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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH, AHMEDABAD
Before: Ms. SUCHITRA KAMBLE & SHRI WASEEM AHMED
PER SUCHITRA KAMBLE, JUDICIAL MEMBER :
This is an appeal filed by the assessee against the order dated 03.02.2016 passed by the CIT(A)-2, Vadodara for the Assessment Year 2005-06.
The assessee has raised the following grounds of appeal :
“1. On the facts and circumstances of your appellants case and in law, the learned Commissioner of Income-tax (Id. CIT (A) erred in disallowing the claim of Rs.89,00,430/-on depreciation in respect of instrument placed at customer's site and capitalized in the books of accounts on erroneous plea that instrument placed with customers were not used for the business purpose of the appellant and accordingly depreciation u/s.32 is not allowable on the said instruments.
2. Your appellant says and submit that the learned AO has disallowed your appellant's claim of depreciation without giving due regard to the nature of business carried on by your appellant and the revenue generated on account of placement of the said instruments at customer's site and copy of agreement and confirmation from customer produced during the assessment proceeding.
Page 2 of 5 3. Your appellant therefore prays your Honors be pleased to hold so now and delete impugned disallowance.
4. On the facts and circumstances of your appellant, the Id CIT (A) erred in disallowing the provision for warranty of Rs.25,00,000/-.
Your appellant therefore prays your Honors be pleased to hold so now and delete impugned disallowance.
6. Your Appellant submits that the impugned assessment order passed by the learned AO is bad in law as Siemens Healthcare Diagnostics Limited has ceased to exist on the date of the impugned order on account of its merger with Siemens Limited with effect from 1 October 2009, thereby the entire assessment proceedings be regarded to be void ab initio.
7. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(l)(c) of the Act. The Appellant submits that the additions/disallowances considered are only due to rejection of a bonafide claim and/or difference of opinion and the same cannot be a valid and justifiable reason for initiating penalty proceedings under section 271(1)(c).”
The assessee company is engaged in the business of manufacturing and trading of diagnostic reagent strips and kits. The assessment was completed under Section 143(3) of the Income Tax Act, 1961 on 26.12.2008 determining the total income at Rs.13,35,21,350/- as against the returned income of Rs.8,81,70,480/-. The CIT(A) partly allowed the appeal of the assessee which was later on contested by the assessee before the Tribunal and the Tribunal vide order dated 12.11.2013 restored the issues pertaining to disallowance of depreciation on the reagent sale and claim of provisions for warranty. The Assessing Officer vide order dated 23.02.2015 made addition in respect of depreciation claim of reagent sales, provision for warranty and thereby made total addition of Rs.89,00,430/- and Rs.1,14,00,430/- respectively.
Being aggrieved by the assessment order dated 23.02.2015 the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
5. The Ld. A.R. submitted that ground no.6 is not pressed. As regards ground nos.1, 2 & 3, the Ld. A.R. submitted that the CIT(A) erred in disallowing the claim of depreciation in respect of instruments which were placed at customer’s site and capitalised in books of account on erroneous plea that since the assessee failed to Page 3 of 5 furnish the agreements it was not known whether the ownership with respect to those machines vests with the assessee or not and hence depreciation in respect of those instruments was not allowed. The Assessing Officer disallowed assessee’s claim of depreciation without giving due regard to confirmation submitted for placement of instruments and also business carried on by the assessee. The Assessing Officer also ignored the revenue generated on account of placement of the said instruments at customer’s site.
The Ld. D.R. submitted that as regards ground nos.1, 2 & 3 related to the ownership of the machinery and its expenditure, the assessee has not filed any document except the document of confirmation. In fact, the machinery was purchased in earlier year as per the contentions of the Ld. A.R. and, therefore, the claim of depreciation was subject to agreement itself.
We have heard both the parties and perused the material available on record. As regards ground nos.1, 2 & 3 the assessee has provided confirmation before the Assessing Officer, though it cannot be said that it is technical confirmation yet from the relevant records produced before the Authorities and before us we can clearly see that the machinery was purchased and utilised according to the needs of the assessee. In fact, the complete expenditure was allowed by the Revenue in the subsequent years and in the first year of operation. Therefore, total reversal stand taken by the Revenue in this year is not justifiable and hence the disallowance of the claim of depreciation in respect of instruments placed at customers site cannot be held as proper on the part of the Assessing Officer as well as CIT(A). Thus, ground nos.1, 2 & 3 are allowed.
As regards ground no.4 & 5, the ld. A.R. submitted that the CIT(A) erred in disallowing warranty provision of Rs.25,00,000/- by observing that it is a contingent liability and, therefore, not an allowable deduction. The warranty provision covers the expenses related to the repairing and maintenance of equipments sold as well as equipment placed with the customers which contractually bind the company to provide free supplies/replacements of spares and hence the liability in respect of warranty for instruments sold/placed should be provided in the year in which the instruments are sold/placed. It had made provisions on the basis of method consistently followed by it
Page 4 of 5 in this regard. The Ld. AR submitted that in the subsequent years the provisions for warranty was allowed by the Revenue.
As regards ground nos.4 & 5, the Ld. D.R. submitted that it is a contingent liability related to provisions of warranty but the method which was taken into account by the assessee was not a scientific method. In fact, the assessee has not correlated the provisions of warranty with the claims made by the customers for defective goods in proportionate manner in this particular year.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the provision for warranty has not been properly followed by the assessee as per any scientific method and before us the assessee could not correlate the provisions of warranty to the sale/claims from customers for defective products of the earlier year or the subsequent years and on what basis the assessee has allocated provision for warranty in respect of this particular head. Despite giving opportunity to the assesse in the first round by the Tribunal, the assesse failed to provide any proper evidence and reasons in respect of detailed working of the provisions for warranty. The calculations given by the assesse during the second round before the Assessing Officer, CIT(A) as well as before us are also not proving to be proper. Some figures are shown in the chart of provisions for warranty and the chart table for overall provisions including the warranty in the paper book, but the calculation of the provisions for warranty specifically is not showing about how many claims were finalized during the year from the earlier funds of the provisions for warranty. Merely giving overall amount will not prove the case of the assessee that it is properly arrived at the particular amount for provisions for warranty in the present assessment year without giving any details of the method used by the assessee. Besides this, the contention of the Ld. AR that in subsequent year the same is allowed can also not be taken as sole criteria for allowing or disallowing any claim as per the Income Tax Statute. In A.Y. 2005-06, despite giving opportunity to the assessee by the Tribunal, the assesse failed to establish the nexus in respect of arriving the particular amount of provisions for warranty in the present assessment year than in earlier or its subsequent years. Thus, the CIT(A) as well as the Assessing Officer rightly disallowed this claim. There is no need to interfere with the findings of the CIT(A). Therefore, ground nos. 4 & 5 are dismissed.
Page 5 of 5 11. Ground no.6 is not pressed, hence dismissed.
Ground no.7 is consequential and hence not adjudicated at this juncture.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on this 25th day of May, 2022.