High Court Of Madras
Renowned Auto Products Mfrs. Ltd. vs. ITO
Assessment Year : 2004-05
Section : 37(1), 263
Mrs. R. Banumathi And K. Ravichandrabaabu, JJ.
Tax Case (Appeal) No. 324 Of 2010
February 18, 2013
JUDGMENT
K. Ravichandrabaabu, J. -The assessee is on appeal in respect of the assessment year 2004-05. The above tax case appeal was admitted on the following substantial questions of law :
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the ‘warranty liability’ is only a provision for unascertained liability ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in not referring to and following the judgment of the Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC) relied on and cited before it at the time of hearing ?”
2. The assessee is engaged in the manufacture of shock absorbers. For the assessment year 2004-05, the assessee filed its return of income claiming a loss of Rs. 4,89,62,328. The return was processed under section 143(1) of the Income-tax Act. The regular assessment was completed under section 143(3) thereby determining the loss as Rs. 4,65,01,833 after making certain adjustments. The Commissioner of Income-tax issued a show-cause notice under section 263 of the said Act by pointing out that a sum of Rs. 32,93,438 representing provisions towards warranty cost was not added back to the income computed and, therefore, called upon the assessee to show cause as to why a direction should not be given to revise the assessment. The assessee filed its reply on March 3, 2009, and submitted that for the earlier assessment years, viz., 2001-02, 2002-03, 2003-04 no disallowance was made in the assessment on account of product warranty cost. In so far as the present assessment year 2004-05 is concerned, the assessee submitted that out of the warranty expenses aggregating to Rs. 1,78,13,444, a sum of Rs. 1,45,20,006 represents the claim paid during the year and the provision for warranty liability based on technical estimate has been made during this year also. It was further submitted by the assessee that the Assessing Officer did not call for the details of product warranty cost while taking up the case for scrutiny, obviously, for the reason that in the earlier years the allowability of the expenditure had been gone into and there has been no change in the facts during the instant year. Thus, according to the assessee, the provision is not of a lump sum, ad hoc or arbitrary and the same was on technical estimate.
3. After considering the reply submitted by the assessee, the Commissioner of Income-tax passed an order on March 11, 2009, under section 263 of the Income-tax Act thereby rejecting the assessee’s contention and directed the Assessing Officer to quantify the correct amount of provision for warranty created during the year by calling for and examining the relevant details and then to disallow the same in computing the total income.
4. Aggrieved against the order of the Commissioner, the assessee went on appeal before the Tribunal. By its order dated September 11, 2009, the Tribunal rejected the contention of the assessee and thereby dismissed the appeal. Aggrieved against the said order, the present appeal is filed by the assessee.
5. Heard the learned counsel appearing for the assessee as well as the learned standing counsel appearing for the Revenue and perused the materials available on record.
6. The learned counsel appearing for the assessee submitted that in earlier assessment years the allowability of the expenditure had been gone into by the Revenue and in fact such warranty expenditure was allowed for the assessment years 2001-02 to 2003-04. Even in respect of the present assessment year, the learned counsel submitted that there are no change of circumstances and, therefore, the order of the Commissioner directing disallowance of the provision for warranty cost is not correct. He further submitted that it is the actual warranty cost claimed by the assessee and not on any ad hoc or lump sum basis. The learned counsel further submitted that there is no actual loss of revenue to the Department, in view of the fact that what is shown as provision for warranty cost in the present year will be carried forward to the next year and, therefore, there is no revenue loss to the Department. In support of his submissions, the learned counsel relied on the decision in Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC).
7. Per contra, the learned counsel appearing for the Revenue submitted that each assessment year is a separate block and the income of a particular year is to be assessed only in that year and not in any other year. He further submitted that warranty provision was made only on ad hoc basis and not on scientific basis. Though the warranty provision can be made on estimate basis it has to be done based on product-wise susceptibility and based on the past track records. As the provision made in a particular year is carried forward to subsequent year, the balancing provision will certainly be shown on higher side year by year and, therefore, the assessee is not correct in contending that there is no revenue loss. He relied on an unreported decision of this court made in CIT v. Forbes Campbell Finance Ltd. [2013] 352 ITR 602 (Mad) in support of his submissions.
8. From the perusal of the materials placed before us and upon hearing the respective submissions made by the counsel appearing for the parties, it is seen that the Assessing Officer completed the assessment and assessed the loss as Rs. 4,65,01,833. However, the Commissioner, on finding that a sum of Rs. 1,78,13,444 had been debited towards warranty expenses ; that a sum of Rs. 94,75,847 was shown as outstanding towards product warranty cost and that a sum of Rs. 32,93,438 represented provision towards warranty cost which was not added back to the income computed, initiated proceedings under section 263 as he felt that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue.
