CIT v. Micro Land Ltd. - Taxpublishers.in

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The Tax Publishers2012 TaxPub(DT) 1570 (Karn-HC) : (2012) 045 (I) ITCL 0297 : (2012) 347 ITR 0613 INCOME TAX ACT, 1961 --Business expenditure--AllowabilityProvision for warranty claims--The assessee was a company having income generated by its business but varied activities, particularly as for the assessment year 1998-99 it had activities of carrying on non-banking finance services, apart from sale of computer [hardware] and follow up services of providing backup solutions for software applications. The question raised before AO was as to whether the assessee was entitled to claim an amount by way of deduction for providing a possible future warranty claim during the years of unexpired warranty periods in respect of products sold during the accounting periods in question. The AO disallowed the provisions made by the assessee for future warranty claims, which was claimed as an expenditure due for a future contingent liability, but within the scope of section 37. The CIT(A) and the Tribunal, however, allowed assessee's claim. Held: The liability for incurring expenditure which has arisen in the present, but actually incurred and expended in subsequent year, but the liability for meeting an expenditure having arisen as and when a warranty claim is put forth whether or not such warranty claim is satisfied in the very accounting period or in the later accounting period falling back on the expression 'laid out', an assessee can nevertheless claim that as an expenditure to be allowed as a deduction in the accounting period corresponding to the assessment year, but where no expenditure is laid out, in the sense, no claim has been put forth by any customer, there is no question of allowing a deduction by way of a provision for possible future claims. On an examination of the record, it is found, as a matter of fact, that the finding of fact or even an inference by the first appellate authority that the provision made by the assessee for future warranty claims is on 'perfectly scientific basis' is an impossible inference drawn by the first appellate authority and is one not based on any available dependable factual material placed before the first appellate authority for inferring such a view. [Para 39] The assessee had not placed any material either before the AO or before the appellate authorities as to the actual warranty claims that it had received in the past accounting period relevant for the earlier assessment years and what actual expenditure it had incurred and provided in the earlier accounting periods. There is nothing on record to indicate any such expenses having been incurred or laid out by the assessee as had been claimed before the authorities or as had been placed before the authorities. The so-called 'perfectly scientific basis' is merely one relating to the tabular column appended to the return of income and the footnotes to the tabular column. At the best, one possible, method that is discernible is that in respect of sales effected during the accounting period, the unexpired months are in an ascending order with the figure for the month of April 1997 being '0' and figure for the month of March 1998 being '11'. [Para 40] In spite of best efforts, court is unable to comprehend the depth of the so-called 'perfectly scientific basis' as was appreciated by the first appellate authority and affirmed by the Tribunal from this welter shelter of figures and abbreviations. In spite of best efforts, court is not able to see either any pattern or any methodology based on which any evaluation of the provision for future warranty claims has been arrived at. It is nothing but ipsy-dixsy of the first appellate authority and merely affirmed without due application of mind by the Tribunal . [Para 42] Inferences of nature as drawn by the first appellate authority is an illogical, untenable inference and the finding recorded is nothing short, of a perverse finding. The order of the Tribunal without giving any reasons is still worse. The question in the circumstances inevitably has to be answered in the negative in favour of the revenue and against the assessee for the simple reason that the conclusion of the first appellate authority is nothing short of a conclusion which is more conjunctures and surmises and not on, relevant material, but in an illogical manner, but more importantly being a perverse finding for the reason that the finding is not backed by commensurate material or evidence. Even a finding of fact without support of commensurate material is a substantial question of law as the finding becomes perverse finding which is the settled legal position. The ipsy-dixsy (sic-ipse dixit) of the Tribunal in dismissing the appeal of the revenue by merely endorsing the view taken by the first appellate authority by simply saying that they have considered the rival contentions and gone through the records. [Para 44] When examined on the touchstone of these principles, the present case woefully lacks for coming anywhere near the parameters indicated by the Supreme Court. In the first instance, there is absolutely nothing placed on record about past experience or the actual expenditure which the assessee had incurred or laid out for the past assessment years. There is nothing to indicate