2015 (10) TMI 491

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....resent appeals are AYs 2001-02 to 2004-05. 2. The first Assessee, Seagram Distilleries Private Limited was a 100% subsidiary of Seagram India Private Limited engaged in the business of manufacture and sale of Grain Neutral Spirit (GNS) and India Made Foreign Liquor (IMFL) from its Nasik plant. The parent company, originally incorporated under the Companies Act, 1956 on 3rd September, 1993 under the name and style of Seagram India Private Limited, changed its name to Pernod Ricard India Private Limited (PRIPL) and obtained a fresh certificate of incorporation on 23rd April, 2007. Thereafter, Seagram Distilleries Private Limited was merged into the parent company, PRIPL by a scheme of amalgamation which received sanction from this Court vide an order dated 8th October 2010. The second Assessee, Seagram Manufacturing Limited (SML) is a 100% subsidiary of Seagram India Private Limited, now PRIPL, and is engaged in the business of blending, bottling, and trading of IMFL. The memo of parties in the appeal by the second Assessee, being ITA No. 237, shows the second Assessee as also "now Pernod Ricard India Private Limited." Both the Assessees" products are transported in glass bottles ....

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....e actual breakages for each of the AYs, the ITAT noted that in each year the provision made was excessive. The first Assessee did not have enough experience of its own to enable it to make provision of expenditure on scientific basis. It appeared to have been made on ad hoc basis depending on the places of destination. By a subsequent order dated 28th November 2014, the ITAT followed its earlier aforementioned decision and dismissed the second Assessee's cross appeal on the same issue for AY 2001-02. Against the said dismissal the second Assessee has filed ITA No. 237 of 2015. Thus, the five appeals before this Court are as under: Appeal before the High Court Appeal before the ITAT Assessment Year ITAT Order ITA 237/2015 (Second Assessee's appeal) ITA No. 4535/Del/2004 (Assessee's Appeal) 2001-02 28th November, 2014 ITA No. 898/2009 (First Assessee's appeal) ITA No. 2802/Del/2007 (Assessee's appeal) 2004-05 16th March, 2009 ITA No. 899/2009 (First Assessee's appeal) ITA No 146/Del/2007 (Assessee's appeal) 2002-03 16th March, 2009 ITA No. 900/2009 (First Assessee's appeal) ITA No. 147/Del/2007 (Assessee's appeal) 2003-04 16....

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....d fair picture of the accounts. He also referred to the Notification No. SO 69(E) dated 25th January 1996, issued by the Central Board of Direct Taxes ("CBDT") which required that "provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." The CBDT had highlighted the need for the Assessees to adopt such accounting policies "so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies." It is accordingly submitted that the ITAT erred in holding the provision for the known liabilities for transit breakages made by the Assessees to be a contingent liability and, therefore, not allowable as a revenue expenditure. Reliance was also placed on the decision of the Supreme Court in Rotork Controls India P. Ltd. v. Commissioner of Income Tax [2009] 314 ITR 62 (SC). 9. Countering the above submissions, Mr. N.P. Sahni, learned Senior Standing counsel and Mr. Raghvendra Singh, learned Junior Standing counsel appearing for....

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....nomic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of the obligation cannot be made." 11. AS 29 further states that 'provisions' are distinguishable from other liabilities such as trade payables and accruals "because in the measurement of provisions substantial degree of estimation is involved with regard to the future expenditure required in settlement." However a 'provision' is recognised only where: "(a) an enterprise has a present obligation as a result of a past event: (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised." 12. Appendix A to AS-29 sets out in a tabular the summary of the AS. The provisions which are recognised and those that are not are set out in separate columns. What is not recognised is a provision for a liability which arises from "a possible obligation" that may, but probably will not, require an outflow of resources. 13. It is not in dispute th....

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....make any difference if the future date on which the liability shall have to be discharged is not certain." 16. The Court further summarised the decision in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) as under: "(i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, thought to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for the income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; and (iv) A trader computing his taxable profits for a particular year may properly deduct ....

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....vent resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation." The Assessee was held entitled to a deduction in respect of the warranty provision under Section 37 of the Act. 20. The Court in Rotork Controls India P. Ltd. (supra) explained: "The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced." 21. Having examined the decisions that explain the legal position, the Court proceeds to examine the facts on hand. The chart produced by the first Assessee shows that for AY 2001-02 the total amount debited to the P&L Account by way of provision for transit breakages was Rs. 6,40,338 and the actual breakages were Rs. 2874. In effect, therefore, the provision was in excess by Rs. 6,37,464. However, the AO while disallowing the provision added back the entire amount of Rs. 6,40,338. 22. For the next four years i.e. AYs 2002-03 to 2005-06....