Commissioner Of Income Tax-X vs Smt Paramjeet Luthra
2014 Latest Caselaw 4438 Del

$~
*      IN THE HIGH COURT OF DELHI AT NEW DELHI
                                  Date of decision: 15th September, 2014
+                          ITA 596/2014

       COMMISSIONER OF INCOME TAX-X            ..... Appellant
               Through   Ms. Suruchi Aggarwal, Sr. Standing
               Counsel.

                           versus

       SMT PARAMJEET LUTHRA                               ..... Respondent
               Through

       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE V. KAMESWAR RAO

       SANJIV KHANNA, J. (ORAL)

Present appeal relates to assessment year 2007-08 and

impugns order dated 7th February, 2014, passed by the Income

Tax Appellate Tribunal („Tribunal‟, for short).

2. The respondent-assessee an individual had shown returned

income of Rs.2,85,924/-, for the assessment year in question.

Assessing Officer, vide its order dated 24.12.1999, had made

additions and enhanced the income to Rs.65,63,039/- on various

counts. The, present appeal is concerned with addition of

Rs.60,70,492/- made under Section 68 of the Income Tax Act,

1961 („Act‟, for short).

The respondent-assessee, as proprietor of M/s

International Surgical Agency, had undertaken liaisoning work

of sale of medical equipments etc. and had received commission

of Rs.1,41,33,516/-. The assessment order records that the

assessee had to provide comprehensive warranty for first 5

years, including spares on the medical equipments sold to the

customers i.e. government hospitals. She was also required to

provide trouble free annual maintenance of equipments without

spares for the further/next 5 years. The aforementioned payment

of Rs 1,41,33,516/- included service charges for providing

maintenance for five years with the supply of spare parts and

another five years for maintenance only without spare parts. The

respondent-assessee had submitted that the medical equipments

were installed in government hospitals, therefore, the machines

required constant servicing and maintenance in view of large

number of visiting patients. Expenditure on service and parts

would increase as the equipments got older. So , Assessee had

treated 39% (Rs 55,12,088) out of the aforementioned

commission amount, as expenditure which would have been

incurred during the tenure of first 5 years and therefore excluded

Rs 55,12,088 from the returned income of assessment year in

question. Rather, assessee had offered the entire amount of

55,12,088 for tax in proportionate basis, in 5 assessment years as

the corresponding or necessary expenditure would be incurred in

the said span of 5 years . The Assessing Officer did not accept

the said submission and observed that in Schedule 10 relating to

Accounting Policies, the respondent-assessee had herself

declared that there was "sale of goods" at the time of physical

delivery with simultaneous preparation of invoice, therefore the

price received was wrongly bifurcated towards sale price and

maintenance charges. The warranty clause, it was observed, was

compulsory in all trades and the assessee was not justified in

treating 39% of the total price as an amount for fulfilment of the

warranty conditions.

3. The Commissioner of Income Tax (Appeals) did not agree

and reversed the aforesaid finding. He referred to the fact that

the respondent-assessee had done liaisoning work for supply of

medical equipments. Insofar as sale and purchase were

concerned, the transactions were between the foreign suppliers

and the concerned hospitals. The respondent-assessee‟s work

was confined to installation and maintenance of the medical

equipments. The assessee had entered into an annual

maintenance contracts and it was the obligation of the

respondent-assessee to maintain the said equipments for the first

5 years etc. In initial year the cost of maintenance was low, but

would increase in the subsequent years with wear and tear and as

the equipments got old. Accordingly, the total maintenance

contract income to the extent 39% was allocated as 5% for the

first year, 7% for the second year, 8% for the third year, 9% for

the fourth year and l0% for the fifth year. For the assessment

year 2007-08, no income or receipt from this 39% was allocated

on the ground that the medical equipments were installed at the

end of the said year, hence would not entail cost of maintenance

in the said year. The details with regard to installation of

equipments were set out and stand mentioned in tabulated form

in paragraph 5.1 of the first appellate order. In paragraph 5.2,

the assessee‟s stand that she had shown the deferred

maintenance income in the subsequent assessment years 2008-09

to 2012-13, was recorded and the total quantum of

Rs.55,12,088/- was bifurcated and shown as income, as per the

following table:-

"

