Assistant Commissioner of Income Tax v. Simpson & Co. Ltd.

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The Tax Publishers2012 TaxPub(DT) 1049 (Chen-Trib) : (2011) 010 ITR (Trib) 0283 Income Tax Act, 1961 --Business expenditure--Allowability Provision for warranty--During the relevant previous year, the assessee had claimed provision for warranty for Rs. 10,06,000 which was disallowed by the AO relying on the decision in the case of CIT v. Rotork Controls India Ltd. (2007) 293 ITR 311 (Mad) : 2007 TaxPub(DT) 974 (Mad-HC). of the jurisdictional High Court reported in . Before the CIT(A), the submission of the assessee was that it had made such provision based on the actual expenditure incurred for the earlier years. The submission of the assessee was that actual warranty claims for the previous year relevant to the assessment year 2002-03 were 1.61 per cent. of the sales, the actual warranty claims in the previous year relevant to the assessment year 2003-04 were 0.83 per cent, of the sales, the actual warranty claims in the previous year relevant to the assessment year 2004-05 were 0.30 per cent, of the sales and the actual warranty claims in the previous year relevant to the assessment year 2005-06 were 0.60 per cent, of the sales. According to the assessee, based on the actual expenditure for the assessment years 2004-05 and 2005-06 it had arrived at the average of 0.27 per cent, of the sales as possible warranty expenditure and provided accordingly, for the relevant previous year. Hence, as per the assessee, it was done in a realistic manner. The CIT(A) appreciating the contentions and also noticing that the decision in the case of Rotork Controls India Ltd. (2007) 293 ITR 311 (Mad): 2007 TaxPub(DT) 974 (Mad-HC) of the Hon'ble jurisdictional High Court was reversed by the Apex Court in Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) : 2009 TaxPub(DT) 1730 (SC), held that the provision for warranty was allowable as revenue expenditure. Held: Justified. Without doubt, the assessee had made the provision based on the figures of actual claim of warranty for the previous year relevant to the assessment years 2004-05 and 2005-06. This has not been disputed. May be, this was the first year for which the assessee had made a provision for warranty. Now, the question is, is an assessee disabled from making such provision in a year only for a reason that the similar provisions were not made for any earlier years. When the assessee is lawfully and legitimately eligible to make a claim for provision for warranty and if it has made the provision on scientific basis, worked on the preceding year's actual warranty expenses, the claim has to be allowed, in view of the decision of the Apex Court in the case of Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) : 2009 TaxPub(DT) 1730 (SC). Their Lordships clearly held that the provision for warranty made on scientific basis was allowable. In view of this decision of the Apex Court, the case of Consolidated Photo and Finvest Ltd. (2006) 281 ITR 394 (Delhi): 2006 TaxPub(DT) 1215 (Del-HC) of the Delhi High Court rendered on an earlier date, pales into insignificance. In this view of the matter, there is no reason to interfere with the order of the CIT(A). [Para 15] Income Tax Act, 1961, Sections 37(1) Income Tax Act, 1961 --Reassessment --Full and true disclosure Notice under section 148 after four years--The assessee had filed original return for the impugned assessment year declaring income of Rs. 35,64,40,434 which was later revised through a revised return to Rs. 35,64,17,704. The assessment was completed under section 143(3) on 25-3-2004. Thereafter, notice was issued on 28-3-2008 under section 148 for reopening the assessment. Though the assessee objected to the reopening, the AO proceeded with the reassessment and completed such reassessment on 11-12-2008. The assessee assailed the reopening before the CIT(A) in its appeal. The submission of the assessee was that the reopening was beyond four years after the end of the relevant assessment year and invalid since, it had furnished all particulars before the assessing officer during the original assessment proceedings. It was pointed out by the assessee that notes on account to its balance-sheet as on 31-3-2001 specifically mentioned research and development expenditure of Rs. 4,02,65,172 as revenue in nature and Rs. 8,33,520 as capital in nature. Further, according to the assessee, the AO had, during the original assessment proceedings, vide his letter dated 9-2-2004 required various clarifications from the assessee in relation to the assessment, which, inter alia, included details in respect of product development expenses being part of its research and development claim. Specific reason was also sought by the AO, why such claim should be allowed as revenue expenditure. According to the assessee, detailed reply was given by it to the AO on 17-2-2004 and break-up was also given for total expenditure of Rs. 4,02,65,172. This break-up included technical assistance fees for development of new S.J. Series engine as per agreement with one M/s. AVL, Austria. Therefore, as per the assessee, clarifications were given and the AO having satisfied himself on the reply given by the assessee, completed the assessment. Hence, it was argued that reopening was purely on a change of opinion. As per the assessee, there was no new information available with the AO nor was any information omitted by the assessee to be given to the AO. Again, as per the assessee, its research and development department was developing basic engineering details for a new engine which was forwarded to Austria for comments of AVL and based on such comments, improvements suggested were carried out. Thereafter, research and development department developed prototype engine and carried out testing again through AVL, Austria. The crux of its submission was that all such details were submitted to the AO and, therefore, reopening was merely on a change of opinion. The CIT(A), appreciating the contentions of the assessee held that there was no failure on the part of the assessee to furnish full and complete particulars during the course of the original assessment proceedings and hence, reopening done was invalid. Held: Justified. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1049 (Chen-Trib) : (2011) 010 ITR (Trib) 0283

