Telangana High Court

Healthware Private Ltd. vs The Asst. Commissioner Of Income ... on 26 October, 2022

Bench: Ujjal Bhuyan, C.V. Bhaskar Reddy

         THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN
                                       AND
          THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY


                          ITTA.No.443 of 2005

JUDGMENT: (Per the Hon'ble the Chief Justice Ujjal Bhuyan)


       Heard Mr. Naga Deepak, learned counsel for the

appellant and Mr. B.Narasimha Sarma, learned Standing

counsel for Income Tax Department appearing on behalf of

the respondent.

2. This appeal under Section 260A of the Income Tax

Act, 1961 (briefly 'the Act' hereinafter) is directed against

the order dated 29.07.2005 passed by the Income Tax

Appellate Tribunal, Hyderabad Bench 'A', Hyderabad

(Tribunal) in I.T.A.No.179/Hyd/2004 for the assessment

year 2001-2002.

3. While admitting the appeal, no substantial

questions of law were formulated. However, in the memo of

appeal, the following two questions have been proposed as

substantial questions of law:

"1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of reassessment under Section 148 of the Assessing Officer on a mere change of opinion?

2. Whether in view of the accounting policy followed by the appellant, the liability having been incurred by the appellant, (though to be quantified at a future date) during the year of account, a provision made on scientific basis could be disallowed in the hands of the appellant?"

4. From the above, it is seen that first question

assails reopening of assessment under Section 148 of the

Act by the Assessing Officer on the ground that such

reopening was on the basis of mere change of opinion.

5. The second question proposed is that the liability

on account of the warrantee having been incurred by the

appellant based on the accounting policy followed by the

appellant, though to be quantified at a later date, whether

the same could have been disallowed by the Assessing

Officer and affirmed by the lower appellate authorities.

6. We deal with the first question at the outset.

7. Assessing Officer passed the assessment order for

the assessment year under consideration on 29.09.2003

under Section 143(3) r/w Section 148 of the Act. It may be

mentioned that appellant is a company assessed to tax

under the Act. It is engaged in the business of purchase of

sale of medical equipments and related services. For the

assessment year under consideration, appellant had filed

its return of income on 31.10.2001 disclosing total income

of Rs.79,07,060.00. In this connection, intimation under

sub-section (1) of Section 143 was issued to the appellant

by the Assessing Officer on 27.03.2002. Later on it was

found that appellant had debited an amount of

Rs.49,18,400.00 to the profit and loss account being a

provision for warranty. Observing that it was only a

provision and not an allowable deduction, a view was taken

that the aforesaid amount was an income chargeable to tax

but had escaped assessment. Thereafter, notice under

Section 148 of the Act was issued. Following reassessment

proceedings, assessment order dated 29.09.2003 was

passed by the Assessing Officer under Section 143(3) r/w

Section 148 of the Act.

8. From a perusal of the assessment order, we do not

find that appellant had questioned the competence of the

Assessing Officer in initiating reassessment proceedings on

the ground that the same was done on the basis of a mere

change of opinion.

9. None the less, before the Commissioner of Income

Tax (Appeals) - II, Hyderabad (briefly 'CIT(A)' hereinafter),

appellant raised the ground that Assessing Officer had

erred in assuming jurisdiction under Section 148 of the Act

on mere change of opinion. First appellate authority i.e.,

the CIT(A) noticed that the assessment was reopened

within 4 years from the end of the financial year relevant to

the assessment order under consideration. On that basis,

first appellate authority declined to entertain the above

ground of the appellant.

10. Before the Tribunal, this was taken up as an

additional ground by the appellant. However, Tribunal

rejected the same in the following manner:

18. We have carefully considered the rival submissions and perused the record. As regards additional ground urged by the assessee with regard to the validity of reassessment proceedings, the case of the learned counsel is that there is no reason to believe that income has escaped assessment since compete details pertaining to the claim of deduction in the form of provision for warranty were already on record and hence it is a mere change of opinion. In our considered opinion the contention of the learned counsel is misconceived. Section 147 of the Income Tax Act had undergone drastic changes w.e.f. 1-4-89 and as per Explanation - 2 to Section 147 of the income chargeable to tax has been under assessed or excessive allowance under this Act has been computed, it would be deemed to be a case where income chargeable to tax has been escaped assessment. In fact in the instant case though the material was on record, the AO had no occasion to examine the correctness of the claim since the return of income was processed under Section 143(1) of

the Act. As rightly contended by the learned DR merely because the AO has not exercised the power of issuing a notice under Section 143(2) of the Act to convert a case into scrutiny he is not debarred from reopening the assessment under Section 147 of the Act. Identical issue has come up before the ITAT - B - Bench Hyderabad in the case of Elegant Chemicals Enterprises Pivate Limited wherein we have taken a view that it is not necessary for the AO to exhaust a remedy of issuing a notice under Section 143(2) of the Act before taking recourse to Section 147 of the Act. Since the return was processed under Section 143(1) without making investigation, it cannot be said that the AO has exercised his mind and now sought to change his opinion on the issue of allowability of deduction. Suffice to say that in the light of the amended provisions of Section 147 of the Act the AO has reason to believe that the income assessable to tax has escaped assessment. We therefore reject the additional ground urged by the assessee.

