M/S MULTITECH SOLUTIONS,KOLKATA vs. ACIT, CIR. -31, KOLKATA

Present for: Appellant by : Shri Giridhar Dhelia, Advocate Respondent by : Shri Raja Sengupta, Additional CIT, Sr. DR Date of Hearing : 03.07.2024 Date of Pronouncement : 30.09.2024 O R D E R

PER RAKESH MISHRA, ACCOUNTANT MEMBER:

“1. That the order passed by the Ld. CIT(A)-NFAC is unwarranted, arbitrary, invalid and bad-in-law, in so far as they are against the interest of the appellant firm.

M/s Multitech Solutions: AY: 2013-14 2. For that the Hon'ble CIT(A) has erred in sustaining the addition of Rs.24,17,582/- made by Ld. ACIT Cir. 31/Kol on account of provision for warranty on the ground that only the actual expenditure incurred in course of business can be claimed as cost of services rendered ignoring the business practice generally followed in the of business.

3. For that the Hon'ble CIT(A) has erred in stating that the appellant has "never maintained historical data of their past events, actual warranty claimed by customers etc." required to make a reliable estimate for provision of warranty whereas the appellant maintained such records.

4. For that the Hon'ble CIT(A) has erred in stating that the provision for warranty expenses cannot be charged to direct cost in profit & loss account as accounted for by the appellant in their accounts and sustaining the AO's contention that the provision for warranty expenses was a "contingent liability" as alleged by the AO.

5. For that the Hon'ble CIT(A) has erred in sustaining the additions of Rs.19,60,000/-made by Ld. AO on account of fresh unsecured loan taken by the appellant from various parties detailed in assessment order on the alleged ground that the assessee failed to prove the identity and creditworthiness of the loan creditors and genuineness of the transaction.

7. That the appellant craves leave to add or amend any grounds of appeal

.”

3. Brief facts of the case as culled out from the Appeal Memo filed before the Ld. CIT(A) are that the appellant is a partnership firm with Shri Ramesh Chandra Jhunjunwala and Shri Anuraj Jhunjunwala as partners. The firm is engaged in the business activity of marketing, sales and service of computer hardware and software for integrated infrastructure projects of various Government and Corporate customers. The return of income for the AY 2013-14 was filed on 27.08.2013 showing total income of Rs. 19,78,290/-. The case was selected for scrutiny under CASS and notices u/s 143(2) & 142(1) of the Act were sent. During the course of the assessment proceedings, two major additions were made i.e. disallowance of Provision for Warranty of Rs.24,17,582/- and addition of unexplained Cash Credit of Rs. 19,60,000/-. The Ld. AO completed the assessment u/s 143(3) of the I.T. Act, 1961 on 28.02.2016 by assessing the total income at Rs.63,55,870/-. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A), who vide order dated

4. Rival contentions were heard and the submissions made and the document filed and the record were examined.

5. Ground Nos. 1 and 7 are general in nature and do not require any separate adjudication. However, it may be mentioned that all orders which are against the interest of the assessee are not bad in law.

6. Ground Nos. 2, 3 and 4 relate to the provision for warranty disallowed by the Ld. AO which addition has been confirmed by the Ld. CIT(A). The Ld. AO noted that the assessee had charged provision for warranty expenses to the tune of Rs. 24,17,582/- and required the assessee to explain how the said expenses were relevant to its business. The assessee relied upon the provisions of law, the Accounting Standard 29, the relevant judgements and the order under section 263 of the Act of the CIT-IX, Kolkata and thereby concluded that in view of the detailed explanations filed and judgments and past experience along with the scientific method adopted for arriving at the provision for Warranty Expenses, it was clear that under the various contracts of sale listed, it had contractual obligation of providing comprehensive maintenance and replacement of the parts during warranty period and in some cases its obligation also warranted providing of warranty support for 6 years in remote locations. It was also stated that the company had been regularly following the practice of providing for warranty expenses for a long time. Hence, apart from a scientific method of calculating provision for warranty expenses the company had past long experience of executing projects of similar nature with similar warranty conditions, paving the way for arriving at a justified estimate of the provision for warranty expenses. It was also to be noted that the facts stated for the claim for deduction of warranty expenses were also covered in the decision of the M/s Multitech Solutions: AY: 2013-14 Hon'ble Supreme Court in the case cited. Accordingly, the provision for Warranty Expenses was an admissible and allowable expense as claimed by the assessee.

