TMI Blog2018 (4) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration. The learned CIT(A) categorically stated that the assessee was following this method consistently - Decided against revenue - I.T.A. No. 3202/Del/2014 - - - Dated:- 31-1-2018 - Shri N.K. Saini, Accountant Member and Shri K.N. Chary, Judicial Member Department by: Sh. Sanjay I. Bara, CIT Respondent by: Sh. Deepak Chopra, Smt. Rashmi Chopra Amit Shrivastava, Advocates ORDER PER N.K. SAINI, A.M: This is an appeal by the Department against the order dated 26.2.2014 of the learned CIT(A), XVI, Delhi. This appeal was earlier disposed off by the ITAT Delhi Bench E New Delhi vide order dated 30.6.2017 wherein the issues relating to liquidated damages and provision for warranty were restored to the learned CIT(A). Against the said order assessee preferred an appeal before the Hon ble jurisdictional High Court in ITA No. 641/2017 wherein vide order dated 23.11.2017 the issue relating to the liquidated damages and provisions for warranty claimed by the assessee as expenses, were directed to be adjudicated. Accordingly, this appeal was fixed for hearing. 2. During the course of hearing, the learned counsel for the assessee, at the very outset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business of the enterprise that is recognised as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under S. 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling valve actuators. They are in the business from asst yr. 1983-84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing and sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idated damages were contingent in nature therefore, the AO rightly made the addition. 6. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the facts relating to this issue are narrated by the learned CIT(A) in paras 3.5.1 to 3.5.7 of the impugned order which read as under:- 3.5.1 Ground No. 5 is on the issue of disallowance Provision for Liquidated Damages ₹ 1,199,672 by AO. During the FY relevant to the subject AY, an amount of ₹ 196,651,910 has been debited to the Profit and Loss account in respect of provision for liquidated damages and the same was claimed as tax deductible expenditure. Further, provision for liquidated damages amounting to ₹ 20,452,238 was utilized and written back/ credited, respectively during the FY relevant to the subject AY. The appellant is engaged in the business of manufacturing and trading of telecom equipment and therefore is obliged to supply telecom equipment and provide installation and commissioning services in respect of telecom equipment under the terms of the contract. The appellant is obligated to undertake supply of equipment/se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year. This certain act or event of not completing the work within stipulated time has imported a definite and absolute liability on the assessee and merely because of the fact that liability would be discharged at a future date and, there is a difficulty in estimating the correct amount thereof would not convert this definite and absolute liability into conditional one as has been held by the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR I (SC), Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) 3.5.5 Similar position has been upheld in the following decisions: (i) K.C.P. Limited vs. ITO (34 ITD 50) (Hyderabad Tribunal) (ii) CIT vs. Ram Lal Rajaram (235 ITR 156) (Allahabad High Court) In this regard, it is further submitted that this issue has been settled in favour of the appellant by the Hon ble CIT(A)-XX for AY 2005-06 (copy of the order is enclosed as Item 11 of the paper book). Relevant portion of the order is reproduced hereunder for your reference:- The facts of the case is that it undertakes contracts for material supply and the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred under the contract on account of delays caused by the appellant in supply of materials. Hence, the appellant submits that, it is therefore right that the provision for liquidated damages be recorded in the said AY and claimed as a deduction. Accordingly, based on the above, the appellant submits that the claim for provision for liquidated damages be allowed as a deductible expenditure where the same emanates from contractual obligation of the appellant and is likely to arise in future, based on the prudent estimate / scientific analysis. 7. The learned CIT(A) deleted the impugned addition by observing as under:- 4.4.1 Ground no. 5 of appeal is direct against disallowance of a sum of ₹ 17,61,99,671/- towards provision for liquidated damages. During the year, the assessee has claimed provision for liquidated damages to the tune of ₹ 17,61,99,671/-. The assessee stated that in terms of the purchase order received from customers, liquidated damages @ 0.5% per week subject to a maximum of 0.7% or such other rate as per the relevant contract would be imposed for the late delivery of equipment. The stipulation in the purchase order clearly shows that the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stainable. Therefore, the same is deleted. The appeal is allowed in this ground. 8. In the present case from page no. 136 of the assessee s paper book, it is noticed that total provision for liquidated damages was of ₹ 19,66,51,910/- out of which ₹ 2,04,52,238/- were utilized and credited / written back, the remaining amount of ₹ 17,61,99,672/- was the actual amount of the damages which were accounted for in the profit and loss account. In the instant case, the learned CIT(A) categorically stated that when the payments were actually made, the accounts were adjusted with reference to any remission or waiver that the company may get in respect of damages payable for the late delivery and the same was brought to tax u/s 41 (1) of the Act by crediting the liquidated damages accounts. Therefore, the impugned amount was not only the provision but the actual amount of the liquidated damages pertaining to the period of delay falling within the previous year relating to the assessment year under consideration. The learned CIT(A) categorically stated that the assessee was following this method consistently. We, therefore, do not see any valid ground to interfere with th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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