11. Tribunal noted that as per Explanation (2) to

Section 147 of the Act, if the income chargeable to tax was

under-assessed or excessive allowance was computed, it

would be deemed to a case where income chargeable to tax

had escaped assessment. Though the materials in the form

of profit and loss account was on record, Assessing Officer

had no occasion to examine the correctness of the claim

since only intimation was issued under sub-section (1) of

Section 143 of the Act. Tribunal concurred with the stand

taken by the revenue that merely because the Assessing

Officer had not exercised the power of issuing notice under

Section 143(2) of the Act to make it a case of scrutiny

assessment, he would not be debarred from re-opening the

assessment under Section 147 of the Act. Therefore, when

the return was processed under Section 143(1) of the Act

without making due scrutiny, it could not be said that the

Assessing Officer had applied his mind and taken a

particular view; thus issuance of notice under Section 148

would tantamount to a change of opinion. Accordingly,

Tribunal rejected the above ground urged by the appellant.

12. We agree with the view taken by the Tribunal on

this aspect. We are fortified in our view when we refer to

Explanation (1) to Section 147 of the Act, as it existed at

the relevant point of time as per which production before

the Assessing Officer the account books or other evidence

from which material evidence with due diligence could have

been discovered by the Assessing Officer would not

necessarily amount to disclosure within meaning of Section

147 of the Act.

13. That being the position we answer the first

question against the appellant and in favour of the

revenue.

14. This brings us to the second question relating to

provision for warranty which incidentally was the reason

for re-opening of assessment. We may mention that

appellant had debited an amount of Rs.49,18,400.00 to the

profit and loss account being provision for warranty. This

was disallowed i.e., not allowed as a deduction by the

Assessing Officer in the assessment order dated

29.09.2013 on the ground that appellant had not incurred

any amount / expenditure on account of warranty during

the assessment year under consideration. It was further

held that the amount of Rs.49,18,400.00 which was

debited by the appellant being the provision for warranty

was nothing but a contingent liability. The same was not

an expenditure incurred by the appellant in the

assessment year under consideration. Therefore, Assessing

Officer held that the subject amount was not allowable as a

deduction and accordingly added the same to the total

income of the appellant while determining the income of

the appellant under the Act.

15. CIT(A) also considered this aspect of the matter.

Concurring with the view taken by the Assessing Officer,

the first appellate authority held that claim of warranty

expenses were not actually incurred while making the

provision against the claim of warranty. The claim is not

carried out as well, as it was not certain. Therefore

Assessing Officer was justified in holding that uncertain

liability to pay damages at future rates would represent

merely a contingent liability and could be allowed.

16. In further appeal before the Tribunal, the above

view taken by the CIT(A) was affirmed. After analysing

various decisions, Tribunal culled out the following

principles which are required to be taken into

consideration for determining as to whether a liability

could be construed to be contingent or uncertain:

(i) If the business liability has definitely arisen in the

accounting year, the deduction should be allowed although

liability may have to be quantified and discharged at a

future date;

(ii) It should be capable of being estimated with

reasonable certainty though the actual quantification may

not be possible;

(iii) The quantification should be based upon the

'prudence'.

(iv) The notification issued prescribing accounting

standards in exercise of powers under Section 145(2) of the

Act, should also be taken into consideration.

17. Thereafter, Tribunal negatived the claim of the

appellant as under:

20. In the instant case, it is not in dispute that this is the first year in which the assessee has undertaken to provide warranty and thus it cannot be said that the quantification is based upon the past experience of the assessee. No doubt the assessee claimed that it is based upon the past experience of the holding company but there is nothing on record to suggest as to what is the percentage of expenditure incurred by the holding company upon sale of similar products with warranty.

21. On the other hand, report of the standing committee dated 13.02.2001, which is very much available before the end of the accounting relevant to the assessment year under consideration, shows that the performance of the units installed in India are good, indicating that the provision made towards warranty liability is excessive. There is also huge gap between the provision and the actual expenditure, which is evidenced from the fact that in the subsequent years the assessee has offered it to revenue. In fact the warranty costs of Rs.49,18,400/- which is claimed to be an ascertained liability pertains to the warranty period commencing after the end of the

accounting year relevant to the assessment year under consideration. There is nothing on record to suggest that before the end of the concerned accounting year the assessee-company has installed the product. In the year under consideration the assessee has undertaken to give warranty to the products sold only w.e.f. 01.01.2001. In other words, in this year the assessee decided to provide for warranty only on the sales made in the last quarter of the year.

Thus looking at from any angle, the quantification of the liability has not been proved to be based on any scientific analysis. Under these circumstances the case law relied upon by he learned counsel for the assessee are distinguishable on facts. On the contrary the decision of the Apex Court in the case of Bharat Earth Movers, far from supporting the stand of the assessee, helps the plea of the revenue inasmuch as the material on record suggests that the assessee could not estimate the liability with reasonable certainty which is evidenced from the fact that 90% of the provision was written back in the next year. Under these circumstances, we affirm the order of the learned CIT(A) and dismiss the appeal filed by the assessee.

18. Learned counsel for the appellant has referred to

a decision of the Supreme Court in the case of Bharat

Earth Movers Vs. Commissioner of Income Tax, reported

in [2000] 245 ITR 428 (SC) and also to a decision of the

Madras High Court in the case of M/s.Grundfos Pumpas

India Limited Vs. The Deputy Commissioner of Income

Tax in T.C.A.No.1003 of 2008, decided on 03.09.2018.

19. We have carefully gone through the decisions so

cited by the learned counsel for the appellant.

20. Having regard to the facts and circumstances of

the case, we are of the view that the above decisions would

not be applicable. As has been held by the Supreme Court