Commissioner of Income Tax vs Himalaya Machinery (P) Ltd.

K.A. Puj, J.—In all these four tax appeals, parties are common and hence, the same are being disposed of by this common judgment and order.

Tax Appeal No. 1909 of 2008 is filed by the Assessee u/s 260A of the IT Act, 1961 for asst. yr. 1995-96 proposing to formulate the following substantial question of law for the determination and consideration of this Court:

"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the validity of Sections 147-148 notice ?"

Tax Appeal Nos. 798, 799 and 800 of 2009 are filed by the Revenue for asst. yrs. 1996-97, 1997-98 and 1995-96 respectively. Questions proposed by the Revenue in all these three tax appeals are as under:

Tax Appeal No. 798 of 2009 (asst yr. 1996-97):

"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT(A) deleting the disallowance of Rs. 60,00,000 being provision in respect of warranty obligation, without appreciating that the expenditure is contingent in nature which has not crystallized during the previous year relevant to the assessment year under consideration and was not allowable in view of the Hon''ble Supreme Court''s decision in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, ?"

Tax Appeal No. 799 of 2009 (asst yr. 1997-98)

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT(A) deleting the disallowance of Rs. 10,38,751 being provision in respect of warranty obligation ?"

Tax Appeal No. 800 of 2009 (asst yr. 1995-96)

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT(A) deleting the disallowance of Rs. 2,34,00,000 being provision in respect of warranty obligation ?"

Heard Mr. J.P. Shah, learned senior counsel appearing with Mr. Manish J. Shah for the Assessee and Mr. M.R. Bhatt, learned senior advocate appearing with Mrs. Mauna M. Bhatt, learned standing counsel for the Revenue.

So far as asst. yr. 1995-96 is concerned, there are cross-appeals, one filed by the Assessee and other one is filed by the Revenue. The Assessee is aggrieved by the finding recorded by the Tribunal with regard to reopening of assessment. The Tribunal has held that reopening of assessment is justified and hence, the Assessee has filed tax appeal before this Court challenging the said finding of the Tribunal. The Revenue has filed tax appeal for asst. yr. 1995-96 challenging the decision of the Tribunal deleting the disallowance of Rs. 234 lacs being provision in respect of warranty obligation on merits.

Tax appeals for asst. yrs. 1996-97 and 1997-98 are filed by the Revenue involving identical issue which was involved in Tax Appeal No.

800 of 2009. So far as these two tax appeals are concerned, looking to the specific finding recorded by the learned CIT(A) as well as the Tribunal to the effect that actual expenses incurred were more than the provision made by the Assessee in its books of accounts, Mr. Bhatt has rightly submitted that it cannot be said that any substantial question of law arises for the said two assessment years.

So far as Revenue''s Tax Appeal No. 800 of 2009 is concerned, Mr. Bhatt has submitted that the Tribunal''s decision is merely based on its own decision in the case of the Assessee for asst. yr. 1996-97 which is in favour of the Assessee. The expenditure incurred by the Assessee is contingent in nature which is not crystallized till the end of the previous year relevant to the current assessment year. He has, therefore, submitted that in view of the decision of the apex Court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, , contingent liability was not allowable.

Mr. Shah appearing for the Assessee, on the other hand, has invited the Court''s attention to the finding recorded by the Tribunal after relying on the decision of the apex Court in the case of Bharat Earth Movers Vs. Commissioner of Income Tax, Karnataka, wherein the Court has observed that if a business liability has ''definitely'' arisen in the accounting year, the deduction should be allowed, though the liability may have to be quantified and discharged at a further date. What should be certain is the incurring of the liability. It will also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. In such circumstances, the liability cannot be contingent one and the liability in praesenti and would not make any difference if the future date on which the liability shall have to be discharged is not certain. The Tribunal has further recorded the finding that the expenditure incurred by the Assessee out of the provisions of this year as well as in the subsequent year, major portion of the expenditure has been incurred by the Assessee towards discharge of its liability for warranty. Even the figures were given for subsequent years. So far as the provision made for asst. yr. 1995-96 is concerned, the CIT(A) has categorically recorded the submissions made on behalf of the Assessee which shows that provision of Rs. 234 lacs was actually inadequate as it was mostly utilized within the next three years, still leaving unexpired warranty period of two years. While dealing with this submission of the Assessee, the CIT(A) has observed that out of Rs. 234 lacs, Rs. 186 lacs have actually been spent in the succeeding two years and were not charged to the PandL a/c of these two years. The details of such expenses were also on record. He has further observed that after going through all the judicial decisions and the details submitted, the claim of the Assessee was required to be allowed on the ground that in the mercantile system of accounting, a provision is required to be made for contractual liability.

Since the figures of expenditure for the subsequent three years are not available on record, the Court has asked Mr. Shah to furnish the figures for subsequent three years. Accordingly, statement is produced before the Court which indicates that as against the provisions of Rs. 234 lacs, the Assessee has incurred an amount of Rs. 3,30,74,857. The detailed break-up submitted by the Assessee is as under:

Asst. yr.

Expenditure incurred

Cumulative expenses

Excess of expenditure over provision charged to PandL a/c

1996-97

86,20,677

86,20,677

1997-98

82,36,136

1,68,56,813

1998-99

57,22,016

2,25,78,829

1999-2000

92,48,059

3,18,26,888

84,26,888

2000-01

12,47,969

3,30,74,857

12,47,969

Total

3,30,74,857

96,74,857

Since the Assessee has incurred the expenditure more than the provision made, the Assessee''s case would squarely fall within the ratio laid down by the apex Court in the decision of the Bharat Earth Movers (supra). Looking to these figures, it cannot be said that the provision made by the Assessee is not capable of being estimated with reasonable certainty though the actual quantification was not possible. Some objection was raised by Mr. Bhatt for the Revenue that since these figures were not on record, the same should not be taken into consideration in second appeal. We are of the view that though the finding was recorded by the learned CIT(A) that the Assessee has incurred the expenditure more than the provision made, just to substantiate this finding, the figures were called and there is no dispute about those figures and hence, considering those figures, we are of the view that the issue raised in the tax appeal is squarely covered by the decision of the apex Court and the Tribunal has rightly decided this issue in favour of the Assessee. We, therefore, do not propose to formulate any substantial question of law as framed by the Revenue. The appeal is, therefore, dismissed.

Since the Revenue''s appeal on merits is dismissed by the Court and the order passed by the Tribunal is confirmed, the appeal filed by the Assessee challenging reopening of assessment has become infructuous and hence, it is also dismissed.

In the result, all the four tax appeals are accordingly dismissed.