Gujarat H.C : Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the validity of section 147/148 notice

High Court Of Gujarat

Himalaya Machinery (P.) Ltd. vs. DCIT

Assessment Year : 1995-96 to 1997-98

Section : 37(1)

K.A. Puj And Rajesh H. Shukla, JJ.

Tax Appeal Nos. 1909 Of 2008 And 798 To 800 Of 2009

February 9, 2010

JUDGMENT

K.A. Puj, J. – In all these four tax appeals, parties are common and hence, the same are being disposed of by this common judgment and order.

2. Tax Appeal No. 1909 of 2008 is filed by the assessee under section 260A of the Income-tax Act, 1961 for the assessment year 1995-96 proposing to formulate the following substantial question of law for the determination and consideration of this court :

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the validity of section 147/148 notice ?”

3. Tax Appeal Nos. 798, 799 and 800 of 2009 are filed by the Revenue for the assessment years 1996-97, 1997-98 and 1995-96, respectively. Questions proposed by the Revenue in all these three tax appeals are as under :

Tax Appeal No. 798 of 2009 (assessment year 1996-97)

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 60,00,000 being provision in respect of warranty obligation, without appreciating that the expenditure is contingent in nature which has not crystallized during the previous year relevant to the assessment year under consideration and was not allowable in view of the hon’ble Supreme Court’s decision in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 ?”

Tax Appeal No. 799 of 2009 (assessment year 1997-98)

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 10,38,751 being provision in respect of warranty obligation ?”

Tax Appeal No. 800 of 2009 (assessment year 1995-96)

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 2,34,00,000 being provision in respect of warranty obligation ?”

4. Heard Mr. J.P. Shah, learned senior counsel appearing with Mr. Manish J. Shah for the assessee and Mr. M. R. Bhatt, learned senior advocate appearing with Mrs. Mauna M. Bhatt, learned standing counsel for the Revenue.

5. So far as the assessment year 1995-96 is concerned, there are cross-appeals, one filed by the assessee and the other one is filed by the Revenue. The assessee is aggrieved by the finding recorded by the Tribunal with regard to reopening of assessment. The Tribunal has held that reopening of assessment is justified and hence, the assessee has filed tax appeal before this court challenging the said finding of the Tribunal. The Revenue has filed tax appeal for the assessment year 1995-96 challenging the decision of the Tribunal deleting the disallowance of Rs. 234 lakhs being provision in respect of warranty obligation on the merits.

6. Tax appeals for the assessment years 1996-97 and 1997-98 are filed by the Revenue involving identical issue which was involved in Tax Appeal No. 800 of 2009. So far as these two tax appeals are concerned, looking to the specific finding recorded by the learned Commissioner of Income-tax (Appeals) as well as the Tribunal to the effect that actual expenses incurred were more than the provision made by the assessee in its books of account, Mr. Bhatt has rightly submitted that it cannot be said that any substantial question of law arises for the said two assessment years.

7. So far as the Revenue’s Tax Appeal No. 800 of 2009 is concerned, Mr. Bhatt has submitted that the Tribunal’s decision is merely based on its own decision in the case of the assessee for the assessment year 1996-97 which is in favour of the assessee. The expenditure incurred by the assessee is contingent in nature which is not crystallized till the end of the previous year relevant to the current assessment year. He has, therefore, submitted that in view of the decision of the apex court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 /23 Taxman 37, contingent liability was not allowable.

8. Mr. Shah appearing for the assessee, on the other hand, has invited the court’s attention to the finding recorded by the Tribunal after relying on the decision of the apex court in the case of Bharat Earth Movers v. CIT [2000] 24 5 ITR 428 / 112 Taxman 61 wherein the court has observed that if a business liability has “definitely” arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It will also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. In such circumstances, the liability cannot be contingent one and the liability is in presenti and would not make any difference if the future date on which the liability shall have to be discharged is not certain. The Tribunal has further recorded the finding that the expenditure incurred by the assessee out of the provisions of this year as well as in the subsequent year, a major portion of the expenditure has been incurred by the assessee towards discharge of its liability for warranty. Even the figures were given for subsequent years. So far as the provision made for the assessment year 1995-96 is concerned, the Commissioner of Income-tax (Appeals) has categorically recorded the submissions made on behalf of the assessee which shows that the provision of Rs. 234 lakhs was actually inadequate as it was mostly utilized within the next three years, still leaving unexpired warranty period of two years. While dealing with this submission of the assessee, the Commissioner of Income-tax (Appeals) has observed that out of Rs. 234 lakhs, Rs. 186 lakhs have actually been spent in the succeeding two years were not charged to the profit and loss account of these two years. The details of such expenses were also on record. He has further observed that after going through all the judicial decisions and the details submitted, the claim of the assessee was required to be allowed on the ground that in the mercantile system of accounting, a provision is required to be made for contractual liability.

9. Since the figures of expenditure for the subsequent three years are not available on record, the court has asked Mr. Shah to furnish the figures for subsequent three years. Accordingly, a statement is produced before the court which indicates that as against the provisions of Rs. 234 lakhs, the assessee has incurred an amount of Rs. 3,30,74,857. The detailed break-up submitted by the assessee is as under :

Assessment year

Expenditure incurred (Rs.) Cumulative expenses (Rs.) Excess of expenditure over provision charged to profit and loss account (Rs.)
1996-97 86,20,677 86,20,677  
1997-98 82,36,136 1,68,56,813  
1998-99 57,22,016 2,25,78,829  
1999-2000 92,48,059 3,18,26,888 84,26,888
2000-2001 12,47,969 3,30,74,857 12,47,969
Total 3,30,74,857   96,74,857

10. Since the assessee has incurred the expenditure more than the provision made, the assessee’s case would squarely fall within the ratio laid down by the apex court in the decision of the Bharat Earth Movers case (supra). Looking to these figures, it cannot be said that the provision made by the assessee is not capable of being estimated with reasonable certainty though the actual quantification was not possible. Some objection was raised by Mr. Bhatt for the Revenue that since these figures were not on record, the same should not be taken into consideration in second appeal. We are of the view that though the finding was recorded by the learned Commissioner of Income-tax (Appeals) that the assessee has incurred the expenditure more than the provision made, just to substantiate this finding, the figures were called and there is no dispute about those figures and hence, considering those figures, we are of the view that the issue raised in the tax appeal is squarely covered by the decision of the apex court and the Tribunal has rightly decided this issue in favour of the assessee. We, therefore, do not propose to formulate any substantial question of law as framed by the Revenue. The appeal is, therefore, dismissed.

11. Since the Revenue’s appeal on the merits is dismissed by the court and the order passed by the Tribunal is confirmed, the appeal filed by the assessee challenging reopening of assessment has become infructuous and hence, it is also dismissed.

12. In the result, all the four tax appeals are accordingly dismissed.

[Citation : 334 ITR 64]

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