6.1 The submission of the assessee was considered by the Ld. AO. However, for the reasons mentioned as under, the addition was made disallowing the claim of the assessee. The relevant extract from the order is as under:

The submission of the assessee has been considered. As far as the reliance placed on the decision reported in Rotork Controls India (P.) Ltd. (supra) is concerned, in considering the claim on a provision made for warranty claim, the Apex Court held that "a provision is recognized when: (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 conditions are not met, no provision can be recognized. The Apex Court pointed out: "For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provisions should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provisions for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way." Assessee in present case have provisioned Rs 6,63,000/- (Rs.17000/-*39) for sale to Hewlett Packard India Sales Private Limited. Assessee have neither shown in the submission the basis of Rs 17000 as a figure to be used for calculation nor any historical trends for the same which is required as per the Apex court guidelines in the cited case. Assessee was required to produce a historical trend of warranty provisions made and actual expenses incurred against it. In one more case of supply of Bar code readers to Jovian Creations limited, assessee have provisioned for Rs 1195100/- (1700*703). This time assessee have quoted Rs.1,700/- as a basis of warranty on the item. However, here also assessee have not provided any logical or scientific basis of taking the quoted figure as a basis for sale. In two more sales of the relevant M/s Multitech Solutions: AY: 2013-14 Assessment year, assessees have taken percentage basis for provisioning citing industry standards but not providing the data of aforesaid industry standards or any other relevant study material for the same provisioning methods. In case of Renowned Auto Products Mfrs. Ltd. vs. Income-tax Officer; the Hon'ble Division Bench of High court of Madras held at paragraph 18 that the provision for service charges payable by the assessee by way of warranty provisions was not made on any scientific data. By applying the facts of the case to the law declared by the apex court, it was further observed therein that the provision made was only on ad hoc basis which was a fact recorded by the Tribunal. Here also, the Commissioner as well as the Tribunal categorically found that the assessee had not proved the provision of warranty expenses based on any scientific method in such circumstances, the assessee cannot place reliance on the decision of the Hon'ble Supreme Court in Rotork Controls India (P.) Ltd. (supra) as the facts is totally distinguishable. Even otherwise the assessee has to pass through the triple test as declared therein in order to succeed in his claim on provision for warranty, Assessee was given one more opportunity to provide any related information vide note sheet entry on 17/2/2016 where the assessee was asked to (i) provide any data of past where assessee have offered any non-used provisioned amount for income (ii) provide data of use of current provisioned amount in subsequent years i.e. F.Y. 2013-14 and F.Y. 2014-15 and (ii) provide data to prove that service expenses claimed were of other use than that of provisioned item, so to believe the fact that there are not duplicity of expenses. But as evident from the submission of assessee; nothing of this sort for the support of assessee's claim could be produced as can be seen from the enclosed reply in assessment record. In the absence of any such finding in its favor satisfying the said triple test, the assessee cannot rely on the said decision of the apex court and therefore undersigned deem it fit to disallow provision of expense amounting to Rs.24,17,582/-. [Addition of Rs.24,17,582/-] 6.2 The Ld. CIT(A) confirmed the addition by his finding as reproduced here under:

5.3 The written submission did not give complete factual aspect on the issue of Provision for Warranty. The appellant company relied upon the decision in the case of Rotork Control India Pvt Limited vs CIT rendered by the Hon'ble Supreme Court. The issue of provision of warranty was addressed by Hon'ble Apex Court in the case of Rotork Controls India Pvt Ltd Vs CIT (314 ITR 62) in detail. The Apex Court has laid down various principles to determine the provision of warranty and the allowability of the said expenditure. At para 10.11.12 & 13 of its judgment the Apex Court has dealt in detail the requirements to claim the provision of warranty. It is pertinent to mention here that the Hon'ble Apex court has allowed the assessee's appeal based on the finding of the fact the provision was made on past experience and reversal of unutilized part was duly accounted in every year. The court has also observed that the assessee has maintained the required details in this regard. The relevant finding is as under; "10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial begins of estimation. A M/s Multitech Solutions: AY: 2013-14 provision is recognized what (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 obligation as a result of an, and (c) a reliable estimate can be made of the amount of required to settle the obligations are not met, no provision can be recognized." At paragraph 13 of the order the issue of historical trend has been dealt elaborately and it is reproduced below; • For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. • Thus, the decision on the warranty provision should be based on past experience of the company. • A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. • Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. • On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses Such estimates need reassessment every year. • As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. • If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way." 5.4 The appellant ought to have maintained such historical trend of their past event, actual warranty claims by the customer against their sales, their obligation to create provision for warranty on account of such past event, reversal of unutilised provision for warranty and offering the same in the subsequent assessment year, etc. Only on the basis of such historical data, an enterprise can make a reliable estimate for provision for warranty against their current sales. 5.5 In the present case, no such factual evidences were submitted by the appellant before the AO. On perusal of the P&L a/c., it is noted that the appellant debited Provision for Warranty expenses as a direct cost under the head 'Cost of Services Rendered' in Schedule-15. The relevant page of the financial is scanned and reproduced below: 6.3 The copy of the Schedules to the Accounts has been pasted in the appeal order. The Ld. CIT(A) continues thereafter as under:

