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2015 (10) TMI 2300 - ITAT PUNE

2015 (10) TMI 2300 - ITAT PUNE - TMI - Rectification of mistake - excise duty provision remained allegedly unpaid before the due date of filing of the return of income - Held that:- As per S. 154, the Assessee is entitled to satisfy the act of payment by furnishing evidences when opportunity is afforded to him. The assertions made tax audit report can not necessarily be taken as gospel truth. The Assessee has attempted to avail the opportunity before the CIT(A) to which coterminous powers are ex .....

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ace on record the evidences of actual payment of outstanding excise liability. The AO shall determine the quantum of deductions towards impugned excise duty provisions available to the Assessee for the relevant assessment year 2005-06 in accordance with law. The issue is therefore remitted to the file of AO in terms of above observations.

Disallowance of warranty provision by way of rectification while computing the income under the normal provision of the Act - Held that:- AO has rej .....

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hirdly, the Assessee has not claimed any expenditure on this payment in the books. It has simply reduced the outstanding liability on payment. Therefore, the issue, if at to be examined, involves obvious complexity and cannot be said to be emanating apparently from records. The text and tenor of the Ld. DR itself suggests so. The facts marshaled by the Ld. DR on the other hand seeks to enlarge the reasonings of the AO which is not permissible in so far as exercise of jurisdiction under 154. Thes .....

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ound that the liabilities are of presumably of contingent nature as reported in the tax audit report and not ascertained liability - Held that:- The relevant facts and tax audit report were available to the Revenue for its verification, if considered expedient. It will be far fetched to conclude on the basis of such remarks that the warranty provisions are in the nature of contingent liability particularly when the assessee is making specific denial. The possible difference in opinion can not be .....

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e issue deserves to be vacated and as a consequence, the addition to the book profit on this score stands deleted.

Provision of doubtful debts while computing the book profits under section 115JB - Held that:- It is the case of the assessee as per clarification reply dated 6/03/2009 placed before AO that similar to the impugned provisions for doubtful debts substracted which has been disallowed by the Assessing Officer holding the same to be provision in the nature of unascertained li .....

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he contention of the assessee deserves to be accepted on this count also and addition to the book profit requires to be deleted - Decided in favour of assessee as directed. - ITA No. 1426/PN/2013 - Dated:- 16-9-2015 - Ms. Sushma Chowla, JM And Shri Pradip Kumar Kedia, AM For the Appellant : Shri Dhanesh Bafna & Ms. Sneha Pai For the Respondent : Shri Rajesh Damor ORDER Per Pradip Kumar Kedia, AM The above captioned appeal filed by the assessee is against the order of CIT(A)-V, Pune dated 16. .....

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additions made by the AO via rectification order are already examined by his predecessor while passing the assessment order; and iii. The issues involved do not qualify as mistake apparent from records. Your Appellant prays that such rectification order be treated as null and void. Ground 2: Without prejudice to ground 1, the Ld. CIT(A) has erred in upholding the rectification order, treating the excise duty provision of INR 8,082,905 as unpaid. Your Appellant prays that the addition be deleted .....

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that such disallowance be deleted. Ground 5: Without prejudice to ground 1, the Ld. CIT(A) has erred in upholding the rectification order and adding back the provision for warranties of INR 15,197,332 while computing taxable income under provisions of section 115JB of the Act. Your Appellant prays that addition made for the purpose of section 115JB be deleted. The Appellant craves leave to add, to amend, to alter, to substitute, and to withdraw the above grounds of appeal. 3. Briefly, the facts .....

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nt assessment year 2005-06 on certain issues. In response, the clarifications were filed by the Assessee as required vide its letter dated 06.03.2009. Consequently, a statutory notice dated 20.03.2012 was issued under section 154 of the Act seeking rectification of the assessment orders under section 143(3) & 143(3) r.w.s. 147 of the Act passed earlier. 3.2 The relevant portion of impugned show cause notice under section 154 of the Act dated 20.03.2012 is extracted below:- Particulars of mis .....

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mounting to ₹ 40,64,469/- is debited. The Auditors in form 3CD report vide clause 17K, certified that provision for warrant is a liability of contingent nature. The same is proposed to be added back. (3) Your company engaged in manufacturing of mining & construction tools and during A.Y.2004-05 acquired the mining & construction or Kennametal Widia India Ltd. on slump sale basis. During scrutiny assessment the then Assessing Officer held that provision of ₹ 1,51,97,332/- made .....

