Ti2I v. Theassistant Commissioncr Of Incorne Taxl

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD THURSDAY,THE THIRD DAY OF NOVEMBERTWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANANDTHE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEAL NO: 604 OF 2015 Appeal Under Section 260A of the lncome Tax Act, 1961 against theorder dated 07 -02-2008 in ITA No. 365 / Hyd / 2006 Assessment Year 2003-2004 on the file of the lncome Tax Appellate Tribunal , Hyderabad Bench "B"Hyderabad preferred against the order dated 20-02-2006 in ITA No. 308/ACIT 2(2) / CIT (A) - lll/ 05-06 on the file of the Commissioner of lncome Tax (Appeals ) lll , Hyderabad preferred against the order of the Asst.Commissioner of lncome Tax , Circle 2 (2) , Hyderabad dated 30-'t 2-2005 inPAN / GIR No. AABCH 2124NH-063. Between: M/S. by its Healthware Private Managing Director Limited, Mr. K. Ram 8-2-62311 Narayan , Banjara hills, S/o. K.V.Subramanyam, Hyderabad,Representedaged 54years, Hyderabad. ...APPELLANT AND The Assistant Commissioner of lncome Tax, Circle -2(2) Hyderabad. ...RESPONDENT Counsel for the Appellant: SRI ROHAN ALOOR FOR SRI CH.PUSHYAM KIRAN Counsel for the Respondent: Ms. K. MAMATA CHOUDARYSENIOR SC FOR INCOME TAX DEPARTMENT The Court delivered the following: Judgment HN'BHAND THE HON'BLE SRIJUSTICE C.V.BHASKAR REDDYI.T.T.A.No.604 of 2015 IUDG!4E\[, [/P,r ][ri.e ][Hon'bllt,c ][t ][)t'ur ][lu'n ][t ][It7,t ][Btnyar)] Fleard Iv[-. Rohan A]oor, leamed counsel for the appellantand lv[s. K.]r4amata C]roudary leamed Senior Standing Counsel forthe Income Tax Depanment appearing for the respondent. 2. This appeal has been preferred by theassesseeunderSection 260A of the Income Tax Acq 1961 (briefly 'the Act'hereinafter) assailing the order darcd 07.02.2008 passed by theIncome Tax Appellate Tribrrnal, Hlerabad Bench'B', Hyderabadft [riefly'the ][Tribunal' ][he ][rei ][n,r ][lte ][r) ][in ][I.T.ANo.3 ][65 ][/ ][H1d/ ][2006 ][f ][or]the assessment yar 2003 - a4. 3. \Uhile admitting the appeal on 06.01.2016, no substantialquestions of lav u'ere framed.questions of lav u'ere framed. 4. !(e find from the ,rcmo of appeal that the followingquestions have been proposecl as sr"rbstantial quesrions of law:1. [lWhether ]on the f,rcrs and in the circumstances of thecase, the Appelli-ue Trit'unal u,as right in law in upholdingquestions have been proposecl as sr"rbstantial quesrions of law:1. [lWhether ]on the f,rcrs and in the circumstances of thecase, the Appelli-ue Trit'unal u,as right in law in upholding the order of reassessmenr wrder Section 148 of rheAssessing Officer on a mere change of opinion?2. \Xhether in view of the accounting policy followed bythe appellant, the liability having been incurred by theappellant, (though to be quantified at a future date) duringthe par of account, a provision made on scientific basiscould be disallowed in the han& of dre appellant? 5. kamed counsel for the appellant fairly submits that thequestions raised in this appeal stand covered bya recent decision ofthis Coun in M/s. Healthware Private Limited v. TheAssistant Commissioncr of Incorne Taxl. 6. In view of the above and following the aforesaid judgment,the present appeal is dismissed. No costs.the present appeal is dismissed. No costs. To Miscellaneou applications pending, if any, shall stand closed. Sd/.B.S.CHIRANJEEVIJOINT REGISTRAR(irySECTION OFFICER //TRUE COPY// t. The lncome Tax Appellate [Tribunal ]' [Hyderabad Bench ]["8" ][Hyderabad] 2. The Commissioner of [lncome ][Tax ][( ][Appeals ]) [lll ]' [Hyderabad] 3. The Assistant [Commissioner ][of ][lncome Tax ][, ][Circle ][2 ][(2) ][, ][Hyderabad]+. One CC to SRl. ROHAN [ALOOR, ][Advocate ] +. One CC to SRl. ROHAN [ALOOR, ][Advocate ] s. One CC to lr/s. [K. ] [, ] [for ][lT'Dept ][(OPUC)] 6. Two CD Copies (along with a copy of the [Judgment in ] [No'443 ][of ][2005]dated 26-10-2022). -A=- HIGH COURT To Miscellaneou applications pending, if any, shall stand closed. Sd/.B.S.CHIRANJEEVIJOINT REGISTRAR(irySECTION OFFICER //TRUE COPY// t. The lncome Tax Appellate [Tribunal ]' [Hyderabad Bench ]["8" ][Hyderabad] 2. The Commissioner of [lncome ][Tax ][( ][Appeals ]) [lll ]' [Hyderabad] 3. The Assistant [Commissioner ][of ][lncome Tax ][, ][Circle ][2 ][(2) ][, ][Hyderabad]+. One CC to SRl. ROHAN [ALOOR, ][Advocate ] +. One CC to SRl. ROHAN [ALOOR, ][Advocate ] s. One CC to lr/s. [K. ] [, ] [for ][lT'Dept ][(OPUC)] 6. Two CD Copies (along with a copy of the [Judgment in ] [No'443 ][of ][2005]dated 26-10-2022). -A=- HIGH COURT DATED:0311112022 JUDGMENTIHE [€lA]ITTA.No.604 of 2015C()r-(J2 3 ,,tAt{ ?i]?l'l-t,',.