5.6 It is also noticed from the financials that they have not created any provision for warranty in their accounts at all. The current liability of Rs. 1,79,03,938/- contains only list of Sundry Creditors. In order to get further clarifications, to ascertain the factual aspect, notice dated 20.09.2023 was issued to the appellant with a request to furnish movement of Provision for Warranty from AY 2010-11 to AY 2013-14 by posting the case on 29.09.2023. However, the appellant sought M/s Multitech Solutions: AY: 2013-14 for adjournment for 15 days. As per their request, the case was adjourned to 13.10.2023 vide notice dated 03.10.2023. However, they did not provide the details. Hence, vide notice dated 17.10.2023, the case was again posted for hearing to 30.10.2023. 5.6 In spite of number of opportunities, the appellant failed to provide any such details as they debited ad-hoc sum as provision for warranty into the P&L account without any basis under the head 'Cost of Services Rendered'. As they never maintained such accounts, they could not provide the same. They debited the Provision for Warranty expenses into Cost of Service Rendered. Provision cannot be charged to Direct Cost. Only the actual expenditure incurred during the course of business can be claimed as cost of service rendered. In view of the above, it is proved that Provision for Warranty expense disallowed by the AO was a contingent liability. The action of the AO is upheld and the grounds taken on this issue are dismissed. 6.4 In the course of the appeal, vide written submission filed, the assessee has submitted as under:

6. It is the fact on record and as a matter of precedence in the case of appellant itself as well as in a matter of routine the appellant is following the same said principal of accounting in relation to such provisions for warranty and accordingly considering the factual and legal matrix in relation to the allowability of the said expense for the Asst. year 2006-07 the Department in the said assessment proceeding has allowed such claim as very much evident in the Order passed under section 143(3) of the Act dated 27/08/2008. [placed in paper book at page 28 to 321.

6.8 Further details like the statement of users/application of the provision so made which actually happened during the later years as much as six and more years for which the warranty conditions attached to the sale of goods under the contracts were persisting were filed and as the said warranty period did not conclude at the assessment proceeding stage, there was no occasion to submit the same before the Ld. AO at the assessment stage which documents were secondary evidence. The assessee was also asked to furnish a chart showing the amount of sales, cost of goods sold, provision for warranty and profit in such cases which was filed. It was further submitted that the fact on record and as a matter of precedence in the case of appellant itself, the appellant is following the same said principal of accounting in relation to such provisions for warranty and accordingly considering the factual and legal matrix in relation to the allowability of the said expense for the AY 2006-07, the Department in the said assessment proceeding has allowed such claim as is very much evident in the order passed under section 143(3) of the Act dated 27/08/2008. [placed in paper book at page 28 to 32].

6.9 We have considered the evidence filed and the submissions made. The addition made was confirmed primarily for the reason that the assessee could not furnish the required evidence either before the Ld. AO or before the Ld. CIT(A). The assessee contends that in the proceeding under section 263 as well as in the assessment order for AY 2006-07, such addition was not made. However, since additional evidence has been filed before us, which was not filed before the Ld. AO, it would be appropriate to remit the issue to the file of the Ld. AO to examine the issue in the light of the facts mentioned above and the judicial decisions in this regard and allow the claim as per law. Prima facie, the decisions relied upon relate to the cases of manufacturers who were manufacturing in bulk while the assessee is a supplier and not a manufacturer with M/s Multitech Solutions: AY: 2013-14 much smaller turnover, however since in the assessee’s case, there are precedents, hence the Ld. AO shall examine the issue and on the principle of consistency grant relief to the assessee in this regard as per law. For statistical purposes, these grounds of appeal are allowed.

