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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI R.C.SHARMA & SHRI PAWAN SINGH
O R D E R PER PAWAN SINGH, JM: 1. These two cross appeals filed by the Revenue and assessee against the order of CIT(A)- 14, Mumbai dated 28.01.2013 for Assessment Year (AY) 2009-10 were heard together and are being disposed of by a common order.
In Revenue has raised following grounds of appeal:- 1. "On the facts and circumstances of case and in law, the ld. CIT(A) erred in deleting the addition of Rs.61,53,000/- made on account of Provision for Warranty without appreciating that provision made by the assessee represents only a contingent liability and therefore no deduction is permitted under the Act for the contingent liability". 2. "On the facts and circumstances of case and in law, the ld. CIT(A) erred in deleting the addition of Rs. 61,53,000/- made on account of Provision for Warranty without appreciating that provision has been made by the assessee only on estimated basis and that assessee had failed to prove that the provision was reasonable and the estimate for liability was based on any scientific basis after taking into account past data and was based on principles of prudence
3. "On the facts and circumstances of case and in law, the ld. CIT(A) erred in deleting the addition of Rs.61,53,000/- made on account of Provision for Warranty failing to appreciate that facts of the case were entirely different from the facts of Rotork Controls India Ltd. and that ratio of the decision of Rotork Controls did not apply to the facts of the case". 4. "On the facts and circumstances of case and in law, the ld. CIT(A) erred in deleting the adjustment of Rs.2,77,80,717/- made in the closing stock on the premise of following the decision of the Tribunal for earlier years without verifying and considering the evidence Whether necessary adjustment (addition) of excise duty was made to the closing stock in the assessment year 1998-99 when section 145A has been brought on the statute or not, before allowing adjustment for opening stock.
5. "The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.
6. “The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
In the assessee has raised following grounds of appeal:- Ground I: Disallowance of expenditure on Repairs of Rs. 4,30,081/-:
1. On the facts and in the circumstances of the case and in law, the Commissioner of Income - tax (Appeals)-14, Mumbai ["the CIT(A)"] erred in upholding the action of the Additional Commissioner of Income Tax, Range - 6(1), Mumbai ["the AO"] in disallowing the expenditure incurred on repairs to buildings amounting to Rs. 1,08,081/-, on the alleged ground that the same are capital in nature.
2. Further, the CIT(A) erred in directing the AO to verify as to whether an amount of Rs. 3,22,000/- has been added in the computation of income, without appreciating the fact that the same was never debited to the Profit and Loss Account.
3. The Appellant prays that the aforesaid disallowance be deleted and the direction be annulled. Ground 11: Disallowance u/s.14A r.w. Rule 8D of the Income-tax Rules, 1962 ("the Rules") of Rs.8,31,657/-:
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the AO in disallowing a sum of Rs. 8,31,657/- by treating the same as expenses (including interest) incurred towards earning. exempt income u/s. 14A of the Act r.w.r. 8D of the Rules.
2. The Appellant, therefore, prays that the disallowance of Rs. 8,31,657/- should be deleted or substantially reduced. Ground III: Levy of Interest
1. On the facts and circumstances of the case and in law, the A.O. erred in levying interest u/s. 234C of the Act.
2. The Appellant prays that levy of interest u/s. 234C of the Act be deleted. Ground IV: General: The Appellant craves leave to add to, alter and/or amend all or any of the foregoing grounds of appeal.
4. Authorised Representative (AR) of the assessee has argued that all the grounds raised
in both the appeals are covered either in assessee’s own case or by the decisions of various High Courts and Hon’ble Supreme Court. Ld. DR for revenue disputed the contention of AR for assessee.
5. First we shall take up the appeal filed by the Revenue vide . Though the Revenue has raised as many as six grounds of appeal but as per our considered opinion there are only two basic grounds of appeal: (i) Disallowance of provision for warranty of Rs. 61,53,000/-. (ii) Adjustment in closing stock u/s. 145A of Rs. 2,77,80,717/-.
6. First we shall take up the Ground no.1 which is in respect of deletion of disallowance of Rs. 61,53,000/- for provision of warranty.
7. AR of the assessee argued that this issue is squarely covered by the decision of Hon’ble Apex Court in Rotork Control (I) Pvt. Ltd. vs. CIT (14 ITR 62 (SC) and order(s) of ITAT in assessee’s own case for AYs- 2005-06, 2006-07 and 2008-09. In Rotork Control (I) Pvt. Ltd. the Hon’ble Apex Court while dealing with the provision for warranty held as under: “13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options: (a) account warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim: and it provides far warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be hilly provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfils accrual concept as well as the matching concept. 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 warrant) 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 arc 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. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of' resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. The: are - provisioning which relates to present obligation, it arises out of obligating events. it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case”.
