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TMI Blog2010 (9) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... ome since, the Tribunal's order in block assessment is under reference before this Hon'ble Court. (b) Whether the Appellate Authorities were correct in holding that me warranty expenses which may be claimed subsequently for goods sold by the assessee due to any defect should be allowed as an expenditure during the current assessment year itself by basing such a conclusion on mere conjectures and surmises and recorded a perverse finding when these expenses had not arisen in present but would arise in future i.e., when the customer made such a claim. In ITA No 52 of 2007: (a) Whether the Tribunal was correct in holding that provision for warranty claim being a contingent liability is an allowable revenue expenditure. (b) Whether the Tribunal was correct in holding that the claim of lease rent cannot be treated as the income of the assessee as the transaction was genuine and consequential depreciation claimed was withdrawn which has not concluded and is awaiting the decision of the Settlement Commission. 2. The assessee is a company having income generated by its business but varied activities, particularly as for the assessment year 1998-99 it had activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and relating to an undisclosed source, the claim for eking out the depreciation part on the earning of such income and therefore no claim could be permitted as though it is an income from the business activity such as leasing activity and for computing such profits commensurate deduction should have been allowed etc., and on the other hand, the question viz., provision made towards future warranty claims, on examination of the relevant case laws relating to the concept of deductible expenditure within the scope of Section 37 of the Act, which is a residuary provision for claiming business related expenditures as deductible expenditure in computing business profit of the assessee having business activity, had opined that the provision for a future contingency liability cannot be equated on a par with a present liability, whether to be made in future or otherwise, but show such a claim for even providing or making payment in future having not arisen, but the assessee claiming for making a provision on anticipated future claim was not a deduction that could come within the scope of Section 37 of the Act and therefore had declined such a claim after elaborately discussing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The judgment of the Supreme Court, touching upon the scope of allowable deductions in terms of Section 37 of the Act and a possible provision at a particular rate or at a particular percentage of the value of sales effected during the accounting period being allowed as a deductible expenditure in terms of Section 37 itself, even in respect of future anticipated warranty claims, which, if had been worked out on a systematic and scientific methodology based on history and past experience of such claims having arisen and having settled by an assessee, who, perhaps, has taken it to the level of an arithmetic precision for having arrived at a percentage of deduction to be allowed during the earning period of the income. 11. On the contrary, Ms Anuradha, learned counsel for the respondent-assessee having very vehemently urged that this very question in respect of the very assessee had arisen before this court for the assessment year 1999-2000 in ITA No 3047 of 2005, also an appeal at the instance of the revenue, and this court having elaborately gone into the contentions urged on behalf of the revenue as well as the assessee by the respective counsel and after having elaborately disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 37 of the Act, is not a law which can be sough to hold the field any more in the wake of the judgment of the Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra), and it should be taken that the view expressed by this court in ITA 3047 of 2005 and connected matters, as impliedly overruled, irrespective of the further outcome or result of the view expressed by this court in the said case and that view even if it is not disturbed by the Supreme Court in its further appeal to the Supreme Court, but all such developments are only of historical significance as of now, in the wake of the decision in Rotork Controls India (P.) Ltd.'s case (supra), and therefore urges that the question should necessarily be answered against the assessee and in favour of revenue to reverse the findings of the Tribunal as well as the appellate commissioner and to restore the view as expressed by the assessing officer, who had held that the claim put forth by the assessee is not in the nature of a deductible expenditure within the scope of Section 37 of the Act. 14. Elaborating the submission, Sri Seshachala has further drawn our attention to the orders passed by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal is clearly contrary to the law laid down by the Supreme Court on this aspect of the matter in Rotork Controls India (P.) Ltd.'s case (supra). 17. With regard to the answers given by this court for the other assessment year in respect of the very assessee on the very questions, submission of Sri Seshachala. learned senior central government standing counsel for the income tax department is that firstly each assessment year is different so far as assessment of income in the corresponding accounting period is concerned; that evidence or material placed for one year for claiming or working out a methodology per se cannot constitute evidence for another assessment year; that the income of each year has to be assessed based on the facts as they pertain in the facts and circumstances of the accounting period corresponding to the assessment year; that what income had been earned in another year is of no consequence and what evidence has been placed before the authorities in another year is of no consequence; that in the present appeal of the revenue, the orders passed by the appellate tribunal and first appellate authority recording a finding that the assessee has evolved a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year, but where no