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TMI Blog2008 (3) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... ing part of the Steri Group for a lump sum consideration and hence there was no more purchase of raw materials from Steri Group. On reconciliation of accounts it was found that a sum of Rs. 2,19,609 was due from Steri Group because of rejection of certain materials supplied earlier which the latter did not acknowledge and hence, the assessee had written off the same amount as bad debts during the assessment year under appeal. The Assessing Officer disallowed the same holding that the said amount was receivable on account of purchase of manufacturing units, and therefore, the expenditure was of capital nature, not allowable as deduction. The CIT(A) appreciated the submissions of the appellant in this respect that the amounts written off indeed pertained to raw materials purchased in earlier year and not to assets and therefore deleted same. 4. The learned DR Shri Gunjan Prasad submitted that while passing the order, the learned CIT(A) has merely accepted the contention of the assessee but the order is a non-speaking one. This approach is not proper in view of the Supreme Court decision in the case of Mangalore Ganesh Beedi Works v. CIT [2005] 273 ITR 56 . 5. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the assessee but the order is a non-speaking one. He further submitted that the service kits were important for maintenance of old machinery. These were purchased for the first time which brought into existence new capital asset. Reliance was placed on the following decisions : (1) CIT v. Saravana Spg. Mills (P.) Ltd. [2007] 293 ITR 201 (SC); and (2) CIT v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328 (SC). 9. The learned counsel for the assessee on the other hand relied upon appellate order. He submitted that by purchasing certain service kits, the same were used only for servicing and repairing of specific old plant and machinery. This has not brought into existence any new capital asset and hence the expenditure cannot be considered as capital expenditure. 10. We have considered the rival submissions and the decisions cited. The assessee in order to undertake servicing and repairs of specific old imported plant and machinery purchased certain service kits. The Assessing Officer has treated the same as capital expenditure. The assessee has claimed deduction under section 31 of the Act. When deduction is claimed under section 31 in respect of repai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the assessee took possession of Rs. 5,84,500 equity shares of TVS Whirlpool Limited (TWL), later renamed Whirlpool Washing Machines Ltd., which was held by HSL along with duly signed blank transfer deeds. The agreements provide that interest at the rate of 10 per cent would be charged on such loan which was duly provided in the assessee accounts for the previous year ending 31-3-1995. The interest so provided on accrual amounted to Rs. 13,64,219. HSL was unable to repay the loan in 12 months tenure as provided in the agreements. The assessee accordingly, appropriated the said shares against the loan amount of Rs. 2,924.25 lakhs and the loan transaction was thus squared off. Since the shares were appropriated against the loan, the transaction was viewed as sale of shares by HSL, and hence it did not pay any interest on the loan taken from the assessee, as from HSL point of view the transaction was deemed to be complete on the date of appropriation of the shares by the assessee. In view of the aforesaid, the amount receivable by the assessee from HSL on account of interest already credited to the profit and loss account of the previous year relevant for the assessment year 1995-96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquiring capital assets. The assessee had claimed depreciation of Rs. 7,54,793 on additions made to the cost of fixed as assets on account of foreign exchange fluctuation in respect of foreign currency loan taken to acquire such fixed assets, which remained outstanding at the end of the relevant financial year. The Assessing Officer relying on the order for assessment years 1995-96 disallowed the claim of depreciation on account to the fixed assets due to fluctuation in foreign exchange on the ground that the same was admissible only at the time of actual repayment of the foreign currency loan and not on the intermediate fluctuation in the rate of exchange which is recognized at the end of the year. The CIT(A) deleted the addition by relying on earlier year orders for assessment year 1995-96. 15. At the time of hearing both the counsels agreed that the issue stands decided in favour of the assessee by the decision of Hon ble Delhi High Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2007] 294 ITR 451 wherein the court held that the amendment to section 43A of the Act is prospective with effect from 1-4-2003 and prior thereto the cost of asset was to be adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under appeal. In view of the submissions by the learned counsel for the assessee the amount of 1/7th and 1/10th of debenture issue expenses cannot be allowed in the year under appeal and the same were rightly disallowed by the Assessing Officer. 20. In the result the appeal is partly allowed. 21. We now take up the appeal of the assessee. The first ground of appeal is as under : "That the CIT (Appeals) erred on facts and in law in not deleting addition of Rs. 3,09,42,798 being additional warranty provision made on the basis of actuarial valuation in the assessment year under appeal in respect of floating population of machines in the market." 