TMI Blog2012 (10) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... The observation of the learned CIT(A) that because of the introduction of AS29 the assessee changed its method of recognising expenditure on warranty claim from actual basis to accrual basis and accordingly made provision of warranty claims on the basis of past experience/records also could not be controverted by the learned DR. Accordingly the order of the CIT(A) allowing the provision for warranty claim is upheld Interest on share application money disallowed by the AO u/s.37(1) - Held that:- Interest on share application money is allowable on the principles of commercial expediency. - ITA NO. 686/PN/2011 and ITA NO. 687/PN/2011, CO No. 23/PN/2011 and CO No. 26/PN/2011 - - - Dated:- 5-10-2012 - Shri Shailendra Kumar Yadav Judicial Member and Shri R.K. Panda Accountant Member Assessee by : Sri S.N. Puranik Department by : Smt. Vinita Menon ORDER PER BENCH : The above two appeals filed by the Revenue are directed against the separate orders dated 25-02-2011 of the CIT(A)-Aurangabad, relating to Assessment Year 2005-06 and 2007-08 respectively. The assessee has also filed Cross objections against the appeals filed by the revenue. For the sake of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deferral Loan is transferred to capital reserves, being a capital receipt . 4. However, the AO was not convinced with the explanation given by the assessee by observing as under : 3.1 I have carefully considered the submission made by the assessee. The assessee has stated that the waiver of sales tax deferral loan from Govt. of Maharastra is a capital receipt and hence, the amount of ₹ 138.78 lakhs has been transferred to capital reserve. The submission of the assessee is not acceptable. It is seen that the assessee company vide Eligibility Certificate No. DICA/PSI-1993/STI/DEFERRAL/763/3046 dated 01-03- 2002 has become eligible for the sales tax deferral scheme for an amount of ₹ 199.99 lakhs. It is disclosed by the assessee that the assessee has repaid 57.83 lakhs towards full and final payment of sales tax deferral loan of ₹ 199.99 lakhs and the amount of ₹ 138.78 lakhs has credited to the capital reserve being capital receipt. From the above said submission of the assessee, the following facts are apparent: 1. The assessee was liable to pay 199.99 lakhs as sales tax deferral loan. 2. The sales tax loan is a revenue in nature. 3. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Package Scheme of incentives is payment to Sales Tax Department. What is liability in the books of the company is sales tax deferral loan, as appearing in the Audit Report, Final Accounts of the company with notes to Account and Tax Audit Report. (iii) In the case under appeal the first precondition for applicability of section 41(1) of the Act that an allowance or deduction has been made in respect of loss, expenditure or trading liability incurred by the assessee in an assessment year has not been fulfilled. The outstanding amount of loan cannot be regarded as trading liability. Further, no allowance or deduction can be regarded as having been made in respect of the loan which is the item, which in fact is prepaid. In support of above contention the assessee relied on following decisions : (a) CIT Vs. Phoolchand Jeevan Ram 135 ITR 37 (Del.) (b) Dalchand Chittat Mal Vs. CIT 75 ITR 710 (Alla.) (iv) The second precondition for applicability of section 41(1) of the Act that in subsequent year the assessee obtains either in cash or in any other manner what so ever any amount of such loss or expenditure or some benefit in respect of such trading liability by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the course of its trading activity, hence sales tax accrued/collected on the sale of goods by the assessee becomes a trading receipt of the assessee. This is the settled position of law in view of the decision of Hon ble Supreme Court in the cases of Chowringhee Sales Bureau P. Ltd. Vs. CIT (1993) 87 ITR 542 (SC) and Sinclair Murray and Co. P. Ltd. Vs. CIT (1974) 97 ITR 615 (SC). The decision of the Hon ble High Court of Gujarat in the case of Wolkem (P) Ltd. Vs. CIT reported in 259 ITR 430 (Guj) 24 also supports the above proposition. In the present case the assessee has itself been treating the sales tax collected as part of trading and not as capital receipts in its books of account and returns of income filed by it, even during the period when it was eligible for the benefits of sales tax deferral under the package of Incentive schemes. In support of the above he referred to the copy of audit report u/s.44AB of the I.T. Act, 1961 for the A.Ys. 2000-01, 2001-02 2002-03 and submitted that in column 13(e) of the Tax Audit Report, in respect of amounts not credited to the Profit Loss A/c., being capital receipts, if any, the auditor has categorically stated NIL . Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t value ₹ 3,37,13,393/- against the future liability of ₹ 7,52,01,378/- credited by the assessee under the capital reserve account in its books of account is a capital receipt and cannot be termed as remission/cessation of liability and consequently no benefit has arisen to the assessee in terms of section 41(1)(a) of the Income Tax Act, 1961. Accordingly, the modified question as framed in para 5 of this order is answered in favour of the assessee and against the revenue . 