Itta/443/2005 Of Healthware Private Ltd v. The Asst. Commissioner Of Income Tax

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD WEDNESDAY ,THE TWENTY SIXTH DAY OF OCTOBERTWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANANIDTHE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIB UNAL APPEAL NO: 443 OF 2005 lncome Tax Appeal Under Section 260_4 of the lncome Tax Act,1961 against the order of the Income Tax Appeilate Tribunal, Hyueraoaa"A" Bench, in t.T.A. No. 179 t Hydt2}04 dated 29_07-2005 for theAssessment Year 2001-02 prererred against the order of thecommissioner of rncome Tax ( Appears ) - li Hyderabad dated 28-0i-2004 in lrA No. 3s5 / crr (A) -[ / 03-04 preferred igainst the order of theAssistant commissioner of rncome Tax , circre 1 (4), Hyderao"a a"i"a29-09- 2003 in PANi GtR No. H-63 Between: M/s. Healthware Private Ltd., 8-2-62311,Banjara Hills, HyderabadRepresented by its Managing Director Mr.K. Ram Narayan, S/o. K.V.Subramanyam, aged 52 years.,..APPELLANT/APPE LLANT AND The Asst. Commissioner of lncome tax, Central Circle _ .l(4) Hyderabad. ...RESPONDENT ITTAMP. NO: 484 OF 2005 Petition under Section ['r ]5r cpc praying that in the circumstanc,esstated in the affidavit filed in support of the petiiion, the High court may bepleased to suspend the order dated 2g-7-2005 passed by the rncome TaxAppellate Tribunal, Hyderabad'A' Bench, in lrA No. 17gi1ydt2oo4 for theAssessment year 2oo1-02 and direct the Respondent not tt press for thepayment of disputed taxes and interest in a sum ot Rs.27,24,i76l- pendingdisposal of appeal Counsel for the Appeltant: SRI NAPA DEEPAK FOR SRI S. RAVI Counsel for the Respondent: SRI B. NARASIMHA SARMA SC for l.T. DEPARTMENT The Court delivered the following: Judgment CE4IlDc.v.DY INo. 443of2oo5 DGMENT: lper the Hon,bte the ChteIJustc. r.rrat tshusoa) Heard Mr. Naga Deepak, learned counselfor theappellant and Mr. B.Narasimha Sarma, learned Standingcounsel for Income Ta:r Department appearing on behalf ofthe respondent. 2. This appeal under Sectio n 260Aof the Income TaxAct, 1961 (briefly .the Act,hereinafter) is directed againstthe order d.ated 29.02.2005 passed bvthe lncome TaxAppellateTribunal, HyclerabadBench [,A,]Hl derabad(?ribunal) in I.T.A.No. 179/Hyd/2OO4 for rheassessmen tyear 2OOt-2002. 3. Whileadmitting rheappeal,nos ubstantialguestions of law $,s1s formulated. However, inthe memo ofappeal, the following tr,r,o questions have beenproposed assubstantial questions of law: \ " 1 . Whether [on ][tLte ]facts [and ][in ][the]ctrcumstances [of ][the ][case' ][tLLe ][Appellate]T?ibunal was [ight ][in ][law ][in upholding ][tte ][order]of reassessment [under ][Section ][148 ][of ][th-e]Of [cer ][on ][a ][mere ][chnnge of ][opinion?]Assessing 2. Whetlar in [uietu ][of ][the accounting ][policg]follott-ted [bg ][the ][appellant, ][the liabilitg ][luuing]been incurred [by ][the ][appellant, (tltough ][to ][be]quantified at a future [date) ][during the gear ][of]account, a [prouision made ][on ][scientific ][basis]could be disallotued [in ][the ][hands ][of ][the]appellant?" 4. From the above, [it is ][seen ][that Iirst ][question]assails reopening [of ][assessment ][under ][Section ][148 ][of ][the]Act by the [Assessing ][Officer ][on ][the ][ground ][that ][such]reopening [was on ][the ][basis of ][mere ][chalrge of ][opinion'] 5. The second [question ][proposed ][is that ][the liability] on account of [the ][warrantee having been ][incurred by ][the]based [on the ][accounting ][policy ][followed ][by ][the]appellant appellant, though [to ][be ][quantilied ][at ][a ][later ][date, whether]the same could [have ][been disaliowed ][by the ][Assessing]Officer and affirmed [by ][the ][lower ][appellate ][authorities'] ( IIi 6. We deal with the first question at the outset. 