Commissioner of Income Tax vs Jay Bee Industries

M.M. Kumar, J.—This order shall dispose of ITR Nos. 163 to 166 of 1998, arising out of combined order dated 1-12-1997, passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (''the Tribunal''), in ITA Nos. 1153 to 1155 (Asr.)/1990 and 49(Asr.)/1991, in respect of assessment years 1987-88 to 1989-90.

The Tribunal by exercising its power u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as - the Act) has referred the following questions of law for determination of this Court:

(i) Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that provision of warranty for repairs/replacement is an existing liability at the time of sale and is allowable as deduction?

(ii) Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that the credit in the Modvat account is not to be treated as the income of the assessee although the assessee is ultimately entitled for set off of this amount against the payment of Excise Duty to this extent?

It is appropriate to notice that first question is sought to have emerged in respect of assessment years 1987-88 to 1989-90 whereas second question relates to assessment year 1988-89.

Facts as emerged from the statement of the case drawn by the Tribunal in respect of first question are that the assessee-firm was dealing in the business of manufacture and distribution of transformers. Its major customers were various State Electricity Boards such as Punjab State Electricity Board, U.P. State Electricity Board, Delhi Electricity Supply Undertaking, etc., to whom it was supplying the distributions transformers against their orders as per their terms and conditions like price, payments, delivery, time warranty period, etc. For the assessment year 1987-88, the assessing officer while completing assessment noted that the assessee-firm debited an amount of Rs. 2,74,119 into profit and loss account under the narration ''Inbuilt Liability'', which was to be borne by the assessee. After issuance of notice as to how amount was claimed as deduction, the stand taken by the assessee was that against the goods supplied to different State Electricity Boards it was giving warranty for 12 to 18 months and in some cases even up to 60 months against manufacturing defects and the amount of Rs. 2,74,119 was claimed as provision for carrying out the necessary manufacturing defects or replacement, etc.

The assessee placed reliance on a judgment of the Hon''ble Supreme Court in the case of Calcutta Company Ltd. Vs. The Commissioner of Income Tax, West Bengal, . While disagreeing with the submissions made by the assessee, the assessing officer disallowed the claim of provision of Rs. 2,74,119 for alleged inbuilt liability under the head of ''Warranty''. Similarly, in respect of assessment years 1988-89 and 1989-90, the assessing officer disallowed the claimed amounts of Rs. 8,85,274 and Rs. 14,03,843 respectively.

Against the orders of the assessing officer, the assessee preferred three appeals. The Commissioner (Appeals) rejected the appeals confirming the view of the assessing officer holding that the assessee was making claim of the deduction of warranty twice, ie., once on the basis of estimated provisions ranging between 2 per cent to 6 per cent depending upon the period of warranty and secondly on the basis of actual replacement carried out as the assessee itself admitted that no separate account of warranty and current repair were being maintained. It was further noted by the Commissioner (Appeals) that the assessee adopted the method of accountancy for the purpose of postponement of payment of tax on the provisions claimed for the period of warranty. It was further noticed that the provisions can be made only in respect of determined liability and liability, which was contingent cannot be treated as determined liability. The Commissioner (Appeals) relied upon the judgment of the Hon''ble Supreme Court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, .

On further appeal preferred by the assessee, the Tribunal concluded that the amount of provision was allowable and the claim of the assessee for all the assessment years stands allowed.

Insofar as the second question is concerned, the facts are that during the assessment proceedings for the assessment year 1988-89, the assessing officer rjpted that as per page 4 of Form No. 3-CD an amount of Rs. 1,52,229 stood as modvat credit and the assessee has not credited that amount in profit and loss account. He made the addition of that amount to the total income. The assessee filed an appeal taking the ground that modvat credit remained unutilized as the same can be utilised under statutory conditions and limitations. The amount was not available to the assessee and the same cannot be withdrawn in cash. The Commissioner (Appeals) agreed with the plea of the assessee and deleted the addition. Against this deletion, the revenue filed an appeal before the Tribunal and the Tribunal has concluded that the amount of modvat credit cannot be treated as total income of the assessee and uphold the view of the Commissioner (Appeals).

After hearing learned Counsel for the parties and perusing the record with their able assistance, we are of the considered view that the matter is not res integra and the questions as referred by the Tribunal have already been decided against the revenue.

Insofar as the first question is concerned, a Division Bench of this Court has already decided a similar question against the revenue in the case of CIT v. Majestic Auto Ltd. (2006) 156 Taxman 460 (P&H). The Division Bench referred to the judgment of the Hon''ble Supreme Court in the case of Bharat Earth Movers Vs. Commissioner of Income Tax, Karnataka, and Commissioner of Income Tax Vs. Vinitec Corporation Pvt. Ltd., , as well as judgment of Privy Council in the case of IRC v. Mitsubishi Motors New Zealand Ltd. (1996) 222 ITR 697 (PC). In Bharat Earth Movers ''case (supra), the Hon''ble Supreme Court has dealt with the proposition ''as to whether the assessee would be entitled to deduction in the accounting year, although the liability may have to be quantified and discharged at a future date'' and held that such a liability is to be treated in the present time and would not be contingent liability.

Similarly, second question is also decided against the revenue by the Hon''ble Supreme Court in the case of Commissioner of Income Tax Vs. Indo Nippon Chemicals Co. Ltd., . In the aforementioned case, upholding the view of the High Court, the Hon''ble Supreme Court has held that merely because the modvat credit was an irreversible credit available to manufacturers upon purchase of duty-paid raw material, that would not amount to income which was liable to be taxed under the Act and the income was not generated to the extent of the modvat credit on unconsumed raw material. It was further held that the assessing officer was not right to adopt the ''gross method'' for valuation of raw materials at the time of purchase and the ''net method'' for valuation of stock on hand.

In view of above discussion, the questions referred to above are answered against the revenue and in favour of the assessee.