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o be pertaining to mining & construction or Kennametal Widia India Ltd., which was acquired by the company on slump sale basis. As such this provision was required to be disallowed & added while computing the taxable income in earlier year, as such the deduction allowed on actual payment basis is not in order. Therefore amount of ₹ 1,49,85,639/- is proposed to be added back. 4. In response, the assessee states to have submitted its reply to the aforesaid notice under section 154 vi .....

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l as book profits for the purposes of S. 115JB. 5. The Assessing officer (AO in short) has made following additions/disallowances to the assessed income under normal provisions of the Act :- (i) Excise duty provision of ₹ 80,82,905/- remained allegedly unpaid before the due date of filing of the return of income. (ii) Warranty payments amounting to ₹ 1,49,85,639/- for which relief was incorrectly granted by the AO against the warranty provision of ₹ 1,51,97,332 having regard to .....

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erved that as per clause 21 of the tax audit report furnished in Form No.3CD, there is neither anything on record to suggest that the excise duty provision outstanding at the end of the financial year relevant to assessment year 2005-06 in question has been actually paid before the due date of filing of the return nor the assessee has made any submission in this regard or furnished proof of payment of the same even after issue of notice under section 154 of the Act. He accordingly concluded that .....

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of contingent in nature and cannot be allowed. However, while disallowing the provision, actual payments made during the year towards warranty claim amounting to ₹ 1,49,85,639/- were incorrectly reduced and remaining balance of ₹ 2,11,693/- was only disallowed. The Assessing Officer next observed that warranty provision liability has been simultaneously saddled on the Assessee in acquisition under slump sale. Therefore, the provision was required to be disallowed and added while comp .....

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me under the normal provisions of the Act by invoking S. 154 of the Act. 5.4 On the similar footing, the Assessing Officer proceeded to make additions towards warranty provision for a sum of ₹ 1,51,97,332/- for the purposes of determining book profit under section 115JB of the Act on the ground that the outstanding provisions for warranty to its customers is liability of contingent nature and the Assessee company has nowhere claimed that the same is ascertained liability in any of its subm .....

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order under section 154 of the Act dated 30.03.2012 and enhanced income from a loss of ₹ 5,07,800/- assessed u/s 143(3) r.w.s 147 to a taxable income of 2,25,60,740/-as per normal provisions. Similarly, the book profits assessed earlier u/s 143(3) r.w.s 147 at ₹ 78,00,820/- was enhanced to ₹ 2,70,62,620/. 5.7 The assessee on its part inter alia submitted that the rectification of assessment order is void ab-initio as the changes proposed do not qualify as mistake apparent from .....

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anty amounting to ₹ 1,49,85,639/- before the Assessing Officer. Therefore, the assessee could not challenge the notice under section 154 of the Act on other issues before the Assessing Officer. 6.2 The Ld. CIT(A) next observed that as regards the disallowance of ₹ 80,82,905/- on account of unpaid excise duty, the disallowance has been made on the basis of tax audit report submitted by the Assessee. Since no disallowance was made in the assessment order passed inspite of categorical f .....

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ing the assessment order, and made a disallowance of ₹ 2,11,693/- (Rs.1,51,97,332/- minus ₹ 1,49,85,639/-) by reducing actual payment towards warranty claim. While doing so, the AO missed to take note of the relevant fact that opening warranty provision pertaining to KWIL itself was ₹ 3,06,98,112/-, the construction and mining division of which was acquired by the assessee vide business purchase agreement dated 20.02.2004. Since, the warranty provisions of KWIL were not routed .....

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he ground that same is contingent liability in view of remarks made by the Auditors in para 17(k) of the 3CD Report. The CIT(A) rejected the plea of the assessee that the warranty provisions have been made on scientific basis based on past experience as unproved and therefore reliance placed on the decision of Hon ble Supreme Court in the case of Rotork Controls (India) (P) Ltd. vs. CIT reported in 314 ITR 62 (SC) relied upon by the assessee has no application. 6.5 Similarly, the Ld. CIT(A) held .....

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d under section 143(3) as under :- (1) Compensation received towards reduction in purchase consideration - to be taxed as revenue receipt as against the claim of the assessee of capital receipt. (2) Provision for warranty - to be added for the purpose of 115JB. (3) Actual payment made towards warranty - not allowable as the liability (provision) pertains to another entity which is now taken over by the assessee company. (4) Excise duty not paid before due date - disallowance u/s 43B. (5) Provisi .....