8. Further, the Hon’ble jurisdictional High Court in assessee’s own case for AY-2005-06 reported vide 365 ITR 258 (Bom) while dealing with similar ground held as under: “At the outset, the counsel agreed that the question posed at paragraph 4(i), namely, the deduction claimed by the assessee on account of the provisions for warranty is concerned, that is fully covered in favour of the assessee and against the revenue by the judgment of the Hon’ble Supreme Court in the case of Rotork Controls (P.) Ltd. (supra).The appeal, therefore, does not raise any substantial question of law in relation to this deduction”.
We have noticed that the similar disallowance was made in subsequent year i.e. in AY 2006-07, which, on the appeal of assessee was allowed in favour of assessee by Tribunal in and again for AY 2008-09 vide ITA No. 4053, 4160/Mum/2012 in favour of assessee, Hence, keeping in view the law laid down by Hon’ble Apex Court, judgment of Hon’ble Bombay High Court and various orders of Co- ordinate Bench of ITAT, Mumbai, and following the principle of consistency, we find no infirmity or illegality in the order passed by the CIT(A), hence, this ground of appeal
is dismissed.
10. Next ground for our consideration is adjustment in closing stock u/s. 145A of the Act.
11. AR of the assessee argued that this ground is also covered by the decision of ITAT, Mumbai in assessee’s own case in AY 2005-06 and in AY 2006-07 vide ITA No. 1813, 1831/Mum/2010 and by the judgment of Co-ordinate Bench of Mumbai Tribunal in Hawkins Cookers Ltd. vs. ITO in ITA No. 505/Mum/2004 dated 11.08.2008 and further in Ramaratan Wire Ltd. vs. DCIT in ITA No. 2180/Mum/2012 and ITA No. 8503/Mum/2011 and further Ahmadabad Bench of ITAT in Alpanil Vs. ACIT in ITA No. 169/Ahd./2005 and ITA No. 170/Ahd./2005.
12. We have seen that in assessee’s own case, similar adjustment was disallowed against the assessee in AY 2005-06, however, the Co-ordinate Bench of ITAT allowed the adjustment vide holding as under:
“45. Ground No.5 raised by the assessee reads as follows: “Ground 5: Adjustment in the value of stock u/s. 145A of Rs. 20,92,601/-
1. 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO of making an addition of Rs. 20,92,601/- by applying the provisions of section 145A of the Act.
2. The appellant prays that the addition of Rs. 20,92,601/- made by invoking section 145A of the Act ought to be deleted.
46. This is with reference to the method of accounting as stipulated under section 145A. The Assessee has followed Accounting Standard (AS) 2 on Valuation of Inventories and the Guidance note on Accounting treatment for Modvat/Cenvat issued by the ICAI and accordingly the exclusive method for accounting has been followed. Hence the assessee has valued its inventory as on 31/3/2005 exclusive of taxes, duties etc. paid or incurred on such closing stock. The effect of section 145A has been given in the Tax Audit report. The AO has made an adjustment of Rs. 20,92,601/- in the value of closing stock purported by applying the provisions of Section 145A of the Act by including the unutilized Cenvat credit in closing stock of raw materials. The AO has relied on the working published in an article authorized one Mr. K.L.Jhanwar in the month of December, 2007 issue of the ICAI magazine. For the purpose of statutory accounts the assessee has followed the AS-2 on valuation of Inventories and the Guidance note on Accounting Treatment for Modvat/Cenvat issued by ICAI and accordingly it followed the exclusive method for accounting. However for the purpose of tax return the assessee has worked out the impact of grossing up of tax duty cess etc. by restating the values of purchases and inventories by including, interalia the effect of cenvat credit. The working given on page No.143 of the PB-1 comparing the exclusive method followed and section 145A provisions. Therefore, since the assessee also draws the attention to page nos.140 – 143 of PB-1 which aptly brings out that since the adjustment as per section 145A has already been done, there is no further adjustment required. Further the assessee also relies on the decision of the Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd. (Del)(Spl Bench) wherein it is held that for the purpose of section 145A the modvat element in opening stock should also be adjusted and the addition only to closing stock is not appropriate. Besides, the Bombay ITAT has held in the case of J.B.Chemicals v. ACIT (10 SOT 362) that for giving effect to Section 145A, the adjustment should be made not only to the closing stock but also to purchases. The assessee submits that the working shown in Tax audit report is in accordance with these two decisions and hence the addition made by the AO only to closing stock deserves to be deleted. Hence the assessee prays that the aforesaid adjustment be deleted.
47. The CIT(A) however did not agree with the submissions of the assessee. He held that opening stock of the present will be the value of the closing stock of the earlier year and it cannot be varied. He, therefore, confirmed the order of the AO.
