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Income Tax Appellate Tribunal, BENGALURU “C” BENCH, BENGALURU
Before: Shri George George K. & Ms. Padmavathy S.
Date of hearing: 22/09/2022 Date of pronouncement: 26/09/2022 O R D E R Per: Padmavathy, A.M.
This appeal is against the order passed by the National Faceless Appeal Centre (NFAC), Delhi in appeal No. CIT(A), Bengaluru-4/10071/2018-19 dated 29.04.2022 for AY 2012-13.
The assessee raised the following grounds of appeal: - “1.1 The learned Commissioner of Income-tax (Appeal) has erred in dismissing the appeal filed by the appellant and in confirming the assessment order passed by Assessing Officer. On proper appreciation of facts and law, the learned Commissioner of Income tax (Appeals) should have quashed the order passed by the Assessing Officer. 1.2. The Assessing Officer having passed the original order on proper application of mind and after considering all the issues, the present SKF Engineering & Lubrication India Pvt. Ltd. impugned assessment order passed by the learned assessing officer and as confirmed by the learned CIT(A) is only on account of change of opinion and therefore also the orders of lower authorities deserves to be quashed. 1.3. There was no erroneous order at all so as to cause any prejudice to the interest of revenue. There being no earlier erroneous order, the impugned assessment order passed U/s. 143 r.w.s 263 of I.T. Act, 1961 has no legs to stand and is to be quashed. The learned CIT(A) has erred by upholding the order of the learned assessing officer which under applicable law and facts of the case deserves to be quashed. [Tax effect of above ground : Rs 33,84,980/-1 Without prejudice: 2.1. The learned Commissioner of Income tax (Appeals) has erred in upholding the addition of Rs. 49,20,000/- as made by Assessing Officer by holding provision for liquidated damages as unascertained liability. 2.2. On proper appreciation of facts of the appellant's case and applicable legal provisions, the addition of Rs. 49,20,000/- is erroneous and is liable to be deleted. 2.3. The addition as made in the assessment order resulting only in timing differences without resulting in any additional revenues to the exchequer ought to have been deleted by the learned CIT(A). [Tax effect of above ground : Rs 33,84,980/-1 Without further prejudice, 3. Alternatively and without acceding, the lower authorities upon holding provision for current year as unascertained liability ought to have at least a) allowed deduction in current year in respect of provisions made in the preceding year.and b) allowed deduction for current year's provisions in the income computation of subsequent year. [Tax effect of above ground : Rs 33,84,980/-] 4. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that impugned assessment order be quashed or at least disallowance of Rs. 49,20,000/- be deleted. [Tax effect of above ground : Rs 33,84,980/-]”
The assessee is in the business of automated lubrication systems, manual lubrication equipment and industrial pumping systems. The assessee returned total income of Rs.37,18,54,400/- for AY 2012-13 vide revised return
SKF Engineering & Lubrication India Pvt. Ltd. of income. The case was selected for scrutiny and an assessment order was passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act) on 16.02.2015 wherein the assessee company’s income was assessed at Rs.37,74,93,367/-. Subsequently notice under Section 263 of the Act dated 26.12.2017 was issued by the PCIT stating that the order under Section 143(3) r.w.s. 144C(13) of the Act dated 16.02.2016 is erroneous and prejudicial to the interest of Revenue because the assessee has been allowed deduction for provision for liquidated damages on Rs.49,20,000/- which was an unascertained liability. The PCIT did not accept the submissions made by the assessee with regard to the allowability of liquidated damages and proceeded to pass an order under Section 263 of the Act dated 06.02.2018 setting aside the assessment order and directed the AO to verify the claim of the assessee with regard to the provision of liquidated damages and redo the assessment. Accordingly the AO passed an order under Section 143(3) r.w.s. 263 of the Act dated 05.06.2018 disallowing the provision for liquidated damages stating that it is in the nature of unascertained liability.
On further appeal the CIT(A) confirmed the order of the AO. Aggrieved the assessee is in appeal before the Tribunal.