               S1.No.   AY              Income            Remarks
               1.       2008-09         7,06,678/-        @ 5%
               2.       2009-10         9,89,349/-        @ 7%
               3.       2010-11         11,30,685/-       @ 8%
               4.       2011-12         12,72,020/-       @ 9% .
               5.       2012-13         14,13,356/-       @ 10%




                Total maintenance       55,12,088/-      @ 39%
               contract receipts =

                                                                     "

4. The stand of the respondent-assessee was that the entire

contractual receipt of Rs.55,12,088/- was on account of annual

maintenance contract with spares, for 5 years and, therefore, the said

amount could not have been taxed or treated as income of one year.

This amount was shown in the balance sheet under the head "current

liability" of Rs.61,57,890/-, which included amount of Rs.55,12,088/-

and another amount of Rs.5,58,404/- on account of local maintenance

i.e. with regard to local sale and purchase of medical equipments.

Other deficiencies and incorrect assumptions made by the Assessing

Officer were highlighted. It was pointed out that addition of

Rs.60,70,492/- was based upon wrong assumption by adding up figures

of Rs.55,12,088/- and Rs.5,58,404/-. Further out of this amount of

Rs.5,58,404/-, expenditure of Rs.3,39,526/- was made in the

subsequent assessment year 2008-09 and the balance amount was

carried forwarded. The Commissioner of Income Tax (Appeals) has

referred to the assessee‟s detailed written submission dated 7th May,

2010, in which assessee had mentioned about the manner and mode of

her business operations and stated that she had entered into an annual

contract for maintenance of medical equipments supplied by them.

Assessee highlighted the mistake made by the Assessing Officer in

clubbing the local business of sale and purchase of medical equipments

and the liaisoning of supply of foreign medical equipments and their

annual maintenance contracts, which were two separate lines of

business.

5. In view of the submissions made and to adjudicate the matter,

Commissioner of Income Tax (Appeals) called for a remand report

from the Assessing Officer, the relevant portions of which stand quoted

in the first appellate order, read as under:-

"--While going through the case file I have observed that the assessee had filed the details asked by the AO. The last details were filed on 17/12/2009 and the case was discussed. The then AO had not issued any show cause notice during the course of assessment hearings. I have not found any adverse remark made by the AO regarding the disagreement over the amount and nature of provision for equipment maintenance. No note in the file was found to explain the nature of NMICDEC Account at any stage during the course of assessment proceedings..........As per the case file or the order sheet I have observed that the above facts were not reconciled before making the addition and the assessee was not asked to co- relate the facts that how 39% provision of sale proceeds amounts to Rs 60,70,492/-, if made on sale. If not then how the provision was created........... In view of the above submission made by the assessee and the comments made thereupon, the matter may kindly be considered by your good self accordingly."

6. After having considered the remand report, the Commissioner of

Income Tax (Appeals) found merit in the submission made by the

respondent-assessee and deleted addition of Rs.5,58,404/-. Even with

regard to addition of Rs.55,12,088/-, he upheld the contention of the

assessee recording as under:-

"5.8 So far as the balance amount of Rs.55,12,088/- is concerned, there is no dispute regarding the facts of the case and the business of the assessee regarding the liaisoning: facilitation, installation and the annual maintenance etc of the medical equipments for the next five years. It is apparent from the facts of the case that the assessee has the obligation of maintaining the medical equipments for the next five year with the spare parts and another five years without spare parts. There is also no dispute regarding the receipt of the income which has been deferred by the assessee and declared in the subsequent years spread over in five AYs as discussed earlier. It is apparent from the order of the AO and the remand report of the AO that the addition has been made without proper appreciation of the facts and circumstances of the case. There is no denying that the assessee has the future obligation of maintenance of medical equipments for the next five years with spare parts and another five years without spare parts, so there is considerable merit in the submission of the assessee that the entire income cannot be offered for taxation in one AY as the assessee has the future obligation of maintenance service and the necessary expenditure required for the same."

