Ita/576/2016 Of Bharat Fritz Werner Ltd v. The Joint Commissioner Of Income-Tax (Osd)

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 4 DAY OF DECEMBER 27070 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADILT.A. NO.5/76 OF 201 BETWEEN: BHARAT FRITZ WERNER LITID.OFF TUMKUR ROAD|YESHWANTHPUR P.O.BANGALORE-560027)REP. HEREIN BY ITSCHIEF FINANCIAL OFFICERMR. SUJOY DASGUPTA. (BY SRI. T. SURYANARAYANA, ADV.,) ... APPELLAN I AND* 1.|THE JOINT COMMISSIONER OF _ INCOME-TAX (OSD) CIRCLE-11(2)BMTC BUILDING, 80 FEET ROAD.61TH BLOCK, KORAMANGALABENGALURU-560095.BMTC BUILDING, 80 FEET ROAD.61TH BLOCK, KORAMANGALABENGALURU-560095. 2.|THE DEPUTY COMMISSIONER OF INCOME-TAX _CIRCLE-11(2)CIRCLE-11(2) BMTC BUILDING, 80 FEET ROAD. 61TH BLOCK, KORAMANGALABENGALURU-560095.BENGALURU-560095. 3.|THE COMMISSIONER OF INCOME-TA®BMTC BUILDING, 80 FEET ROAD.61TH BLOCK, KORAMANGALABENGALURU-560095.BMTC BUILDING, 80 FEET ROAD.61TH BLOCK, KORAMANGALABENGALURU-560095. (BY SRI. K.V. ARAVIND, ADV.) .. RESPONDENTS. THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961L ARISING OUT OF ORDER DATED 03.06.2016 PASSED IN ITANO.225/BANG/2014 FOR THE ASSESSMENT YEAR 2009-10,PRAYING TQ: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER.PASSED BY THE ITAT, C BENCH, BENGALURU, PRONOUNCED ON.03-06-2016 IN ITA NO.225/BANG/2014 (ANNEXURE-D) & ETC.| THIS|ITACOMING|ONFOR.HEARING,|THISALOK ARADHE J.,DELIVERED THE FOLLOWING: | DAY, | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as the Act for short)has been preferred by the assessee. The subject matter|of the appeal pertains to the Assessment year 2009-10.The appeal was admitted by a bench of this Court vide order dated 06.12.2017 on the following substantialquestion of law: (1)The Tribunal, in holding that theAppellant had failed to demonstrate either before the lower authorities or before it that|the liability had accrued during the year,|arrived at a finding that was contrary to thematerial placed on record and thus perverse?| (il)The.tribunal In|holdingthatsubstantialProvisionswere|reversedIn|subsequent years, gave a finding that was|perverse inasmuch as it was contrary to the.material on record before it and consequently|committed a grave error in observing that thiswould prove that the liability had not been|estimated with reasonable accuracy? (111)The tribunal committed an error [n>holding that the principles enunciated in the|decisions of the Hon’ble Supreme Court in)Bharat Earth Movers (245 ITR 42) and.Calcutta Co. Ltd. (37 ITR 1) were not.applicable to the present case? And| (iv) The tribunal thus failed to appreciate|that the method followed by the appellant as.on a scientific basis, besides being fair and.reasonable and that therefore the provisioned amount represented an accrued liability which was accordingly allowable as a deduction|while computing its income chargeable to tax|under the Act for the Assessment Year JZOO910?| 2.|Facts leading to filing of this appeal brieflystated are that assessee is engaged in the business of manufacture and sale of machine tools. After the sale of.machine tools, the assessee is required to install themachinery which is sold by it. No separate invoices were.raised by the assessee as the value of service ofinstallation is already included in the sale price of themachine. The installation and commissioning of themachines is done within two to three months from the.date of sale of the machinery. However, with respect to.some sales it was not possible to install and commission|the machinery by the end of the year. In order to meetsuch an eventuality, the assessee created a provision for.erection and commissioning. The provision was made.between 0.5% to 2% of the sales depending upon the|type|ofmachines|Soldfor.whicherectionand commissioning was not done before the end of the!financial year. In the next year, the provisions were.reversed and a fresh provision was created. Thus, forthe Assessment Year 2009-10, the machineries, which.were sold but for which erection and commissioning was|not done as on 31.03.2009, a provision was createdwhile reversing the provision created for the previous|Year. 3 The assessee filed return of income forAssessment Year 2009-10, in which deduction of an.amount of Rs.28,10,905/- was claimed and while doing|so, it Nad added back the provision for a sum ofRs.40,73,440/- made in the preceding year. Thus, thenet amount under the head in fact, was an addition of|Rs.12,62,535/- to the income and not a claim for)deduction per se. The Assessing Officer by an order|dated 23.12.2011 inter alia disallowed the provision for.erection and commissioning on the ground that theprovisioning was done on an estimated basis and the assessee had failed to show that the expenditure was—worked out scientifically on an actual basis. Theassessee thereupon approached the Commissioner of.Income Tax (Appeals) by filing an appeal.The.Commissioner of Income Tax (Appeals) by an orderdated 23.10.2013 upheld the disallowance in respect ofthe provision made by the assessee, however, otherdisallowances made by the Assessing Officer were|deleted. Tne assessee as well as tne revenue filed|appeals before the Income Tax Appellate Tribunal(hereinafter referred to as the tribunal’ for short). Thetribunal by order dated 03.06.2016 inter alia upheld thedisallowance.fortheprovision.for.erection andprovisioningmade.DY|tneASS@SSINQ|Officer.anadismissed the appeal preferred by the assessee as wellas the revenue. In the aforesaid factual Dackground, the|assessee Nas approached this court. 