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TMI Blog2014 (12) TMI 1236X X X X Extracts X X X X X X X X Extracts X X X X ..... the Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories Ltd. (2009 (7) TMI 1273 - ITAT DELHI) which has been relied on by the CIT(A) while rejecting the claim of the assessee.Respectfully following the decision of the Bangalore Special Bench of the Tribunal and in absence of any distinguishable features brought to our notice by the Ld. DR, we set-aside the order of the CIT(A) on this issue and direct the AO to allow the claim of expenditure - Decided in favour of assessee Disallowance of Warranty Provision in normal tax computation - Held that:- The Hon’ble Supreme Court in the case of Rotork Controls Pvt. Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA ) has held that when large number of sophisticated goods are manufactured and sold with warranty and the past records show that defects existed in some of the items, the provision made by the assessee for warranty claims on the basis of past experience is an allowable deduction u/s.37. The various decisions relied on by the Ld. Counsel for the assessee also support the case of the assessee. Since the assessee in subsequent years has incurred expenditure against such warranty provision, therefore, we do not find any justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that loss amounting to 72,10,000/- was incurred by the assessee on account of foreign exchange rate fluctuation in respect of import and export transactions made during the year we find no infirmity in the order of the CIT(A) allowing the claim of loss of 72,10,000/- on account of foreign exchange rate fluctuation as a revenue expenditure. - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1 However, the Ld.CIT(A) also was not satisfied with the explanation given by the assessee and upheld the action of the AO. While doing so, he relied on the decision of the Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories Ltd. Vs. DCIT vide ITA No.1666/DCIT/2006 where similar claim has been disallowed. 3.2 Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 4. The Ld. Counsel for the assessee at the outset referred to the decision of the Bangalore Special Bench of the Tribunal in the case of Biocon Ltd. Vs. DCIT (LTU) reported in 144 ITD 21 wherein it has been held that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head "profits and gains of business or profession. It is on account of an ascertained liability and not a contingent liability and it cannot be treated as a short term capital receipt. He also relied on the following decisions : 1. CIT Vs. PVP Ventures Ltd., - 90 DTR 340 (Mad.) 2. SSI Ltd. Vs. DCIT - 85 TTJ 1049 (Chn.) 3. Sterlite Optical Technologies Ltd. Vs. DCIT - 7136 & 7177/Mum/2004 4. Bharti Airtel Limited Vs. ACIT - ITA No.5636/Del/2011 4.1 He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance to the extent of actual expenses of INR 2,209,381. The Appellant prays that the entire provision for warranty of INR 6,703,381 should be allowed as a deduction in computing the taxable income as per normal provisions of tax." By Revenue : "2a. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in restricting the addition on account of warranty provisions to ₹ 44,94,000/-. 2b. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in holding that the decision of the Hon'ble Supreme Court in the case of Rotork Controls Ltd [314 ITR 62] is applicable in this case when scientific basis of the provision of warranty is not conclusively established." 7.1 Facts of the case, in brief, are that the AO during the course of assessment proceedings observed that the assessee company has debited an amount of ₹ 67.30 lakhs on account of provision for warranty expenses. The Assessing Officer confronted the representative of the assessee and asked as to why the same should not be disallowed treating the same as contingent liabilities. It was submitted that the provision for warranty expenses is not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Karwar Project : ₹ 2,70,000/- Kanthal Project : ₹ 3,60,000/- ------------------------ Total excluding MSPL Project : ₹ 44,94,000/- ------------------------ 20. Though the appellant claims that provision for warranty compared to overall turnover never exceeded 0.50%, the fact of the matter is working of the provision is not on any scientific basis. It is quite excessive as the subsequent utilization has proved and therefore provisions for warranty liability to the extent of ₹ 44,94,000/- is treated as excess. Accordingly, the Assessing Officer is directed to restrict disallowance to ₹ 44,94,000/-. The appellant gets relief of ₹ 22,09,381 (67,03,381 - 44,94,000). Thus the ground is partly allowed". 