Before us the learned A.R. submitted that the assessee is under contractual obligation to pay liquidated damages since the purchase orders raised by the customers or the contracts entered into by the assessee with its customers contain a clause for payment of liquidated damages by the assessee if the assessee fails to deliver the lubricating systems/products on or before the schedule delivery date. The learned A.R. also submitted that the provision for liquidated damages is accrued for the financial year ended on 31.03.2012 on the basis that the liability has accrued for the year ended, though the actual payment would happen on a later date. According to the learned A.R. the assessee is following mercantile system of accounting and therefore the SKF Engineering & Lubrication India Pvt. Ltd. liability to pay liquidated damages which is accrued during the year under consideration has to be provided for in the books of account and the fact that liquidated damages are payable on a later date will not dilute the liability that has accrued to the assessee. The learned A.R. further submitted that the PCIT has claimed that the details of the provisions for liquidated damages was not submitted by the assessee which is not factually correct since the assessee has submitted the detailed working of the provision made towards liquidated liability before the lower authorities (pages 65 & 66 of paper book).
The learned D.R., on the other hand, submitted that the liability to pay the liquidated damages is arising at future date and therefore it cannot be stated to be an ascertained liability. The learned D.R. therefore supported the orders of the lower authorities.
We have heard the rival contentions and perused the material on record. The assessee during the year under consideration has made a provision for liquidated damages for an amount of Rs. 49,20,000/-. The AO during the revision proceedings has disallowed the said amount on the basis that the calculation of liquidated damages is based on percentage agreed upon the time of purchase order and at the time of making the provision the assessee would not be aware of the date of delivery which a future date. Against the appeal filed by the assessee before the CIT(A) the disallowance was upheld on the basis that the liability would arise only on actual supply and therefore the provision made for the year under consideration is an unascertained liability. The CIT(A) in this regard relied on the decision of the Hon'ble Madras High Court in the case of FFE Minerals India (P.) Ltd. vs. JCIT (2018) 98 taxmann.com 170 (Madras). We perused the working submitted by the learned A.R. with regard to calculation of liquidated damages which is extracts as below: -
SKF Engineering & Lubrication India Pvt. Ltd.
ED Weeks Delay Per Max Sales Order Delv as per Max % SI. So. Customer Name CLAUSE as on 31- Week ED Weeks for Basic Value LD Amount No. PO LD IN PO (Y/N) Mar-12 % LD I SIEMENS VAI METALS TECHNOLOGIES PVT 1003997 Y 30/07/201 I 35 1.00% 10.00% 10.00 1,62,00,000 16,20,000 2 SIEMENS VAI METALS TEC1 1NOLOGIES PVT 1004371 Y 30/09/2011 27 1.00% 10.00% 10.00 8,97,000 89,700 3 HUMBOLDT WEDAG INDIA PVT. LTD. 1004013 Y 31/08/2011 31 0.50% 5.00% I0.00 40,00,649 2,00,032 4 HUMBOLDT WEDAG INDIA PVT. LTD. 1004014 Y 31/08/201 I 31 0.50% 5.00% 10.00 40,00,649 2,00,032 5 HUMBOLDT WEDAG INDIA PVT. LTD. 1004016 Y 31/08/2011 31 0.50% 5.00% 10.00 40.00,649 2,00,032 6 HUMBOLDT WEDAG INDIA PVT. LTI). 