-;j,, D!SMISSING THE ITTA WITHOUT COSTS {\A-19\ lr> \ THE HON'BLE THE CIIIEF JUSTICE UJJAL BHUYANAND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY ITTA.No.443 of 2OOS JUDGMENT:(Per the Hotl'ble tIe Chi{ Justice Ujjal Bhuganl Heard Mr. Naga Deepak, learned counsel for theappellant and Mr. B.Narasimha Sarma, learned Standingcounsel for Income Tax Department appearing on behalf ofthe respondent. 2. This appeal under Section 260A of the Income TaxAct, 196 1 (briefly 'the Act' hereinafter) is directed againstthe order dated 29.07.2005 passed by the Income TaxAppellate Tribunal, Hyderabad Bench 'A', Hvderabad(Tribunal) ln I.T.A.No.l79 /Hyd/2004 for the assessment,vear [2O0 ][l-2OO2.] 3. While admitting the appeal, no substantialquestions o[ law were formulated. However, in the memo ofappeal, the following two [questions ][have been proposed ][as]substantial questions of law: "1. Whether on the facts and in tlecircumstances of the case, the AppellateTribunal u.tas rtght in law in upholding tlrc orderof reassessment under Section 148 of theAssessing Offtcer on a mere ch.ange of opinion? 2. Whether in uieu of the accounting policgfollouted [by ][the ][appellant, ][the liabilitg ][tnuing]been incurred by the appellant, (though to bequantified at a future date) duing tle gear ofaccount, a prouision made on scientific basiscould be disallouted in the lnnds of theappellant?" 4. From the above, it is seen that first questionassails reopening o[ erssessment under Section 148 of theAct by the Assessing Officer on the ground that suchreopening \ [ias ]on the basis of mere change of opinion. 5. Thr sccond cluestion proposed is that the liabilityon account of the sarrirntee having been incurred by theappellant based on the accounting policy followed by theappellant, thougl-r 1o be quantified at a later date, whetherthe samc , ould hitvt' lrce r-r disallowed by the AssessingOfficer and affirmed b.r, rhe lor.r,er appellate authorities. 6. We deal with the first question at the outset. 7. Assessing Ofhcer passed the assessment order forthe assessment year under consideration on 29.O9.2OO3under Section 1a3(3) r/w Section 148 of the Act. It may bementioned that appellant is a company assessed to taxunder the Act. It is engaged in the business of purchase ofsale of medical equipments and related seryices. For theassessment year under consideration, appellant had filedits return of income on 31.10.2001 disclosing total incomeof Rs.79,O7,O6O.OO. In this connection, intimation undersub-section (1) of Section 143 was issued to the appellantby tlre Assessing Officer on 27.O3.2OO2. Later on it '"\'asfound that appellant had debited an amount ofRs.49, 1B,4OO.OO to the profit and loss account being aprovision for u,arranty. Observing that it was only aprovision and not an allowable deduction, a view was takenthat the aforesaid amount was an income chargeable to taxbut had escaped assessment. Thereafter, notice underSection 148 of the Act was issued. Following reassessment proceedings, assessmenl order dated 29.O9.2003 waspassed by the Assessing Officer under Section 143(3) r/wSection 148 o1' the Act.passed by the Assessing Officer under Section 143(3) r/wSection 148 o1' the Act. proceedings, assessmenl order dated 29.O9.2003 waspassed by the Assessing Officer under Section 143(3) r/wSection 148 o1' the Act.passed by the Assessing Officer under Section 143(3) r/wSection 148 o1' the Act. 8. From a perusal of the assessment order, we do notfind that appellant had questioned the competence of theAssessing Officer in initiating reassessment proceedings onthe ground that the same \!'as done on the basis of a merechange of opinion. 