7. Assessing Officer passed the assessment order for 4. From the above, [it is ][seen ][that Iirst ][question]assails reopening [of ][assessment ][under ][Section ][148 ][of ][the]Act by the [Assessing ][Officer ][on ][the ][ground ][that ][such]reopening [was on ][the ][basis of ][mere ][chalrge of ][opinion'] 5. The second [question ][proposed ][is that ][the liability] on account of [the ][warrantee having been ][incurred by ][the]based [on the ][accounting ][policy ][followed ][by ][the]appellant appellant, though [to ][be ][quantilied ][at ][a ][later ][date, whether]the same could [have ][been disaliowed ][by the ][Assessing]Officer and affirmed [by ][the ][lower ][appellate ][authorities'] ( IIi 6. We deal with the first question at the outset. 7. Assessing Officer passed the assessment order for the assessment year under consideration on 29.O9.2OO3under Section 1a3(3) r/w Section l4g of the Act. It may bementioned that appellant is a company assessed to taxunder the Act. It is engaged in ttre business of purchase ofsale of medical equipments and related services. For theassessment year under consideration, appellant had filedits return of income on 3 1 . l O.2OO 1 disclosing total incomeof Rs.79,07,060.00. In this connection, intimation undersub-section (l) of Section 143 was issued to the appellantby the Assessing Oflicer on 22.O3.2OO2. Later on it wasfound that appellant had debited an amount ofRs.49,18,400.0O to the profit and loss account being aprovision for warrarty. Observing that it was only aprovision and not an allowable deduction, a view was takenthat the aforesaid arrount was an income chargeable to taxbut had escaped assessment. Thereafter, notice underSection 148 of the Act was issued. Following reassessment proceedings, assessment order dated 29.09.2003 [was]passed by the Assessing Officer under Section [143(3) ][r/w]Section 148 of the Act. 8. From a perusal of the assessment [order, ][we ][do ][not]find that appellant had [questioned ]the [competence ][of ][the]Assessing Officer in initiating reassessment [proceedings on]the ground that the sarne [was done ][on the basis of a ][mere]change of opinion. 9. None the less, before the [Commissioner ][of ][Income]Tax (Appeals) - II, Hyderabad [(briefly ]'CIT(A)'hereinafter),appellant raised the ground that [Assessing ]Officer [had]erred in assuming [jurisdiction ]under [Section ][148 ][of ][the ][Act]on mere change of opinion. First [appellate authorit5r ][i.e.,]the CIT(A) noticed that the assessment was [reopened]within 4 years from the end of the financial [year ][relevant ][to]the assessment order under consideration. [On ][that ][basis,]Iirst appellate authority declined to entertain [the ][above]ground of the appellant. 10. Before the Tribunal, this was taken up as anadditional ground by the appellant. However, Tribunalrejected the same in the following manner: 18. We haue carefullg considered. the iualsubmissions and perused. tle record. As regardsadditional ground urged bg tte assessee taithregard to tLLe ualiditg of . reassessmentproceedings, the case of th.e learned counsel isthat there is no rea.son to belieue that incomehas escaped assessmenf since compete d.etailspertaining to tte cloim of deduction in the formof prouision for utarrantg were alreadg on record,and lrcnce it is a mere change of opinion. In ourconsidered opinion the contention of the learnedcounsel is misconceiued. Section 147 of theIncome Tax Act had undergone d.rastic chnngesw.e.f. 1-4-89 and as per Explanation _ 2 toSection 147 of the income chargeable to tax hasbeen under assessed or excessiue allowanceunder this Act has been computed., it ulould. bedeemed to be a case where income cLnrgeableto tax has been escaped assessment. In fact inthe instant case thougLt tLrc material was onrecord, the AO lwd no occasion to exantine thecoffectness of the clcLim since the return ofincome was processed und.er Section 1a3(l) of the Act. As rightlg contended [bg ][the ][learned ] merelg because the AO has not [exercised ][the]pouer of issuing a notice under Section H3(2) ofthe Act to conuert a case into [scrating ][he ][is ][not]debarred from reopening the [assessment ][under]Section 147 of the Act. Identical [zssue ][has ][come]up before the ITAT - B - [Bench ]Hgderabad [in]the case of Elegant Clemicals [Dnterpises ][Piuate]Limited uLerein ute haue taken a uieu that [it ][is]not necessary for the AO to [exhaust ][a ][remedg ][of]issuing a notbe under Section H3(2) of [the Act]before taking recourse [to Section 147 ][of ][tle ][Act.]Sincc the rehtnt tuas [processed ][under ][Section]143(1) utithout m.aking inuestigation, [it ][cannot ][be]said that the AO has exercised his mind [and]nou.t sought to change his opinion [on ][the ][issue ][of]allouabilitg of deduction. Suffice to sag that [in]the light of the amended prouisions of Section147 of tlte Act tlp AO has reason to beLieue [that]tte income assessable to tax has [escaped]assessmerut. We tLerefore reject the additionalground urged bg th.e assessee. ' 1 1. Tribunal noted that as per Explanation [(2) ][to]Section 147 of the Act, if the income chargeable [to ][tax ][was]under-assessed or excessive allowance [was computed' ][r1 ]["] t,' \ would be deemed to a case where income chargeable to taxhad escaped assessment. Though the materia_ls in the formof profit and loss account was on record, Assessing Officerhad no occasion to examine the correctness of the claimsince only intimation was issued under sub_section (1) ofSection 143 of the Act. Tribunal concurred with the standtaken by the revenue that merely because the AssessingOificer had not exercised the power of issuing notice underSection 143(21 of the Act to make it a case of scrutin.yassessment, he would not be debarred from re_opening theassessment under Section 142 of the Act. Therefore, whenthe return was processed under Section 1a3(l) of the Actu,ithout making due scrutiny, it could not be said that theAssessing Olficer had apptied his mind arrd taken aparticular view; thus issuance of notice under Section 148would tantamount to a change of opinion. Accordingl_v,Tribunal rejected the above ground urged by the appellant. 12. We agree with the view taken by the Tribunal onthis aspect. We are lortified in our view when we refer toExplanation (1) to Section t4T of the Act, as it existed at the relevant point ol time as per which production beforethe Assessing Officer the account books or other evidencefrom which materia-l evidence with due diligence could havebeen discovered by the Assessing Officer w,ould notnecessarily amount to disclosure within meaning of Section147 ofthe Act. 13. That being the position we ans\.\''er the lirstquestion against the appellant and in favour ol therevenue 14. This brings us to the second question relating toprovision for warrant5r which incidentally was the reasonfor re-opening of assessment. We may mention thatappellant had debited an amount of Rs.49,18,400.00 to theprofit and loss account being provision for warranty. Thiswas disallowed i.e., not allowed as a deduction by theAssessing Officer in the assessment order dated29.O9.2013 on the ground that appellant had not incurredany amount / expenditure on account of warranty duringthe assessment year under consideration. [t u,as further (t held that [the ][amount ][of ][Rs'49'18'4OO'OO ][which ][was]debited [by the ][appellant ][being ][the ][provision ][for ][warranty]was nothing [but ][a ][contingent ][liability' ][The ][same ][was ][not]an expenditure [incurred ][by the ][appellant ][in ][the]assessment [year ][under ][consideration' Therefore' ][Assessing]Officer [held ][that the ][subject ][amount ][was ][not ][allowable ][as ][a]deduction [and ][accordingly added ][the ][same ][to ][ttre ][total]income [of ][the ][appellant ][while ][determining ][the ][income ][of]the aPPellant [under ][the ][Act'] (t held that [the ][amount ][of ][Rs'49'18'4OO'OO ][which ][was]debited [by the ][appellant ][being ][the ][provision ][for ][warranty]was nothing [but ][a ][contingent ][liability' ][The ][same ][was ][not]an expenditure [incurred ][by the ][appellant ][in ][the]assessment [year ][under ][consideration' Therefore' ][Assessing]Officer [held ][that the ][subject ][amount ][was ][not ][allowable ][as ][a]deduction [and ][accordingly added ][the ][same ][to ][ttre ][total]income [of ][the ][appellant ][while ][determining ][the ][income ][of]the aPPellant [under ][the ][Act'] 15. CIT(A) [also ][considered ][this ][aspect ][of ][the ][matter']Concurring [with ][the ][view ][taken ][by ][the ][Assessing Officer']the first [appellate ][authority ][held ][that ][claim ][of ][warranty]expenses [were ][not ][actually incurred ][while ][making ][the]provision [against ][the ][claim of ][warranty' The ][claim ][is ][not]carried [out ][as ][r't'ell, ][as ][it ][was ][not ][certain' ][Therefore]Assessing [Oftrcer was ][justified ][in ][holding ][ttrat ][uncertain]Iiability [to ][pay ][damages ][at ][future ][rates would ][represent]merely [a ][contingent ][liability ][and ][could ][be ][allowed ]['] iItIIIII 16. In further appeal [before ][the ][Tribunal, ][the ][above] view taken by the [CIT(A) ][was ][alfirmed. ][After ][alalysing]various decisions, Tribunal [culled ][out the ][following]principles which a.re required [to be ][taken ][into]consideration for determining [as ][to ][whether ][a ][liability]could be construed [to ][be ][contingent ][or ][uncertain:] (i) If the business liability has [definitely arisen ][in ][the] accounting [year, the deduction should ][be ][allowed ][although]liability may have to [be ][quantified ][and ][discharged ][at ][a]future date; (ii) It should be capable of being [estimated ][with]reasonable certainty though [the actual quantification ][may]not be possible; (iii) The quantification should be based [upon ][the]'prudence'. (iv) The notification issued prescribing [accounting]standards in exercise [of powers ][under ][Section ][145(2) of ][the]Act, should also be taken [into ][consideration.] 17 . Therealter, Tribunal [negatived ][the ][claim ][of ][the]appellant as under: i Ii I i I 2O. In th.e instant case, it is not in di.sputetLwt this is the first year in uhich the assesseeLns undertaken to prouide uanrantg and thus itcannot be said that tLre quantification is basedupon tlrc past expertence of the assessee, Nodoubt the assessee claimed that it i,s basedupon tlp past expeience of the laldingcompanA but there is nothing on reard tosuggest as to what is the percentage ofexpenditure incured bg tlrc holding companAupon sale of similar products utith u:anrantg. 27. On the other hand, report of thestanding committee dated 13.02.200 1, u;hich ismuch auailable before tle end of theuery occounting releuant to the assessment Aearunder consideration, slrotus tlnt tLEperfonnance of the units installed in India aregood, indicating tlLat the prouision madetowards uarrantA liability is excessiue. Th.ere isalso huge gap bettueen the prouision and theactual expenditure, which is euidenced from thefact [that ][in ][tLre ][subsequent ]Aears [tte ][assessee]has offered it to reuenue. In fact the tuarrantgcosts of Rs.49,18,400/- which is claimed to bean ascertained liability pertains to the tuarrantgperiod commencing ofter the end of the )) 27. On the other hand, report of thestanding committee dated 13.02.200 1, u;hich ismuch auailable before tle end of theuery occounting releuant to the assessment Aearunder consideration, slrotus tlnt tLEperfonnance of the units installed in India aregood, indicating tlLat the prouision madetowards uarrantA liability is excessiue. Th.ere isalso huge gap bettueen the prouision and theactual expenditure, which is euidenced from thefact [that ][in ][tLre ][subsequent ]Aears [tte ][assessee]has offered it to reuenue. In fact the tuarrantgcosts of Rs.49,18,400/- which is claimed to bean ascertained liability pertains to the tuarrantgperiod commencing ofter the end of the )) accounting Aear releuant to fhe assess ment gearunder consideration. Tlwe is nothing on reardunder consideration. Tlwe is nothing on reardto suggest that before th,e end of the corrcernedaccounting gear the assessee-compang hasaccounting gear the assessee-compang hasinstalled the product. In the Aear underconsideration the assessee has undertaken togiue u.tarrantg to the products sold onlg w.e.f.01.01.2001. In otler utords, in this year theassessee decided to prouide for u.tarrantg onlgon tLte sales made ift th.e last quarter of the gear.giue u.tarrantg to the products sold onlg w.e.f.01.01.2001. In otler utords, in this year theassessee decided to prouide for u.tarrantg onlgon tLte sales made ift