Case Law Details
Brief of the Case
ITAT Mumbai held In the case of M/s Crompton Greaves Ltd. vs. CIT that the AO has not made any enquiry with respect to the claim of deduction of the assessee company with respect to provisions for warranty charges, excise duty, sales tax and liquidity damages amounting to Rs.17.72 crores. The claim was accepted by the AO without any further enquiry, examination or verification as was warranted. Further in audited accounts, the said expenses of Rs.17.72 crores were reflected under the head ‘other Provisions’ were reflecting disclosures of ‘Provisions, Contingent Liabilities and Contingent Assets’ in pursuance to Accounting Standard 29. It was all the more incumbent on the AO to have made proper and necessary enquiries , examination and verifications as the amount is reflected under the head ‘Provisions and contingent liabilities’ as provisions and contingent liabilities prima-facie cannot be claimed as expenses as it is settled law under the Act that deductions while computing income under the Act can only be claimed for known and ascertained liabilities having crystallized during the assessment year which are incurred wholly and exclusively for the purposes of business. Accordingly, revision u/s 263 is valid in which directing the AO to assess the income of the assessee company after making necessary enquiries, examination and verifications.
Facts of the Case
The assessee company is engaged in the business of manufacturing, marketing and operating turnkey projects over a diverse portfolio that includes power systems, industrial systems and consumer products, networking and telecommunication equipments. The assessee company filed its return of income with Revenue for the assessment year 2007-08 on 29-10-2007 and thereafter filed revised return on 24-03-2009. The case was selected for scrutiny and assessment was framed by the AO vide assessment order dated 28.12.2010 passed u/s 143(3). Thereafter, the CIT issued notice dated 06.12.2012 u/s 263 observing that the assessment u/s 143(3) was made by the AO in a routine and perfunctory manner.
The CIT observed that the A.O. failed to carry out the necessary enquiry as warranted by the facts and circumstances of the case for proper completion of the assessment u/s 143(3). The CIT noticed from the assessment records that the assessee company has claimed deduction for expenditure in respect of provisions on account of “Warranty, Sales Tax, Excise and Liquidated Damages”. The CIT observed that it is a settled principle of law that no expenditure in nature of contingent expenditure or provisions for expenditure can be allowed u/s 28 or 37, unless the assessee company followed mercantile system of accounting and liability claimed on accrual basis has crystallized during the previous year.
Contention of the Assessee
The ld counsel of the assessee submitted that the CIT erroneously invoked the provisions of section 263 and it cannot be invoked until the original order dated 28.12.2010 u/s 143(3) is revised by the orders of the Tribunal in the first round and it is only the revised order u/s 143(3) of Act after giving appeal effect to the orders of the Tribunal, can be subject matter of revision by the CIT u/s 263 .The ld. Counsel submitted that the A.O. has framed an assessment order dated 24.02.2014 u/s 143(3) of the Act read with Section 263 of the Act, in pursuance to the order dated 06.02.2013 passed by the CIT u/s 263 of the Act, whereby disallowance for provisions for warranty, excise duty , sales tax and liquidity damages were made by the AO. The ld. Counsel for the assessee company submitted that in the first round of assessment framed u/s 143(3), the A.O. has not made any disallowance with regard to provisions for warranty, excise duty , sales tax and liquidity damages while in the second round, disallowance was made by the AO vide orders dated 24.02.2014 passed u/s 143(3) of the Act read with Section 263.
The ld. Counsel of the assessee company submitted that the assessee company has now conceded with respect to the disallowance made by the A.O. in respect of warranty, excise duty and sales tax which is not pressed before the Tribunal while the assessee company is challenging and contesting the additions on account of provisions for liquidated damages of Rs. 9,08,90,000/- made by the A.O. u/s 143(3) of the Act read with Section 263 of the Act, vide orders dated 24.02.2014 . The ld. Counsel of the assessee company submitted that the original assessment order dated 28.12.2010 passed by the A.O. u/s 143(3) of the Act is neither erroneous nor is prejudicial to the interest of Revenue, as the A.O. had carried out necessary, proper and detailed enquiries while framing the order dated 28.12.2010 passed u/s 143(3) of the Act
The ld. Counsel of the assessee company contended that the assessee company has been earlier allowed in preceding assessment year, the claim of liquiditated damages by the Revenue and based on the principles of consistency the same should be allowed in the current assessment year.
