Ita/651/2007 Of The Commissioner Of Income Tax v. M/S.wep Peripherals Ltd

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 1/ DAY OF MARCH 2014. PRESENT THE HON‘'BLE MR. JUSTICE DILIP B BHOSALE AND| THE HON‘'BLE MR. JUSTICE B MANOHAR ITA.NO.651/2007 C/W ITA.NO.655/2007 BETWEEN 1.THE COMMISSIONER OF INCOME TAX. C.R.BUILDING, QUEENS ROAD. BANGALORE 2.THE ASSISTANT COMMISSIONER OF INCOME TAXCIRCLE 12(3), C.R.BUILDING,QUEENS ROAD, BANGALORE ., COMMON APPELLANTS (BY SRI K V ARAVIND, ADV.,). AND M/S WEP PERIPHERALS LTDFORMERLY WIPRO E PHERIPHERALS LID.,I] FLOOR BASAPPA COMPLEX40/1A, LAVELLE ROADBANGALORE 560 0OO1.., COMMON RESPONDENT| (BY SMT S R ANURADHA, ADV.,) THIS ITA.NO.651/200/7 FILED U/S.260-A OF I.T.ACT,1961 ARISING OUT OF ORDER DATED 2/7-4-200/7 PASSED I ITA NO.618/BNG/2005, FOR THE ASSESSMENT YEAR 2001-02,|PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF|LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE)THE ORDER PASSED BY THE [TAT BANGALORE IN ITA|NO.618/BNG/2005,DATED 27-4-2007 CONFIRM THE ORDERS|OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER|PASSED BY THE ASSISTANT COMMISSIONER OF INCOME|TAX,CIRCLE-12(3),BANGALORE IN THE INTEREST OF JUSTICE|AND EQUITY. | THIS ITA.NOQ.655/2007 FILED U/S.260-A OF I.T.ACT,|1961 ARISING OUT OF ORDER DATED 2/7-4-200/7 PASSED IITA NO.619/BNG/2005, FOR THE ASSESSMENT YEAR 2002-03,|PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF|LAW STATED THEREIN, II]. ALLOW THE APPEAL AND SET ASIDETHE ORDER PASSED BY THE ITATL BANGALORE IN ITA|NO.619/BNG/2005,DATED 27-4-2007 CONFIRM THE ORDERS|OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER|PASSED BY THE ASSISTANT COMMISSIONER OF INCOME|TAX,CIRCLE-12(3),BANGALORE IN THE INTEREST OF JUSTICE|AND EQUITY. | THESE ITAS COMING ON FOR HEARING, THIS’ DAY, THIS COURT, DELIVERED THE FOLLOWING: © ORAL JUDGMENT: (DILIP B. BHOSALE J.) These two appeals arise from the common orderdated 27[/,]April 2007 whereby, the Income Tax Appellate|Tribunal, Bangalore Bench-A (for short the “Tribunal’)|dismissed the appeals filed by the revenue bearing ITA 618-619/2005 pertaining to assessment years 2001-02.and 2002-03. The Tribunal also disposed of ITANo.421/2005 by the very same order. However, we arenot concerned witn the same in the present appeals. 2. The appeals (ITA No.618-619/2005) were directedagainst the order dated 3[5;]February 2005 passed by the.Commissioner of Income Tax (Appeals-III) Bangalore (forSnort “CIT(A)’) whereby ITA 79/AC 12(3)/CIT(A)III/04-05|filed by the assessee was partly allowed. Though theappeal was partly allowed by CIT(A), insofar as the present|appeals are concerned, the questions of law raised hereinwere decided in favour of the assessee. In other words,|insofar as the present appeals are concerned, the appealfiled by the assessee before the CIT(A) was allowed. The)Assessing Officer vide order dated 29-10-2004 madeaddition of Rs.90,58,354/- as a difference between the.value of opening stock and closing stock pertaining to)Hyderabad Unit. In so far as the provision for warranty is concerned, the Assessing Officer for both the assessmentYEd[sdisallowedthecdeductionCO tneextent.OT|Rs.1,60,98,440(assessmentYEdr|2001-02)andRs.89,01,000/- (assessment year 2002-03). It is in this|backdrop, in the present appeals the revenue has raised.tne following substantial questions of law: 1. Whether tne Appellate Authorities were|justified in holding that the difference between.the Opening Stock and the Closing Stockcannot be added back as held by the AssessingOfficerdespitetnegenuinenessOT|tnepurcnasesnNavingnotpeen|provedDYproduction of Purchase Invoices? 2. Whether the Appellate Authorities werecorrect in holding that the provision forWarranty is a business expense which isallowable despite the same being a ContingentLiability and the same having not beenexpended by the Assessee during tne currentAssessment Year? Insofar as the second substantial question of law is)concerned, it is raised in both the appeals. 3. The respondent-assessee disputed addition of Rs.90,58,354/- being a difference between tne opening| 1. Whether tne Appellate Authorities were|justified in holding that the difference between.the Opening Stock and the Closing Stockcannot be added back as held by the AssessingOfficerdespitetnegenuinenessOT|tnepurcnasesnNavingnotpeen|provedDYproduction of Purchase Invoices? 2. Whether the Appellate Authorities werecorrect in holding that the provision forWarranty is a business expense which isallowable despite the same being a ContingentLiability and the same having not beenexpended by the Assessee during tne currentAssessment Year? Insofar as the second substantial question of law is)concerned, it is raised in both the appeals. 