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TMI Blog2011 (9) TMI 994X X X X Extracts X X X X X X X X Extracts X X X X ..... d income. 3. That the appellant may please be permitted to amend or alter any of the foregoing grounds or to adduce any additional ground at or before the time of hearing." The grounds of appeal taken by revenue in ITA No.2882/Del/2011 read as under :- "1. On the facts and circumstances of the case and in law, the CIT (A) has erred in restricting the addition to ₹ 5,00,000/- out of total addition of ₹ 45,80,999/- made on account of disallowance u/s 14A of the I.T. Act. 2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing." 2. The assessee is engaged in the manufacture of commercial vehicles, tractors, two wheelers and gears. The assessment u/s 143(3) was completed on 12.12.2007. 3. In ground No.1 of assessee's appeal, the issue involved is against the confirmation of the disallowance of provision for warranty of ₹ 91.70 lacs. The learned AR submitted that the assessee is engaged in the business of manufacture and sale of commercial vehicles, tractors, two wheelers and gears. These products are sold with warranty period and during the warranty period, if any component becomes defective due to any manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nger an unascertained liability, hence it should have been made allowable as deduction. The learned AR also relied on the decision of Hon'ble Delhi High Court in ITA No.1154 of 2009 in the case of CIT vs. Whirlpool of India Limited wherein the Hon'ble High Court has decided as under :- "19. We may also point out at this stage itself that the Supreme Court distinguished the judgments in Sajjan Mills (supra) as well as Indian Molasses Co. (supra). We would also like to refer to the judgment of the Supreme Court in CIT Vs. Woodward Governor India P. Ltd. 312 ITR 254 wherein it was held that the accounting method followed by the assessee continuously for a given period of time has to be presumed to be correct till the AD comes to the conclusion for the reasons to be given that the estimate does not reflect to be true and correct profits. 20. The legal principle delineated in the aforesaid judgment would clearly demonstrate that whenever there is a warranty clause in the bulk product sold by the company/assessee to its customers, warranty provision can be made and it would not be treated as contingent liability. There is no quarrel to this proposition and in fact in this very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal warranty. The assessee's claim that additional provision was made for increasing trend in the claim is not based on any scientific study and actuarial basis. Past history in this regard also had no role for this claim. The provision for warranty has been already calculated @ 0.43% which is based on past history of case, therefore, allowing the provision for additional warranty on LCV (Engine and trans) for earlier years shall amount to be the double claim. He pleaded to sustain the order of CIT (A) on this issue. 5. We have heard both the sides and also considered the facts of the case. The relevant part of CIT (A) order is as under:- 3.13 I have considered the facts of the case, assessment order of the assessing officer and submissions made by the assessee. The Supreme Court in the case of Rotork Controls (supra), after considering the various earlier decisions rendered in the context of accrual of liability and allowability thereof under section 37 of the Act held that provision for warranty made in respect of sales occurred during the year, which may need to be discharged on a future date, is allowable deduction in the year of sale itself provided a reliable estimate of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the relevant year. The aforesaid method of computing warranty has been upheld by the Tribunal in the assessment year 2002-03 and by my predecessor in the assessment year 2003-04. 3.16 From the chart extracted above, it is seen that additional warranty has been claimed (Eng+ Tran) on LCV for earlier years of ₹ 91.70. This claim has been made for the first time this year and is not covered by the decision of CIT(A) nor the Hon'ble ITAT. It was submitted before the A.O that this additional warranty was claimed because of actual problems faced during the year but no evidences of such actual incidences of such problems could be filed before the A.O nor was there any mention of such remarks in the audit report. Before me it was submitted that the additional warranty of 91.70 was made in this A.Y on account of increasing trend in actual settlement of warranty claims as observed in the past years. Considering the increasing trend the appellant estimated the normal provision cost in respect of sales rendered during the year at 0.43% as against 0.39% arrived at on the basis of average claims settled in last three years. The appellant also submitted that this was explained to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transmission for LCV. When no evidence could be produced of actual incidences and claims from various customers and dealership, it has changed its stand and argued that the additional provision was on account of increasing trend in claim and hence provision was increased from .39% to .43%.From the chart extracted and referred to above and found in page 2 of assessment order the provision for warranty calculated at ₹ 1424.12 (including addll Warranty provision on LCV( engine and trans) for earlier years) has already been calculated at .43%.Therefore if the appellants claim is accepted it will amount to allowing the double claim of the appellant. 3.19 Accordingly, the disallowance made by the assessing officer is partly deleted and the amount to the extent of ₹ 91.70 is confirmed. Therefore the appellant partly succeeds in this ground." Thus, the CIT (A) has granted the part relief. The CIT (A) has accepted the settled legal position. Provisions for warranty based on scientific study and calculated on the basis of actuarial and past history of case is allowable. In all cases relied upon by learned AR, it has been held that provision for warranty is allowable only when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timate. Learned AR submitted that the mutual funds were purchased and sold during the year and the loan amount has been reduced in comparison to the past year. The investment and the mutual funds is not the main business of the assessee and only surplus funds are invested in these funds. There is no nexus between borrowed funds and investments, hence nothing should be disallowed and he relied on the decision of Hon'ble High Court of Kerala in ITA No.467 of 2009 in the case of CIT vs. The Catholic Syrian Bank Limited reported in 313 ITR 303. Ld. DR pleaded that it is on assessee to establish that no borrowed fund was utilized for investment in assets which generated tax free income. Since assessee is not able to show that no borrowed fund was utilized, the AO had correctly worked out the interest spent on the earning of tax free income. He pleaded that the order of CIT (A) may be set aside and restored the order. 8. We have heard both the sides on the issue. The CIT (A) has reduced the disallowance on estimate basis treating the same as fair and reasonable. We have considered assessee's reliance on Catholic Syrian Bank Ltd, cited supra, in which the High Court held vide para 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the shareholder but is paid in respect of the payer's own liability; (2) S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards taxfree income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance is established - which is the relationship of the expenditure with income which does not form part of the total income - a disallowance u/s 14A has to be effected; (3) The argument that a literal interpretation of s. 14A leads to absurd consequences is not acceptable. S 14A is founded on a valid rationale that the basic principle of taxation is to tax net income i.e gross income minus expenditure; (4) The argument that the method in Rule 8D r.w.s 14A (2) for determining expenditure relating to the tax-free income is arbitrary and violative of Article 14 is not acceptable because there is an adequate safeguard before Rule 8D can be invoked. The AO cannot ipso facto apply Rule 8D but can do so only where he records satisfaction on an objective basis that the assessee is unable to establish the correctness of its c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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