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2018 (4) TMI 311 - AT - Income TaxDeduction of expenses u/s 37 - Liquidated damages and provisions for warranty - Held that - Provision for warranty claimed is decided in favour of the assessee as relying on case of Rotork Controls India (P) Limited vs. CIT reported in (2009 (5) TMI 16 - SUPREME COURT OF INDIA) Total provision for liquidated damages was of ₹ 19,66,51,910/- out of which ₹ 2,04,52,238/- were utilized and credited / written back, the remaining amount of ₹ 17,61,99,672/- was the actual amount of the damages which were accounted for in the profit and loss account. CIT(A) categorically stated that when the payments were actually made, the accounts were adjusted with reference to any remission or waiver that the company may get in respect of damages payable for the late delivery and the same was brought to tax u/s 41 (1) of the Act by crediting the liquidated damages accounts. Therefore, the impugned amount was not only the provision but the actual amount of the liquidated damages pertaining to the period of delay falling within the previous year relating to the assessment year under consideration. The learned CIT(A) categorically stated that the assessee was following this method consistently - Decided against revenue
Issues Involved
1. Provision for warranty claimed as expenses. 2. Provision for liquidated damages claimed as expenses. Detailed Analysis Issue 1: Provision for Warranty Claimed as Expenses The Department appealed against the order dated 26.2.2014 of the CIT(A), XVI, Delhi, which was earlier disposed of by the ITAT Delhi Bench "E" New Delhi. The issues of liquidated damages and provision for warranty were restored to the CIT(A). The High Court directed the ITAT to adjudicate these issues. During the hearing, the assessee's counsel referenced a judgment by the Karnataka High Court in the assessee’s own case, which was favorable to the assessee. The Department's representative could not counter this claim. The Tribunal noted that an identical issue with similar facts was previously decided in the assessee's favor by the Karnataka High Court, following the Supreme Court judgment in Rotork Controls India (P) Ltd. vs. CIT (2009) 314 ITR 62. The Supreme Court defined a provision and the conditions under which it can be recognized, emphasizing that obligations arising from past events should be recognized as provisions if they meet specific criteria. Based on this, the Tribunal decided the issue relating to the provision for warranty in favor of the assessee. Issue 2: Provision for Liquidated Damages Claimed as Expenses The assessee argued that the liability for liquidated damages was ascertained and not contingent, made at a contractual rate of 0.5% to 0.7% of the sale value. The actual damages paid were transferred to the profit and loss account, and the remaining provision was carried forward to the balance sheet. The Department contended that the liquidated damages were contingent and supported the AO's addition. The Tribunal reviewed the CIT(A)'s findings, which detailed the nature of the provision for liquidated damages. The provision was made based on contractual obligations and the invocation of liquidated damages clauses by customers due to delays in supply. The CIT(A) referenced several judicial precedents, including the Supreme Court's decision in Bharat Earth Movers Ltd. vs. CIT (245 ITR 428), which held that a definite liability incurred in the accounting year should be allowed as a deduction, even if quantification occurs later. The CIT(A) concluded that the provision for liquidated damages was an ascertained liability, determinable based on the contract terms, and consistently followed by the assessee. The Tribunal found no reason to interfere with this factual finding and upheld the CIT(A)'s decision to delete the addition made by the AO. Conclusion The Tribunal dismissed the Department's appeal, affirming the CIT(A)'s decision on both issues: the provision for warranty and the provision for liquidated damages were both recognized as valid expenses. The judgment emphasized adherence to established accounting principles and judicial precedents in determining the nature of liabilities and provisions.
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