9. Nont: the less, belore the Commissioner of IncomeTax (Appeals) - II, Hyderubad (briefly 'CIT(A)'hereinafter),appellant raised the grourrd that Assessing Officer haderred in assuming jurisdiction under Section 148 of the Acton mere change of opinion. First appellate authority i.e.,the CIT(A) noticed that the assessment was reopenedwithin 4 years from the cnd of the financial year relevalt tothe assessment order undcr consideration. On that basis,first appellate authorit-t' declined to entertain the aboveground of the appellant 10. Before the Tribunal, this was taken up as anadditional ground by the appellant. However, Tribunalrejected the same in the following rnanner: 18. We haue carefullg considered the riualsubmissions and perused the record. As regardsadditional ground urged bg the assessee tuithregard to the ualiditg of reassessmentproceedings, the case of tle learned counsel isthat there is no reason to belieue tLwt incomehas escaped assessment since compete detailssubmissions and perused the record. As regardsadditional ground urged bg the assessee tuithregard to the ualiditg of reassessmentproceedings, the case of tle learned counsel isthat there is no reason to belieue tLwt incomehas escaped assessment since compete detailspertaining to the claim of deduction in tlrc formof proutsion for warrantg were alreadg on recordand hence it is a mere change of opinion. In ourconsidered optnion th.e contention of ttte learnedcounsel is nisconceiued. Section 147 of theIncome Tax Act had undergone drastic chnngesof proutsion for warrantg were alreadg on recordand hence it is a mere change of opinion. In ourconsidered optnion th.e contention of ttte learnedcounsel is nisconceiued. Section 147 of theIncome Tax Act had undergone drastic chnngesu.).e.f. l-4-89 and as per Explanation - 2 toSection 147 of the income chargeable to tox hasbeen under assessed or excessiue allouanceunder this Act has been computed, it would bedeemed to be a case tahere income chargeableto tax has been escaped assessrnent. In fact inthe instant case though the mateial u)as onrecord, the AO had no occasion to examine thecorrectness of the claim since the return ofinconte LDas processed under Section H3(1) ofSection 147 of the income chargeable to tox hasbeen under assessed or excessiue allouanceunder this Act has been computed, it would bedeemed to be a case tahere income chargeableto tax has been escaped assessrnent. In fact inthe instant case though the mateial u)as onrecord, the AO had no occasion to examine thecorrectness of the claim since the return ofinconte LDas processed under Section H3(1) of tle Act. As rightlg contended bg the leanrcd DRmerelg because the AO h,,s not exercised thepouJer of issuing a notice under Section 1a3(2) ofthe Act to conuert a case into scrutiny he is notdebarre.d from reopening tte assessment underSection 147 of the AcL ldentical issue has comeup before tte ITAT - B - Bench Hyderabad inthe case of Elegant Chemicals Enterpises PiuateLimited u.therein u.te Ltaue taken a uiew that it isnot necessary for the AO to exhaust a remedg ofissuing a notice under Section 143(2) of the Actbefore taking recourse to Section 147 of the Act.Since the retunt was processed under Section143(1) uithout making inuestigation, it cannot besaid that the AO has exercised his mind andnou-t sought to change his opinion on the issue ofallowabilitg of deductiort Suffice to sag that inthe light of the amended prouisions of Section147 of the Act the AO has reason to beLieue thatth.e income assessable to tax has escapedassessment. We therefore reject the additionalground urged bg lhe assessee- 1 1 . Tribunal notecl that as per Explanation (2) toSection 147 of the Act, if the income chargeable to tax wasunder-assessed or excessive allo'"r,ance uras computed, itunder-assessed or excessive allo'"r,ance uras computed, it would be deemed to a case where income chargeable to taxhad escaped assessment. Though the materials in the formof profit and loss account was on record, Assessing Offrcerhad 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 AssessingOfficer had not exercised the power of issuing notice underSection A3(21 of the Act to make it a case of scrutinyassessment, he would not be debarred from re-opening theassessment under Section 147 of the Act. Therefore, whenthe return was processed under Section 143(1) of the Actwithout making due scrutin,r,, it could not be said that theAssessing Oflicer had applied his mind arrd taken aparticular vis\ [r; ]thus issuance of notice under Section 148would tantamount to a change of opinion. Accordingly,Tribunal rejected the above [ground ]urged [by ][the appellant.] 