22. The assessee is manufacturing and selling refrigerators and deep freezers and the same being consumer durable products, assessee offers Optional Service Contract (OSC) for a period of seven years on machines sold. The warranty for the first year of sale is for the whole machine whereas from the 2nd to 7th year it relates only to the compressor. The amount received by the assessee on account of OSC are included in its income in the year of sale. The assessee has been consistently making provision for warranty on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. CIT [2006] 98 ITD 278 (Hyd.). Shri Vohra also submitted that it may be pertinent to point out that in the future years, the appellant has been providing for warranty liability on the basis of actuarial valuation in respect of floating population of machines with outstanding warranty obligation as at the relevant year end consistent with the method followed in the year under appeal. The provision for warranty made on the aforesaid basis has been allowed deduction by the Assessing Officer in the assessment years 1995-96 to 2000. In that view of the matter, the disallowance made calls for being deleted. 24. The learned DR on the other hand, relied upon appellate order. He submitted that the provision for additional warranty claimed is in respect of sale of compressors and not refrigerators. He submitted that the sales in respect of which additional warranty provision is made were not made during the year. Thus the liability for warranty provision crystallized in the year of sales and not in the subsequent years when the provision was made. Reliance was placed on the decision of Hon ble Delhi High Court in the case of CIT v. Vinitec Corpn. (P.) Ltd. [2005] 278 ITR 337 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys be related to the year of sale. It is settled law that even though there is some difficulty in estimation, it would not convert the accrued liability into an additional one or a contingent liability. Reference can be made to the decision of Hon ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and that of Bharat Earth Movers v. CIT [2000] 245 ITR 428 . The Hon ble Karnataka High Court in the case of Motor Industries Co. Ltd. ( supra ) held that where the assessee is required to make provision for additional gratuity liability pertaining to the past services, the same is held to be an allowable deduction. Thus the ratio laid down can help the case of the assessee in the sense that even if the sales were effected in the past, the additional liability on the re-appreciation of the material on hand will require the assessee to make provision for additional liability if the situation so demands and can be claimed as deduction. The decision of Hon ble Delhi High Court in the case of Vinitec Corpn. (P.) Ltd. ( supra ) relied upon by the learned DR laid down that provision for future liability under warranty which is under the Warranty Clause of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g convenience, ignoring the fraction period of few days of February, 1995 the royalty was calculated on sales made from 1-3-1995 and onwards. Accordingly the royalty of Rs. 70,66,000 pertaining to sales made during the period from 1-3-1995 to 31-3-1995 was accounted for in the captioned assessment year. In the computation of total income the assessee suo motu offered to tax the royalty expenses of Rs. 70,66,000 considering the same as previous year expenses in view of the auditor s disclosure in the tax audit report. However, the assessee vide letter dated 20-8-1998 submitted to the Assessing Officer during assessment proceedings that the royalty of Rs. 70,66,000 should be allowed to the assessee in the previous year relevant to assessment year under appeal in terms of section 40( a )( i ) of the Act, since the tax has been deducted on royalty in the year under appeal only, and deposited on 10-5-1996, i.e., within the time prescribed by rule 30 of the Income-tax Rules, 1962. Hence, the same could only be allowed during the present year under appeal. The contention raised by the assessee during the assessment proceedings was negated by the Assessing Officer and the claim for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing the income of the previous year in which such tax has been paid or deducted." Referring the above provision the Hon ble Delhi High Court in the case of Oracle Software India Ltd. ( supra ) held that where the disallowance was made only on the ground that payment was actually made in the next financial year. Under section 40( a )( i ) as long as the tax was deducted within the year, the assessee must be entitled to its benefit. Since it is noted that the assessee had deducted the tax during the relevant year, the Assessing Officer averred in his view. Once again the Hon ble Delhi High Court in the case of Nestle India Ltd. ( supra ) held as under : "Section 40( a )( i ) has three ingredients ( a ) Royalty which is payable outside India or in India to a non-resident; ( b ) the tax is deductible at source under Chapter XVII-B and has not been deducted, or ( c ) after deduction has not been paid during the period specified. In the section it is a composite performance and a satisfaction of these ingredients which would deduct the amount indicated in the section beyond the mischief of section 40( a )( i ). If language of these ingredients are not satisfied, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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