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Per Pawan Singh Judicial Member; 1. These two appeals under section 253 of Income tax Act by assessee are directed against separate orders of Commissioner (Appeals) Mumbai, dated 08.01.2014 and 28.08.2015 for assessment year 2008-09 and 2009-10 respectively. In both the appeals the assessee has raised certain common ground of appeal, thus, both the appeal were clubbed, heard and are decided by common order for the sake of convenience. For appreciation of facts, first we are referring the facts of assessment year 2008-09. The assessee has raised following grounds of appeal.
(1) The learned Commissioner (Appeals) erred in law and on facts in confirming the disallowance of advertisement expenses of Rs.33,65,007/-made by assessing officer on the ground that invoices in respect of such expenses were raised in the subsequent financial year 2008-09. The learned Commissioner (Appeals) ought to have appreciated the fact that the said expenses relates to the advertisements released in the financial year 2007-08. (2) The learned Commissioner (Appeals) has erred in law and on facts in confirming disallowance of provision for warranty of Rs.44,57,867/- made by learned assessing officer. The learned Commissioner (Appeals) ought to have appreciated the fact that out of the disallowance of Rs.44,57,867/-, an amount of Rs.18,19,487/- pertains to actual expenses on after sales service and such actual expenses should be allowable. (3) The learned Commissioner (Appeals) has erred in law and on facts in confirming disallowance of provision for gratuity of Rs. 13,37,283/-made by the assessing officer. The learned Commissioner (Appeals) ought to have considered the assessing officers finding in remand report that the said provisions were not routed through the profit and loss account. (4) The learned Commissioner (Appeals)has erred in law and on facts in confirming disallowance of provisions for warranty of Rs.44,57,867/- while computing the book profit under section 115 JB of the Act. The learned Commissioner (Appeals) ought to have appreciated the fact that out of the disallowance of Rs. 44,57,867/-, an amount of Rs. 18,19,487/- pertains to actual expenses on after sales services and this actual expenses should be allowable. (5) The learned Commissioner (Appeals) has erred in law and on facts in confirming disallowance of provision for warranty of Rs.1,33,283/-while computing the book profit under section 115JB of the Act. The learned Commissioner (Appeals) ought to have considered the assessing officers finding in remand report that the said provision was not routed through the profit and loss account.
ITA No. 2371/M/2014 & 5347/M/2015 Brother International 2. Brief facts of the case are that assessee company is engaged in the business of trading of Computer peripherals viz Printers, Fax machines, multifunction centre, filed its return of income for assessment year 2008-09 on 26.09.2008 declaring total loss of Rs. 1,22,47,548/-. The assessment was completed on 20 December 2011 under section 143(3) of the Act. The assessing officer while passing assessment order besides other disallowance, disallowed advertisement expenses of Rs. 33,65,007/-, disallowed provision for warranty Rs.44,57,867/- and provision for Gratuity of Rs. 13,37,283/-. On appeal before Commissioner (Appeals) the action of assessing officer for all disallowances was confirmed. Further, aggrieved by the order of Commissioner (Appeals) the assessee has filed present appeal before us.
We have heard learned AR of the assessee and learned DR for revenue and perused the material available on record. Ground No.1 relates to disallowance of advertisement expenses of Rs.33,65,007/-. The learned AR of the assessee submits that the assessee company has been consistently following the mercantile system of accounting. The assessing officer disallowed the expenses on the ground that expenses pertains to the subsequent year as the dates on the bills of the said expenses is of April and May 2008, which does not fall in previous year relevant to the assessment year under consideration. The assessee received the invoices in respect of expenses incurred on such expenses in the month of April and May 2008 and the said expenses were credited in the accounts of respective parties. 3 & 5347/M/2015 Brother International The learned Commissioner (Appeals) despite observing the fact that invoices were received in month of April and May 2008 confirmed the disallowance. On the other hand learned DR for the revenue supported the order of authorities below.
We have considered the rival submission of the parties and have considered the orders of authorities below. There is no dispute that the assessee is following Mercantile system of accounting. Further it is not in dispute that invoices related to the advertisement expenses were received by the assessee in the month of April and May 2008, though the expenses relates to the advertisement made prior to March 2008. Considering the fact that expenses relates to the advertisement expenses are related with the assessment year under consideration, the disallowance made by assessing officer and confirmed by learned Commissioner (Appeals) are deleted. In the result ground number 1 of the appeal is allowed.