Contention of the Revenue
The ld counsel of the revenue submitted that the CIT has rightly invoked the provisions of section 263 of the Act as no enquiry was made by the A.O. with respect to the claim of deduction of the assessee company with respect to the provisions for warranty, sales tax, excise duty and liquidity damages while computing income under the Act , made by the assessee company in the books of accounts and as claimed as deduction from the income computed under the Act. The ld. DR submitted that, on perusal of the assessment order dated 28.12.2010 passed u/s 143(3) of the Act by the AO, no enquiry has been made by the A.O. and the assessment order has been passed in a routine and perfunctory manner hence the CIT has rightly set aside the orders dated 28.12.2010 passed u/s 143(3) of the Act by the AO.
Held by CIT (A)
CIT (A) partly allowed the appeal of the assessee. CIT (A) directed the AO to verify the facts in case the facts are found to be correct, then the addition to be restricted to Rs.1 lac.
Held by ITAT
ITAT held that the on perusal of the assessment order dated 28.12.2010; we have observed that the A.O. has not made any enquiry with respect to the claim of deduction of the assessee company with respect to provisions for warranty charges, excise duty, sales tax and liquidity damages amounting to Rs.17.72 crores claimed as deduction by the assessee company from the income of the assessee company and the claim made by the assessee company was accepted by the A.O. without any further enquiry, examination or verification as was warranted . Further, on perusal of the audited accounts of the assessee company reflects that the said expenses of Rs.17.72 crores were reflected under the head ‘other Provisions’ in Schedule 16 and Schedule 33 reflecting disclosures of ‘Provisions, Contingent Liabilities and Contingent Assets’ in pursuance to Accounting Standard 29. It was all the more incumbent on the AO to have made proper and necessary enquiries , examination and verifications as the amount is reflected under the head ‘Provisions and contingent liabilities’ as provisions and contingent liabilities prima-facie cannot be claimed as expenses as it is settled law under the Act that deductions while computing income under the Act can only be claimed for known and ascertained liabilities having crystallized during the assessment year which are incurred wholly and exclusively for the purposes of business.
The amendment to section 263 of the Act by insertion of Explanation 2 to Section 263 of the Act is declaratory & clarificatory in nature and is inserted to provide clarity on the issue as to which orders passed by the AO shall constitute erroneous and prejudicial to the interest of Revenue ,it is , inter-alia, provided that if the order is passed without making inquiries or verifications by AO which, should have been made or the order is passed allowing any relief without inquiring into the claim; the order shall be deemed to be erroneous and prejudicial to the interest of Revenue. The Hon’ble Supreme Court in the case of Malabar Industrial Company Limited v. CIT (2000)109 Taxman 66 (SC) held that if the AO has accepted the entry in the statement of account filed by the taxpayer without making enquiry, the said order of the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered opinion, the facts of the case of the assessee company are similar to the facts in the case of Malabar Industrial Co. Limited whereby no enquiry/verification is made by the AO whatsoever with respect to claim of deduction of Rs. 17.72 crores with respect to the provisions for warranty, excise duty , sales tax and liquidated damages.
In our considered view, the CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry, examination and verifications as warranted for the proper completion of the assessment, with respect to claim of deduction of Rs.17.72 crores with respect to the provisions for warranty, excise duty, sales tax and liquidated damages. It is an established principle under the Act that provisions and contingent expenses are not allowed as deduction while computing the income of the assessee. It is only an ascertained liability which has crystallized during the year and which is wholly and exclusively incurred for the purpose of business of the assessee company, is allowed as deduction while computing income under the Act. The A.O. was under duty to make necessary and proper enquiry, examination and verification’s with respect to Provisions of Rs. 17.72 crores. Accordingly, we find no infirmity in the order dated 06.02.2013 of the CIT passed u/s 263, setting aside the assessment order dated 28.12.10 passed u/s 143(3) of the Act as erroneous in so far as prejudicial to the interest of the Revenue and directing the AO to assess the income of the assessee company after making necessary enquiries, examination and verifications.
Accordingly appeal of the assessee dismissed.
