TMI Blog2011 (9) TMI 1104X X X X Extracts X X X X X X X X Extracts X X X X ..... the computation of Long Term Capital Gains [LTCG] made in accordance with the provisions of s. 112 of the Act; (iii) that the CIT was not justified in disallowing the provisions for warranty when the AO had allowed the same accepting that it was a crystallized liability; that the CIT was also not justified in disallowing the provision for discount; (iv) that he was not justified in hold that the set off of the brought forward loss has been allowed without verification of the same, though a comprehensive table of eligible losses had been furnished in the return of income and also during the course of the revision proceedings. 3. Briefly stated, the assessee engages in software development, consultancy services and providing internet enabling technology, furnished its return of income for the AY under dispute, admitting LTCG of ₹ 1.16 crores and Short Term Capital Gains [STCG] of ₹ 35.26 lakhs which was set off against the previous year s capital loss. The appellant had also offered LTCG for tax at the rate of 10%, as according to the appellant, being gain derived from long term mutual funds. Also ₹ 49.77 lakhs and ₹ 74.37 lakhs were debited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e initiation after having fully satisfied with the assessee s explanation and, thus, CIT was not justified in assuming that the AO had dropped the rectification proceedings not on the basis of assessee s clarification, but, on the basis that the issues were debatable; - also in not appreciating the fact that where two views were possible, applying one of them in accordance with the provisions of law could not be a cause for treating the assessment erroneous; - in disturbing the computation of LTCG made in accordance with the provisions of s.112 and also in disallowing the provision for warranty which was a crystallized liability; that the warranty claims were more in the nature of accrued/ascertained liability rather than contingent liability; and that he failed to appreciate that the provisions were not contingent for having been accounted for, based on the consistent practice of the appellant; - in failing to appreciate that the provisions have been made in consideration of the situation that (a) the appellant had a present obligation as a result of past event; (b) there was probability that an outlaw of resources would be required to settle the obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of proceedings u/s 263 6.1. We have, with due respects, perused the ruling of the highest judiciary of the land in the case of Malabar Industrial Company Ltd v. CIT reported in 243 ITR 83 (SC) - on which the assessee placed strong reliance. The Hon ble Court had held that when the AO adopts one of the two courses permissible in law and it has resulted in loss of revenue or where two views are possible and the AO has taken one view with which the Commissioner does not agree, the AO s order cannot be treated as erroneous or prejudicial to the interests of revenue unless the view taken by the AO is unsustainable in law. As rightly advocated by the Ld. CIT in his impugned order, the ratio prescribed by the Hon ble Apex Court will be applicable only where the AO had considered two possible views on a particular issue and had consciously adopted one of the permissible views. However, in the present case, the AO had not at all considered the nature of provision for post contract services and provision for discount and its allowability and had completely ignored the observations of the Auditors made in the Audit Report u/s 44AB that the said sums represent liability of conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Bench was that the CIT was not justified in disturbing the computation of LTCG made in accordance with the provisions of s. 112 of the Act. 7.2. To illustrate further, let us have a quick look at the provisions of s. 112 of the Act: 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long term capital asset, which is chargeable under the head capital gains , the tax payable by the assessee on the total income shall be the aggregate of,- (a) (b) In the case of a domestic company,- (i) the amount of income-tax payable on the total income as reduced by the amount of such long term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income-tax calculated on such longterm capital gains at the rate of twenty per cent; Provided that where the tax payable in respect of any income arising from the transfer of a long term capital asset, being listed securities or unit or zero coupon bond, exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es rather than the contingent liability as branded by the Ld. CIT. 9.1. However, the Ld. CIT took a divergent view based on the Audit Report in Form 3CD furnished by the assessee. To illustrate further, the liability has been mentioned as contingent nature. 9.2. Brushing aside the assessee s contention that the sums claimed were not contingent in nature and the same were claimed based on the consistent practice of the company s sound account principles and accepted judicial position and also distinguishing various case laws on which the assessee had placed strong reliance, the Ld. CIT, taking refuge in the ruling of the Hon ble Supreme Court in the case of Rotork Control India P. Ltd v. CIT reported in 314 ITR 62 (SC) - wherein it has been ascertained that a provision is recognized when (a) an enterprise has a present obligation as a result of a past event, (b) it is possible that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made on the amount of the obligation, if these conditions are not met, no provision can be recognized held that the sums debited to Profit and Loss account being provision for post contract supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove decision is in this regard apposite: 14. The ratio decidendi of the above cases is squarely applicable to the facts of the present case. It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. Once an assessee is maintaining his accounts on the mercantile system, a liability accrued, though to be discharged at a future date would be a proper deduction while working out the profits and gains of his business, regard being had to be accepted principles of commercial practice and accountancy. (ii) In the case of Honda Siel Cars India Ltd. V. ACIT reported in (2007) 111 TTJ 630 (Del), it was held that - 21.4 We have heard both the parties and carefully considered the rival submissions, examined the facts, evidence and material placed on record. There is no dispute about the fact that the cars sold to the customers are covered by warranty and after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fill such claim, if claim is made. The provision is made at the rate of 2 per cent of sale price. Though no precise base is indicated by the assessee, yet, if can be considered to be reasonable having regard to the claim made in the past. The provision is made on matching principle i.e. matching cost with revenue. Such matching principle has been recognized in the case of Taparia Tools Ltd. vs. Jt. CIT (2003) 180 CTR (Bom) 256 : (2003) 260 ITR 102 (Bom). Thus, the provision represents a liability in praesenti though discharged at a later date .. In conformity with the various judicial pronouncements on the issue, we are of the firm view that the ascertained and accrued liability of the assessee was allowable. However, the Ld. CIT took a view that since the auditor in Col.17 (k) of Form 3CD had remarked to the effect that the said sums represent liabilities of contingent nature and as such the assessee was not entitled to claim such claims as allowable. The assessee ascertained that the sums were not contingent in nature and the auditor had inadvertently remarked as so, but, the said sums were not contingent in nature and the same were claimed based on the consistent pra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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