Ground No.2 relates to the provision for warranty. The learned AR for the assessee submits that the assessee has the practice for making provision for warranty on the basis of percentage of turnover. The amount of provision for warranty is determined on the basis of analyses of empirical data failure rate. The assessee has made provision for warranty at the rate of 1.5% of the turnover which is quite reasonable. This year provision has been revised to the extent of 1.42% of the turnover. The learned and AR of the assessee to buttress its submission relied upon the decision of Hon’ble Supreme Court 4 & 5347/M/2015 Brother International in case of Rotork Control India Pvt Limited Versus CIT (2009) (180 Taxman 422)(SC).
On the other hand learned DR for the revenue supported the order of authorities below. It was submitted that assessee is not the manufacturer of the equipment. The assessee is in the business of sales and services. Even otherwise, it was the first year for of business for the assessee into the trading of the computer equipments. The provision for warranty is recognized when the manufacturer has obligation as a result of past event, thus no provision can be recognized.
We have considered the submission of both the parties and have gone through the orders of authorities below. During the assessment proceedings the assessing officer noted that assessee has debited Rs. 44,57,867/- under the head provisions for warranty. The assessee was asked to justify the claim. The assessee filed its reply dated 29/11.2011 and contended that the assessee company made a provision for warranty of Rs.44,57,867/- being 1.54% (approx) of turnover as per their policy. The assessee is in the business of trading in information communication equipments such as printers and facsimile machine. These electronic items always subject to repair, damage etc. over a period of time. Hence, the assessee-company provides additional services after sale service to its customers. The assessee- company also provides warranty for its products, which is general business practice. The same is allowable deduction. The contention of the assessee 5 ITA No. 2371/M/2014 & 5347/M/2015 Brother International was not accepted by assessing officer holding that the working of the provisions for warranty is not based on methodology. The assessee has not shown any evidence that the items manufactured or sold by Assessee Company were defective and any such amount was incurred on such defects.
No manufacturing year wise data is provided by the assessee. The ld. Commissioner (Appeals) also observed that the assessee is in the trading of information and communication equipments e.g. printer, fax machine on which they provides warranty as additional service as a part of after sales services to their customers. It was further observed that the assessee is not the manufacture of the items. The ld. Commissioner (Appeals) was also of the view that the warranty is not passed by the manufacture to the trader.
The assessee has not filed any evidence to substantiate that after sales service, the assessee made expenses on account of warranty. The ld. Commissioner (Appeals) also examined after sale service expenses, for the relevant period, which is 1.03% of the total turnover. The ld. Commissioner (Appeals) also observed that it was the first year of the assessee into the trading.
In our view a provision is recognized when a enterprises has a future obligation as a result of past events, it is probable that a out flow of the recourses will be required to settle the obligation and a reliable estimation can be made for such obligation. All such factors are missing in the present case. In our humble view, the ratio of the decision of Hon’ble Supreme 6 & 5347/M/2015 Brother International Court in Rotrok Control P Ltd (supra) relied by ld. AR for the assessee is not applicable on the facts of the present case. As the ratio laid down by Hon’ble Court in said case that “a present obligation as a result of a past event” is not satisfied. Neither the assessee is manufacturer nor have a past history in respect of the claim of warranty. Thus, we do not find any illegality or infirmity in the order of ld. Commissioner (Appeals) for our interference. In the result this ground of appeal
is dismissed.
9. Ground No.3 relates to provision of Gratuity. The ld AR for the assessee argued the AO disallowed the provision of gratuity holding that mere provision covered by section 40A(7) and has not been debited in Profit & Loss A/c. The ld. Commissioner (Appeals) also confirmed the action of AO holding that the provision is not routed through Profit & Loss A/c as it was a balance-sheet item. The ld. AR of the assessee argued that in Schedule-11 of Profit & Loss A/c, the assessee has shown the provisions of gratuity (page 54 of PB).
10. On the other hand, the ld. DR for the revenue supported the order of the authorities below. It is submitted that note in the Profit & Loss A/c in Schedule-11 speaks about taking the liability from Brother International Singapore Pvt. Ltd.
