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TMI Blog2021 (4) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, wherever it becomes material, in the same mode of the taxable income of the assessee. Therefore, the trading loss of a business is deductible in computing profits earned by the business even though there is no specific provision for allowance thereof. As decided in MYSORE SUGAR COMPANY LIMITED [ 1962 (5) TMI 3 - SUPREME COURT] while computing the assessable profits and gains , an appellant is entitled to claim incurred for the purpose of its business but not covered under any specific clause. On going through the facts and circumstances of the instant case, keeping in view the judgments of Hon ble Supreme Court since the amount has been incurred during the regular course of business, the same is allowed to be claimed under expenses for the year. - ITA No. 4663/Del/2017, ITA No. 4664/Del/2017, CO No. 190/Del/2017, CO No. 191/Del/2017 - - - Dated:- 7-4-2021 - Sh. Kul Bharat, Judicial Member Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. S. K. Aggarwal, CA For the Revenue : Ms. Vanita R. Sharma, CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeals by the revenue and the Cross Objections by the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be recovered by assessee on full final settlement of employees who left the employment with assessee. Amount written off is claimed as a deduction u/ s 28 of the Act and therefore, requirement of offering corresponding income in the hands of employees should not be relevant; (iii)) Security deposits written off represents amount which could not be recovered by assessee from party (i.e. premises owner) on full final settlement on leaving the rented premises by the assessee. Said premises was used by assessee in carrying out its business operations and therefore, amount written off is not capital in nature; 5. In CO No. 191 / Del/2017, following grounds have been raised by the assessee: 1. That on the facts and circumstances of the case and in law, the Hon ble CIT(A) has erred in not allowing the deduction for advances deposits written off of ₹ 2,58,178, being amounts written off in the course of business and debited in the P L A/c for AY 2013-14, since, (i)) Advances deposits written off are in the nature of advances given to vendors in the course of business which could not be recovered by assessee and are therefore allowable as a normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company for the supply of goods, time was essence of the contract and any delay in the delivery of the goods would result in the liability to pay damages. It was also stated that the stipulation in the contract showed that the liability for liquidated damages were certain, accrued and was not to depend upon the happening of any event other than delay in deliveries. The assessee company claimed that the liability to pay liquidated damages accrued as soon as the delay took place and as per the agreement such delay was a breach of contract and, therefore, it was claimed that deterrent in the form of penalties against delays in deliveries was to avoid future litigation as to the quantum damages. It was further submitted that the calculation or quantification of damages was based on accounting of damages as and when delays took place and as per the contract Agreements, Liquidated Damages Clause specified the quantum of liquidated damages payable by the assessee Company and, therefore, it was claimed that quantification was predetermined and noting was contingent. Therefore, the assessee claimed that such provision for liquidated damages should be allowed. The submission furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach may be applied to determine whether a provision for Liquidated damages constitutes a penalty. Second, it is also important to examine the nature of the transaction to see whether the amount of damages resulting from the default would be easily and readily determinable. A provision for Liquidated damages is more likely to be correct if it would be difficult to determine the amount of damages following a breach of contract. Keeping in view, the above general considerations in respect of provision for Liquidated damages, it may be observed that in order to qualify for recognition as a liability, there must be not only present obligation but also a probability of an outflow of resources to settle the obligation. Further, a provision has to made with a reasonable degree of certainty with past history of experience. A provision will also not quality to be a liability if it is made without adopting a scientific methodology. On perusal of the statement of details and basis for provision of Liquidated damages submitted by the assessee company, it was observed that the justification of the stipulation and determination of liquidated damages is not laid out in a scientific manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed amongst the parties in relation to liquidated damages on account of delay in deliverables. The relevant clauses clearly point out that there is a contractual obligation to pay liquidated damages in respect of contract whenever there would be default in providing services on time to the customers and in terms of deliverables as agreed in the contract. Since time was the essence of the contract and any delay in delivery of the goods would have resulted in liability to pay damages, therefore, the assessee had made provision by taking into account the period of delay from the close of accounts. The Id. CIT (A) has categorically noted that assessee has provided for liquidated damages based on the period of delay which occurred during the end of the year and on the basis of percentage of the contract the value payable as damages in terms of the agreement. Apart from that, assessee has also reversed the provision for liquidated damages in the year in which clients waived the said liquidated damages and the write back amount has been offered to tax by the assessee. Whence a provision is arising out of a contractual obligation and the basis of providing the provision is based on pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can also be inferred that the assessee is under contractual obligation to discharge warranty claims raised by the customers arising in a later period. However, as per mercantile system of accounting being following by the assessee, it is required to make provision for warranty in the year in which it recognized revenue from contract by following the principle of matching of revenue and cost. While estimating the warranty expense for the year, the assessee transforms various relevant factors having a bearing on the determination of warranty expense into statistical information. These factors may relate to data with regard to the past historical experience, failure rate experienced in the past, increase in sales volume of the products under warranty, technical evaluation, nature and use of product, length of warranty with regard to goods sold and their spare parts, etc. The provision made by the assessee varies year by year depending upon the possibility of warranties claim to be made in future years. The assessee has utilized provision for warranty of ₹ 24,32,96,504/ - during AY 2012-13. It is thus submitted that provision for warranty of ₹ 17,61,74,571/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f matching concept. Only costs or expenses which are ascertainable and have accrued can be claimed as an allowable deduction. Furthermore, in the case of the assessee there is no reliable estimate as to the amount of obligation that may arise to the assessee in the near future and therefore, a provision for warranty is an unascertainable liability which cannot be claimed as deduction. Furthermore, the case laws and the judicial precedents cited by the assessee are distinguishable from the facts and circumstances of the present case. Further the revenue also filed an appeal before the Hon'ble ITAT on the issue of disallowance of liquidated damages in AY 2010- 11 and 2011-12. Hence the issue is in dispute and didn't get finality. 12. The ld. CIT (A) deleted the addition based on the order of the ld. DRP. The issue has attained finality by the Tribunal in the case of the assessee for the assessment year 2008-09 and for the subsequent assessment year. The relevant part of the order (para 14) of the ITAT in ITA No.2295/ Del/2013 dated 31.10.2017 is as under: 14. So far as the issue relating to disallowance of provision for warranty , it is an admitted fact that u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 13. Since, the matter stands adjudicated and allowed for several years prior, in the absence of any material change, we hereby hold that the addition made by the AO cannot be sustained. Advance and deposits written off: 14. The assessee company debited a sum of ₹ 12, 34,220/- toward' advance Deposits Written off. 15. The ld. CIT (A) found that the amount of ₹ 12,34,220/- consists of ₹ 9, 14,598/- pertains to duty entitlement written off which stands offered in the earlier year and hence deleted the addition. We find no infirmity with the decision of the ld. CIT (A) on this aspect. 16. With regard to write off of employee adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a proper item to be debited against the incomings in ascertaining the profits and gains properly so called. 21. Section 28 of the Act provides for taxation of profits and gains of any business or profession. From the charging provisions of the Act, it is discernible that the words income or profits and gains should be understood as including losses also, so that, in one sense profits and gains represent plus income whereas losses represent minus income . In other words, loss is negative profit. Both positive and negative profits are of revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Therefore, the trading loss of a business is deductible in computing profits earned by the business even though there is no specific provision for allowance thereof. 22. Finally, the Hon ble Supreme Court in the case of CIT Vs Mysore Sugar Co. Ltd [1962] 46 ITR 649 (Supreme Court) laid down the principles for allowance of loss incidental to business as under: The tax under the head Business is payable under section 10 of the Income- tax Act. That section provides by sub-section (1) t ..... 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