6. In support of the legal position, the Commissioner of Income

Tax (Appeals) refered to the decision of the Tribunal In Re Mahindra

Holidays & Resorts (India) Ltd. (2010) 39 SOT 438 (Chennai) and

decision of the Supreme Court in M/s. Madras Industrial Investment

Corporation Ltd. vs CIT, (1997) 225 ITR 802 (SC), on the question of

matching of income with expenditure.

7. Tribunal in the impugned order has affirmed the said finding.

8. We had asked the learned counsel for the appellant-Revenue to

state whether the aforesaid income were declared in the subsequent

years and had been taxed and whether on the question of bifurcation or

the quantum i.e. 39%, any objection was taken by the Assessing

Officer/Departmental Representative before the Tribunal on the ground

that it did not represent a fair, correct and reasonable estimate, based

upon past or scientific data. Before the Commissioner of Income Tax

(Appeals), the respondent-assessee was directed to submit a note in this

regard, which was accepted. The tribunal has referred to remand report

of assessing officer in which he had reported that expenditure made for

the maintenance of equipments in the subsequent years was adjusted

against the provisions made for equipment maintenance by the assessee

and the provision for equipment maintenance for Assessment Years 2006-

07, 2007-08 and 2008-09 were verified by the Assessing Officer. The

Tribunal has observed that aforesaid calculations had been made on

scientific basis and the balance amount was offered for taxation in the

subsequent years. We had specifically asked from the counsel for the

appellant revenue to show as to what was the actual expenditure

incurred in the subsequent years. She was unable to answer. In fact,

the said details are not available. Thus on the said factual aspect and in

absence of material, we are not inclined to interfere.

9. On the principle of matching of income, the issue stands decided

by the decision of Delhi High Court in Commissioner of Income Tax

vs. Dinesh Kumar Goel [2011] 331 ITR 10 (Delhi). In the said case,

the assessee had received full consideration in one year, but was liable

to provide service over two or more assessment years. It was held that

the entire amount received cannot be taxed in one year as expenses had

to be incurred and the assesee was to provide service in future years.

In case the entire amount received was taxed in one year, whereas

services and expenditure was to be incurred in future year, it would

lead to an anomaly. Income/receipt would be taxed in one year, and

expenditure in the other years. Reference was made to the decisions of

the Supreme Court in E.D. Sassoon and Co. Ltd. Vs. CIT [1954] 26

ITR (SC), Calcutta Co. Ltd. Vs. CIT [1959] 37 ITR 1 (SC) and CIT

Vs. Woodward Governor India (P) Ltd. [2010]321ITR147(Delhi).

10. In Rotork Controls India (P) Ltd. Vs. Commissioner of Income

Tax, Chennai [2009] 314 ITR 62(SC), while interpreting section 37 of

the Income Tax Act, 1961, the Supreme Court observed that 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. A past event that leads to a present obligation is called as an

obligating event. Under the matching concept, if revenue is recognized,

the cost incurred to earn that revenue including warranty costs has to

be fully provided for. Assessee should scrutinize the historical trend of

warranty provisions made and the actual expenses incurred against it.

On this basis a sensible estimate should be made. 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. if the historical trend indicates that large number of

sophisticated goods were being manufactured in the past and in the

past if the facts established show that defects existed in some of the

items manufactured and sold then the provision made for warranty in

respect of the any of such sophisticated goods would be entitled to

deduction from the gross receipts under Section 37 of the Act. It

would all depend on the data systematically maintained by the

assessee.

11. Finally, we observe that invoking Section 68 of the Act was not

warranted. The source of money and genuineness of credit entry of Rs

1,41,33,516/- was never doubted. Thus addition of Rs 60,70,492/- was

not relatable to section 68 of the Act.

In view of the aforesaid, we do not find any merit in the present

appeal and the same is dismissed.

SANJIV KHANNA, J.

V. KAMESWAR RAO, J.

SEPTEMBER 15, 2014 NA