4Learned counsel for tne assessee submittedtnat the provision made in the case of the assessee is_ scientific and was between 0.5% to 2% of the sales|depending upon the type of machinery sold. It is furthersubmitted that when the actual expenditure is incurredfor installation in subsequent years, the assessee debits.the respective heads in its profit and loss account while.previously created provision is reverse / return back. Itis also argued that a fresh liability towards erection andcommissioning for the succeeding year is provided for at|the end of each financial year. It is also pointed out tnatwhile making claim for financial year 2008-09 the|assessee had added back the provision made in thepreceding year amounting to Rs.40,/73,440 and createdfresh provision for an amount of RS.28,10,905/- towards installation charges. It is also argued tnat in other words.it is in fact an addition to an income of Rs.12,62,535/-|and not a claim for deduction. It is also argued that if provision created is compared with actual expenses.there is hardly any difference which demonstrates thatthe creation of provision is scientific and the assessee has been following the aforesaid method of provisioningconsistently for nearly ten years and has a historicalbasis. | 5.|It ISalsopointedthat|beforetheCommissioner of Income Tax (Appeals) the assesseehad produced a comparative statement showing the|sales for which deduction is pending, the corresponding|provisioning, the actual expenses incurred in the next|years for financial years 200-06 to 2011-12 as well as.ledger account extracts of the provision for erection andcommissioning, which evidences reversals as on the last|day of the financial year and therefore, the finding:recorded by tne tridDunal that the assessee has failed todemonstrate that the liability had accrued during theyear is perverse and contrary to the decisions of theSupremeCourt|In'CALCUTTACoO.LTD.VS.COMMISSIONER OF INCOME-TAX', (1959) 37 ITR 1.(SC) BHARAT EARTH MOVERS VS. CIT, (2000)112 TAXMAN 61 (SC),and"ROTORN CONTROLS 5.|It ISalsopointedthat|beforetheCommissioner of Income Tax (Appeals) the assesseehad produced a comparative statement showing the|sales for which deduction is pending, the corresponding|provisioning, the actual expenses incurred in the next|years for financial years 200-06 to 2011-12 as well as.ledger account extracts of the provision for erection andcommissioning, which evidences reversals as on the last|day of the financial year and therefore, the finding:recorded by tne tridDunal that the assessee has failed todemonstrate that the liability had accrued during theyear is perverse and contrary to the decisions of theSupremeCourt|In'CALCUTTACoO.LTD.VS.COMMISSIONER OF INCOME-TAX', (1959) 37 ITR 1.(SC) BHARAT EARTH MOVERS VS. CIT, (2000)112 TAXMAN 61 (SC),and"ROTORN CONTROLS INDIA PVT. LTD VS. CIT’, (2009) 180 TAXMAN 422(SC).On the other hand, learned counsel for the|revenue has submitted that the assessee has not.established that liability to commissioning and erection|has accrued and findings of fact in this regard have beenrecorded by all the authorities under the Act andtherefore, no substantial question of law is involved in-this appeal. It is further submitted that additionalevidence referred to cannot be relied on witnout|adjudication of the factual aspect of the matter. 6.|We have considered the submissions made.by learned counsel for the parties and nave perused therecord. Before tne Commissioner of Income Tax.(Appeals), the assessee had produced a comparativestatement showing the sales in which erection is|pending, the corresponding provisioning, the actual|expenses incurred in the next year for financial years2005-06 to 2011-12 and ledger account extracts of theDrovisionsfor.erectionand commissioning, WNICcn evidences reversals as on the last day of financial year.However, the Commissioner of Income Tax (Appeals).has not taken note of the aforesaid material produced bythe assessee. The tribunal has held that the assessee|hasfailedCO demonstrateeitherbeforetheCommissioner of Income Tax (Appeals) or before thetribunal that liability Nas accrued during the year and|the fact that the substantial provision was reversed in.subsequent years. The aforesaid finding is contrary tothe material available on record. Therefore, in the facts.of the case, the material produced by the assesseebefore the Commissioner of Income Tax (Appeals) as.well as the tribunal needs factual adjudication in the.lignt of law laid down by Supreme Court. Tnerefore, we.quash the order passed by the Commissioner of IncomeTax (Appeals) as well as the tribunal insofar as itpertains to disallowance of the provision and remit thematter to the Commissioner of Income Tax (Appeals) to.adjudicate the aforesaid issue afresh in the light of materials produced by the assessee and in view of law.laid down in CALCUTTA CO. LTD, BHARAT EARTH.MOVERS and ROTORN CONTROLS INDIA PVT. LTD.SUPIad. In view of preceding analysis, it is not necessaryfor us to answer the substantial questions of law framedin this appeal. In the result, the appeal is disposed of. Sd/-—JUDGE. SS| Sd/-JUDGE.