3. The respondent-assessee disputed addition of Rs.90,58,354/- being a difference between tne opening| stock as on 1-2-2001 and the closing stock as on31-3-2001 pertaining to Hyderabad Unit. It appears that)on receipt of the final audit report under Section 142(2A).of the Income Tax Act, 1961 (for snort “the Act’), the.issues were identified and a show cause notice (letter) was.issued to the assessee-company on 18-08-2004. The)assessee filed their replies on 30-08-2004 and 0O2-092004. Further clarification was sougnt from the assessee—Whicn was aiso submitted vide letter dated 28-09-2004. It!nas come on record that the assessee had purchasedgoods from Godrej and company wortn Rs.3,6/7,81,086/-and the total value shown as purchases, at the end ofassessment year was Rs.4,99,41,820/-. The break up of.this amount as mentioned in the order of the assessment|reads thus «| Goods purcnased by Godrej & Co. and deemed to navecarried on account of WEP =Rs. 36/81086carried on account of WEP =Rs. 36/81086•Difference between the value of opening stock ofHyderabad unit as of 1[./]February 2001 over closingstock as of 31[./]March 2001 which was taken as part of|purcnase by the assessee=Rs. 9058354Hyderabad unit as of 1[./]February 2001 over closingstock as of 31[./]March 2001 which was taken as part of|purcnase by the assessee=Rs. 9058354•Other adjustments made to purchases =Rs. 4102381. While dealing with this issue, Special Audit Report under|Section 142(2A) of the Act, dated 10-08-2004 placed onrecord, was taken into consideration. This report reveals|that the purchases to the extent of 97.69% were verifiedby the Special Audit Party and in view thereof, the)assessee’'scontentionthatthe.ASS@SSINQOfficer’sobservation in respect of the purcnases at Hyderabad Unit)were held to be not correct. In other words, it was|contended that the observations made/conclusions arrived.at py the Assessing Officer in respect of purchases at.Hyderabad Unit remained unsubstantiated. It appears tnat|the difference of Rs.90,58,354/- between opening stock|and closing stock at Hyderabad factory had beenconsidered only to arrive at the consumption of material at)Hyderabad factory of Rs.4,99,41,820/-. In short, the casepleaded by the assessee was that the total purchases|made by tne assessee were made during the assessment.year. This case of the assessee has been accepted by the. first appellate authority as well as the Tribunal. Thefindings of the first appellate authority made on the)question read thus: first appellate authority as well as the Tribunal. Thefindings of the first appellate authority made on the)question read thus: “Tne.appellant's|SUDMISSIONSare|carefully considered. On perusal of SpecialAudit Report u/s.142(2A) dated 10-08-2004(page 3), I find that the Special Audit Partynas verified the purchases to the extent of97.69%. In the circumstances, I am inclined|to agree with the appellant's contention thatthe Assessing Officer’s observation that thepurcnasesatHyderabadunitWereunsubstantiated is not correct. Furtner tne!Assessing Officer nas not brougnt anything on.record to indicate that there was a discrepancyin the value of opening stock, purchases andclosing stock refiected in the Annual Accounts.OT|tneappellant.Tne.difference OT|Rs.90,58,354/- petween the opening stock andclosing stock at Hyderabad factory has beenconsidered by the appellant only to arrive atthe consumption of material Rs.4,99,41,820/-.at Hyderabad factory. The difference ofRs.90,58,354/- between opening stock and tneclosing stock at Hyderabad factory has beenadded to the purcnases at Hyderabad factorytoarriveattneconsumptionOf|Rs.4,99,41,820/-. The appellant has also.arrived.attneSameconsumptionOf|Rs.4,99,41,820/- by adding purchases to tnevalue Of opening stock and from the resultantfigure reducing the value of closing stock (referPara 3.0 above). In the circumstances, I am ofthe considered opinion that the addition of Rs.90,58,354/-.onaccount|of|difference between opening stock and closing stock wasnotwarrantec.|Accordinglyaddition17'DRs.90,58,354/is deleted. Tne Tribunal confirmed the above findings recorded by the.CIT(A). It is clear from the findings recorded by the FirstAppellate Authority as well as the Tribunal that the)evidence produced by the assessee in respect of thepurcnases and consumption are the finding of fact, though the revenue disputed that no evidence was placed on)record to substantiate the purchases worth Rs.90,58,354/-Even if the Submission made on benalf of the revenue Is.presumed to be correct, we would not like to enter into)this controversy in view of the concurrent findings.recorded py the authorities below and in particular, Special Audit report under Section 142(2A) of the Act, dated10-08-2004, which confirms the purchases to the extent of 97.69% as were verified by the Special Audit Party. In the)circumstances,We|confirmtheconcurrentfindingsrecorded by the authorities below on this question and) answer the first question against the revenue and in favourof tne assessee. 4. Insofar as the second question is concerned, at the outset, Mr.Aravind, learned counsel for the revenue|invited our attention to the judgment of the SupremeCourtIn.RotorkControls|India|(P)|Ltd.VS. Commissioner of Income Tax Chennai, [2009] 314.ITR 62 (SC)to contend tnat tne matter deserves to be)remitted to tne Tribunal to consider whether the tests laid.down by the Supreme Court in the said judgment stands|satisfied. 