7. Ground Nos. 5 and 6 relate to the addition of Rs. 18,02,680/- on account of unexplained cash credits. The Ld. CIT(A) confirmed the addition as under:

6.1 During the course of assessment proceedings, the AO noticed that the appellant firm got fresh unsecured loan to the tune of Rs. 1,20,31,135/. They were asked to furnish relevant bank statements of the Loan Creditors to prove their identity, credit worthiness and genuineness of the transactions. When the appellant produced such details, the AO noticed that lot of cash deposits were made into the Creditors' bank account mysteriously just before the date of transfer of loan to the appellant firm. It was analysed carefully on each Creditor's account. The AO observed that in all those cases except a few, majority of people were family members with no credible sources of income. After thorough examination, the AO demonstrated that the following Creditors did not have any creditworthiness: (1) Pawan Neotia : Rs.11,20,000/- (2) Bina Junjunwala : Rs. 3,00,000/- (3) Harshitha Junjunwala : Rs. 50,000/- (4) Prema Junjunwala :Rs. 2,40,000/- (5) Suraj Prakash Junjunwala: Rs. 1,80,000/- (6) O.P. Dalmia : Rs. 70,000/- Total : Rs.19,60,000/- 7.1 No addition was made in respect of rest of the creditors where explanation was found to be justified. Besides relying upon several judicial pronouncements, the assessee also submitted before the Ld. CIT(A) as under regarding the creditworthiness of the loan creditors:

9 Regarding the creditworthiness of the loan creditors, it is submitted as under, a. Mr. Pawan Kumar Neotia have net owned fund of Rs.43.86 Lakhs out of which he has advanced Rs 11.50 Lakhs to the assessee. In response to summon u/s 131, he submitted that he is carrying a business as wholesaler of Rakhi which is a seasonal business and the maximum sales are 4-5 months M/s Multitech Solutions: AY: 2013-14 before the Rakhi festival. The cash deposited in the bank against which the loans were given to the assessee on different dates was generated out of the Rakhi business as well as advances received against plot of land owned by him intended to be sold. The Ld. AO have summarily rejected his statement given u/s 131 without giving the speaking reasons for recording his dissatisfaction. In the circumstances, there are no reasons to doubt the creditworthiness of the loan creditor. b. The assessee have taken Rs. 3,00,000/- from Bina Jhunjhunwala on 06- 10-2012 which was given out of cheque received amounting to Rs.2,97,140/- credited in the bank account on 03-10-2012 and not against cash deposited amounting to Rs.3,00,000/- on 01-10-2010 as alleged by the Ld. AO. The said can be verified from the copy of the bank statements enclosed herewith and therefore the contention of the Ld. AO is not acceptable. c. In case of loan from Harshita Jhunjhunwala, the cash was withdrawn on 17-05-2012 (Rs 30,000/-) and 21-06-2012 (Rs 20.000/-) which was deposited in bank on 09-06-2012 and out of which the loan was given to the assessee in the instant case, the Ld AO's observation while making the addition is not correct. d. The loan creditor, Prema Jhunjhunwala, is the mother of Sri Annurag Jhunjhunwala on of the partner of the assessee and aged about 72 years. She had cash in hand as on closing of 31-03-2012 amounting to Rs 3.87,545/- out of which she deposited in bank Rs 3,00,000/- and given loan to the assessee company amounting to Rs 2,40,000/-. The return of income for the AY 2012- 13 was filed in ITR 4 where the closing cash balance as on 31.03.2012 was declared in the ITR. Hence, there is no reason to doubt the cash in hand at the beginning of the AY 2013-14 out of which loan was given. e. In the case of Suraj Prakash Jhunjhunwala, the cash amounting to Rs. 1,50,000/- was withdrawn on 21-04-2012 from his bank account maintained with Standard Chartered Bank and was deposited in State Bank of India account and loan was given to the assessee. Further cash was withdrawn between 05-06-2012 to 07-06-2012 and re-deposited in bank on 08-06-2012 (Rs 30,000/-) out of which loan of Rs.75,000/- was given to the assessee. The Ld. AO has made addition of Rs. 1,80,000/- (Rs. 1,50,000/- + Rs. 30,000/-) alleging cash deposit. f. In case of loan from Om Prakash Dalmiya, the cash was withdrawn on 18- 05-2012 (Rs.50,000/-) and 30-05-2012 (Rs.20,000/-) which was deposited on 08-06-2012 and a loan amounting to Rs. 1,00,000/- was given to the assessee. Out of which, the Ld. AO have made addition of the amount deposited in bank (i.e. Rs.70,000/-). It is pertinent to mention it here that the cash deposited in the bank accounts of the most of the loan creditors were withdrawn from the bank during the assessment year under reference and re-deposited in bank for advancing loan to the assessee and there are no reasons to doubt the transactions of loan or sources of cash deposited in bank account. The allegation of the Ld AO observing that it is definitely seemed to be way to route the money from them as a loan so that one hand there is income in their respective account through interest deposits and deduction of interest in the assessee's account on other hand, is on mere suspicion, surmises and conjunctures and deserve to be deleted