11. We have considered the submissions of the ld. representatives of the parties and gone through the orders of the authorities below. The AO disallowed the provision of gratuity holding that same is not debited to the Profit & Loss 7 ITA No. 2371/M/2014 & 5347/M/2015 Brother International A/c as it related to the erstwhile liaison office of the Japanese Company. The assessee further explained that it has not debited the provision of gratuity to the Profit & Loss A/c as there is reversal of the provision during the year under consideration. The assessee has shown the same in Clause-17(i) of Tax Audit Report, wherein provision of payment of gratuity disallowance is reported as Nil. The assessee also contended that AO has not asked for any details or explanations nor any opportunity was given before disallowing the provisions of gratuity. The submission of assessee was forwarded to the AO or his remand report. The AO submitted his remand report. In the remand report, the AO contended that the provision for gratuity is a balance-sheet item and has not been routed through Profit & Loss Account. The actuarial certificate furnished by assessee was verified, which show that an amount of Rs. 16,12,347/- has been reflected in the balance-sheet. The AO added Rs. 13,37,283/- being difference of opening and closing balance as on 1st April 2007 (Rs. 2,75,064/-). The AO arrived at the figure of Rs. 13,37,283/- (Rs.
16,22,347 – Rs. 2,75,064/-). The AO confirmed that the provision of gratuity is not routed through Profit & Loss Account and a balance-sheet item. The ld. Commissioner (Appeals) on the basis of remand report furnished by assessee confirmed the action of AO holding that the provision of gratuity are not routed through Profit & Loss Account as it was a balance- sheet item. We have noted that the ld. Commissioner (Appeals) confirmed the action after verification of the fact that provision for gratuity is not 8 & 5347/M/2015 Brother International routed through Profit & Loss Account. The assessee has shown the provisions of gratuity as on 31.03.2008 as a liability taken over from its Associated Enterprieses (Brother International Singapore Pvt. Ltd.). In our view, the disallowance made by Assessing Officer and confirmed by ld. CIT(A) is not correct. The disallowance was made only on the ground that it was not routed through Profit & Loss A/c and was a balance-sheet item. We are conscious of the fact that balance-sheet are not sacrosanct. The assessee claimed the provision of gratuity of Rs. 13,37,283/-. During the remand proceeding assessee furnished actuarial certificate showing amount of Rs. 16,12,347/- which has been reflected in the balance-sheet. The assessee claimed provision for payment of gratuity on the basis of actuarial valuation.
The Assessing Officer at the time of passing assessment order on 20.12.2011 has not verified, if the similar amount is claimed in next Assessment Year, therefore, this issue is restored to the file of Assessing Officer to decide it afresh in accordance with law. Needless to order that before passing the order, the Assessing Officer shall allow proper opportunity of hearing to the assessee. 12. In the result, this ground of appeal is allowed for statistical purpose.
13. Ground No. 4 &5 relates to addition of provision of warranty and gratuity to the book profit while computing income under section 115JB. The ld. AR of the assessee submits that these grounds of appeal are consequential. In case, & 5347/M/2015 Brother International the assessee succeeds in ground no. 2 & 3 no addition under to the book profit under section 115JB is warranted.
14. On the other hand, the ld. DR for the revenue relied upon the order of lower authorities.
15. We have considered the submission of both the parties. We have already confirmed the addition in ground no.2 and restored the addition/disallowance in ground no.
3. Therefore, the Assessing Officer is directed to make consequential adjustment accordingly with regard to the disallowance of gratuity. As we have directed the Assessing Officer to decide the issue of provision of gratuity afresh. Therefore, the Assessing Officer shall pass the order for adjustment under section 115JB with regard to provision of gratuity after deciding the issue afresh.
16. In the result, the appeal of the assessee is partly allowed. for AY 2009-10 by assessee.
17. As we have already noted that the assessee has raised certain common grounds of appeal as raised in appeal for AY 2008-09. We have noted that the ground No.1 of the present appeal is identical to the ground No.2 of appeal for AY 2008-09, which we have already dismissed in appeal for AY 2008-09, hence following the principle of consistency, this ground of appeal is also dismissed.