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TMI Blog2013 (8) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... age of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act. Disallowance for provision of warranties - One year warranty is offered on each computer manufactured and sold by it to purchasers and in terms thereof the assessee provide free maintenance including replacement of parts within one year from the date of sale / installation of computers – Held that:- 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 – Applying the decisions in the cases Bharat Earth Movers Ltd. Vs. CIT [2000 (8) TMI 4 - SUPREME Court]; Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai [2009 (5) TMI 16 - SUPREME COURT OF INDIA], it was held that provision for warranty is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'Act') relating to the assessment year 1991-92. The appeal was admitted vide order dated 24.9.2007 on the following substantial questions of law : - "(1) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance of Rs.77,16,120/- under the head advertisement expenses, following the judgements of the Hon'ble Apex Court which did not at all apply to the instant case ? (2) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance's of Rs.33,77,573/- under the head provisions for warranties ? (3) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the ddisallowance's of Rs.49,37,042/- on account of provisions for royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961 ? (4) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in confirming the order of the CIT (A) in deletion of Rs.82,352/- out of entertainment expenses ? Question No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.' From the perusal of the aforesaid observations of the Apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act. As regards the relevance of accounting method followed by the assessee, we have already observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck Rs.29,51,909/- to the profit as per profit and loss account. While considering this issue the Tribunal has recorded the following findings in paragraph Nos. 10, 11, 12, 13 and 14 of the impugned order : - "10. We have considered the rival submissions. A copy of the computation of the total income for the A.Y.91-92 is placed at page 20-21 of Assessee's paper book. Perusal of the same indicates that the Assessee had debited a sum of Rs. 29,51,909/- in its profit and loss account and this sum was added back to the profit as per profit and loss account and the entire sum of Rs.77,16,120/- was claimed as deduction. By disallowing the entire sum of Rs. 77,16,120/- the AO has in effect disallowed a sum of Rs. 29,51,909/- in excess of what has been claimed by the Assessee as deduction. The disallowance at best could have been only Rs.47,64,211/- (Rs.77,16,120/- Less Rs.29,51,909/-) for the reason that even as per the AO the expenditure to the extent of Rs.29,51,909/- was of a revenue nature as the benefit from incurring this expenditure resulted in benefit to the Assessee to that extent during the previous year. Be that as it may. We may now consider the concept of deferred revenue ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. As a matter of fact, the very purpose of categorizing certain expenditure differently under the head "Deferred revenue expenditure" for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia, the profit of a particular period year as the benefit thereof accrues over a period exceeding the accounting year in which the same are incurred. It is thus clear that when any expenditure is treated as a "deferred revenue expenditure", it presupposes that the concerned expenditure, creating benefit in the Revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. It is thus clear that the authorities below misconstrued the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account, which are not decisive or conclusive in this regard. 14. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs.77,16,120/- made to the total income. Thus grounds 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds 1.1, 1.2 and 1.4." 6.Learned counsel for the appellant has failed to point out any error of fact or law in the impugned order of the ITAT on the point of allowability of advertisement expenses of Rs.77,16,120/-. We also do not find any error in the aforesaid findings recorded by the ITAT. In the case of CIT Vs. Woodward Governor India Private Limited [(2009) 13 SCC 1 Page 1] vide paragraph no. 24, 25 and 33, the Hon'ble Supreme Court has held that Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of business or profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. The Assessing Officer disallowed the entire amount of Rs.33,77,573/- on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. Aggrieved, the assessee filed an appeal before the CIT (A) who confirmed the addition made by the Assessing Officer. The CIT(A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. Aggrieved with the order of the CIT(A) the assessee preferred an appeal before the ITAT which was allowed by the impugned order holding that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain. To reach to the aforesaid finding, the ITAT applied the principles of law settled by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428 (SC) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.10,18,800/- which exceeded the actual expenditure, the appellant reversed Rs.5,00,246 as Reversal of Excess Provision. Consequently, the assessee claimed deduction in respect of the net provision of Rs.5,18,554/- which was disallowed by the A.O. on the ground that the liability was merely a contingent liability not allowable as a deduction under Section 37 of the Income-tax Act, 1961 (the 1961 Act", for short). This decision was upheld by CIT (A). The matter was carried in appeal to the Tribunal by the appellant. 21. We quote hereinbelow the relevant provisions of the Income Tax Act, 1961 as it stood at the material time : 37. General-(1) Any expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession. 40A. Expenses or payment not deductible in certain circumstances - (7)(a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. Explanation 2.-For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid. 22. 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 degree of estimation. 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in some of the items. The data also indicates that the warranty cost(s) is embedded in the sale price. The data also indicates that the warranty is attached to the sale price. In the circumstances, we hold that the principle laid down by this Court in Metal Box Co. of India will apply." (emphasis supplied by us ) 11. Applying the principles of law laid down by Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. (supra) and Rotork Controls India Pvt. Ltd. (supra), we find that the conclusion reached by the ITAT does not suffer from any infirmity. Accordingly, we answer the question no.2 in negative i.e. in favour of the assessee and against the revenue. Question No. 3 12. The Assessing Officer disallowed and added back to the income of the assessee Rs.49,37,042/- on account of royalty as unascertained liability. The Assessing Officer rejected the explanation of the assessee. The provision for royalty was made at Rs.47,70,089/- which is exclusive R D Cess of Rs.1,66,953/-. The aggregate of both the amount is Rs.49,37,042/- is shown in the balance sheet. The CIT(A) upheld the addition made by the Assessing Officer. The ITAT found that in the books of account rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book entries in respect of tax deductible. Thus, out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. The aforesaid interpretation is also supported by the proviso to section 40(a)(i) which provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning. 15. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. This provision of Section 40(a)(i) was substituted by Finance Act (No.2), of 2004 which puts the condition that where tax is deductible at source under Chapter XVII B, and such tax has not been deducted or, after deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, - (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200; Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of Section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.- For the purposes of this sub-clause,- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section 9." 16. In view of the discussion made above we are of the view that since the assessee has deducted the tax during the previous year relevant to the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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