expenditure is laid out, in the sense, no claim has been put forth by any customer, there is no question of allowing a deduction by way of a provision for possible future claims and such is the law settled law all along and an exception only to the limited extent has been indicated in Rotork Controls India (P.) Ltd.'s case (supra) on the facts and circumstances of the case and because the assessee in that case had evolved the methodology for claiming such deduction even by way of future possible claims, based on the experience for the past about seven years in the case of that assessee and in the present case. no any material to indicate of past settling of claims based on the past experience having been placed before the authorities, the present case does not qualify for the kind of exception made in Rotork Controls India (P.) Ltd.'s case (supra) and therefore the assessee cannot claim the benefit of the ruling of the Supreme Court in Rotork Controls India (P.) Ltd.'s case (supra) but on the other hand, as the facts and circumstances and the assessee fell short of making good a possible claim being brought within the scope of ruling of the suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be taken that the view expressed by this court in ITA No.3047 of 2005 has also been affirmed by the Supreme Court and therefore it is of no consequence to look into the law, if any, as has been declared by the supreme court in Rotork Controls India (P.) Ltd.'s case (supra) to make a distinction in respect of this assessee for the other assessment years. 22. It is also emphatic submission of Ms Ahuradha, learned counsel for the respondent - assessee, that on facts with the appellate commissioner and the tribunal having given a clear and categorical finding to indicate that the computation of the same has been made on perfectly scientific basis by taking into consideration the actual expenses incurred for rendering the warranty services, the finding of fact recorded by the appellate commissioner and affirmed by the Tribunal to that effect cannot be disturbed in an appeal by this court under section 260-A of the Act as it is not open to this court to examine or take a different view on a finding of fact as recorded by the lower authorities and therefore also the question as to whether the finding is proper or not as is sought to be made out on behalf of the revenue cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s future possible warranty claims being much less than the percentage as is indicated by the Supreme Court in Rotork Controls India (P.) Ltd.'s case (supra), the claim is fully justified and it is to be allowed even in terms of the Judgment of the Supreme Court. 25. However, learned counsel for the revenue is quick in pointing out that the so-called 'perfectly scientific basis' has no basis at all; that there was absolutely no material placed before the assessing authority or the higher appellate authorities indicating either the basis or the actual warranty claims met and expenditure incurred for the earlier assessment years based on which scientific methodology could have been worked out; that a perusal of the chart only indicates that it is worked out only for the future period on and after the sale having taken place and by a method of reducing the possible warranty period as and when time has elapsed from the date of the sale, but nothing is there to indicate that the percentage even any arrived at is based on any past experience that is based on actual warranty claims met by the assessee in respect of sales effected for the accounting period corresponding to earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there is no precedence or the principles of res judicata as are applied under section 11 of the Code of Civil Procedure per se is not attracted. That is for the simple reason that the subject matter for each assessment year is different, namely, income of the corresponding accounting period of the assessee and what income is earned in an accounting period is again a question of fact and varying from one year to another and therefore generalization of either the level of income or the manner of determination of the tax liability is not concluded by anyone assessment order. While such is the legal position insofar as the assessing authorities and the determination of tax liability is concerned, if the superior courts in this country have while examining the relevant statutory provisions have indicated a manner of understanding of the statutory provisions either by resort to an interpreting a principal or the actual meaning of the statutory provision is clarified by the High Courts or as declared by the Supreme Court that becomes binding on all authorities and even an earlier ruling of the court if it has a general principle involved on an understanding of the statutory provision, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed towards the provision for future warranty claims and it is this appellate order which was subject matter of further appeal in ITA No. 141[BANG]/2002 which the Tribunal disposed of on 26.7.2004. The present appeal in ITA No. 13 of 2005 the earliest of the appeals preferred by the revenue is the appeal against this order which was relevant to the earliest of the three assessment years and which contained reasons as spelt out by the appellate commissioner and as affirmed by this appellate order by the Tribunal. 33. We notice that in respect of the two other assessment years, the appellate tribunal only followed and applied the reasoning as had been given in the assessment relating to the assessment year 1998-99. 