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2015 (10) TMI 491 - DELHI HIGH COURT

2015 (10) TMI 491 - DELHI HIGH COURT - (2015) 378 ITR 581 (Del) - Provision for transit breakages - whether has a scientific basis or is contingent in nature and as such is not an allowable deduction while computing the total income of the Assessee? - Held that:- The Court is unable to discern any uniform scientific method followed by the Appellant in making provision for the breakages. As noticed by the ITAT in its order dated 16th March 2009, the explanation offered by the Appellant was that o .....

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r the AYs in question. In the circumstances, the 'liability' on that score could at best be described as a 'contingent liability' as defined in AS-29.

There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages.The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS 29 ought not be recognised.

The actual transit br .....

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f the provision for transit breakages made in the AYs in question accordance with law. - ITA 898/2009, ITA 899/2009 , ITA 900/2009 , ITA 901/2009 , ITA 237/2015 - Dated:- 6-10-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Deepak Chopra, Mr Aditya Gupta, and Ms Neha Singh, Advocates For the Respondent : Mr. Kamal Sawhney, Senior Standing counsel with Mr. Raghavendra Singh, Junior Standing counsel and Mr Shikhar Garg, Advocate JUDGMENT Dr. S. Muralidhar, J 1. These five appeal .....

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to 2004-05. 2. The first Assessee, Seagram Distilleries Private Limited was a 100% subsidiary of Seagram India Private Limited engaged in the business of manufacture and sale of Grain Neutral Spirit (GNS) and India Made Foreign Liquor (IMFL) from its Nasik plant. The parent company, originally incorporated under the Companies Act, 1956 on 3rd September, 1993 under the name and style of Seagram India Private Limited, changed its name to Pernod Ricard India Private Limited (PRIPL) and obtained a .....

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ssessee, being ITA No. 237, shows the second Assessee as also now Pernod Ricard India Private Limited. Both the Assessees products are transported in glass bottles by roads to various states in the country. According to the Assessees, since the bottles are prone to breakages, the Assessees while dispatching the goods make a provision for breakages on the basis of the past history of the region to which the goods are transported. Once the goods reach their intended destination the Assessees rever .....

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ssessing Officer ( AO ), in the case of the first Assessee, by the order dated 26th March 2004 for AY 2001-02, held that in cases of breakage and pilferage, the liability is not certain. Consequently, the provision made was treated as a contingent liability and, therefore, not allowable. It was added back to the total income of the first Assessee. The Commissioner of Income Tax (Appeals) [ CIT (A) ] by an order dated 31st March 2006 allowed the Assessee s appeal. The CIT (A) held that the provis .....

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05, being ITA Nos. 113, 114 and 3170/Del/2007, were also filed by the Revenue. By the common order dated 16th March 2009, the ITAT allowed the appeals of the Revenue on the above aspect of provision for breakages for AYs 2001-02, 2002-03, 2003-04 and 2004-05. It was held that the provision made was without any basis much less scientific one . It was noted that this was evident by the fact that the first Assessee itself had reversed the provision on the first day of the following year. Analysing .....

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issed the second Assessee s cross appeal on the same issue for AY 2001-02. Against the said dismissal the second Assessee has filed ITA No. 237 of 2015. Thus, the five appeals before this Court are as under: Appeal before the High Court Appeal before the ITAT Assessment Year ITAT Order ITA 237/2015 (Second Assessee s appeal) ITA No. 4535/Del/2004 (Assessee s Appeal) 2001-02 28th November, 2014 ITA No. 898/2009 (First Assessee s appeal) ITA No. 2802/Del/2007 (Assessee s appeal) 2004-05 16th March .....

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r the AY 2005-06 raising the same question of law is pending. 6. This Court has heard the submissions of Mr. Deepak Chopra, learned counsel appearing for the Assessees, Mr. N.P. Sahni, Senior Standing counsel and Mr. Raghvendra Singh, Junior Standing counsel for the Revenue. 7. Mr. Chopra relied on the decisions in Bharat Earth Movers (supra), Commissioner of Income Tax v. Vinitec Corporation P. Ltd. 278 ITR 337 (Del), Commissioner of Income Tax v. Insilco Ltd. 179 Taxman 55 (Del), Commissioner .....

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) and Commissioner of Income Tax v. Brindavan Beverages (P) Ltd. 335 ITR 163 (Karn), Mr. Chopra submitted that transit breakages were normal to the bottling business and, therefore, allowable as a revenue expenditure. By the same analogy, the provision for said breakages should also be allowed particularly since the provision was reversed on the opening day of the following year. Thereby, there was no loss to the Revenue. He placed reliance on the decision of the Commissioner of Income Tax v. Ex .....