48. Being aggrieved by the order of the CIT(A) the assessee has raised Ground No.5 before the Tribunal.
49. We have heard the rival submissions. A perusal of the computation of income at page 48 of the paper book shows that from the profit as pr the P&L Account which was arrived at by the assessee by following exclusive method of valuation of inventory, the assessee had added the impact on the P&L Account by following the exclusive method.
50. The assessee has also not claimed deduction on account of excise duty on closing stock amounting to Rs.86,28,214/-. Thus the assessee had duly given effect to the provisions of section 145A as well as the provisions section 43B of the Act. In our view the AO ignored the submissions and has proceeded on the basis that only closing stock ought to have been revalued. In our view this is contrary to the decision relied upon by the assessee before the CIT(A). Even the Hon’ble Bombay High Court in the case of Mahalaxmi Glass Works has taken the view as was taken by the Hon’ble Delhi High Court in the case of Mahavir Alluminium (supra). In view of the above we hold that the addition made by the AO and confirmed by the CIT(A) should be deleted. We accordingly direct that the addition made be deleted.
And the similar relief was granted to assessee in assessee’s own case for AY 2006-07 in 2012 holding as under: “14. Before us, both the parties submitted that the issue is covered by the decision of the Tribunal in assessee’s own case in AY 2005-06 (supra) wherein the Tribunal held as under:- “50. The assessee has also not claimed deduction on account of assessee had duly given effect to the provisions of section 145A as well as the provisions section 43B of the Act. In our view the AO ignored the submissions and has proceeded on the basis that only closing stock ought to have been revalued. In our view this is contrary to the decision relied upon by the assessee before the CIT(A). Even the Hon’ble Bombay High Court in the case of Mahalaxmi Glass Works has taken the view as was taken by the Hon’ble Delhi High Court in the case of Mahavir Alluminium (supra). In view of the above we hold that the addition made by the AO and confirmed by the CIT(A) should be deleted. We accordingly direct that the addition made be deleted. Ground No.5 raised by the assessee is allowed.”
Since the issue under consideration is identical to that of AY 2005-06, we respectfully follow the decision of Tribunal in AY 2005-06 and in the light of that, we confirm the order of CIT(A) in deleting the addition made by the AO u/s 145 of the Act. Thus, this ground of appeal
is dismissed.
13. Considering the facts and legal positions referred above in assessee’s own case and following the principle of consistency, we do not find any illegality or infirmity in the order passed by the CIT(A). In the result, appeal filed by the Revenue is dismissed.
14. Now we shall discuss the various Grounds raised by the assessee in though the assessee raised as many as four Grounds, however, as per our opinion, the assessee has only two Grounds for our consideration.
15. First Ground for our consideration is disallowance of expenditure on repair of Rs.4,30,081/-. AR of the assessee argued that during the year under consideration, the assessee incurred expenditure of Rs.1,08,081/- on repairing Pipeline. Rs. 3,22,000/- related to building and machinery. The AO disallowed both the expenditure holding as a capital expenditure and cannot be treated as revenue expenditure. The CIT(A) confirmed the disallowance on Pipeline repair holding that assessee constructed the Pipeline during the current year is a capital asset which is required to be capitalized and sustained the disallowance. And in respect of amount of Rs. 3,22,000/-,it was concluded that from Tax Audit Report it is seen that said amount has been capitalised. However, no computation of income was filed with return, hence it cannot be ascertained, if the said amount has actually been added in the computation of income and directed the AO to verify the same if the same is already added back and then delete the addition. This fact is disputed by ld.
AR of the assessee in his submissions while arguing his case. Ld AR argued that assessee incurred Rs.2,22,000/- on installation and Rs. 100,000/- on implementation of server, purchased during the year and during the assessment proceeding it was inadvertently submitted before AO that the amount was earlier debited to P/L a/c, however the actual position was that said amount was earlier debitedto P/L account and later capitalised. Ld. Departmental Representative (DR) for the Revenue supported the order of authorities below and argued that the investment/expenditure made by assessee is capital in nature.
We have considered the rival contentions of the parties and perused the order of authorities below. We find that by making mere expenditure on repairs, no new asset came into existence or created. The expenditure of Rs.1,08,081/-was incurred for the purpose of repair and maintenance. The Revenue authorities has not disputed the nature of expenditure made on repair, rather, forming an opinion that the Pipelines repair by the assessee are capital asset. Keeping in view the nature of expenses which were incurred only on the repair of Pipeline, the addition of Rs.1,08,081/- is deleted. With regard to disallowance of Rs. 3,22,000/- which consist of Rs. 1,00,000/- for purchase of server and Rs. 2,22,000/- incurred for installation. The ld. CIT(A) while considering the nature of expenses incurred for installation of server concluded that assessee has not furnished computation of income as per return and the same could not be ascertained whether the amount has been actually added in the computation of income and directed the AO to verify the same. Hence, we do not find any illegality or infirmity in the direction given by ld. CIT (A) in the impugned order. Hence, this ground of appeal
is partly allowed.