12. We agree rvith the [vierv ]taken by [the ][Tribunal ][on]this aspect. We are fortified [in ][our ][vier.t' ][when we refer ][to]Explanation [(1) ]to Section [of the Act, ][as ][it ][existed at] the relevant point of time as per which production beforethe Assessing Officer the account books or other evidencefrom which material evidence with due diligence could havebeen discovered by the Assessing Officer lr,ould notnecessarily amount to disclosure within meaning ol Section147 of the Act. 13. That being the position we answer the firstquestion against the appellant and in favour o[ therevenue. 14. This brings us to the second question relating toprovision for warran$r which incidentall5r u,as the reasonfor re-opening of assessment. We ma,v mcntion thatappellant had debited an amount of Rs.49, lB,4O0.O0 to theprofit and loss account being provision for rvarranty. Thiswas disallowed i.e., not allowed as a deduction by theAssessing Oflicer in the assessment order dated29.O9.2013 on the ground that appellant had not incurredany amount / expenditure on account of u,arrantv duringthe assessment year under consideration. [t s'as furtherfor re-opening of assessment. We ma,v mcntion thatappellant had debited an amount of Rs.49, lB,4O0.O0 to theprofit and loss account being provision for rvarranty. Thiswas disallowed i.e., not allowed as a deduction by theAssessing Oflicer in the assessment order dated29.O9.2013 on the ground that appellant had not incurredany amount / expenditure on account of u,arrantv duringthe assessment year under consideration. [t s'as further held that the amount of Rs.49,18,4O0.OO which wasdebited by the appellant being the provision for warrantywas nothing but a contingent liability. The same was notan expenditure incurred by the appellant in theassessment year under consideration. Therefore, AssessingOfficer held that the subject amount was not allowable as adeduction and accordingly added the same to the totalincome of the appellant vvhile determining the income ofthe appellant under the Act. 15. CIT(A) also considered this aspect of the matter.Concurring with the view taken b,v the Assessing Officer,the first appellate authoritv held that claim of warrantyexpenses were not actually incurred while making theprovision against the claim of u'arrant-y. The claim is notcarried out as well, as it rt'as not certain. [Therefore]Assessing Oflicer was [justified ]in holding that uncertainliability to pay damages at future rates would [represent]merely a contingent liability [and ][could ][be allou'ed.] 16. In further appeal before the Tribunal, the aboveview taken b1' the CIT(A) was affirmed. After analysingvarlousdecisions, Tribunal culled out the followingprinciples r.r,hich are required to be taken intoconsideration for determining as to whether a liabilitycould be construed to be contingent or uncertaln: 16. In further appeal before the Tribunal, the aboveview taken b1' the CIT(A) was affirmed. After analysingvarlousdecisions, Tribunal culled out the followingprinciples r.r,hich are required to be taken intoconsideration for determining as to whether a liabilitycould be construed to be contingent or uncertaln: (i) If the business liability has definitely arisen in theaccounting year, the deduction should be allovvecl althoughliability may have to be quantified and discharged at afuture date;accounting year, the deduction should be allovvecl althoughliability may have to be quantified and discharged at afuture date; (ii) It should be capable of being estimated u.ith reasonable certainty though the actual quantification maynot be possible; (iii) Ttre quantilication should be based upon the'prudence'. (iv) The notification issued prescribing accountingstandards in exercise of powers under Section 145(2) of theAct, should also be taken into consideration 17. T'hereafter, Tribunal negatived the claim ol theappellant zrs under:appellant zrs under: 2O. In the instant case, it is not in disputethat this is the first year in uhich the assesseehas undertaken to prouide uarrantA and thas itcannot be said that tte quantification ts basedthat this is the first year in uhich the assesseehas undertaken to prouide uarrantA and thas itcannot be said that tte quantification ts basedupon tte past expeience of the assessee. Nodoubt the assessee claimed that it is baseddoubt the assessee claimed that it is basedupon tLte past expeience of the holdirugcompanA but there is nothing on record tosuggest as to uhat is the percentage ofexpenditure incurred bg the holdtng companAcompanA but there is nothing on record tosuggest as to uhat is the percentage ofexpenditure incurred bg the holdtng companAupon sale of similar products with warrantg. 