The order of the Bench was delivered by
INTURI RAMA RAO, AM :-This is an appeal filed by the assessee directed against the order of the Principal Commissioner of Income-tax[‘Principal Commissioner’ for short] passed u/s 263 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] dated 17/03/2015 for the assessment year 2009-10.
2. The assessee raised the following grounds of appeal:
1. The learned Principal Commissioner of Income-tax - Bangalore - I ("the learned CIT") has erred in initiating proceedings under Section 263 of the Income-tax Act, 1961 ("the Act") without appreciating that the assessment order passed under section 143(3) of the Act was not erroneous and prejudicial to the interests of the revenue.
2. The learned CIT has erred in not relying upon the decision of the Supreme Court in the case of Malabar Industries Co Ltd v. CIT [2000] 243 ITR 83 (SC) wherein it has been held that "where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.
3. The learned CIT ought to have appreciated that the Assessing Officer had made proper enquiry and examined the accounts appropriately before passing the assessment order.
Relief claimed in appeal
Being aggrieved by the contention of the learned CIT in the order issued under section 263 of the Act, the Appellant prefers this appeal to quash the order issued under section 263 of the Act.
The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.
3. Briefly, facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of providing marketing and related services for Apple hardware and software products in India.
3.1 Return of income for the assessment year 2009-10 was filed on 25/09/2009 declaring total income of Rs. 69,67,78,028/-. After processing the return of income under the provisions of section 143(1) of the Act, the case was selected for scrutiny and the assessment was finally completed u/s 143(3) r.w.s. 144C of the Act accepting the returned income. Subsequently, the Principal Commissioner issued a show cause notice to the assessee whereby the assessee-company was called upon to explain as to why the assessment order cannot be treated as erroneous and prejudicial to the interests of revenue for the following reasons:
“During the year a net charge of Rs. 14,40,19,057/-has been charged to the P&L a/c as provision for warranty. The etails of warranty provision provided in schedule- 15 ‘Notes on account’ do not disclose that the warranty provision has been charged on a scientific basis. The provision for warranty thus claimed is to e disallowed especially in view of the decision of the Supreme Court in the case of Rotork Controls India Pvt. Ltd. Vs CIT Chennai 180 Taxman 422.
The assessment order passed by the Assessing Officer, thus suffers from the errors which have caused prejudice to the interest of the revenue.”
3.2 The assessee-company has responded to the show cause notice by filing letter dated 27/08/2014 wherein it is contended that action u/s 263 was not maintainable as the Assessing Officer [AO] took one of the possible views on the issue of provision for warranty expenditure. It was also contended that the assesseecompany has followed scientific method for arriving at the amount of provision for warranty. It was also submitted that provision for 0warranty expenses came to be allowed by the Hon’ble ITAT for the assessment years 2005-06 and 2006-07 and for the assessment year 2003-04 SLP filed by the department was dismissed by the Hon’ble Supreme Court on the same issue. It was thus submitted that where two views are possible, the assessment order cannot be treated as erroneous and prejudicial to the interests of revenue and in support of this proposition, relied on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83).
3.3 The Principal Commissioner, after considering the above submissions held that the AO had not examined whether provision for warranty was made on a scientific basis as laid down by the Hon’ble Supreme Court in thecase of Rotork Control India Pvt.Ltd. vs. CIT (314 ITR 62). The Principal Commissioner held that the assessment order passed by the AO is erroneous and prejudicial to the interests of revenue. Therefore, he set aside the issue of deductibility of warranty provision to the file of the AO for fresh assessment after affording due opportunity to the assessee-company.
4. Being aggrieved by this order, assessee-company is before us in the present appeal.
4.1 Learned AR of the assessee contended that the issue of provision for warranty was considered by the AO during the course of assessment proceedings. In this connection, he has invited our attention to the written submissions filed before the Addl.CIT, Bangalore, dated 31/12/2012 and also placed at pages 84 to 91 of the paper book. He also invited our attention to the questionnaire issued by him u/s 144A of the Act which are placed at pages 68 & 69 of the paper book Thus, learned AR of the assessee submitted that after considering the submissions made, the AO has allowed the claim and took one of the possible views. Therefore, the assessment order is not amenable to the jurisdiction u/s 263. In this connection, he relied on the following case laws:
i. Malabar Industries Co Ltd v. CIT [2000] 243 ITR 83 (SC);
ii. CIT(Central) Ludhiana v. Max India Ltd (2007) [2007]295 ITR 282(SC)
iii. Gokuldas Exports [2011] 333 ITR 214 (Kar.) HC);
iv. CIT vs. Sunbeam Auto Ltd [2011] 332 ITR 167 (Delhi);
v. CIT Vs. Gabriel India Ltd. [1993] 203 ITR 108 (Bombay HC); and
vi. CIT vs. Vikas Polymers [2012] 341 ITR 537 (Delhi HC)
4.2 On the other hand, learned Departmental Representative vehemently contended that the AO had failed to examine the basis adopted for calculating provision for warranty expenditure. Provision for warranty expenditure was allowed without application of mind by the AO on the aspect of basis adopted by the assessee for calculating provision for warranty expenditure in terms of the guidelines laid down by the Hon’ble Apex Court in the case ofRotork Control India Pvt.Ltd.(supra). Thus, he 10 submitted that the order of the Principal passed u/s 263 be upheld.