6. So, respectfully following the aforesaid decision of Special Bench of the Tribunal in the case of Sulzer India Ltd. (Supra), we hold that the CIT(A) was not justified in confirming the addition of ₹ 1,11,66,935/- made by the Assessing Officer treating the sales tax loan waiver as revenue receipt. Assessing Officer is directed accordingly. Respectfully following the decision of the Tribunal in the case of Rucha Engineers Pvt. Ltd. which has been passed after considering the decision of the Special Bench of the Tribunal in the case Sulzer India Ltd. (Supra) and in absence of any contrary material brought to our notice against the order of the Tribunal in the case of Rucha Engineers (P) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars A.Y. 04-05 A.Y. 03-04 A.Y. 02-03 1 Sales Rejection 13,13,790 5,00,986 7,28,726 2 Sales 22,58,65,643 9,19,89,549 2,55,95,448 3 Rejection as % of sale 0.58 0.54 2.85 4 Average Rate of Rejection 1.32 The assessee has further submitted statistical details as under : Particulars Average for F.Y.2004-05 Average for F.Y. 2003-04 In PPM (%) In PPM (%) In process Rejection 1,307 0.01 1,627 0.01 In process Rework 22,110 2.21 19,320 1.93 Customer Return 3,803 0.03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. 16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the finding given by the CIT(A) that assessee has sold the products manufactured by it with warranty has not been disputed by the revenue. The further finding of the learned CIT(A) that the assessee has in the past paid warranty claim to its customers and claimed the same as expenditure on actual basis also remains uncontroverted. The observation of the learned CIT(A) that because of the introduction of AS29 the assessee changed its method of recognising expenditure on warranty claim from actual basis to accrual basis and accordingly made provision of warranty claims on the basis of past experience/records also could not be controverted by the learned DR. 17. We find the Hon ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. has held as under (Short notes) : Business Expenditure Sophisticated goods manufactured in large quantities Statistical data indicating that some of the goods were defective Warranty execute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability 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. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event: (b) it is probable that an outflow of resources 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 provisions can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. 18. We find the Delhi Bench of the Tribunal in the case of Honda Seil Cars India Pvt. Ltd. has he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Earth Movers Vs. CIT (2000) 162 CTR (SC) 325; (2000) 245 ITR 428 (SC); in which it was inter alia held that if the business liability had definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged in a subsequent year. Thus, the ratio of the case was that if incurring of the liability is certain, the same is not a contingent liability but it is a liability in praesenti, though it may have to be discharged at a future date. The factum of discharge at a later date does not make any difference in coming to the conclusion that the liability has arisen in the previous year. In that case, the Hon ble Court also pointed out that if such a liability can be worked out on a scientific basis, the amount so determined has to be allowed in computing the income. The assessee was required to state its case regarding the quantification of the liability. No argument was made. Therefore, the matter is restored to the file of the AO to examine whether the quantification of the liability was made keeping in mind the past record of the assessee and a reasonable amount worked out on that basis may be allowed in computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the following decisions : 1. CIT Vs. Hindustan Conductor Pvt. Ltd. 240 ITR 762. 2. Kejariwal Enterprises Vs. CIT 260 ITR 341 3. India Cements Ltd. Vs. CIT 60 ITR 52 4. Challapalli Sugard Ltd. Vs. CIT 98 ITR 167 23.1. However, the AO was not satisfied with the explanation given by the assessee. Distinguishing the various decisions cited before him and relying on the various decisions the AO disallowed the interest so paid on share application money. 24. Before the CIT(A) it was submitted that the assessee has utilised the share application money pending allotment for the day-to-day business which includes payments to suppliers of materials, labour etc. thereby reducing working capital exposures from banks. The decision of the Hon ble Bombay High Court in the case of Hindustan Conductors Pvt. Ltd. 240 ITR 762 and the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. vide ITA No.419/PN/2002 were brought to the notice of the learned CIT(A). 25. Based on the arguments advanced by the assessee and relying on the decision of the Pune Bench of the Tribunal in the case of Western India Forging Ltd. (Supra) the learned CIT(A) deleted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the Companies Act. The appellant has paid interest @8% per annum which cannot be regarded as excessive. Another reason stated by the AO for disallowance of interest is that it was not obligatory for the appellant company to pay interest on share application money pending allotment. The Hon ble ITAT Pune, in the case of Western India Forging Ltd ITA No.419/PN/2002 dated 24-07-2007 has considered this reason stated by the AO that it was not obligatory on the part of the appellant company to pay the interest on share application money pending allotment. The Hon ble ITAT, Pune has rejected the above contention relying on the decision of Hon ble Bombay High Court in the case of Sales Magnesite 214 ITR 1, wherein it has been held that even expenditure incurred voluntarily on the ground of commercial expediency to facilitate carrying on of the business would be deductible u/s.37. In view of the above facts and discussion and the ratio laid down by the decisions relied on by the appellant and particularly following the decision of Hon ble Jurisdictional Tribunal on identical issue, the addition made by the AO on account of disallowance of interest on share application money pend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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