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8.2 As regards, addition of ₹ 80,82,905/- towards excise duty provision to the total income computed under normal provisions, he submitted that admittedly the requisite details of payment of excise duty could not be collated at the time of S.154 proceedings. However, he adverted our attention to monthly returns filed before the Excise Authority for the period of April, 2005 to July, 2005 as placed at page 90 to 93 of the Paper Book to submit that the outstanding excise duty liability in q .....

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ment his case, he further adverted our attention to Annexure-2 of Form No.3CD relevant to clause 21(i)(A) thereof appearing at page No. 107 of the Paper Book relevant to subsequent assessment year 2006-07 to demonstrate that the amount was paid in the subsequent year. He next adverted our attention to computation of income for the assessment year 2006-07 to submit that the impugned excise duty provision for which payment has been made in the subsequent year has not been claimed as deduction on p .....

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g return. The tangible evidences are available on record to negate the assertions of report. It was ardently emphasized that excise duty liability has been duly discharged before the due date of filing of the return and therefore is fully allowable in the assessment year 2005-06 itself. In the alternative, it should be directed to be allowed on payment basis in the next year as per the provisions of the Act. 8.3 The Ld. Authorized Representative for the assessee next contended that disallowance .....

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nt basis only if disallowed in the earlier years when the provision was created for which no evidence was furnished. Per contra, the Ld. Authorized Representative for the assessee advanced his plea that such kind of adjustments which emanates from earlier years cannot be taken as apparent mistake amenable to section 154 of the Act. He further submitted that from the assessment order for assessment year 2005- 06 under section 143(3), it can be seen that the Assessing Officer has disallowed the en .....

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ability account in respect of warranty provisions and not charged to the Profit & Loss Account. The expenditure incurred towards payment of warranty claims made during the year is an allowable expenditure and since the same has not been claimed by the assessee in the earlier year, the same was rightly allowed by the Assessing Officer while framing the assessment and therefore no rectification is called for. He relied upon the decision of Hon ble Madras High Court in the case of CIT vs. Fenne .....

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AR invited our attention to clause 17(k) of the tax audit report where particulars of any liability of contingent nature is required to be disclosed. He submitted that the tax auditors have in unequivocal terms narrated the explicit contentions of the assessee company that the provision for warranty is toward provision for performance warranty is not a liability of contingent nature in the light of various judicial pronouncements noted therein. The Ld. AR contended that the observation of the As .....

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adjustments cannot be brought in the league of mistake apparent from record . 8.5 As regards, addition of ₹ 40,64,469/- to the book profits under section 115JB of the Act provision for bad and doubtful debts, The Ld. AR submitted that as per letter dated 06.03.2009 filed before the Assessing Officer, similar provision of ₹ 2,51,53,409/- was simultaneously reversed in the assessment year 2005-06 pertaining to provision for doubtful debts created in the earlier years. This has the eff .....

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der section 154 of the Act. 9.1 After the closure of the hearing, the learned DR filed a letter dated 04- 09-2015 to supplement the arguments advanced during the course of hearing on the issue pertaining to addition of ₹ 149.86 Lacs towards warranty provisions. The Learned DR observed that decision of Hon ble Madras High Court in the case of CIT vs. Fenner (India) Ltd. 241 ITR 645 is not applicable to the facts of the case. The aforesaid decision relates to payment of gratuity and which is .....

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ount cannot therefore be again allowed as deduction in the hands of the assessee more so when the corresponding income is not being offered for taxation in the hands of the assessee. The learned DR further contended in the aforesaid written note that the assessee has acquired M/s KWIL on a slump sale basis for a total consideration of ₹ 64.4 crore which includes net current assets of ₹ 25.87 crores. This net current assets includes debtors as well as creditors related to sales and pu .....

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. DR contended that it is apparent from records that the Assessee company was incorporated on 16.02.2004 and it bought M/s KWIL on the slump sale basis vide agreement dated 20.02.2004. The incorporation and acquisition of M/s KWIL is in A.Y. 2004-05. As per schedule 12 of the Annual report for A.Y. 2005-06, it is apparent that an amount of ₹ 306.98 was a provision for warranty a on 01-04-2004 related to M/s KWIL. Out of this provision of ₹ 306.98 lakhs, the assessee liquidated ₹ .....