21. On tLe other hand, report of thestanding committee dated 13.O2.2OO1, uthich ismuch auailable before the end of theuery accounting releuant to the c.ssessment Aearunl-er consideration, shorus that theperformance of the units installed in India aregood, indicating that the prouision madetowards warrantg liabilttg is excessiue. There isalso huge gap betueen the prouision and theactual expenditure, which is eutdenced from thefact [that ][iru ][the ][subsequent ]Aears [fhe ][assessee]has offered it to reuenue. In fact the u.tarrantgcosts o.f Rs.49,18,4OO/- uhich is clainted to bean ascertained liabiltty peftains to the tuarrantyperiod commencing after the end of the account tg Aear releuant to the assessment [gear]under consideration. Tlrcre is nothing on recordto suggest that before the end of tle concemedaccounting year the assessee-companA hasinstalled the product. In thp gear underconsideration the assessee has undertaken togiue warrantg to the products sold onlg u.e.f.O1-O1.2O01. In otler utords, in this gear theassessee decided to prouide for u.tarrantg onlyon tte sales made in the last quarter of the gear.Thus looking at from dnA angle, thequantification of the liabilitg has not beenproued to be based on ang scientific analysis.Under these circumstances tle case lau.t reliedupott by he leamed counsel for the assessee aredistinguishable on facts. On the contrary thedecisio,t of the Apex Court irt tte case of BharatEarth Mouers, far from supporting the stand ofthe ctssessee, trclps the plea of tLrc reuenueinasntLch as th.e mateial on record suggeststhat the assessee could not estimate the liabilitytuith reasonable certaintg u.thich is euidencedfronr [the: ]fact [that ][9O% ][of ][the ][prouision ][utas]writtert back in the nert gear. Under thesecircunt stances, we affirm the order of thelearned CIT(A) and dismiss the appeal jiled bgthe assessee. 18. Learned counsel for the appellant has referred toa decision of the Supreme Court in the case of BharatDarth Moaers Vs. Cornmissioner of Income ?ax, reporteda decision of the Supreme Court in the case of BharatDarth Moaers Vs. Cornmissioner of Income ?ax, reportedin 245 ITR 428 (SC) and also to a decision of the[2OOO] Madras High Court in the case of M/s.Grundfos PumpasIndiq Limited Vs. The Deputg Commissioner of IncomeTax in T.C.A,No.7OO3 of 2OO8, decided oo 03.09.2O18.[2OOO] Madras High Court in the case of M/s.Grundfos PumpasIndiq Limited Vs. The Deputg Commissioner of IncomeTax in T.C.A,No.7OO3 of 2OO8, decided oo 03.09.2O18. 19. We have carefully gone through the decisions socited by the learned counsel for the appellant.cited by the learned counsel for the appellant. 20. Having regard to the facts and circumstances ofthe case, we are of the view that the above decisions u'ouldnot be applicable. As has been held by the Supreme Conrtin Bharat Earth Mooers (cited supra) the lau' is settledthat if a business liability has arisen in the accou nting5rear, [the deduction should ][be allou,ed ][although ][the ][tiabilitl']may have to be quantified and discharged at a future date.What should be certain is the incurring of the liabitit-\.. It should also be capable of being estimated with reasonablecertainty thougl'r the actual quantification may not bepossible. [f thr:se requirements are satisfied, the liability isnot a contingent one. The liability would be in-praesentithough it mav have to be discharged at a future date. 21. In the present case, no liability had arisen in theassessment year under consideration. All that the assesseehad done ',t'as to make a provision for warranty that mightaccrue in future. There u,as no certainiy of incurring theexpenditure 22. h'r such circurnstances, we see no reason toallsrer the second qucstion in favour of the appellant.Consequentll, this question is also answered against theappellant arnd in favour of the revenue. 23. Therefore, in the light of the discussions madeabove. the appeal is dismissed. Miscellaneous applications pending, if any, shallstand closed. However, there shall be no order as to costs. UJJAL BHIIYAN, CJ C.V.BIIASKAR REDDY, J