BGR ENERGY SYSTEMS LIMITED,,CHENNAI vs. OFFICE OF THE ASSISTANT COMMISSIONER OF INCOME TAX,CENTRAL CIR 3(1), CHENNAI

O R D E R

PER V. DURGA RAO, JUDICIAL MEMBER:

3. The first common ground raised in both the appeals relates to confirmation of disallowance of warranty obligation. The assessee has made provision of ₹.3,39,00,575/- and ₹.3,08,00,000/- for the assessment years 2016-17 and 2017-18 towards ‘warranty obligation’ on the products supplied by the assessee company and debited the same to the profit and loss account under the head “Administrative Expenses”. After considering the submissions of the assessee, the Assessing officer has held that the provision for future warranty as an unascertained liability is not allowable under section 37 of the Income Tax Act, 1961 [“Act” in short] and accordingly brought to tax for both the assessment years. On appeal, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer for both the assessment years.

Add; Provision Less: Less: Opening Less: Ind Closing S.No. A.Y Turnover made Provision Provision balance AS adj balance during the utilized reversed year 1. AY 2014-15 3,29,560 2,230.00 485.00 (109.00) (8.00) 2,598.00 (105.00) 2. AY 2015-16 3.36,500 2,598.00 536.00 (520.00) 2.509.00 (303.00) 3. AY 2016-17 3,18,789 2,509.00 345.00 (10.00) 2,844.00 4. AY 2017-18 3,39,994 2,844.00 321.00 (13.00) 2,849.00 5. AY 2018-19 3,25,625 2,849.00 317.00 (19.00) (1,227.00) 1,920.00 6. AY 2019-20 3,19,363 1,920.00 402.00 (5.00) (284.00) 2,033.00 7.2 The perusal of the above table shows hardly any amount of warranty provision is being used for any of the years. In fact, the provision is getting accumulated every year. The provisions made do not have any correlation to the requirement of utilization for obligation. In fact the appellant has been constantly and regularly reversing the provisions so made implying thereby that the provisions made have been purely on the basis of outlier estimate that has no relation to the obligation of the past events that ca11s for outlay of funds for obligation towards past events. In fact the provision created by the appellant is unscientific and is grossly exaggerated. Thus it is very clear that the provision made has only been a contingent liability and is not allowable as business expenditure. 7.3 It is further noticed that similar issue had been the subject of appeal proceedings for A Y 2010-11 and as well as earlier years; the assessee had claimed a provision for warranty towards warranty obligation on the product supplied by the assessee company debiting the same under the head selling and warranty expenses; the AO had disallowed the same holding that the provision was towards contingent liability and that a deduction cannot be claimed merely by making an entry in the books of accounts. The CIT(A) had allowed this claim for earlier years. However on appeal, the Hon’ble [TAT, Chennai had held that this was a provision and not an expenditure already incurred. 7.4 The ITAT, Chennai had upheld the disallowance with regard to provision for warranty vide its order & 262/Chny/2018 dated 2° January, 2019. "During the course of hearing, Ms. Jharna B. Harilal, the Ld. representative for the assessee, very fairly submitted that this issue was examined for the very same assessment years by the Hyderabad Bench of this Tribunal in 1T.A. Nos.1513/Hyd/11 and IT.A. No.985/Hyd/12 and decided the issue against the assessee. 3 LT.A. Nos.261 & 262/Chny/18 LT.A. Nos.472 & 47 3/Chny/18 C.O. Nos. 74 & 75/Chny/18.

5. We heard Shri S. Bharath, the Ld. Departmental Representative also. As rightly submitted by the Ld. representative for the assessee, the Hyderabad Bench of this Tribunal in the assessee's own case for the very same assessment years found that the provision for warranty cannot be allowed. In fact, the Hyderabad Bench in para 29 of its order dated 05.09.2013 observed as follows: We heard both sides and perused the material available on record. We are of the considered opinion that this item of disallowance, viz. warranty 'provision, is merely a provision and not an expenditure already incurred and laid out for the purpose of business. Unless the liability for such expenditure crystalises, assessee is not entitled to claim for deduction in respect of such expenditure. The CIT(A) has not given any valid reason for substantiating his finding, while allowing the claim of the assessee. We accordingly, set aside the impugned order of the CIT(A), and restore the disallowance made by the Assessing Officer in this behalf. Revenue 's ground on this issue is allowed."

6. Respectfully following the decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2008-09 and 2009-10, the ld. CIT(A) has decided the issue against the assessee. Thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue. The contention of the ld. Counsel for the assessee that the appeal against the orders of the Tribunal in earlier years before the Hon’ble Madras High Court is pending, has no bearing, since the decision of the Tribunal has not been reversed or modified. Accordingly, the ground raised by the assessee is dismissed.