34. It is therefore that the examination of the contentions of the assessee relating to the assessment year 1998-99 in the first instance if at all could have been a satisfactory way of resolving answers to the questions as had arisen for this assessment year. 35. Be that as it may, it is a fact that this court did examine the question as arose from the order of the Tribunal passed for the assessment year 1999-00 wherein the Tribunal's order was merely, one pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the actual warranty claims that it had received in the past accounting period relevant for the earlier assessment years and what actual expenditure it had incurred and provided in the earlier accounting periods. There is nothing on record to indicate any such expenses having been incurred or laid out by the assessee as had been claimed before the authorities or as had been placed before the authorities. The so-called 'perfectly scientific basis' is merely one relating to the tabular column appended to the return of income and the footnotes to the tabular column. At the best, one possible, method that is discernible is that in respect of sales effected during the accounting period, the unexpired months are in an ascending order with the figure for the month of April 1997 being '0' and figure for the month of March 1998 being '11'. 41. Ms Anuradha, learned counsel for the assessee has sought to explain by drawing our attention to the amount attributable to the warranty [20%] as Rs. 72.08.000/- and the provision for unexpired warranty cost as Rs. 39,67,845/- as against the net product sales of Rs. 78,11,73,000/- and has submitted that the warranty cost/produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces inevitably has to be answered in the negative in favour of the revenue and against the assessee for the simple reason that the conclusion of the first appellate authority is nothing short of a conclusion which is more conjunctures and surmises and not on, relevant material, but in an illogical manner, but more importantly being a perverse finding for the reason that the finding is not backed by commensurate material or evidence. Even a finding of fact without support of commensurate material is a substantial question of law as the finding becomes perverse finding which is the settled legal position. The ipsy-dixsy of the tribunal in dismissing the appeal of the revenue by merely endorsing the view taken by the first appellate authority by simply saying that they have considered the rival contentions and gone through the records and by further saying that the facts of the case arc more or less identical to the facts decided by the different Benches of the Tribunal as it has quoted which read as under: "(a) Voltas Ltd. v. Dy. CIT [1998] 61 TTJ 543/98 Taxman 174 (Mum.)(Mag.) (b) ITO v. Wanson [India] Ltd. [1983] 5 ITD 102 (Pune) (c) CIT v. Majestic Auto Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40A. Expenses or payments not deductible in certain circumstances - (7)(a) Subject to the provisions of cl. (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason; (b) Nothing in cl. (a) shall apply in relation to: (i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year: (ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely: (1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fully 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 subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, but nevertheless it is claimed by an assessee as possible future expenditure which may have to be incurred or laid out because of certain terms of the sale of its product with its customers and has indicated that the High Court should not have disturbed the finding of the Tribunal in the peculiar facts and circumstances of the case as it prevailed in that case and as the assessee in that case had rightly made a provision for warranty by calling in aid a fiction that it can be so acted because the assessee has incurred the present obligation as a result of past events that there was evidence and material to indicate continuous outflow of resources and reliable estimation of the obligation was also possible and it is with support of all such factual position, the Supreme Court ventured to conclude that: "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 s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponse, learned counsel for the assessee has also submitted that neither the Assessing Officer has gone into the question of the method and manner of the assessee claiming deduction towards provisioning of future warranty claims; that the Assessing Officer has neither indicated that it is based on past experience nor has indicated it is not and as to whether the method is incorrect is not the finding recorded by any of the authorities. 53. We have examined the present appeals on the touchstone of the law declared by the Supreme Court and as already discussed above. We find that it falls too short of the requirement as indicated by the Supreme Court in Rotork Controls India (P.) Ltd. (supra). 54. We have further examined the submissions of the learned counsel for the assessee that with the Assessing Officer also not having recorded a finding of fact as to whether the working out of the provision was based on past experience or otherwise, there was no occasion for this court to infer either in favour or adverse to the assessee on this aspect of the matter. 55. While we appreciate the submissions made at the Bar and we also do appreciate that it is only for the purpose of supporting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future warranty claims was based on past experience and past actual expenditure incurred due to the claims that the assessee had received, the method as was sought to be placed before the authorities and as has been exempted by this court is not a method which fetches the approval of this court on the touchstone of the law laid down by the Supreme Court tin Rotork Controls India (P.) Ltd. (supra). 59. Therefore, the question of remanding the matter to the authorities for recording a finding of fact in the absence of any material with reference to which a finding of fact is to be recorded is an exercise in futility and therefore we have to inevitably reject the submission made on behalf of the assessee even for a remand to the authorities to record the so-called finding of fact regarding method being based on past experience of the assessee. 60. In the absence of any material on record to indicate that the assessee had filed returns for the earlier assessment years indicating the actual claims that it had received from its customers and the actual expenditure incurred or laid out, we are not even encouraged to remand the matter to the authorities for enabling the assessee to place ..... X X X X Extracts X X X X X X X X Extracts X X X X
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