1004571 Y 28/03/2011 1 0.50% 15.00% 30.00 16.32,000 8,160 7 HUMBOLDT WEDAG INDIA PVT. LID. 1004576 Y 28/03/2012 I 0.50% 5.00% 10.00 6,88,500 3,443 8 L&T-MHI Turbnie Generators Pvt. Ltd 1004218 Y 10/01/2012 12 0.50% 5.00% 10.00 62,00,000 3.10,000 9 ITC LIMITED 1004174 Y 30/11/2011 18 0.50% 5.00% 10.00 2,00,000 10,000 10 ITC LIMITED 1004414 Y 29/02/2012 5 1.00% 10.00% 10.00 53,93,630 2,69,682 11 THYSSENKRUPP INDUSTRIES INDIA PVI 1004003 Y 15/11/2011 20 0.50% 5.00% 10.00 4,52,000 22,600 12 THYSSENKRUPP INDUSTRIES INDIA PV.1. 1004007 Y 30/09/201 I 27 0.50% 5.00% 10.00 46,50,000 2,32,500 13 ABHIJEET PROJECTS LTD 1003845 Y 25/12/2011 14 1.00% 10.00% 10.00 22,00,000 2,20,000 14 HOWDEN AIR & GAS INDIA PVT. LIMITED 1004465 Y 15/01/2012 11 0.50% 5.00% 10.00 38,00,000 1,90,000 15 BEML LIMITED 1004176 Y 31/10/2011 22 0.50% 5.00% 10.00 7,40,139 37.007 16 BEML LIMITED 1004177 Y 30/11/2011 18 0.50% 5.00% 10.00 14,80,277 74.014 17 BEML LIMITED 1004178 Y 31/01/2012 9 0.50% 5.00% 10.00 14,80,277 66,612 18 BEML LIMITED 1004631 Y 30/03/2012 1 0.50% 5.00% 10.00 7,98,140 3,991 19 SMS INDIA PVT. LTD., 1004556 Y 01/03/2012 5 0.50% 5.00% 10.00 67,50,000 1,68,750 20 ANUPAM INDUSTRIES LTD.. 1004234 Y 09/09/201 I 30 0.50% 5.00% 10.00 7,19,600 . 35,980 21 ANUPAM INDUSTRIES LTD.. 1004235 Y 09/09/2011 30 0.50% 5.00% 10.00 21,00.000 1,05,000 22 INOX WIND LTD 1003914 Y 10/05/2011 47 1.00% 5.00% 5.00 26,95,000 1,34,750 23 PAUL WORTH INDIA PVT LTD. 1004115 Y I5/09/2011 29 0.50% 5.00% 10.00 13,67.000 68,350 24 PAUL WORTH INDIA PVI I I'D. 2008647 Y 04/01/2012 13 0.50% 5.00% 10.00 10,99.759 54,988 25 MUKAND LTD. 1002590 Y 30/05/2010 44 0.50% 5.00% 10.00 12,00,000 60,000 26 MUKAND LTD. 1002849 Y 30/05/2010 44 0.50% 5.00% 10.00 12,40,000 62,000 27 MAITHAN !SPAT LIMITED 1001798 Y 15/01/2009 12 1.00% 5.00% 5 00 19,93,791 99,690 28 MAITHAN [SPAT LIMITED 1003558 Y 15/01/2009 12 1.00% 5.00% 5.00 2,23,000 11,150 29 ELECON ENGINEERING COMPANY LTD. 1003848 Y 22/03/2011 2 0.50% 5.00% 10.00 2,25,000 2,250 30 ELECON ENGINEERING COMPANY LTD. 1004242 Y 10/11/2011 21 0.50% 5.00% 10.00 2,25,000 11,250 31 ELECON ENGINEERING COMPANY LTD. 1004393 Y 08/11/201L 21 0.50% 5.00% 10.00 2,62,000 13,100 32 ELECON ENGINEERING COMPANY LTD. 1004407 Y 10/11/2011 21 0.50% 5.00% 10.00 6,25,500 31,275 33 ELECON ENGINEERING COMPANY LTD. 1004469 Y 08/11/2011 21 0.50% 5.00% 10.00 1,35.900 6,795 34 ELECON ENGINEERING COMPANY LTD. 1004637 Y 08/02/2012 8 0.50% 5.00% 10.00 5,50,000 22,000 35 ELECON ENGINEERING COMPANY LTD. 1004638 Y 08/02/2012 8 0.50% 5.00% 10.00 2,75,000 11,000 36 ELECON ENGINEERING COMPANY LTD. 1004656 Y 08/03/2012 4 0.50% 5.00% 10.00 2,75,000 5,500 37 TENOVA HYPERTHERM PVT. LTD. 1004314 Y 31/10/2011 22 0.50% 5.00% 10.00 12,80,000 64,000 38 LARSEN & TOUBRO LTD. 1004283 Y 20/09/2011 28 0.50% 5.00% 10.00 3.00,700 15,035 39 LARSEN & TOUBRO LTD. 1004671 Y 29/02/2012 5 1.00% 10.00% 10.00 2.00,000 10,000 40 LARSEN & TOUBRO LTD. 1004673 Y 29/02/2012_ 5 1.00% 10.00% 10.00 7,19,264 35,963 41 METAL ENGINEERING & TREATMENT 1003854 Y 31/03/2011 53 0.50% 5.00% 10.00 8,00,000 40,000 42 L N V Technology Private Limited 1004109 Y 01/08/2011 35 0.50% 5.00% 10.00 3,77,400 18.870 43 L N V Technology Private Limited 1004110 Y 01/08/2011 35 0.50% 5.00% 10.00 3,77.400 18,870 44 BlIARAT HEAVY ELECTRICAI.S LTD 2007079 Y 20/03/2011 2 0.50% 15.00% 30.00 3.24,657 3,247 45 BlIARAT HEAVY ELECTRICALS LTD 2007960 Y 10/09/201 I 29 0.50% 15.00% 30.0(1 1,30,106 18,865 46 ESSAR STEEL INDIA LIMITED. 