5. We heard rival submissions and perused material on record. The issue in present appeal is on the validity of assumption of jurisdiction by the Principal Commissioner under the provisions of sec.263 of the Act. The Principal Commissioner was of the view that the AO merely allowed provision for warranty expenditure without looking into the aspect of whether such provision was made on a scientific basis as per guidelines laid down by the Hon’ble Apex Court in the case of Rotork Control India Pvt.Ltd.(supra). From perusal of the assessment order it is not discernable whether the AO had applied his mind on this aspect. No doubt once it is established that the AO had applied his mind on this issue and took one of the possible view, it is settled law that CIT cannot exercise jurisdiction u/s 263 of the Act, but in the present case, we have gone through the written submissions filed before the Addl.CIT as well as the ACIT during the course of assessment proceedings wherein the Addl.CIT has sought for details of the provisions made for warranty expenditure. The Addl.CIT, Range 11, in exercise of power vested with him u/s 144A had issued a notice dated 03/12/2012 calling upon the appellant to explain and justify warranty expenditure charges debited of Rs. 14.40 cores and how the same has been calculated on any scientific basis. The relevant submissions made in this behalf are as under: 10
“Methodology and basis of estimating gwarrany cost on a scientific basis:
The company, at the time of sale of its hardware products, provides a warranty to the customer against defects in materials and workmanship for a period of one year from the date of original retail purchase which is inbuilt in the sale price of the product. A customer can also opt for an extended warranty period of 2 years beyond the inbuilt warranty period of 1 year for an additional cost to be paid at the time of purchase of the product. If a defect exists, the Company will:
a. Repair the product at no charge, using new or replacement parts;
b. Exchange the product with a product that is new or which has been manufactured from new or serviceable used parts and is at least functionally equivalent to the original product.”
5.1 From above submissions it is clear that the appellant only stated the policy being followed by it and also made a mere bald statement that provision was estimated following scientific method. Thus, nowhere the assessee-company has stated what is the scientific method followed by it. The AO, without looking into what scientific basis, merely accepted the submission and allowed deduction thereof. Therefore, it cannot be said that the assessee-company had followed the guidelines laid down by the Hon’ble Apex Court in the case of Rotork Control India Pvt.Ltd (supra). Thus, in our considered opinion, constitutes nonapplication of mind on this aspect by the AO. The ratio laid down by the Hon’ble Apex Court in the case of Malabar Industries Co. Ltd. (supra) is squarely applicable to the facts of the case wherein the Hon’ble Apex Court held that where AO merely accepted the claim of the assessee in absence of any supporting material without making any enquiry, exercise of jurisdiction by the CIT was held to be justified. The relevant paragraph is as under:
“10. In the instant case, the Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to thecase in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellantcompany was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and wi thout making any inqui ry. On these facts, the conclusion that the order of the ITO was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under section 263(l) was justified. ”
5.2 Even the Hon’ble jurisdictional High Court in the case of CIT vs. Infosys Technologies Ltd. (341 ITR 290) upheld assumption of jurisdiction u/s 263 by the CIT to set aside assessment order passed without making any enquiry and accepting the claim. In light of the above legal position, we uphold assumption of jurisdiction by the Principal Commissioner u/s 263 of the Act in the facts of the present case. The proposition canvassed by the learned AR of the assessee that a possible view has been taken and therefore, the Principal Commissioner was not justified in assuming jurisdiction u/s 263 cannot be accepted as in the facts of the present case, the learned AR of the assessee had not demonstrated before us that 10 the AO had verified the aspect of the scientific basis followed for estimating provision for warranty expenditure and it cannot also be said that the AO made an enquiry on this aspect. Since the AO had not looked into the issue of scientific basis adopted by the assessee for estimating provision for warranty expenditure, it cannot be said that the AO took one of the possible views, as the AO had never gone into this issue at all and applied his mind on this particular aspect. Therefore, reliance placed by learned AR of the assessee on the following decisions is misplaced:
i. Malabar Industries Co Ltd v. CIT [2000] 243 ITR 83 (SC);
ii. CIT(Central) Ludhiana v. Max India Ltd [2007]295 ITR 282(SC);
iii. Gokuldas Exports [2011] 333 ITR 214 (Kar.) ;
iv. CIT vs. Sunbeam Auto Ltd [2011] 332 ITR167(Delhi);
v. CIT Vs. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.) and
vi. CIT vs. Vikas Polymers [2012] 341 ITR 537 (Delhi).
In the cases cited supra, the AO had made an enquiry and took one of the possible views. As held supra, in the present case, it cannot be said that the AO took one of the possible views. Therefore, we uphold the assumption of jurisdiction u/s 263 by the Principal Commissioner.
6. In the result, the appeal filed by the assessee is dismissed.
The order pronounced in the open court on 20th July, 2016