9.1 Aggrieved with such part relief given by the CIT(A) the Assessee as well as the Revenue are in appeal before us. 10. The Ld. Counsel for the assessee at the outset submitted a chart giving details of project-wise warranty provision for F.Y. 2001-02 to F.Y. 2004-05. He submitted that the assessee is consistently following the method of providing warranty from year to year and there was no disallowance in the past on this account. Again refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-03-2003 amounting to ₹ 44,94,000/- as excess provision. Therefore, from the total disallowance of ₹ 67,03,381/- he sustained an amount of ₹ 44,94,000/- and allowed the balance amount to the assessee. We find from the detailed chart filed by the assessee that it has incurred actual expenses against the warranty provision in subsequent years. Whenever, there is excess provision, the assessee suomoto has written back the same in its books of accounts. Further, the assessee is following this method of making provision for warranty since last so many years and there was never any disallowance on this account as stated by the Ld. Counsel for the assessee at the bar. 13.1 The Hon'ble Supreme Court in the case of Rotork Controls Pvt. Ltd. (Supra) has held that when large number of sophisticated goods are manufactured and sold with warranty and the past records show that defects existed in some of the items, the provision made by the assessee for warranty claims on the basis of past experience is an allowable deduction u/s.37. The various decisions relied on by the Ld. Counsel for the assessee also support the case of the assessee. Since the assessee in subsequent yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer treated it as contingent and unascertained liability. Since the assessee has not incurred expenditure during the year, the AO disallowed 1/5th of the total amount of ₹ 70.84 lakhs which came to ₹ 14.16 lakhs. 16. Before CIT(A) it was submitted that ₹ 70,84,078/- consisted of the following amount: Stamp duty on adjudication of Court order for merger : ₹ 65,84,078/- Professional fees : ₹ 5,00,000 It was stated that the amount of ₹ 65,84,078/- was paid on 3rd April 2002 and out of ₹ 5,00,000/- representing professional fees, payment was made to the tune of ₹ 4,95,610/- leaving the balance of ₹ 4,390/- 17. Based on the arguments advanced by the assessee the Ld.CIT(A) restricted such disallowance to ₹ 878/- only by observing as under : "15. I have carefully considered the facts of the case as well as reply of the appellant. The subsequent expenditure justified the estimated expenses being debited to P&L A/c. In mercantile system of accounting the estimated expenses pertaining to the year needs to be debited to the P&L Account. Therefore, action of the Assessing Officer treating the amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rejecting the various explanation given by the assessee the AO treated the same as capital expenditure and allowed depreciation of ₹ 7,50,830/-. Thus, he made addition of ₹ 22,52,493/-. 20. Before CIT(A) it was submitted that the expenditure has been incurred on application software and the assessee company is not the owner for such software as it is merely a license to use the software. It was submitted that the rate of obsolescence in application software is very high and due to rapid technological advancement, need for replacement of software arises frequently. Various decisions were also relied upon. 21. Based on the arguments advanced by the assessee the Ld.CIT(A) deleted the addition made by the AO by holding that in respect of application software there is need for regular upgradation and no enduring benefit can be said to have derived after acquiring the softwares as the life of such software is very very limited. 21.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 22. We have considered the rival arguments made by both the sides. We find the issue stands squarely decided in favour of the assessee by the decision of the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Delhi Bench of the Tribunal in the case of Xerox India Ltd. Vs. DCIT reported in (2008) TIOL 557 (Del) for the proposition that addition cannot be made purely on the ground that expenditure is not fully verifiable. The assessee further relied upon Delhi Tribunal's decision in case of ACIT Vs. Amtek Auto Ltd., 112 TTJ 435 for the same proposition. 25. Based on the arguments advanced by the Ld.CIT(A), the deleted the additions by observing as under : "35. I have carefully considered the facts of the case as well as the reply of the appellant. In the case of company question of personal expenditure does not arise. The issue of business or non-business expenditure can be there. But for that too, addition cannot be made on adhoc basis without giving any finding in relation to particular expenditure being incurred for the purpose of business or otherwise. Non maintenance of log books may be a trigger for further inquiry but that itself cannot be basis of disallowance in case of a company. Therefore, on the facts and circumstances of the case, it is held that the Assessing Officer was not justified in making adhoc additions in respect of the above three items. Accordingly, Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal No.6 by the Revenue read as under : By Assessee : "Ground 2: Disallowance of Warranty Provision in computation of book profit as per the provisions of section 115 JB of the Act. The Ld. CIT(A) erred in holding that provision for warranty is excessive to the extent of INR 3,820,000 and adding the same while computing the book profits as per the provisions of section 115JB of the Act. The Appellant prays that no addition be made towards provision for warranty, while computing the book profits as per section 115 JB of the Act." By Revenue : "6a. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in directing the A.O. to recompute the book profit for the purpose of sec. 115JB of the Act, by adopting the figure of provision for warranty & project service cost at ₹ 38,20,000/- as against ₹ 45,52,024/- made by the A.O.? 6b. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in directing the A.O. to recompute the book profit for the purpose of sec. 115JB of the Act, by excluding provision for discount on sales of ₹ 1,08,59,472/-." 28.1 After hearing both the sides, we find the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue of unutilized MODVAT credit in favour of the appellant in it's own case for A.Y,1993-94 in ITA No.476/PN/1997 following the Supreme Court Judgment in the case of Indo Nippon Chemicals Co. Ltd (2003) 261 ITR Page 275. In that case unutilized Modvat was added to the value of closing stock. In the present case unutilized CENVAT has been treated as income of the appellant. Ratio of the Hon'ble Supreme Court decision(supra) can be said to be applicable in this case too. Moreover the decision of Special Bench Tribunal, Chandigarh (supra) directly covers the issue under consideration. Therefore, respectfully following the decision of Special bench of Chandigarh Tribunal, the Assessing officer is directed to delete the addition of ₹ 99,19,393/- as the whole exercise becomes revenue neutral once it is held that CENVAT credit is nothing but advance payment of excise duty eligible for deduction u/s.43B of Income-Tax Act. Thus, the ground is allowed". 30.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 31. After hearing both the sides, we find the Ld.CIT(A) while allowing the claim of the assessee has also followed the decision of Chandiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that no documentary evidence was filed in support of the claim that the liability has accrued during the previous year. 33. In appeal the Ld.CIT(A) deleted the addition by observing as under : "18. I have carefully considered the facts of the case as well as the reply of the appellant. It is seen that provision for discount on sales has been made in the books in respect of sales made in the last quarter. These discounts are given to dealers on achieving specific sales target as per terms of contract .Since the final working of the discount for the last quarter of the Financial year was to be done for which all the data were yet to be received in respect of all the dealers, provision for the same was made in the books on the basis of available documents with the appellant company. In mercantile system of accounting when 'the sales of ₹ 29 crores were recorded in the books of accounts, it is but natural that the corresponding discount should also be accounted for. The discount liability could not be quantified at that point of time but it cannot be said that liability for the same had not accrued during the previous year relevant to the A.Y. 2003-04. The appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. While doing so, he has also followed the ratio laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd., (Supra) and Rotork Controls Pvt. Ltd., (Supra). Since the Ld. Departmental Representative could not controvert the finding given by the Ld.CIT(A) that as against provision of ₹ 1.09 crores, the assessee has made payment to the tune of ₹ 1.11 crores towards the provision for discount on sales, therefore, under the facts and circumstances of the case, we find no infirmity in the order of the CIT(A) deleting the disallowance made by the AO. We accordingly uphold the same and the ground raised by the revenue is dismissed. 35. Grounds of appeal No.4 by the Revenue reads as under : "4. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting the addition of ₹ 72,10,000/- on account of loss in Foreign Exchange Rate Fluctuation, ignoring the provisions of Rule 115 of the I.T.Rules, 1962." 35.1 Facts of the case, in brief, are that the AO during the course of the assessment proceedings noticed that the assessee company has claimed expenditure of ₹ 72,10,000/- as "Exchange loss". The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute to be decided in the impugned ground is regarding the disallowance of ₹ 72,10,000/- on account of loss in foreign exchange rate fluctuation. We find the Assessing Officer disallowed the claim of the assessee on the ground that purchases are to be debited at the actual cost incurred and receipts are to be accounted at actuals. Since the assessee has created a separate account for foreign exchange fluctuation such amounts are neither included in the purchase nor in the receipts and therefore the same is not an allowable expenditure. We find the Ld.CIT(A) has allowed the claim of the assessee holding that the loss is related to trading assets relating to import and exports of goods. According to him, in mercantile system of accounting, expenses relating to purchase and sale of the relevant period has to be accounted for. Since the assessee is following this practice as per Accounting Standard-11 approved by the ICAI and the various decisions cited before him are in support of the assessee, the Ld.CIT(A) directed the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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