2008827 Y 07/05/2011 47 0.50% 5.00% 10.00 2,24,795 11,240 47 ABP PVT. LTD., 1004167 Y 15/09/2011 29 0.50% 5.00% 10.00 2,13.180 10,659 48 AJM ENGINEERS 2009130 Y 12/02/2012 7 0.50% 5.00% 10.00 1,06,701 3,735 49 BHUSHAN POWER & STEEL LTD., 1004603 Y 05/03/2012 4 0.50% 5.00% 10.00 1,14,000 2.280 50 BHUSHAN POWER & STEEL LTD., 2008804 Y 27/12/2011 14 0.50% 5.00% 10.00 24,938 1,247 51 McNALLY SAYAJI ENGINEERING LTD. 1004537 Y 30/03/2012 1 0.50% 10.00% 20.00 1,85,640 928 52 McNALLY SAYAJI ENGINEERING LTD. 1004797 Y 30/03/2012 I 0.50% 10.00% 20.00 2.55,000 1.275 53 JSL STAINLESS LTD. 1004689 Y 24/03/2012 1 0.50% 5.00% 10.00 4.21,800 2.109 54 SIEMENS VAI METALS TECHNOLOGIES (P) 1004666 Y 30/03/2012, 1 0.50% 5.00% 10.00 3,60,000 1.800 55 ESSAR STEEL LIMITED 2008856 Y 28/02/2012 5 0.50% 5.00% 10.00 14.341 359 56 RAJSHREE SUGARS & CHEMICALS LTD. 2008989 Y 30/01/2012 9 1.00% 5.00% 5.00 6,640 332 57 SUNFLAG IRON & STEEL CO. LTD. 1004647 Y 21/03/2012 2 0.50% 5.00% 10.00 19,776 198 58 FLSmidth Private Ltd. 2009388 Y 30/03/2012 1 0.50% 5.00% 10.00 19,263 96
Total 49,22.740 Expense Debited to P&I. /c 49.22.740 Difference -
SKF Engineering & Lubrication India Pvt. Ltd. On perusal of the above workings it is noticed that the provision is made up to the last date of the financial year, i.e. 31.03.2012. The assessee has considered the delivery date as per the purchase order/clause in the contract and calculated the delay up to 31.03.2012. It is also noticed that the amount of liquidated damages is calculated as a percentage of the basic value of the purchase order/contract. This would mean that the provision for liquidated damages is created for the period relevant to the year under consideration. Though the actual damages would be paid only on delivery of lubrication systems or products, the liability, in our view, has to be provided for under the mercantile system of accounting. We see no merit in the contention that the provision made is an unascertained liability on the basis that the liability to pay would arise on a future date.. The CIT(A) relied on the decision of the Hon'ble Madras High Court in the case of FFE Minerals (supra) while upholding the disallowance. In our view this case is distinguishable from assessee’s case since the fact of the said case is different to the extent that only negotiations and discussion took place and the final amount of liquidated damages was computed much later. In assessee’s case, however, the provision is made based on the terms agreed with the customer and it relates to the period relevant for the year under consideration. In view of the above discussion we hold that the provision made for liquidated damages is an ascertained liability and should be allowed as a deduction. The disallowance made by the AO in this regard is deleted.
In the result, the appeal filed by the assessee is allowed.
Pronounced in the open Court on 26th September, 2022.