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TMI Blog2016 (2) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... ts still remains that the AO has not made any enquiry, examination or verification of the claim of the assessee company with respect to claim of deduction of provision of ₹ 17.72 crores with respect to provisions for warranty, sales tax, excise duty and liquidated damages. The order of the Tribunal in the first round of litigation has not been incidentally enclosed by the assessee company in the documents/paper book filed with the Tribunal. It is an established principle under the Act that provisions and contingent expenses are not allowed as deduction while computing the income of the assessee. It is only an ascertained liability which has crystallized during the year and which is wholly and exclusively incurred for the purpose of business of the assessee company , is allowed as deduction while computing income under the Act. The A.O. was under duty to make necessary and proper enquiry, examination and verification’s with respect to Provisions of ₹ 17.72 crores with respect to the claim of deduction of the assessee company for provisions for liquidity damages, warranty, sales tax and excise duty, while on perusal of the assessment orders u/s 143(3) of the Act dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al as under :- 1. INVALID REVISION u/s 263 a. The Ld. CIT erred in law and facts of the case in initiating revisionary proceedings u/s 263 and thereafter in passing an order u/s 263 ignoring the fact that the order passed by the Ld. AO. u/s 143(3) dt. 28.12.2010 was neither erroneous nor prejudicial to the interest of the revenue in as much as the Ld. A.O. had applied his mind and had made proper inquiries to his satisfaction before passing the assessment order. b. Your appellant submits that; i. The Id. AO had completed the assessment for AY.2007-08 after detailed inquiry and appreciation of the facts, evidences and the law. The provisions made on account of warranty, liquidated damages, sales tax and excise duty represented lawful business expenditures of the company and provisions were made in accordance with AS 29 of the ICAI and were allowed by the AO. only after due consideration of the fact and of the law of allowability of such expenses and in that view of the matter the order could not have been termed as erroneous or prejudicial to the interest of the law. ii. The company had made complete disclosure of the facts in its financial statements un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation payable by the company for delay was computed in reasonable and prudent manner. iii. These expenses for warranty and liquidated damages have been quantified based on past experience of the company. In addition, the company has a policy to write back all the unused amounts and offer the same for taxation on expiry of the relevant period for warranty and liquidated damages. iv. There is no leakage of revenue. Further, the company is being taxed at a flat rate of 30%. v. During the year the company has accounted for sales tax amounting to ₹ 2,67,00,000 representing sales tax liability on account of noncollection of declaration forms under the Act/Rules. vi. During the year the company has accounted for excise duty amounting to ₹ 43,00,000 representing the differential duty liability that has materialized in respect of matters contested in appeal. vii. Without prejudice kindly note that all of the expenses under consideration were quantified and accounted by following the sound accounting principles and the policies followed were mandated by Accounting Standard 29 of the ICAI r.w.s. 209 of the Companies Act. viii. Accounting was com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he necessary enquiry as warranted by the facts and circumstances of the case for proper completion of the assessment u/s 143(3) of the Act. The CIT noticed from the assessment records that the assessee company has claimed deduction for expenditure in respect of provisions on account of Warranty, Sales Tax, Excise and Liquidated Damages . The CIT observed that it is a settled principle of law that no expenditure in nature of contingent expenditure or provisions for expenditure can be allowed u/s 28 or 37 of the Act , unless the assessee company followed mercantile system of accounting and liability claimed on accrual basis has crystallized during the previous year relying on decision of Shri Sajjan Mills Limited v. CIT 156 ITR 585(SC). The CIT noticed from the schedule 16 read with note 33 to schedule 13, that the expenditure of ₹ 17.72 crores claimed by the assessee company was nothing but provisions for expenditure. The CIT observed that the A.O. failed to make relevant and meaningful enquiry to the fact that liabilities in this regard (liability relating to Warranty, Sales Tax, Excise and Liquidated Damages ) has crystallized to the extent deduction has been claimed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies (P) Ltd. v. ACIT (2005) 142 Taxman 79 (Mag)(Kol)(Trib) in support and contended that even on estimate basis if provision for warranty was made by the assessee company following mercantile system of accounting, the expenditure was allowable expenditure and the assessment order cannot be treated as erroneous and prayed that the proceedings u/s 263 of the Act should be dropped. 