5.In.Rotork Controls India (P) Limited,theSupreme Court was considering the question what is)provision? (for warranty). The Supreme Court while)dealing with this question observed tnat “a provision is a)liability which can be measured only by using a substantialdegree of estimation. A provision is recognized when: (a).an enterprise has a present obligation as a result of a past) event; (b) it is probable an outflow of resources will berequiredCOsettletheobligation;and |(c) reliable estimate can be made of the amount of theObligation. If these conditions are not met, no provision|can be recognized.” On the basis of these observationsand following the observations made by the Supreme.Court in paragrapn 13, Mr.Aravind, learned counsel|appearing for the Revenue submitted that to find out)whether all the tests laid down by the Supreme Court)stand satisfied in the present case, it deserves to beremanded to the. Tribunal. Relevant observations in.paragrapn 13 read tnus: event; (b) it is probable an outflow of resources will berequiredCOsettletheobligation;and |(c) reliable estimate can be made of the amount of theObligation. If these conditions are not met, no provision|can be recognized.” On the basis of these observationsand following the observations made by the Supreme.Court in paragrapn 13, Mr.Aravind, learned counsel|appearing for the Revenue submitted that to find out)whether all the tests laid down by the Supreme Court)stand satisfied in the present case, it deserves to beremanded to the. Tribunal. Relevant observations in.paragrapn 13 read tnus: “AdetailedassessmentOf|thewarrantyprovisioning policy is required particularly if theexperience suggests that warranty provisionsaregenerally reversed ifthey|remained.unutilized at the end of the period prescribedin the warranty. Therefore, the companySsnouldscrutinizethe.nistorica]trendOf|warranty provisions made and the actualexpenses incurred against it. On this basis asensibleestimateshouldbemade. The.warranty provision for the products should bebased on the estimate at year end of future warranty expenses.Sucn|estimates|need|reassessment every year. AS one reaches closeto the end of the warranty period, tneprobability that the warranty expenses will Deincurred is considerably reduced and thatShould be reflected in the estimation amount.|Whether this snould be done through a prorata reversal or otnerwise would requireassessment of historical trend. If warrantyprovisionsarepased_On|experience|and.nistorical trend(s) and if the working is robustthen the question of reversal in the subsequenttwo years, in the above example, may notarise in a Significant way. In our view, on thefacts and circumstances of this case, provisionfor warranty is rigntlhy made by the appellantenterprise because it has incurred a presentobligation as a result of past events. There isalso an outflow of resources. A. reliableestimate of the obligation was also possibile.Tnerefore, the appellant has incurred a liability,on the facts and circumstances of this case,during the relevant assessment year wnicn was_entitied to deduction under Section 3/7 of tne1961 Act. Therefore, all the three conditions.for recognizing a liability for the purposes ofprovisioning stand satisfied in this case. It isimportant to note that there are four importantaspects OT|provisioning. TneyareprovisioningWNICDNrelates|TO presentobligation, it arises out of obligating events, itinvolves outflow of resources and lastly itinvolves.reliableestimationof.obligation.Keeping in mind all the four aspects, we are ofthe view that the High Court snould not tohave interfered with the decision of the’Tribunal in this case. 6. In the present case, the appellant-Revenue Nas|disputed the allowance of Rs.89,01,000/- being provision.for warranty for the assessment year 2002-03 and.Rs.1,60,98,440/- for the assessment year 2001-02. Insupport our attention was invited to the observations made.in paragraph 3.0 and 3.1 in the order of the CIT(A) todemonstrate whether all the three tests laid down by the.Supreme Court inRotork’scase stand satisfied in the|present case. 7. From bare perusal of the observations made by the CIT(A), which are confirmed by the Tribunal, in our)opinion, it cannot be stated that tne tests laid down by the.Supreme Court in|Rotork’scase were taken tntoconsideration and applied. This has not been disputed|seriously by the respondents. Hence, insofar as the issuein respect of the provision for warranty is concerned, we)are inclined to allow these appeals and remand the matter| to the Tribunal to consider the second substantial question|of law in the light of the judgment of the Supreme Court in| Rotork(supra) and also in|Commissioner of Income.Tax and another vs. M/s.IBM India Limited, [2013]. 357 ITR 88 (Kar.).—Order accordingly. 8. Witn these observations, the appeals are partlyallowed. However, there shall De no order as to costs. la Sd/-.JUDGE| Sd/- JUDGE|