8. On being aggrieved, the assessee is in appeal before the Tribunal.

"The explanation of by the Authorised Representative of the assessee company cannot be accepted in view of the provisions of u/s 404(2)(a) of I.T. Act, particularly when the source of the loan and advances given was from borrowed fund and the assessee company has debited huge interest to its Profit and Loss Ale. Therefore, it is held that interest shall be charged on the loans/ advances made to the three concerns referred above, at the rate of 11 % per annum which is the rate of interest paid to banks by the assessee on the funds borrowed by it. Since the advances are made over a period of time, it is concluded that interest shall be charged on the average outstanding balance. Therefore, interest on the average outstanding of Rs. 15,90,31,231 works out @ 11% per annum is Rs. 1,75,93,435/- for A.Y. 2016-17 and interest on the average outstanding of Rs.8,18,50.252 @ 11% per annum works out to Rs.90,03,527/- for A.Y: 2017-18 which is treated as income as interest on advances made to the subsidiary company and related parties and the same is added back to the income of the assessee, Thus the AO had made addition of Rs. 1,75.93,435/- for A.Y. 2016-17 and Rs. 90,03,527/- for A.Y. 2017-18 towards Interest on Loan/ advance given to subsidiary companies and related parties. 8.1 The AR during the appeal proceedings filed written submissions as under. Since the submissions are identical, the submission for one A.Y. 2016- 17 is extracted as under: “Appellant's Submissions: The appellant company claims that it is allowable on the following grounds:-

The appellant company is continuously making profit and has accumulated reserves. The advances are made out of reserves and not out of any loans availed by the company. Cuddalore Power Company Limited is in the process of setting up of Thermal Power Plant in Cuddalore, Tamil Nadu. Construction of Power Plant is the important business of the appellant company. The advance given to the M/s. Cuddalore Power Company Limited a group company of Ms BGR Energy Systems ltd and M/s. Nanilam Property a group company of M/s BGR Energy Systems Ltd are in the nature of trade advances and for commercial expediency and not for otherwise. The Supreme Court in S.A. Builders Ltd vs. CIT (2007) 158 Taxman

74. (SC), held that "a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, the assessee would, in our opinion, ordinarily entitled to deduction of interest on its borrowed loans ... "Refer this APB pages 102 to 106. Further in CIT vs. Bharti Televentures Ltd (201 I) 331 !TR 502 (Delhi) held that "No direct nexus between borrowed funds and advances, sources of advances explained and assessee having adequate non-interest bearing funds at relevant time. Advances to subsidiaries fund to be made for business consideration. Onus to prove commercial expediency discharged Deduction of interest allowable u/s 36(1)(iii) of the Income tax act. Refer this APB pages 107 to 110. The appellant company also relied on the decisions of Hon'ble Bombay High Court in Commissioner of Income Tax-7 vs. Reliance Communication Infrastructure Ltd [2012] 21 taxmann.com I 18 (Bom) Refer this APB pages 111 to I 18 and Hon'ble Chennai Income tax Appellate Tribunal in the case of Assistant Commissioner of Income tax, Circle 1(1), Chennai vs. Apollo Hospitals Enterprises Ltd (2012) 25 taxman.com 223 (Chennai) which held no interest disallowance of surplus is advanced to sister concern Refer this APB pages 119 to 124.

9. I have gone through the facts of the case. The appellant had made similar submissions in respect of the identical disallowance for all earlier years. In this regard, it is noted here that the disallowance made for the earlier A Ys have been upheld by the Ld. CIT(A) as well as the Hon. ITAT. The appellant had not pressed this ground before the Hon'ble ITAT in respect of AYs. 2008-09 and 2009-10 as is evident in Hon’ble ITAT in its order in 262/CHNY/2018 dated 02.01.2019. The ITAT had dismissed the issue with regard to interest on advance to subsidiary companies as 'not pressed'. The facts of this issue have not changed as the business exigency of advancing loan to sister concerns has not been demonstrated by the appellant and hence the claim has been already been disallowed by the Hon'ble ITAT and the first appellate authority. The appellant accepted identical disallowance before the first appellate authority for the A.Y. 2010-11 and the appellant had not agitated it before the Hon'ble ITAT. Similar is the situation with reference to the AY 2011-12 & 2012-13 under identical set of facts and circumstances. The absence of any commercial expediency for AY 2010-11 cannot be resurrected for subsequent AYs that too when the appellant has not demonstrated any material change in facts. In fact, it is pertinent to note that the AR of the appellant did not press the grounds before the undersigned during the appeal proceedings for the A Y 2016-17 vide order sheet noting dated 16.3.2020. In view of the foregoing and keeping in view the judicial discipline and precedent, I am of the view that there is no infirmity in the decision of the AO in disallowing Rs.1,75,93,435/- for A.Y. 2016-17 and Rs. 90,03,527- for A.Y. 2017-18. The appellant's grounds connected to this issue are dismissed.

11. Respectfully following the decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2008-09 and 2009-10, the ld. CIT(A) has decided the issue against the assessee. Thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue. The contention of the ld. Counsel for the assessee that the appeal against the orders of the Tribunal in earlier years before the Hon’ble Madras High Court is pending, has no bearing, since the decision of the Tribunal has not been reversed or modified. Accordingly, the ground raised by the assessee is dismissed.