5. The CIT, however, held that the A.O. was required to examine that provisions made for warranty etc. was based on estimates which were realistic and based on the past experience of the assessee company. The CIT held that the A.O. was required to examine the actual outgoing during the year and that excess provisions if any made in the earlier year was duly written back as income in the following years, but he A.O. did not examine the basis for provisions made for sales tax and excise duty liability and on what account these provisions were justified. For claim of deduction for warranty, the A.O. has not examined the contract and find out when the warranty was expiring, the justification for allowing the provision cannot be made out. The CIT held that the A.O. was required to examine the normal range of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 143(3) of the Act by the AO vide orders dated 28.12.2010, the A.O. has not made any disallowance with regard to provisions for warranty, excise duty , sales tax and liquidity damages while in the second round, disallowance was made by the AO vide orders dated 24.02.2014 passed u/s 143(3) of the Act read with Section 263 of the Act on the following heads:- i. Provision for Warranty ₹ 5,53,40,000/- ii. Provision for Liquidity damages ₹ 9,08,90,000/- iii. Provision for Sales tax ₹ 2,67,00,000/- iv. Provision for Excise duty ₹ 43,00,000/- The ld. Counsel of the assessee company submitted that the assessee company has now conceded with respect to the disallowance made by the A.O. in respect of warranty, excise duty and sales tax which is not pressed before the Tribunal while the assessee company is challenging and contesting the additions on account of provisions for liquidated damages of ₹ 9,08,90,000/- made by the A.O. u/s 143(3) of the Act read with Section 263 of the Act, vide orders dated 24.02.2014 . The ld. Counsel of the assessee company submitted that the original assessment order dated 28.12.2010 passed by the A.O. u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order has been passed in a routine and perfunctory manner hence the CIT has rightly set aside the orders dated 28.12.2010 passed u/s 143(3) of the Act by the AO. 9. We have considered the rival contentions and carefully gone through the orders of the authorities below. We have also deliberated upon the judicial pronouncements referred by the lower authorities and also cited by the ld. A.R. during the course of hearing before us, in the context of factual matrix of the case. We have observed that the original assessment order was framed u/s 143(3) of the Act vide order dated28-12-2010. On perusal of the said assessment order dated 28.12.2010, we have observed that the A.O. has not made any enquiry with respect to the claim of deduction of the assessee company with respect to provisions for warranty charges, excise duty, sales tax and liquidity damages amounting to ₹ 17.72 crores claimed as deduction by the assessee company from the income of the assessee company and the claim made by the assessee company was accepted by the A.O. without any further enquiry, examination or verification as was warranted . Further, on perusal of the audited accounts of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner authorised by the Board in this behalf under section 120; (b) record [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the [Principal Commissioner or] Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal [filed on or before or after the 1st day of June, 1988], the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.] [Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier cases the following as objects of an explanation to a statutory provision (Reference Page 214-215,Principles of Statutory Interpretation by Justice G.P.Singh ,13th Ed.):- (a) To explain the meaning and intendment of the Act itself , (b) Where there is any obscurity or vagueness in the main enactment to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) To provide an additional support to dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act if it can help or assist the Court in interpreting the true purport and intendment of the enactment, and (e) It cannot, however , take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same. It is profitable at this stage to refer to the Memorandum to Finance Bill 2015 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and directing fresh assessment. It is proposed to amend sub-section (1) of the aforesaid section to insert an Explanation so as to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, (a) the order is passed without making inquiries or verification which, should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. This amendment will take effect from 1st June, 2015. Now, as can be seen above , the amendment to section 263 of the Act by insertion of Explanation 2 to Section 263 of the Act is declaratory clarificatory in nature and is inserted to provide clarity on the issue as to which orders passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature and consequently retrospective. Similarly , in Brij Mohan Das Laxman Das v. CIT (1997) 90 Taxman 41(SC), explanation 2 added to section 40 of the Act was held to be declaratory in nature and , therefore , retrospective.(Reference Page 569-570,Principles of Statutory Interpretation by Justice G.P.Singh ,13th Ed.). In our considered view, the CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry, examination and verifications as warranted for the proper completion of the assessment, with respect to claim of deduction of ₹ 17.72 crores with respect to the provisions for warranty, excise duy,sales tax and liquidated damages. Regarding the contentions of the assessee company that the CIT should have set aside the orders passed by the AO after giving appeal effect to the orders of the tribunal in the first round has to be rejected as the basic facts remains that the AO has not made any enquiry, examination or verification of the claim of the assessee company with respect to claim of deduction of provision of ₹ 17.72 crores with respect to provisions for warranty, sales tax, excise duty and liquidated damages , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the CIT dated 06.02.2013 , we uphold . We order accordingly. 10. In the result, the appeal of the assessee company is dismissed. ITA No. 2836/Mum/2014 for A.Y. 2007-08. 