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n for known liabilities failing which the balance sheet would not reflect the true and fair picture of the accounts. He also referred to the Notification No. SO 69(E) dated 25th January 1996, issued by the Central Board of Direct Taxes ( CBDT ) which required that provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. The CBDT had highlighted the need for .....

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the decision of the Supreme Court in Rotork Controls India P. Ltd. v. Commissioner of Income Tax [2009] 314 ITR 62 (SC). 9. Countering the above submissions, Mr. N.P. Sahni, learned Senior Standing counsel and Mr. Raghvendra Singh, learned Junior Standing counsel appearing for the Revenue pointed out that the very nature of the line of business of the Assessees was such that the breakages would be known within 15 to 30 days of the dispatch or at the latest on the delivery of the goods. The matc .....

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ent were allowed as revenue expenditure in the year in which such breakages occurred. They submitted that the ITAT s impugned orders do not call for any interference. 10. The Court proposes to begin examining the above contentions by first referring to the applicable AS. The cue for this is to be found in the CBDT Notification No. SO 69(E) dated 25th January 1996 issued under Section 145(2) of the Act, which states that provisions should be made for all known liabilities and losses even though t .....

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'liability' is defined as a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Contingent Liability is defined as under: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) .....

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regard to the future expenditure required in settlement. However a 'provision' is recognised only where: (a) an enterprise has a present obligation as a result of a past event: (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. 12. Appendix A to AS-29 sets out in a tabular the summ .....

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istilleries Ltd. (supra) and Commissioner of Income Tax v. Brindavan Beverages (P) Ltd. (supra) recognised this. In fact, for AYs 2002-03 to 2004-05 the AO has allowed transit breakages as revenue expenditure in the year in which the breakages occurred. 14. The issue, however, is the justification for creating a provision for such breakages anticipating them in advance of the occurrence of the actual breakages. If such transit breakages cannot be estimated with a reasonable degree of certainty t .....

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ions on the point, the Court proposes to first discuss the decision in Bharat Earth Movers (supra). There the Assessee had floated a beneficial scheme for its employees for encashment of leaves. The Assessee made a provision for meeting the liability to the extent of the entitlement of the officers and staff to accumulated earned leaves in terms of the scheme and claimed that provision as a deduction. The ITAT held in favour of the Assessee but the High Court reversed it on the ground that the p .....

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on may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in prasenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 16. The Court further summarised the decision in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) as under: (i) For an assessee maintaining his accounts on mercantile system, a liability a .....

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le working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; and (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a .....

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ty. The decision acknowledged that where a scheme for leave encashment is floated by a company, the number of employees and their entitlements to leave encashment can be estimated with a reasonable degree of certainty. It would be a case of a 'known' liability. 18. In Commissioner of Income Tax v. Vinitec Corporation P. Ltd. (supra) the question for consideration was whether a provision for future warranty expenditure is a contingent liability. On facts, it was not in dispute that the wa .....

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e would be a proper deduction. 19. In Rotork Controls India P. Ltd. v. Commissioner of Income Tax (supra), the Assessee sold valve actuators and at the time of sale provided a standard warranty whereby in the event of the product or a part thereof becoming defective within the periods specified thereunder, the Assessee had an obligation to rectify or replace the defective part free of charge. It was noticed that although the AYs in question were 1991-92 to 1994-95 the claim of such allowance had .....

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td. (supra) explained: The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. 21. Having examined the decisions that explain the legal position, the Court proceeds to examine the facts on hand. The chart p .....

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AO allowed the expenditure of the actual breakages as revenue expenditure and added back the excess provision made since it was in the nature of a contingent liability. In other words what was disallowed was the difference between the provision created and reversed. 23. The Court is unable to discern any uniform scientific method followed by the Appellant in making provision for the breakages. As noticed by the ITAT in its order dated 16th March 2009, the explanation offered by the Appellant was .....

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ages for the AYs in question. In the circumstances, the 'liability' on that score could at best be described as a 'contingent liability' as defined in AS-29. 24. Extensive reference has been made to AS-29 since one of the submissions of the Assessees is that its failure to make a provision for transit breakages would violate the applicable accounting standards. However, as has been discussed hereinbefore, the AS is clear that an enterprise should not recognise a contingent liabil .....

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