on record that the assessee had filed its return of income for any of the earlier years and this position is confirmed by the counsel for the assessee, but the counsel would venture to submit that the assessee, in fact, is being assessed to tax from the assessment year 1984-85 and business of sale of computers has been carried on from that year onwards. [Para 51] In the present two appeals, the amount is one which is not in dispute, but the dispute is relating to the allowability or otherwise of the amount as a deductible expenditure with reference to section 37 and as an item of expenditure claimed for providing future warranty claims. The only basis for providing that expenditure and to fit it into section 37 it is noticed, is in the exceptional circumstances as indicated by the Supreme Court in Rotork Controls India (P.) Ltd. Otherwise, the law relating to deductible expenditure under section 37 of the Act is long back authoritatively settled by the Supreme Court to indicate that it can only be an expenditure actually incurred or laid out in the present and not an expenditure which is a future contingent expenditure which may arise or may not. As rightly submitted by senior standing counsel appearing for the revenue that it will become a speculative nature of expenditure depending on the contingency of warranty claim being put forth by purchaser of product in event of the product having revealed a manufacturing defect which the assessee may accept or may not as a manufacturing defect. [Para 56] Therefore, the exception as indicated by the Supreme Court and as is now examined by the Supreme Court in Rotork Controls India (P.) Ltd., (sic) cannot be enlarged to put it on par with a present expenditure incurred or laid out which is the requirement under section 37 for claiming such an expenditure as a deductible expenditure for the purpose of arriving at computing profits of the assessee. [Para 57] In the wake of the assessee not having placed any material to indicate that the method of providing for future warranty claims was based on past experience and past actual expenditure incurred due to the claims that the assessee had received, the method as was sought to be placed before the authorities and as has been exempted by this court is not a method which fetches the approval of this court on the touchstone of the law laid down by the Supreme Court in Rotork Controls India (P) Ltd. (supra). [Para 58] Therefore, the question of remanding the matter to the authorities for recording a finding of fact in the absence of any material with reference to which a finding of fact is to be recorded is an exercise in futility and therefore court has to inevitably reject the submission made on behalf of the assessee even for a remand to the authorities to record the so-called finding of fact regarding method being based on past experience of the assessee. [Para 59] In the absence of any material on record to indicate that the assessee had filed returns for the earlier assessment years indicating the actual claims that it had received from its customers and the actual expenditure incurred or laid out, court is not even encouraged to remand the matter to the authorities for enabling the assessee to place such material before the authorities henceforth. Even such a possibility is not an event that is productive, but only one postponing the finalization of the assessment proceedings which has already reached level of this court and relating to the assessment years 1998-99 and 2000-01. [Para 60] These two appeals are allowed. [Para 61] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1570 (Karn-HC) : (2012) 045 (I) ITCL 0297 : (2012) 347 ITR 0613

INCOME TAX ACT, 1961

--Business expenditure--AllowabilityProvision for warranty claims--The assessee was a company having income generated by its business but varied activities, particularly as for the assessment year 1998-99 it had activities of carrying on non-banking finance services, apart from sale of computer [hardware] and follow up services of providing backup solutions for software applications. The question raised before AO was as to whether the assessee was entitled to claim an amount by way of deduction for providing a possible future warranty claim during the years of unexpired warranty periods in respect of products sold during the accounting periods in question. The AO disallowed the provisions made by the assessee for future warranty claims, which was claimed as an expenditure due for a future contingent liability, but within the scope of section 37. The CIT(A) and the Tribunal, however, allowed assessee's claim. Held: The liability for incurring expenditure which has arisen in the present, but actually incurred and expended in subsequent year, but the liability for meeting an expenditure having arisen as and when a warranty claim is put forth whether or not such warranty claim is satisfied in the very accounting period or in the later accounting period falling back on the expression 'laid out', an assessee can nevertheless claim that as an expenditure to be allowed as a deduction in the accounting period corresponding to the assessment year, but where no expenditure is laid out, in the sense, no claim has been put forth by any customer, there is no question of allowing a deduction by way of a provision for possible future claims.