11. This appeal filed by the assessee company is arising out of the orders u/s 143(3) read with Section 263 of the Act dated 24-2-2014 passed by the AO in pursuance to the order dated 06.03.2013 passed u/s 263 of the Act. 12. The assessee company has raised the following grounds of appeal in the memo of appeal filed with the Tribunal:- DISALLOWANCE OF CLAIM FOR DEDUCTION OF LIQUIDATED DAMAGES OF ₹ 9,08,90,000 a. The Ld. A.O. erred in law and on facts in disallowing the claim for deduction for expenditure/loss in respect of liquidated damages of ₹ 9,08,90,000 by carrying out direction of CIT in his order dt. 06.02.2013 passed u/s. 263 without applying his mind to the facts of the case. b. Your appellant submits that : i. During the year the company had accounted for expenses/loss on, liquidated damages amounting to ₹ 9,08,90,000/- towards delayed expectation of contracts which were executed by the company beyond the agreed delivery dates and the compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles and the policies followed were mandated by Accounting Standard 29 of the ICAI r.w.s. 209 of the Companies Act. c. Your appellant pleads that appellant's claim for deduction on account of excise duty of ₹ 43,00,000 be allowed. 4. LEVY OF INTEREST U IS. 234 D a. The Ld. AO. erred in law and on facts in levying interest u/s. 234D of ₹ 37,93,211 without giving any opportunity of hearing and further erred in law in not passing any speaking order for the levy of interest. b. Your appellant denies any liability of payment of interest and further submits that the interest was charged in violation of the provision of Natural Justice in as much as no opportunity for hearing was given. c. Your appellant pleads that the interest levied be deleted. 5. SERIOUS VIOLATION OF NATURAL JUSTICE a. The Ld. AO. erred in law and on facts in completing the proceedings in a complete haste and without giving sufficient time and opportunity and erred in law in ignoring all the evidences and proofs and documents available on records. Further erred in treating the order passed by A.O. as erroneous and prejudicial to the interest of the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e perusal of section 253(1) of the Act will reveal that following appeals can be filed before the Tribunal:- Appeals to the Appellate Tribunal. 253. (1) Any assessee aggrieved by any of the following orders may appeal to the Appellate Tribunal against such order- (a) an order passed by a [Deputy Commissioner (Appeals)] [before the 1st day of October, 1998] { or, as the case may be, a Commissioner (Appeals)] under [***] [section 154], [***] section 250, [section 271, section 271A or section 272A]; or [(b) an order passed by an Assessing Officer under clause (c) of section 158BC, in respect of search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, after the 30th day of June, 1995, but before the 1st day of January, 1997; or] [(ba) an order passed by an Assessing Officer under sub-section (1) of section 115VZC; or] (c) an order passed by a [Principal Commissioner or] Commissioner [under section 12AA [or under clause (vi) of sub-section (5) of section 80G] or] under section 263 [or under section 271] [or undersection 272A] [***] or an order passed by him under section 154 amending his or ..... 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(3) of section 143 [[except an order passed in pursuance of directions of the Dispute Resolution Panel [***] [or an order referred to in sub-section (12) of section 144BA]]] or section 144, to the income assessed, or to the amount of tax determined, or to the amount of loss computed, or to the status under which he is assessed; [(aa) an order of assessment under sub-section (3) of section 115WE or section 115WF, where the assessee, being an employer objects to the value of fringe benefits assessed; (ab) an order of assessment or reassessment under section 115WG;] (b) an order of assessment, reassessment or recomputation under section 147 [[except an order passed in pursuance of directions of the Dispute Resolution Panel [***] [or an order referred to in sub-section (12) of section 144BA]]] or section 150; [(ba) an order of assessment or reassessment under section 153A [[except an order passed in pursuance of directions of the Dispute Resolution Panel]] [***] [or an order referred to in sub-section (12) of section 144BA];] [(bb) an order of assessment or reassessment under sub-section (3) of section 92CD;] (c) an order made under section 154 or se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty under section 272AA; (q) an order imposing a penalty under Chapter XXI; (r) an order made by an Assessing Officer other than a Deputy Commissioner under the provisions of this Act in the case of such person or class of persons, as the Board may, having regard to the nature of the cases, the complexities involved and other relevant considerations, direct. On perusal of Section 246A of the Act, we have observed that appeal against the orders passed u/s 143(3) read with Section 263 of the Act shall lie with the CIT(A) u/s 246A(1)(a) of the Act being an order passed by learned assessing officer u/s 143(3) of the Act. Appeal under the Act is a statutory right which emanates only from the statute. The assessee does not have a vested right to appeal unless provided for in the statute . Reference is drawn to the decision of Hon ble Supreme Court in the case of CIT v. Ashoka Engineering Co. (1992) 194 ITR 645(SC) whereby the Hon ble Supreme Court held that : 7. We have heard the counsels for both the parties. The question at issue is regarding a right of appeal. It is true that there is no inherent right of appeal to any assessee and that it has to be spelt fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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