We are enclosing here with brief note in respect of all the loan creditors individually explaining how the transactions have taken place together with their respective copy of ITR, computation of income, Balance Sheet and Profit & Loss Account, bank statement, loan confirmation etc for your perusal and consideration. Under the aforesaid facts and circumstances, it is therefore humbly prayed to your good self to kindly drop both the additions made by the Ld ITO as they are unjustified, bad in law and lack proper evidence.

7.2 The explanation did not find favour with the Ld. CIT(A) who has held as under and confirmed the addition:

6.3 However, the observations made by the AO in the assessment order and the creditworthiness given in Para-9 of the written submission above, are more or less demonstrating the trend that just before transfer of loan to the appellant, cash was deposited and that amount was transferred to the appellant. Other than those specific cash deposit entries, there were no other recurrent transactions noticed in the bank accounts. This was the reason that led to addition of unsecured loans for a sum of Rs. 19,60,000/-. 6.4 In order to get further information, vide notice dated 20.09.2023, the appellant was asked to furnish complete set of income tax returns filed by the Loan Creditors for AY 2012-13 & 2013-14 to verify the creditworthiness disputed by the AO by posting the case on 29.09.2023. However, the appellant sought for adjournment for 15 days. As per their request, the case was adjourned to 13.10.2023 vide notice dated 03.10.2023. However, they did not provide the details. Hence, vide notice dated 17.10.2023, the case was again posted for hearing to 30.10.2023. However, the appellant failed to provide such details called for. 6.5 In spite of availing multiple opportunities, the appellant failed to furnish such basic information about their own Creditors. When the AO disputed the creditworthiness, the onus of establishing the creditworthiness and genuineness of the transaction always falls on assessee. In the present case, the appellant did not explain the same to the satisfaction of the AO and the appellate authority. I am inclined to uphold the action of the AO. Hence, the action of the AO is upheld and the grounds taken on this issue are dismissed. 7.3 Before us, it is submitted vide written submissions filed, that the loan was taken from the immediate family members of the partners of the firm and was taken in the normal course of business through proper banking channel, interest was charged by the creditors as per the prevailing market rate and TDS was deducted by the assessee on the said interest and the interest after deduction of the TDS was paid on year-on-year basis by the assessee. It is further submitted that the loan so received M/s Multitech Solutions: AY: 2013-14 was duly refunded in full by the appellant through banking channel in the financial year in which the loan was received or the very next financial year 2013-14, which is much before the start of the instant reassessment proceedings. The relationship of the creditors with the partners has also been mentioned and a transaction summary in case of the loan creditors from whom the loan was received by the appellant and later on repaid back with interest after deduction of TDS, which is also recorded and confirmed by the said parties in the ledger account and evidence by the bank statement placed in the paper book submitted, has also been filed. The assessee has relied upon several judicial pronouncements in support of the claim that the unsecured loan raised by the assessee from relatives, if returned back with payment of interest after deduction of TDS, is not liable to be added. Since these evidences were not filed either before the Ld. AO or even before the Ld. CIT(A), hence this issue is also set aside and remitted to the Ld. AO to examine the evidences available with the assessee and thereafter decide the issue in accordance with law and the judicial pronouncements relied upon by the assessee. The assessee is directed to file necessary evidence in this regard before the Ld. AO. Hence, these grounds of appeal are also allowed for statistical purposes.

Order pronounced in the open court on 30th September, 2024.