th.e last quarter of the gear.Thus looking at from anA angle, thequantification of the liability has not beenproued to be based on dnA scientiJic @nalysis.quantification of the liability has not beenproued to be based on dnA scientiJic @nalysis.Under these circumstances tlrc case laut reliedupon bg he learned counsel for tlrc assessee areupon bg he learned counsel for tlrc assessee ared-istinguishable on facts. On the corutrary thedecision of th-e Apex Court in tLe case of BLmratdecision of th-e Apex Court in tLe case of BLmratEarth Mouers, far from supporting the stand ofthe assessee, helps the plea of tle reuenuethe assessee, helps the plea of tle reuenueinasmuch as the material on record suggeststhat the assessee could not estimate the liabilitytuith reasonable certainty which is euidencedfrom [the ]fact [that ][90% ][of ][the ][prouision ][tuas]uritten back in the next gear. Under thesethat the assessee could not estimate the liabilitytuith reasonable certainty which is euidencedfrom [the ]fact [that ][90% ][of ][the ][prouision ][tuas]uritten back in the next gear. Under thesecircumstances, we afJirm tte order of thelearned CIT(A) and dismiss the appeal filed bytlte assessee.tlte assessee. ,' 18. Learned counsel for the appellant has referred toa decision of the Supreme Court in the case of BhqratEarth Mouers Vs. Commdss ioner of Income Tax,reportedin [2ooo] 24s rrR 428 (sc) and also to a decision of theMadras High Court in the case of M/s.Grundfos pumpasIndla Limited Vs. The Deputg Commissioner of IncomeTax rn T.C.A.No.7OOS of 2OO8, decided on OB.O9.2Ol8. 19' we have carefulry gone through the decisions socited by the learned counsel for the appellant. 2O. Having regard to the facts and circumstances ofthe case, we are of the vier.r, that the above decisions wouldnot be applicable. As has been held by the Supreme Courtin Bhq.rat Earth Mouers (cited supra) the law is settledthat if a business liability has arisen in the accountingyear, the deduction should be allowed although the liabilitymay have to be quantified and discharged at a ruture date.What should be certain is the incurr.ing of the liability. It { \\ should also be capable of being estimated with reasonablecertainty though the actual quantification may not bepossible. Il these requirements are satisfied, the liability isnot a contingent one. The liability would be in-praesentithough it may have to be discharged at a future date. 21. In the present case, no liability had arisen in theassessment year under consideration. AII that the assesseehad done was to make a provision for warrant5i that mightaccrue in future. There was no certaint5r of incurring theexpenditure. { \\ should also be capable of being estimated with reasonablecertainty though the actual quantification may not bepossible. Il these requirements are satisfied, the liability isnot a contingent one. The liability would be in-praesentithough it may have to be discharged at a future date. 21. In the present case, no liability had arisen in theassessment year under consideration. AII that the assesseehad done was to make a provision for warrant5i that mightaccrue in future. There was no certaint5r of incurring theexpenditure. 22. In such circumstances, we see no reason toanswer the second question in favour of the appellant.Consequently this question is also answered against theappellant and in favour of the revenue. 23. Therefore, in the light of the discussions madeabove, the appeal is dismissed. '( Miscellaneous applications pending, if any, shall stand closed. However, there shali be no order as to costs. Sd/-K.SRINIVASA RAOJOINT REGISTRAR //TRUE COPY//.tSECTIoti oFFtcER To 1. The lncome Tax Appellate Tribunal, Hyderabad "A" Bench, z. The Commissioner of lncome Tax ( Appeals ) - ll, Hyderabad 3. The Assistant Commissioner of lncome Tax , Circle 1 (4), Hyderabad 4. One CC to SRl. S. RAVI, Advocate s. One CC to SRl. B NARASIMHA SARMA, SC for l.T. Dept., 6. Two CD Copies a-- HIGH COURT DATED:2611012022 IF.E [s ][14]ri-/oIi2 5 JAN ?[NJUDGMENT\) *..,,lTTA.No.443 ot 2005 DISMISSING THE ITTA WITHOUT COSTS 0crtsnY/,1\t\rt