17. Second Ground for our consideration is disallowance u/s. 14A r.w. Rule 8D(2) of the Act. During the year under consideration, the assessee claimed to have earned exempt income of Rs.1,16,15,394/- and exempt interest of Rs. 24,955/-. The assessee has not disallowed any expenditure against the said exempt income. The AO invoked the method prescribed under Rule 8D and worked out the disallowance u/s. 14A at Rs. 8,31,657/-. Ld. CIT(A) after considering the contention of the assessee concluded that assessee has not voluntary disallowed any amount on account for earning exempt income. As Rule 8D is applicable from the AY 2008-09, hence, the reliance of decision of ITAT in assessee’s own case for AY 2004-05 to 2006-07, as claimed by assessee were not applicable and rejected the appeal of assessee holding as under: “6.14 I have considered the above submissions of the appellant and also the decisions cited in this regard. Subsection (1) of section 14A of the Act prescribes that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Subsection (2) prescribes that if the Assessing Officer, having regard to the correctness of the claim of the assessee in respect of such expenditure is not satisfied, he shall determine the amount of expenditure incurred in relation to such income in accordance with the method as may be prescribed. Subsection (3) prescribes that the provisions of subsection (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income. With effect from AY 2008-09, rule 8D has been introduced, which lays down the method of computation of the expenditure in regard to exempt income for the purpose of disallowance under section 14A. 6.15 If one reads subsection (3) along with subsection (2), it simply means that in a case where the assessee claims that no expenditure has been incurred in respect of the exempt income, the AO shall determine the amount of expenditure incurred in relation to such income in accordance with the method as may be prescribed in view of the provisions of sub-section (2). Therefore, since from AY 2008-09, rule 8D is applicable, the AO shall be free to compute the disallowance of expenditure as per this rule in respect of the exempt income in all such cases where the assessee claims that no expenditure has been incurred in respect of the said income and no suo-moto disallowance of expenditure has been made by the assessee. This is quite logical as well, because it cannot be the case of any investor that he has not incurred even a single penny for making such investment and earning of exempt income there-from. This is exactly the case of the appellant, where accounts are kept on a mixed fund basis, and for the purpose of investment in shares etc, separate accounts have not been kept. Although the appellant has given a number of arguments based on the facts of its case, as outlined above, still, in spite of that, due to reasons cited above, it cannot be accepted that the appellant has not incurred even a single penny for making investment, maintaining the investment portfolio and thereby earning exempt income. Even if the requirement of AO's satisfaction in this regard is considered necessary, the very knowledge of the fact on the part of the AO that the appellant has not disallowed any expenditure suo-moto, was sufficient for her to compute the disallowance under rule 8D read with section 14A of the Act. 6.16 The latest decision available on this issue is the judgement of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd, 328 ITR 81, wherein the Hon'ble Court has held that the dividend income and income from mutual funds, falling within the ambit of section 10 of the Act are not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income. It has also been held that provisions of rule 8D of the I.T Rules, 1962 shall apply with effect from assessment year 2008-09. It is held by the High Court that the disallowance for the purpose of section 14A shall be computed as per rule 80 and the said rule is constitutionally valid. In view of this decision therefore, it is evident that the AO was justified in computing the disallowance under rule 80 in respect of the appellant's exempt income because the appellant had not made any disallowance suo-moto and claimed that absolutely no expenditure has been incurred in relation to the earning of exempt income. The decision of Hon'ble Bombay High Court is binding and the AO has simply followed the same. Hence I have no choice than to reject the contention of the appellant.”
In view of the above observation, we find that assessee not claimed that interest free funds were available with him for making investment for earning exempt income. Assessee has not made voluntary disallowance for earning exempt income while filing return of income. The AO invoked/applied the provision of Rule 8D for working out the disallowance on the basis of judgment of Hon’ble jurisdictional High Court in Godrej & Boyce Manufacturing Co. Ltd. (328 ITR 81). The disallowance made by AO is reasonable one. Ld. CIT(A) has elaborately discussed all the factors leading to working of the disallowance in its order. Hence, we do not find any infirmity or illegality in the order passed by CIT(A). Thus, this ground of appeal
raised by assessee is dismissed.
19. In the result, appeal filed by the revenue is dismissed and the appeal filed by assessee is partly allowed.
Order pronounced in the open court on this 27th May, 2016.