On an examination of the record, it is found, as a matter of fact, that the finding of fact or even an inference by the first appellate authority that the provision made by the assessee for future warranty claims is on 'perfectly scientific basis' is an impossible inference drawn by the first appellate authority and is one not based on any available dependable factual material placed before the first appellate authority for inferring such a view. [Para 39] The assessee had not placed any material either before the AO or before the appellate authorities as to the actual warranty claims that it had received in the past accounting period relevant for the earlier assessment years and what actual expenditure it had incurred and provided in the earlier accounting periods. There is nothing on record to indicate any such expenses having been incurred or laid out by the assessee as had been claimed before the authorities or as had been placed before the authorities. The so-called 'perfectly scientific basis' is merely one relating to the tabular column appended to the return of income and the footnotes to the tabular column. At the best, one possible, method that is discernible is that in respect of sales effected during the accounting period, the unexpired months are in an ascending order with the figure for the month of April 1997 being '0' and figure for the month of March 1998 being '11'. [Para 40] In spite of best efforts, court is unable to comprehend the depth of the so-called 'perfectly scientific basis' as was appreciated by the first appellate authority and affirmed by the Tribunal from this welter shelter of figures and abbreviations. In spite of best efforts, court is not able to see either any pattern or any methodology based on which any evaluation of the provision for future warranty claims has been arrived at. It is nothing but ipsy-dixsy of the first appellate authority and merely affirmed without due application of mind by the Tribunal . [Para 42] Inferences of nature as drawn by the first appellate authority is an illogical, untenable inference and the finding recorded is nothing short, of a perverse finding. The order of the Tribunal without giving any reasons is still worse. The question in the circumstances inevitably has to be answered in the negative in favour of the revenue and against the assessee for the simple reason that the conclusion of the first appellate authority is nothing short of a conclusion which is more conjunctures and surmises and not on, relevant material, but in an illogical manner, but more importantly being a perverse finding for the reason that the finding is not backed by commensurate material or evidence. Even a finding of fact without support of commensurate material is a substantial question of law as the finding becomes perverse finding which is the settled legal position. The ipsy-dixsy (sic-ipse dixit) of the Tribunal in dismissing the appeal of the revenue by merely endorsing the view taken by the first appellate authority by simply saying that they have considered the rival contentions and gone through the records. [Para 44] When examined on the touchstone of these principles, the present case woefully lacks for coming anywhere near the parameters indicated by the Supreme Court. In the first instance, there is absolutely nothing placed on record about past experience or the actual expenditure which the assessee had incurred or laid out for the past assessment years. There is nothing to indicate on record that the assessee had filed its return of income for any of the earlier years and this position is confirmed by the counsel for the assessee, but the counsel would venture to submit that the assessee, in fact, is being assessed to tax from the assessment year 1984-85 and business of sale of computers has been carried on from that year onwards. [Para 51] In the present two appeals, the amount is one which is not in dispute, but the dispute is relating to the allowability or otherwise of the amount as a deductible expenditure with reference to section 37 and as an item of expenditure claimed for providing future warranty claims. The only basis for providing that expenditure and to fit it into section 37 it is noticed, is in the exceptional circumstances as indicated by the Supreme Court in Rotork Controls India (P.) Ltd. Otherwise, the law relating to deductible expenditure under section 37 of the Act is long back authoritatively settled by the Supreme Court to indicate that it can only be an expenditure actually incurred or laid out in the present and not an expenditure which is a future contingent expenditure which may arise or may not. As rightly submitted by senior standing counsel appearing for the revenue that it will become a speculative nature of expenditure depending on the contingency of warranty claim being put forth by purchaser of product in event of the product having revealed a manufacturing defect which the assessee may accept or may not as a manufacturing defect. [Para 56] Therefore, the exception as indicated by the Supreme Court and as is now examined by the Supreme Court in Rotork Controls India (P.) Ltd., (sic) cannot be enlarged to put it on par with a present expenditure incurred or laid out which is the requirement under section 37 for claiming such an expenditure as a deductible expenditure for the purpose of arriving at computing profits of the assessee. [Para 57] In the wake of the assessee not having placed any material to indicate that the method of providing for future warranty claims was based on past experience and past actual expenditure incurred due to the claims that the assessee had received, the method as was sought to be placed before the authorities and as has been exempted by this court is not a method which fetches the approval of this court on the touchstone of the law laid down by the Supreme Court in Rotork Controls India (P) Ltd. (supra). [Para 58] Therefore, the question of remanding the matter to the authorities for recording a finding of fact in the absence of any material with reference to which a finding of fact is to be recorded is an exercise in futility and therefore court has to inevitably reject the submission made on behalf of the assessee even for a remand to the authorities to record the so-called finding of fact regarding method being based on past experience of the assessee. [Para 59] In the absence of any material on record to indicate that the assessee had filed returns for the earlier assessment years indicating the actual claims that it had received from its customers and the actual expenditure incurred or laid out, court is not even encouraged to remand the matter to the authorities for enabling the assessee to place such material before the authorities henceforth. Even such a possibility is not an event that is productive, but only one postponing the finalization of the assessment proceedings which has already reached level of this court and relating to the assessment years 1998-99 and 2000-01. [Para 60] These two appeals are allowed. [Para 61]