9. The assessee though filed a reply to the show-cause notice and asserted that the provision for warranty liability was made based on technical estimate, he himself admitted that the Assessing Officer did not call for the details of product warranty cost. The assessee only presumed that the Assessing Officer did not call for the details of product warranty cost for the reason that in the earlier assessment years, the allowability of the expenditure was decided in favour of the assessee. The learned Commissioner, however, pointed out that the Assessing Officer omitted to examine the admissibility of the provision of Rs. 32,93,438, especially when the same was representing the provision towards warranty cost. He further pointed out that the facts with regard to the earlier accounting years are not relevant in so far as the present assessment year is concerned. It is also pointed out by him that the method adopted for striking the amount of provision has not been explained even though it is seen from the assessee’s reply that in respect of each month, the warranty provision under the categories of after market and original equipment is debited to the accounts by passing a journal voucher. Therefore, the Commissioner had found, that the said provision has been worked out on an estimate basis even though it was claimed by the assessee that the accrual for warranty costs in respect of sales are made on the basis of technical and other estimates. He further pointed out that if the assessee had analysed each and every sale bill raised by it and marked out the particular item/items, which generally were susceptible to the enforcement of the warranty by the purchasers and thereupon arrived at the required provision on the basis of sale value of the particular items involved, then such a provision could be called to have been made on a scientific basis. By observing so, the Commissioner of Income-tax had found that the provision created by the assessee was not established to have been made on a scientific basis. Consequently, the Commissioner of Income-tax held that the provision for warranty claims created by the assessee was a contingent liability and the same was not deductible. Therefore, such aspect of the matter was not considered by the Assessing Officer or omitted to be examined by him with regard to the admissibility of the said provision. Whether such act of non-consideration or omission would result in an erroneous order or prejudicial to the interests of the Revenue has been considered by this court in the decision in K. A. Ramaswamy Chettiar v. CIT [1996] 220 ITR 657/88 Taxman 526 (Mad), wherein it was observed that when the Income-tax Officer is expected to make an enquiry of a particular item of income and if he does not make an enquiry as expected, that would be a ground for the Commissioner of Income-tax to interfere with the order passed by the Income-tax Officer under section 263 of the Income-tax Act, 1961, since such an order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue.
10. Similarly, the hon’ble Supreme Court in a decision in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 has observed that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. It is further observed that in the said case as follows (page 88) :
“In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts, the conclusion that the order of the Income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified.”
11. The Tribunal also pointed out that the Assessing Officer has not at all examined the aspect with regard to the admissibility of the said sum of Rs.32,93,438 shown as provision for warranty cost. It further also pointed out that the method as projected by the assessee in their reply, in showing the warranty provisions under the categories of after market (AM) and original equipment (OE) by debiting the account by passing a journal voucher, was never explained before the Assessing Officer nor was it examined by him. Thus, the Tribunal held that liability is only an unascertained contingent liability. When such being the factual findings of the authorities below and when such non-consideration or omission by the Assessing Officer is found to be an erroneous one and prejudicial to the interests of the Revenue, we find no reasons to interfere with such factual findings.
12 No doubt, the learned counsel for the assessee relied on the decision of the apex court in Rotork Controls India (P.) Ltd. (supra) to substantiate his contention that the estimated provision for warranty cost is allowable. The very same decision was considered by the Division Bench of this court in Forbes Campbell Finance Ltd. (supra) wherein it was observed at paragraphs 14 and 16 as follows (pages 607 and 608) :
“We reject the claim of the assessee on both counts. As far as the reliance placed on the decision in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) is concerned, in considering the claim on a provision made for warranty claim, the apex court held that ‘a provision is recognised when : (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obligation ; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized …
Thus, the apex court pointed out that the provision has to be made based on reliable estimation of the obligations. Unless the three conditions recognising the liability are satisfied, the claim could not be automatically allowed as a provision made on a historical trend.”
13 After observing so, the hon’ble Division Bench further held at paragraph 18 that the provision for service charges payable by the assessee by way of warranty provision was not made on any scientific data. By applying the facts of the case to the law declared by the apex court, it was further observed therein that the provision made was only on ad hoc basis which was a fact recorded by the Tribunal. Here also, the Commissioner as well as the Tribunal categorically found that the assessee had not proved the provision of warranty expenses based on any scientific method in such circumstances, the assessee cannot place reliance on the decision of the hon’ble Supreme Court in Rotork Controls India (P.) Ltd. (supra) as the facts are totally distinguishable. Even otherwise the assessee has to pass through the triple test as declared therein in order to succeed in his claim on provision for warranty. In the absence of any such finding in its favour satisfying the said triple test, the assessee can not rely on the said decision of the apex court. We do not find any merits in the appeal and, therefore, both the questions of law are answered against the assessee. Accordingly, the tax case appeal is dismissed. No costs.
[Citation : 354 ITR 127]