Income Tax Act, 1961

--Business expenditure--Allowability Provision for warranty--During the relevant previous year, the assessee had claimed provision for warranty for Rs. 10,06,000 which was disallowed by the AO relying on the decision in the case of CIT v. Rotork Controls India Ltd. (2007) 293 ITR 311 (Mad) : 2007 TaxPub(DT) 974 (Mad-HC). of the jurisdictional High Court reported in . Before the CIT(A), the submission of the assessee was that it had made such provision based on the actual expenditure incurred for the earlier years. The submission of the assessee was that actual warranty claims for the previous year relevant to the assessment year 2002-03 were 1.61 per cent. of the sales, the actual warranty claims in the previous year relevant to the assessment year 2003-04 were 0.83 per cent, of the sales, the actual warranty claims in the previous year relevant to the assessment year 2004-05 were 0.30 per cent, of the sales and the actual warranty claims in the previous year relevant to the assessment year 2005-06 were 0.60 per cent, of the sales. According to the assessee, based on the actual expenditure for the assessment years 2004-05 and 2005-06 it had arrived at the average of 0.27 per cent, of the sales as possible warranty expenditure and provided accordingly, for the relevant previous year. Hence, as per the assessee, it was done in a realistic manner. The CIT(A) appreciating the contentions and also noticing that the decision in the case of Rotork Controls India Ltd. (2007) 293 ITR 311 (Mad): 2007 TaxPub(DT) 974 (Mad-HC) of the Hon'ble jurisdictional High Court was reversed by the Apex Court in Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) : 2009 TaxPub(DT) 1730 (SC), held that the provision for warranty was allowable as revenue expenditure. Held: Justified.

Without doubt, the assessee had made the provision based on the figures of actual claim of warranty for the previous year relevant to the assessment years 2004-05 and 2005-06. This has not been disputed. May be, this was the first year for which the assessee had made a provision for warranty. Now, the question is, is an assessee disabled from making such provision in a year only for a reason that the similar provisions were not made for any earlier years. When the assessee is lawfully and legitimately eligible to make a claim for provision for warranty and if it has made the provision on scientific basis, worked on the preceding year's actual warranty expenses, the claim has to be allowed, in view of the decision of the Apex Court in the case of Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) : 2009 TaxPub(DT) 1730 (SC). Their Lordships clearly held that the provision for warranty made on scientific basis was allowable. In view of this decision of the Apex Court, the case of Consolidated Photo and Finvest Ltd. (2006) 281 ITR 394 (Delhi): 2006 TaxPub(DT) 1215 (Del-HC) of the Delhi High Court rendered on an earlier date, pales into insignificance. In this view of the matter, there is no reason to interfere with the order of the CIT(A). [Para 15]

Income Tax Act, 1961, Sections 37(1)

Income Tax Act, 1961

--Reassessment --Full and true disclosure Notice under section 148 after four years--The assessee had filed original return for the impugned assessment year declaring income of Rs. 35,64,40,434 which was later revised through a revised return to Rs. 35,64,17,704. The assessment was completed under section 143(3) on 25-3-2004. Thereafter, notice was issued on 28-3-2008 under section 148 for reopening the assessment. Though the assessee objected to the reopening, the AO proceeded with the reassessment and completed such reassessment on 11-12-2008. The assessee assailed the reopening before the CIT(A) in its appeal. The submission of the assessee was that the reopening was beyond four years after the end of the relevant assessment year and invalid since, it had furnished all particulars before the assessing officer during the original assessment proceedings. It was pointed out by the assessee that notes on account to its balance-sheet as on 31-3-2001 specifically mentioned research and development expenditure of Rs. 4,02,65,172 as revenue in nature and Rs. 8,33,520 as capital in nature. Further, according to the assessee, the AO had, during the original assessment proceedings, vide his letter dated 9-2-2004 required various clarifications from the assessee in relation to the assessment, which, inter alia, included details in respect of product development expenses being part of its research and development claim. Specific reason was also sought by the AO, why such claim should be allowed as revenue expenditure. According to the assessee, detailed reply was given by it to the AO on 17-2-2004 and break-up was also given for total expenditure of Rs. 4,02,65,172. This break-up included technical assistance fees for development of new S.J. Series engine as per agreement with one M/s. AVL, Austria. Therefore, as per the assessee, clarifications were given and the AO having satisfied himself on the reply given by the assessee, completed the assessment. Hence, it was argued that reopening was purely on a change of opinion. As per the assessee, there was no new information available with the AO nor was any information omitted by the assessee to be given to the AO. Again, as per the assessee, its research and development department was developing basic engineering details for a new engine which was forwarded to Austria for comments of AVL and based on such comments, improvements suggested were carried out. Thereafter, research and development department developed prototype engine and carried out testing again through AVL, Austria. The crux of its submission was that all such details were submitted to the AO and, therefore, reopening was merely on a change of opinion. The CIT(A), appreciating the contentions of the assessee held that there was no failure on the part of the assessee to furnish full and complete particulars during the course of the original assessment proceedings and hence, reopening done was invalid. Held: Justified.