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records that the said actual liquidation of warranty provision of ₹ 149.86 lakhs pertains to M/s KWIL, the same is not allowable as deduction . Also, this amount can not only be claimed in the hands of M.s KWIL when it had booked the corresponding sales. Accordingly, the action of the AO in passing rectification under S. 154 and of the Ld. CIT(A) of confirming the action of the AO is correct. 10. We have carefully considered the rival submissions and orders of the authorities below. 11. O .....

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ror which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected under s. 154. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether order impugned is correct or not. An error apparent on the record means an error which strikes one on mere looking and does not need a long drawn out process of reasoning on points on which there .....

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ent from the record. Although the law is well settled, useful reference can be made to the judgments of T.S. Balaram, ITO vs. Volkart Bros. & Ors. (1971) 82 ITR 50 (SC) and CIT vs. Hero Cycles (P) Ltd. (1997) 142 CTR (SC) 122 : (1997) 228 ITR 463 (SC) and plethora of other decisions relied upon by the Assessee. 12. In the backdrop of legal position narrated above, let us examine the factual matrix concerning issues involved in the present case. 12.1 The first issue which is subject-matter of .....

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is apparent from record in the absence of requisite evidence in this regard in so far as the AO is concerned to grant him jurisdiction to issue notice under S. 154. Notwithstanding aforesaid, one possible view can be that during the course of Assessment, the evidence is not possibly called for and therefore not filed. Therefore, the mistake can be attributable to either side. The facts being peculiar, the benefit of doubt need to go to the Assessee. As per S. 154, the Assessee is entitled to sa .....

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been made in the next year while the Assessee was eligible for it in terms of S. 43B. Hence, having regard to the fact situation, we consider it expedient that the issue is set-aside to the file of the Assessing Officer to afford one more opportunity to the Assessee to place on record the evidences of actual payment of outstanding excise liability. The AO shall determine the quantum of deductions towards impugned excise duty provisions available to the Assessee for the relevant assessment year .....

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ed on payment basis only if it is disallowed in the earlier years when the provision was created for which no evidence has been furnished. In reply, the assessee contended that the aforesaid amount towards warranty was specifically accepted in the assessment order dated 31.12.2007 which reads as under :- the assessee has incurred the expenditure of ₹ 1,49,85,639/- towards warranty during the year, which is acceptable and accordingly the said amount is allowed as a deduction from computing .....

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ade in the hands of the transferor company, KWIL and added back in the computation of income in their hands prior to acquisition of its division by the assessee under slump sale is a matter of enquiry and verification of facts. The allegation of the revenue can possibly be examined with reference to the assessment records of the KWIL. It cannot by any stretch of imagination, be termed as apparent error borne out from the assessment records of the assessee. The Revenue has not brought out any evi .....

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Assessee and/or transferor Co.. It cannot be treated as a patent or manifest mistake contemplated u/s 154. Therefore, the rectification carryout out under section 154 of the Act towards warranty provision of ₹ 1,49,85,639/- and approved by the CIT(A) is ostensibly not permissible. 13.3 The elaborate plea of the Ld. DR in para no. 9.2 above has the obvious trappings of the issue being argumentative, complex and subjective. The plea of the DR can not be accepted for following reasons. First .....

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nable to S. 154. Thirdly, the Assessee has not claimed any expenditure on this payment in the books. It has simply reduced the outstanding liability on payment. Therefore, the issue, if at to be examined, involves obvious complexity and cannot be said to be emanating apparently from records. The text and tenor of the Ld. DR itself suggests so. The facts marshaled by the Ld. DR on the other hand seeks to enlarge the reasonings of the AO which is not permissible in so far as exercise of jurisdicti .....

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tion 154 is not available to the Revenue. 14. The next issue relates to addition of ₹ 1,51,97,332/- towards warranty provision to the book profits computed under section 115JB of the Act on the ground that the liabilities are of presumably of contingent nature as reported in the tax audit report and not ascertained liability. We have perused the observations made by the tax auditor which is reproduced as under :- (k) particulars of any liability of a contingent nature - An amount of ₹ .....

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ly misread the remarks of the auditor and is repugnant thereto. As can be seen, tax auditor has clearly remarked that company contends that the same is not liability of contingent in nature in view of judicial decisions noted above. The remarks in the tax audit runs counter to the stand of the AO. Besides, the case was subject-matter of scrutiny twice, first under section 143(3) and thereafter again under section 143(3) r.w.s. 147 of the Act. The relevant facts and tax audit report were availabl .....

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