1.2 IN THE APPEAL OF THE ASSESSEE FOR THESE THREE ASSESSMENT YEARS ARE ALLO WED. 5.1 UNDISPUTEDLY FACTS OBTAINING IN THE YEAR U NDER CONSIDERATION ARE SIMILAR TO FACTS PREVAILING IN THE PERIOD RELEV ANT TO THE AYS 2000- 01 2001-02 & 2003-04 AND SINCE THE ASSESSEE HAS PR OVIDED FOR THE WARRANTY EXPENSES BASED ON TECHNICAL EVALUATION AND PAST EXP ERIENCE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT AND A REL IABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH WARRANTY IS ALLOWABLE. CO NSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE IN LIGHT OF THE VIEW TA KEN BY THE HON'BLE APEX COURT IN THE AFORESAID DECISION WE HAVE NO ALTERNATIVE BUT TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF PROVISION FOR WARRANTY EX PENSES FOR THE YEAR UNDER CONSIDERATION. THEREFORE GROUND NOS. 1.1 & 1.2 IN THE APPEAL OF THE ASSESSEE ARE ALLOWED . 6. NO ADDITIONAL GROUND HAVING BEEN RAISED IN TERM S OF THE RESIDUARY GROUND ACCORDINGLY THIS GROUND IS DISMISSED. ITA NO.4153/AHD/2007 6 7. IN THE RESULT APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 22 -03 -2010 SD/- SD/- (D T GARASIA) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 22-03-2010 COPY OF THE ORDER FORWARDED TO : 1. INDUCTOTHERM (INDIA) PRIVATE LIMITED AMBLI BO PAL ROAD BOPAL AHMEDABAD 2. THE DCIT CIRCLE-4 AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-VIII AHMEDABAD 5. THE DR ITAT B-BENCH AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD