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2010 DIGILAW 1015 (KAR)

Commissioner Of Income Tax v. Micro Land Ltd.

2010-09-21

D.V.SHYLENDRA KUMAR, H.S.KEMPANNA

body2010
Judgment :- SHYLENDRA KUMAR, J. 1. These two appeals by the Revenue under Section 260A of the Income Tax Act, 1961 [for short, the Act] are directed against two orders passed by the Income tax appellate tribunal in Nos ITA No 141/Bang/2002 and ITA No 586/Bang/2005 allowing the appeals of the same assessee for two different assessment years, one relating to assessment year 1998-99 [ITA No 13 of 2005] and the other relating to assessment year 2000-01 [ITA No 52 of 2007], posing for answer the following substantial questions of law: In ITA No 13 of 2005: Whether the Appellate Authorities were correct in holding that the lease rental income cannot be brought to tax in regular assessment proceedings despite the finding recorded by the Tribunal in the block assessment proceedings that it is lease rental income since the Tribunal’s order in block assessment is under reference before this Hon’ble Court. Whether the Appellate Authorities were correct in holding that the warranty expenses which may be claimed subsequently for goods sold by the assessee due to any defect should be allowed as an expenditure during the current assessment year itself by basing such a conclusion on mere conjectures and surmises and recorded a perverse finding when these expenses had not arisen in present but would arise in future i.e., when the customer made such a claim. In ITA No 52 of 2007: Whether the Tribunal was correct in holding that provision for warranty claim being a contingent liability is an allowable revenue expenditure. Whether the Tribunal was correct in holding that the claim of lease rent cannot be treated as the income of the assessee as the transaction was genuine and consequential depreciation claimed was withdrawn which has not concluded and is awaiting the decision of the Settlement Commission. 2. The assessee is a company having income generated by its business but varied activities, particularly as for the assessment year 1998-99 it had activities of carrying on non-banking finance services, apart from sale of computer [hardware] and follow up services of providing backup solutions for software applications. 3. The substantial questions as raised in these two appeals and for the examination of which questions, as extracted above, these appeals have been admitted. 3. The substantial questions as raised in these two appeals and for the examination of which questions, as extracted above, these appeals have been admitted. The two questions to put in a simple way would be; As to whether the assessee is entitled to claim the commensurate deductions while generating income by way of lease rentals of its products such as gas cylinders and water cylinders and solar equipment plants etc., while computing the income of the assessee from these sources of business activity; and As to whether the assessee was entitled to claim an amount by way of deduction for providing a possible future warranty claim during the years of unexpired warranty periods in respect of products sold during the accounting periods in question? 4. The tribunal while examining the appeals preferred by the revenue as against the orders of the appellate commissioner had affirmed the view expressed by the appellate commissioner, which, in effect, was one of the answers to the above two questions in favour of the assessee and may be by supplementing further reasons of its own for upholding the answers or finding as indicated by the appellate commissioner. 5. The appellate commissioner in his turn has examined the correctness or otherwise of the assessment orders passed by the assessing officer for the two assessment years after issuing notice under Section 143(3) of the Act while examining the return of income filed by the assessee and had occasion to disallow a claim towards deduction of the amount of lease rental income and also had disallowed the provision made by the assessee for future warranty claims, which was claimed as an expenditure due for a future contingent liability, but within the scope of Section 37 of the Act. 6. 6. The assessing officer had opined that the department having as a follow-up action, found that the assessee’s claim of having a business in the activity of leasing its products and earning rental income on the same was a false/bogus claim, as nothing was factually found to support this claim on the part of the assessee and therefore an income by way of a profit in such leasing activity while was retained as an undisclosed income of the assessee and relating to an undisclosed source, the claim for eking out the depreciation part on the earning of such income and therefore no claim could be permitted as though it is an income from the business activity such as leasing activity and for computing such profits commensurate deduction should have been allowed etc., and on the other hand, the question viz., provision made towards future warranty claims, on examination of the relevant case laws relating to the concept of deductible expenditure within the scope of Section 37 of the Act, which is a residuary provision for claiming business related expenditures as deductible expenditure in computing business profit of the assessee having business activity, had opined that the provision for a future contingency liability cannot be equated on a par with a present liability, whether to be made in future or otherwise, but show such a claim for even providing or making payment in future having not arisen, but the assessee claiming for making a provision on anticipated future claim was not a deduction that could come within the scope of Section 37 of the Act and therefore had declined such a claim after elaborately discussing the same in terms of the assessment orders dated 27-3-2001 and 31-3-2003 in ITA No 13 of 2005 and ITA No 52 of 2007 respectively. 7. In so far as the finding and result leading to these appeals on the first question of law viz., income from the activity of leasing certain machinery and equipment is concerned, we have answered the question in respect of the very assessee but as had been based for the assessment year 1997-98, which was examined in ITA No 2869 of 2005, disposed of by us on 15-9-2010. 8. 8. It is not in dispute between the parties and Sri Seshachala, learned senior standing counsel for the appellant-revenue and Ms Anuratha, learned counsel for the respondent-assessee are common agreement in submitting that in so far as this question is concerned, it is now covered by our decision in ITA No 2869 of 2005. Therefore, this question in these two appeals relating to two assessment years is answered in favour of the revenue and against the assessee in terms of our reasons given in the said appeal. 9. That nevertheless leaves us with the other question as to the correctness or otherwise of the affirming order of the tribunal, affirming the view taken by the appellate commissioner to the effect that the assessee was entitled to claim a deduction for having provided for future warranty claims that could possibly arise during the years where the warrantys continues to be in force in respect of the products sold by the assessee during the accounting period related to two accounting years in these appeals. 10. This is a question which is not very free from divergent views and the development of legal position, as reflected in judicial pronouncement have not in any way helped us in a quick and precise resolution of this question and it has taken more than three days of hearing for us to appreciate the intricacies and complexities involved in this question, notwithstanding the submissions of Sri M CV Seshachala, learned senior standing counsel appearing for the appellant-revenue in ITA No 52 of 2007, Ms Veena Jadhav, learned standing counsel appearing for the appellant-revenue in ITA No 13 of 2005 and Ms S R Anuradha, learned counsel for the respondent-assessee in both appeals, to the effect that the question is fully and squarely covered by the judgment of the Supreme Court in the case of ROTORK CONTROLS INDIA (P) LTD vs COMMISIONER OF INCOME TAX [(2009) 314 ITR 62]. The judgment of the Supreme Court, touching upon the scope of allowable deductions in terms of Section 37 of the Act and a possible provision at a particular rate or at a particular percentage of the value of sales effected during the accounting period being allowed as a deductible expenditure in terms of Section 37 itself, even in respect of future anticipated warranty claims, which, if had been worked out on a systematic and scientific methodology based on history and past experience of such claims having arisen and having settled by an assessee, who, perhaps, has taken it to the level of an arithmetic precision for having arrived at a percentage of deduction to be allowed during the earning period of the income. 11. On the contrary, Ms Anuratha, learned counsel for the respondent-assessee having very vehemently urged that this very question in respect of the very assessee had arisen before this court for the assessment year 1999-2000 in ITA No 3047 of 2005, also an appeal at the instance of the revenue, and this Court having elaborately gone into the contentions urged on behalf of the revenue as well as the assessee by the respective counsel and after having elaborately discussed the case law governing the issue, has answered the question in favour of the assessee and against the revenue and the only distinguishing feature between ITA No 3047 of 2005 and the present two appeals being the difference in assessment years and nothing else, and the answer given by this court should necessarily conclude the matter in so far this question is concerned and therefore this court should necessarily answer the two questions in favour of the assessee and against the revenue. 12. Though the matters had been heard at considerable length, we would like to confine our examining in these two appeals on the prominent and relevant submissions made at the Bar, eschewing of other discussions and debates that have taken place for the past several days. 13. The main submissions as urged by the learned senior standing counsel for the revenue in these two appeals are in so as the question relating to the provisions of future warranty claims is concerned. 13. The main submissions as urged by the learned senior standing counsel for the revenue in these two appeals are in so as the question relating to the provisions of future warranty claims is concerned. While it is no doubt a question which had come up for examination before the Supreme Court in the case of ROTORK CONTROLS INDIA (P) LTD [SUPRA], but the Supreme Court has not laid down a general law of the nature of interpreting the scope and extent of a deductible business expenditure in all situations and in cases of all assesses, but had evolved the question only having regard to the peculiar facts and circumstances of the case of the assessee on hand and with a rider that if and only such situations are available in a case of other assessee also, who would put forth such a claim, particularly based on the past experience and such experience having crystallized unto a discernible general and uniform pattern of averaging possible percentage of expenditure that the assessee may have to meet in a given year based on such past experience and such estimation having been made on sound cost accounting methods, then alone a scheme of this nature can be possibly fitted into the provisions of Section 37 to elevate it into the status of a deductible business expenditure in terms of Section 37 of the Act and the present situation being neither one which comes within the scope of a jurisdiction as indicated by the Supreme Court in the case of ROTORK CONTROLS INDIA (P) LTD [SUPRA], but on the other hand going out of the same, the deduction, assuming that this court had opined is a deduction within the scope of Section 37 of the Act, is not a law which can be sough to hold the field any more in the wake of the judgment of the Supreme Court in the case of ROTORK CONTROLS INDIA (P) LTD [supra], and it should be taken that the view expressed by this court in ITA 3047 of 2005 and connected matters, as impliedly overruled, irrespective of the further outcome or result of the view expressed by this court in the said case and that view even if it is not disturbed by the Supreme Court in its further appeal to the Supreme Court, but all such developments are only of historical significance as of now, in the wake of the decision in ROTORK CONTROLS INIDA (P) LTD [supra], and therefore urges that the question should necessarily be answered against the assessee and in favour of revenue to reverse the findings of the tribunal as well as the appellate commissioner and to restore the view as expressed by the assessing officer, who had held that the claim put forth by the assessee is not in the nature of a deductible expenditure within the scope of Section 37 of the Act. 14. Elaborating the submission, Sri Seshachala has further drawn our attention to the orders passed by the assessing officer, appellate commissioner and the tribunal and submits that even when the assessing officer did not find any material or evidence placed by the assessee before the assessing officer indicative of the evaluation of the percentage being based on any past experience or the amount incurred by way of an expenditure by the assessee in the earlier years to meet the warranty claims, the appellate commissioner for reversing this finding simply based on the working sheet produced by the assessee before the assessing officer, which was annexed to the return of income filed by the assessee and has pointed that even in terms of the footnotes on account in Note No 20, which is a note on accounts at 1(vi) reading as under: 20. NOTES ON ACCOUNTS 1. Significant Accounting Policies: Xxx (vi) Revenues for product sales are recognized on dispatch and are net of sakes tax and the estimated unexpired portion of the deferred revenue income relating to warranty. Other revenues are recognized rateably over the contractual period or as the services are performed. A possible link indicating the manner of formulating a scheme for deduction towards warranty claims, is again being in terms of a tabular column attached to the very notes and to the return, wherein it is indicated that the amount attributable to warranty is at 20%. 15. Mr. Seshachala, learned senior central government standing counsel appearing for the revenue would submit that the finding recorded by the first appellate authority and affirmed by the Tribunal is not a finding based on any material available on record, but the first appellate authority simply placed reliance on the chart as indicative of a scientific methodology adopted by the assessee for claiming deduction towards the provision made towards future warranty claims to be satisfied and a finding of this nature without being supported by commensurate material, particularly, as indicated by the Supreme Court in ROTORK CONTROLS INDIA (P) LTD [supra], that it should be based on past experience etc., is not a finding sustainable in law for the reason that though it could be a finding of fact, if the finding of fact is not based on material on record, the finding becomes a perverse finding and therefore not sustainable. 16. 16. Submission is that the reasoning adopted by the first appellate authority and affirmed by the Tribunal is clearly contrary to the law laid down by the Supreme Court on this aspect of the matter in ROTORK CONTROLS INDIA (P) LTD [supra]. 17. With regard to the answers given by this court for the other assessment year in respect of the very assessee on the very questions, submission of Sri Seshachala, learned senior central government standing counsel for the income tax department is that firstly each assessment year is different so far as assessment of income in the corresponding accounting period is concerned; that evidence or material placed for one year for claiming or working out a methodology per se cannot constitute evidence for another assessment year; that the income of each year has to be assessed based on the facts as they pertain in the facts and circumstances of the accounting period corresponding to the assessment year; that what income had been earned in another year is of no consequence and what evidence has been placed before the authorities in another year is of no consequence; that in the present appeal of the revenue, the orders passed by the appellate tribunal and first appellate authority recording a finding that the assessee has evolved a method for claiming a deduction towards the provision made for future possible warranty claims is not based on any supportable material and therefore irrespective of the answers given by this court in respect of the very assessee, the present question has to be answered based on the material as is available and on perusal of the orders and not by merely applying or following the view taken by this court, though in respect of the very assessee for a different assessment year. 18. It is also pointed out that the assessment year concerned for this year is assessment years 1998-99 and 2000-01 whereas the assessment year involved in ITA No.3047 of 2005 was 1999-00 and on the settled principle in taxation, each assessment year being different, that cannot make any difference and at any rate a subsequent material cannot be worked out backwards for the earlier assessment year and if the fact situation remains for the subsequent year and if it is so demonstrated, perhaps it can constitute a question of law which can be decided based on the earlier view, but not otherwise. 19. 19. Mr. 19. Mr. Seshachala, learned senior central government standing counsel further submits that insofar as claim for deduction under section 37 of the Act is concerned, the supreme court itself has pointed out that an expenditure which is to be incurred in future and which had not arisen in the present, does not fit into either an expenditure expended or laid out only and exclusively for the purpose of business within the meaning of section 37 of the Act; that an actual expenditure incurred during the accounting period relevant for the assessment year can be claimed as a deduction either under the cash system of accounting or mercantile system of accounting if had not been claimed earlier and insofar as the mercantile system of accounting is concerned, what is laid out is an expenditure, but the liability for incurring which has arisen in the present, but actually incurred and expended in subsequent year, but the liability for meeting an expenditure having arisen as and when a warranty claim is put forth whether or not such warranty claim is satisfied in the very accounting period or in the later accounting period falling back on the expression ‘laid out’ an assessee can nevertheless claim that as an expenditure to be allowed as a deduction in the accounting period corresponding to the assessment year, but where no expenditure is laid out, in the sense, no claim has been put forth by any customer, there is no question of allowing a deduction by way of a provision for possible future claims and such is the law settled law all along and an exception only to the limited extent has been indicted in ROTORK CONTROLS INDIA (P) LTD [supra] on the facts and circumstances of the case and because the assessee in that case had evolved the methodology for claiming such deduction even by way of future possible claims, based on the experience for the past about seven years in the case of that assessee and in the present case, no any material to indicate of past settling of claims based on the past experience having been placed before the authorities, the present case does not qualify for the kind of exception made in ROTORK CONTROLS INDIA (P) LTD [supra] and therefore the assessee cannot claim the benefit of the ruling of the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra], but on the other hand, as the facts and circumstances and the assessee fell short of making good a possible claim being brought within the scope of ruling of the supreme court and as the decision rendered in ROTORK CONTROLS INDIA (P) LTD [supra] constitutes law declared by the supreme court within the meaning of Article 141 of the Constitution of India, it is immaterial as to what decision had been taken or of the view had been expressed by this court even in respect of the very assessee for different assessment year and it is the duty of this court to operate this law as declared and in this case the assessee having failed to make good requirement as had been indicated by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra], the question necessarily has to be answered in favour of the revenue by allowing the appeal and reversing the order passed by the tribunal and the appellate commissioner. 20. Per contra, appearing on behalf of the respondent – assessee, Ms Anuradha, learned counsel has very vehemently urged that judicial discipline calls for this court to apply the ruling given by this court in respect of the very assessee on identical questions though for a different assessment year; that the matter is concluded against the revenue in view of the answers given by this court in ITA No.3047 of 2005 as per the common Judgment dated 21.9.2007 rendered along with ITA Nos.438-444 of 2002 and other connected cases; that there is no scope for this court to record a different finding or to give a different answer and therefore following the view expressed by this court in ITA NO.3047 of 2005, this appeal has to be necessarily dismissed. 21. IT is also submitted that in respect of decision/Judgment of this court rendered in common, with the appeal preferred against the very assessee by the department, but for a different assessment year was subject matter of civil appeals before the supreme court in Civil Appeal Nos.3511, 3512 & 3514-3520 of 2009 and these appeals have also been disposed of following the Judgment of the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra]; that whether or not the revenue had taken up the matter insofar as the present assessee is also concerned, the situation now that prevails is that in respect of common Judgment rendered by this court while disposing of other appeals along with appeals of the present assessee, the appeal had been preferred to the supreme court by the department and that has come to be dismissed and in this view of the matter, it should be taken that the view expressed by this court in ITA No.3047 of 2005 has also been affirmed by the supreme court and therefore it is of no consequence to look into the law, if any, as has been declared by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra] to make a distinction in respect of this assessee for the other assessment years. 22. 22. It is also emphatic submission of Ms Anuradha, learned counsel for the respondent – assessee, that on facts with the appellate commissioner and the tribunal having given a clear and categorical finding to indicate that the computation of the same has been made on perfectly scientific basis by taking into consideration the actual expenses incurred for rendering the warranty services, the finding of fact recorded by the appellate commissioner and affirmed by the Tribunal to that effect cannot be disturbed in an appeal by this court under section 260-A of the Act as it is not open to this court to examine or take a different view on a finding of fact as recorded by the lower authorities and therefore also the question as to whether the finding is proper or not as is sought to be made out on behalf of the revenue cannot be gone into by this court and the appeal has to be necessarily dismissed. 23. Notwithstanding, learned counsel for the assessee has tried to convince us that the methodology as is indicated in the tabular column and with the supporting foot notes constituted a ‘perfect scientific basis’ is sought to be explained before us by giving us the benefit of a note prepared by the learned counsel for the assessee to which we would like to extract as under: “In the above appeals the Revenue has produced two documents pertaining to the two assessment years in question which were the annexures filed by the assessee along with the return of Income showing the working out of the warranty provision. The method adopted in arriving at the warranty provisions is same for both the assessment years. The net product sales is arrived at by deducting all other sales except product sales. The unexpired warranty period is shown under each month of sales which is remaining period of the warranty for which the provision is required to be made. The warranty sales is arrived by applying the formula of Net product sale divided by 12 X unexpired months. The rate based on the previous year experience is applied to the warranty sales to arrive at a figure which is claimed as the provision for warranty. This method is following for the years in which the assessee has claimed warranty claim. A similar method adopted for the one year is already up help by this Hon’ble Court. The rate based on the previous year experience is applied to the warranty sales to arrive at a figure which is claimed as the provision for warranty. This method is following for the years in which the assessee has claimed warranty claim. A similar method adopted for the one year is already up help by this Hon’ble Court. The assessing officer for the Assessment years in question has not doubted the method by which the provision is made. In the appeal also the Revenue does not set out any reason to find fault with the method adopted by the assessee not does it suggest any other method for providing for warranty claim but only says such a provision itself cannot be made. The end provision made is less in % than what has been approved by the Hon’ble Supreme Court. Hence on facts also the warranty claim is in accordance with the parameters set by the Supreme Court in the case of Rotork Controls. Sd/- Advocate for Assessee” 24. Based on this, submission is that the methodology worked out is fully justified, is based on a methodology as indicated by the Supreme Court in ROTORK CONTROLS INDIA [P] LTD [supra]; that the percentage of claim towards future possible warranty claims being much less than the percentage as is indicated by the supreme court in ROTORK CONTROLS INDIA [P] LTD [supra], the claim is fully justified and it is to be allowed even in terms of the Judgment of the supreme court. 25. 25. However, learned counsel for the revenue is quick in pointing out that the so called ‘perfectly scientific basis’ has no basis at all, that there was absolutely no material placed before the assessing authority or the higher appellate authorities indicating either the basis or the actual warranty claims met and expenditure incurred for the earlier assessment years based on which scientific methodology could have been worked out; that a perusal of the chart only indicates that it is worked out only for the future period on and after the sale having taken place and by a method of reducing the possible warranty period as and when time has elapsed from the date of the sale, but nothing is there to indicate that the percentage even any arrived at is based on any past experience that is based on actual warranty claims met by the assessee in respect of sales effected for the accounting period corresponding to earlier assessment years. 26. Mr. Seshachala, learned senior standing counsel appearing for the appellants, has also drawn out attention to the provisions of section 268A of the Act to counter the submission made on behalf of the assessee by its learned counsel to the effect that the department having not carried the matter by way of further appeal as against the Judgment of this court rendered in ITA No.3047 of 2005 and that the Judgment can be used as a precedent, but also the department is precluded or estopped from questioning such a view or answer for different assessment year and submits that the legislature advisedly having brought in an amendment to the Act by way of introduction of section 268-A[3] of the Act, reading as under: 268A. Filing of appeal or application for reference by income-tax authority: [3] Notwithstanding that no appeal or application for reference has been filed by an income-tax authority pursuant to the orders or instructions or directions issued under sub-section [1], it shall not be lawful for an assessee, being a party in any appeal or reference, to contend that the income-tax authority has acquiesced in the decision on the disputed issue by not filing an appeal or application for reference in any case.” and enabling the revenue to go in appeal for other assessment years notwithstanding the fact that in an earlier assessment year, the revenue had not pursued the matter and had allowed the matter to become final and when such is the intention of the legislature, the principal that each assessment year is different has received legislative recognition and therefore the concept of res judicata or even an acquiescence by the department with a view taken for earlier assessment year cannot be pressed into service by an assessee to take advantage of non-filing of the appeal for the earlier years to pin down the revenue to the same question in other assessment years. 27. It is in the background of submission made as above at the Bar and the orders of the Tribunal, the appellate commissioner, assessing officer and other records made available before us and the supplemental written arguments and clarifications submitted by learned counsel, we are required to examine the questions. 28. In so far as the Judgment of this court in an earlier assessment year is concerned, it is settled law in tax matters, each assessment year is different and there is no precedence or the principles of res judicata as are applied under section 11 of the Code of Civil Procedure per se is not attracted. That is for the simple reason that the subject matter for each assessment year is different, namely, income of the corresponding accounting period of the assessee and what income is earned in an accounting period is again a question of fact and varying from one year to another and therefore generalization of either the level of income or the manner of determination of the tax liability is not concluded by any one assessment order. While such is the legal position insofar as the assessing authorities and the determination of tax liability is concerned, if the superior courts in this country have while examining the relevant statutory provisions have indicated a manner of understanding of the statutory provisions either by resort to an interpreting a principal or the actual meaning of the statutory provision is clarified by the High Courts or as declared by the supreme court that becomes binding on all authorities and even an earlier ruling of the court if it has a general principle involved on an understanding of the statutory provision, that inevitably has to be followed and applied by the court in its subsequent decisions touching upon the understanding of the statutory provision until and unless the earlier view is either overruled by a competent combination of the Bench in the very court or if the view is either reversed or overruled by a superior court. But, that is not the same as to say that a view expressed on the facts and circumstances in respect of the very assessee has to necessarily be the same view for other assessment years even in respect of the very assessee. 29. Appeals under section 260-A of the Act to the High Court, while no doubt are appeals from the orders of the appellate tribunal and are available only if the High Court is satisfied that the case involved substantial questions of law, the question of law is always one as it arises from the order passed by the tribunal relating to each assessment year. 30. It is quite possible that the Tribunal or any other income tax authority may be disposing of appeals preferred by the revenue or the assessee for several assessment years in common and if the questions had been dealt with in common, based on the very material for each assessment year, an answer as evolved and given for one assessment year can automatically conclude the issue in respect of their assessment years also. 31. 31. In the instant case, we find in the present set of appeals, i.e., in ITA No.13 of 2005 the assessment year involved is 1998-99 which is the earlier, the assessment year involved in the other appeal which has already been disposed of by this court in ITA No.3047 of 2005 is 1999-00- the middle year and the other assessment year in the appeal before us i.e., in ITA No.52 of 2007 now under consideration is 2000-01. 32. The earliest assessment year is 1998-99 and the earliest assessment order is dated 27.3.2001 [copy at Annexure-C in ITA No.13 of 2005]. It was against this assessment order, the assessee has carried the matter by way of appeal to the appellate commissioner and the appeal against the order passed for this assessment year came to be allowed as per order of the appellate commissioner passed on 27.11.2001 [copy at Annexure-B in ITA No.13 of 2005]. It is in this appellate order, the appellate commissioner opined that the assessee has evolved a ‘perfectly scientific basis’ for computing the percentage of deduction that can be claimed towards the provision for future warranty claims and it is this appellate order which was subject matter of further appeal in ITA No.141[BANG]/2002 which the Tribunal disposed of on 26.7.2004. The present appeal in ITA No.13 of 2005 the earliest of the appeals preferred by the revenue is the appeal against this order which was relevant to the earliest of the three assessment years and which contained reasons as spelt out by the appellate commissioner and as affirmed by this appellate order by the Tribunal. 33. We notice that in respect of the two other assessment years, the appellate tribunal only followed and applied the reasoning as had been given in the assessment relating to the assessment year 1998-99. 34. It is therefore that the examination of the contentions of the assessee relating to the assessment year 1998-99 in the first instance if at all could have been a satisfactory way of resolving answers to the questions as had arisen for this assessment year. 35. 34. It is therefore that the examination of the contentions of the assessee relating to the assessment year 1998-99 in the first instance if at all could have been a satisfactory way of resolving answers to the questions as had arisen for this assessment year. 35. Be that as it may, it is a fact that this court did examine the question as arose from the order of the Tribunal passed for the assessment year 1999-00 wherein the Tribunal’s order was merely, one passed by applying or following the view it had taken for the earlier assessment year, namely, assessment year 1998-99. It is for this reason, learned counsel for the assessee has vehemently urged that as this court has already opined on the very questions, for the assessment year 1999-00, while disposing of ITA No.3047 of 2005, that view should necessarily be applied for disposal of these two appeals as the questions are identified and the assessee is the same and therefore appeals should be dismissed. 36. It is to get over this contention, learned senior standing counsel appearing for the revenue has called in aid all general legal principles relating to the extent of applicability of the principle of res judicata to tax matters that each assessment year is different apart from the law as is now declared by the Supreme Court in ROTORK CONTROLS INDIA [P] LTD, [supra]. 37. While a matter of convenience of even a matter of propriety may not and cannot decide a question of law and a question of law is answered only, based on the relevant statutory provisions, the questions to be examined from the assessee’s point of view is as to whether the earlier view concludes the outcome of these two appeals or could it be otherwise. 38. The question that remains to be answered in these two appeals is, “Whether the Appellate Authorities were correct in holding that the warranty expenses which may be claimed subsequently for goods sold by the assessee due to any defect should be allowed as an expenditure during the current assessment year itself by basing such a conclusion on mere conjectures and surmises and recorded a perverse finding when these expenses had not arisen in present but would arise in future i.e., when the customer made such a claim?”. 39. 39. On an examination of the record, we have found, as a matter of fact, that the finding of fact or even an inference by the first appellate authority that the provision made by the assessee for future warranty claims is on ‘perfectly scientific basis’ is an impossible inference drawn by the first appellate authority and is one not based on any available dependable factual material placed before the first appellate authority for inferring such a view 40. We say so for the reason that the assessee had not placed any material either before the assessing officer or before the appellate authorities as to the actual warranty claims that it had received in the past accounting period relevant for the earlier assessment years and what actual expenditure it had incurred and provided in the earlier accounting periods. There is nothing on record to indicate any such expenses having been incurred or laid out by the assessee as had been claimed before the authorities or as had been placed before the authorities. The so called ‘perfectly scientific basis’ is merely one relating to the tabular column appended to the return of income and the foot notes to the tabular column. At the best, one possible method that is discernible is that in respect of sales effected during the accounting period, the unexpired months are in an ascending order with the figure for the month of April 1997 being ‘O’ and figure for the month of March 1998 being ‘11’. 41. Ms Anuradha, learned counsel for the assessee has sought to explain by drawing our attention to the amount attributable to the warranty [20%] as Rs.72,08,000/- and the provision for unexpired warranty cost as Rs.39,67,845/- as against the net product sales of Rs.78,11,73,000/- and has submitted that the warranty cost/production of sales is at the rate of 0.009227. 42. Inspite of our best efforts, we are unable to comprehend the depth of the so called ‘perfectly scientific basis’ as was appreciated by the first appellate authority and affirmed by the tribunal from this welter shelter of figures and abbreviations. Inspite of our best efforts, we are not able to see either any pattern or any methodology based on which any evaluation of the provision for future warranty claims has been arrived at. Inspite of our best efforts, we are not able to see either any pattern or any methodology based on which any evaluation of the provision for future warranty claims has been arrived at. It is nothing but ipsy-dixsy of the first appellate authority and merely affirmed without due application of mind by the Tribunal as the discussion in the order of the Tribunal relating to this aspect reading as under: “3[ii]. We have carefully considered the rival contentions and gone through the records. The facts of the case are more or less identical to the facts decided by the different Benches of the Tribunal as referred to above. Applying the same principles, the assessee’s claim in respect of provision for warranty of Rs.39,67,845/- quantified by the assessee has been correctly allowed by the CIT[A]. We decline to interfere.” andnothing more. With respect, in our considered view, this is an apology for a reasoned order and not the manner in which the professional body like the Income Tax Appellate Tribunal is expected to deal with the arguments advanced on behalf of the appellant – revenue and to be examined by the tribunal comprising of two Members one Judicial Member and another an accounting Member. 43. This is nothing but an apology for speaking order and we cannot help but notice that of late the quality of orders produced by the Income Tax Appellate Tribunal has shown a steady decline and orders are passed without indicating any rhyme or reason and without discussing the submissions made at the Bar nor evaluating the ratio in the different decided cases and by indicating as to the ratio evolved in which Judgment of the superior courts is attracted to the fact situation on hand. All these requirements are conspicuously absent in the order passed by the Tribunal. 44. Interference of this nature as drawn by the first appellate authority is an illogical, untenable inference and the finding recorded is nothing short of a perverse finding. The order of the Tribunal without giving any reasons is still worse. All these requirements are conspicuously absent in the order passed by the Tribunal. 44. Interference of this nature as drawn by the first appellate authority is an illogical, untenable inference and the finding recorded is nothing short of a perverse finding. The order of the Tribunal without giving any reasons is still worse. The question as indicated above in the circumstances inevitably has to be answered in the negative in favour of the revenue and against the assessee for the simple reason that the conclusion of the first appellate authority is nothing short of a conclusion which is more conjunctures and surmises and not on relevant material, but in an illogical manner, but more importantly being a perverse finding for the reason that the finding is not backed by commensurate material or evidence. Even a finding of fact without support of commensurate material is a substantial question of law as the finding becomes perverse finding which is the settled legal position. The ipsy-dixsy of the tribunal in dismissing the appeal of the revenue by merely endorsing the view taken by the first appellate authority by simply saying that they have considered the rival contentions and gone through the records and by further saying that the facts of the case are more or less identical to the facts decided by the different Benches of the Tribunal as it has quoted which read as under: “a) Voltas Ltd., [61 ITJ 543] [Mum] Wanson[India] Ltd. 51 ITD 102 [Pune] Majestic Auto Ltd [48 ITJ 566] [Chd.] Singal& Co., [ 1 ITD 476] [Chd]” Purporting to apply the same principle, the assessee’s claim for provision of warranty quantified at Rs.39,67,845/- is nothing short of a perpetuation of the illegality committed by the first appellate authority. The tribunal not showing its awareness to the contentions and not examining them per se vitiates the order of the Tribunal. 45. Apart from this, the factual and legal position as it emerges from the orders of the first appellate authority and the tribunal, we have independently examined the material if it can in any way conform to the norms as is indicated by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra] as the development of the legal position as indicated by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra] happens to be the declaration of law and is binding on this court. 46. 46. It is also for this very treason that we do not propose to examine any further the contentions urged on behalf of the assessee that the view taken by this court in the earlier appeal of the revenue i.e., in ITA No.3047 of 2005 in respect of the very assessee for different assessment year should conclude the matter, but as obviously it does not conclude the legal position is also not as indicated, but apart from that aspect, the legal position is now only as is declared by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra] irrespective of whatever other legal position might have prevailed earlier. 47. For such purpose, it may be useful for us to extract from the Judgment of the supreme court in ROTORK CONTRLS INDIA (P) LTD [supra] as it occurs at paragraphs 9, 10, 11, 12 and 13 which read a under wherein the supreme court did examine the scope of section 37 of the Act in this Judgment. “Relevant provisions of law: 9. We quote hereinbelow relevant provisions of the IT Act, 1961 as it stood at the material time: “37. General – (1) Any expenditure [not being expenditure of the nature described in ss. 30 to 36 [……….] and not being in the nature of capital expenditure or personal expenses of the assessee], laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’. 40A. Expenses or payments not deductible in certain circumstances – (7)(a) Subject to the provisions of cl. (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason: Nothing in cl. (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason: Nothing in cl. (a) shall apply in relation to: any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards on approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year; any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following” conditions are fulfilled, namely; the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason; the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilized out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilized, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilized, is paid by the assessee by way of such contribution before the 1st day of April, 1977. Explanation 1, - For the purposes of sub-cl,(ii) of cl.(b) of this sub-section “admissible amount’ means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one third per cent of the salary [as defined in cl. (h) of r. 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. Explanation 2. – For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.” FINDINGS: 10. What is a provision? This is the question which needs to be answered. 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. If these conditions are not met, no provision can be recognized. 11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. 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. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under s.37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling valve actuators. They are in the business from asst. yr. 1983-84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, a stated above, is erroneous as it rules out the accrual concept. The second option is also in appropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company 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. The warranty provision for the products should e based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant ha incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under s. 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are-provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.” 48. They are-provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.” 48. With great trepidation, the supreme court has tried to fit into section 37 of the Act an expenditure which is not actually incurred or laid out, but nevertheless it is claimed by an assessee as possible future expenditure which may have to be incurred or laid out because of certain terms of the sale of the product with its customers and has indicated that the High Court should not have disturbed the finding of the Tribunal in the peculiar facts and circumstances of the case as it prevailed in that case and a the assessee in that case had rightly made a provision for warranty by calling in aid a fiction that it can be so acted because the assessee has incurred the present obligation as a result of past events that there was evidence and material to indicate continuous outflow of resources and reliable estimation of the obligation was also possible and it is with support of all such factual position, the supreme court ventured to conclude that, “Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under s. 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are – provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.” 49. They are – provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.” 49. The amount of care and caution that has been indicated by the supreme court is only to be appreciated and on the supreme court having noticed the factual position as extracted in paragraph-13 which is, “…………………Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company.” 50. Such past experience in the case of the assessee before the supreme court was available on record from the assessment years 1983-84 onwards and the assessment year with which the examination was one relating to the assessment year 1991-92 by which time the past experience had evolved into the pattern which weighed with the supreme court in indicating its reasons for reversing the Judgment of the High Court and for restoring the order passed by the Tribunal allowing the provision for future warranty claims as a deduction within the scope of section 37 of the Act. 51. When examined on the touchstone of these principles, the present case woefully lacks for coming anywhere near the parameters indicated by the supreme court. In the first instance, there is absolutely nothing placed on record about past experience or the actual expenditure which the assessee had incurred or laid out for the past assessment years. There is nothing to indicate on record that the assessee had filed its return of income for any of the earlier years and this position is confirmed by the learned counsel for the assessee, but the learned counsel would venture to submit that the assessee, in fact, is being assessed to tax from the assessment year 1984-85 and business of sale of computers has been carried on from that year onwards. 52. 52. In response, learned counsel for the assessee has also submitted that neither the assessing officer has gone into the question of the method and manner of the assessee claiming deduction towards provisioning of future warranty claims; that the assessing officer has neither indicated that it is based on past experience nor has indicated it is not and as to whether the method is incorrect is not the finding recorded by any of the authorities. 53. We have examined the present appeals on the touchstone of the law declared by the supreme court and as already discussed above. We find that it falls too short of the requirement as indicated by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra]. 54. We have further examined the submissions of the learned counsel for the assessee that with the assessing officer also not having recorded a finding of fact as to whether the working out of the provision was based on past experience or otherwise, there was no occasion for this court to infer either in favour or adverse to the assessee on this aspect of the matter. 55. While we appreciate the submissions made at the Bar and we also do appreciate that it is only for the purpose of supporting submission that at the best the matter can be remanded to the authority for recording a finding on this aspect and perhaps that would have been a possibility with which we could have examined further, we find that in Income Tax, the material produced for a different assessment year doe s not constitute a material for the subsequent assessment year and the tax liability while it is being determined for the assessment year 1998-99 is a tax liability that is determined on the facts and material as placed by the assessee relating to the accounting period and the manner of working out the income with reference to the facts and figures as placed by the assessee. 56. In the present two appeals, the amount is one which is not in dispute, but the dispute is relating to the allowability or otherwise of the amount as a deductible expenditure with reference to section 37 of the Act and as an item of expenditure claimed for providing future warranty claims. 56. In the present two appeals, the amount is one which is not in dispute, but the dispute is relating to the allowability or otherwise of the amount as a deductible expenditure with reference to section 37 of the Act and as an item of expenditure claimed for providing future warranty claims. The only basis for providing that expenditure and to fit it into section 37 of the Act, we have noticed, is in the exceptional circumstances as indicated by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra]. Otherwise, the law relating to deductible expenditure under section 37 of the Act is long back authoritatively settled by the supreme court to indicate that it can only be an expenditure actually incurred or laid out in the present and not an expenditure which is a future contingent expenditure which may arise or may not. As rightly submitted by Sri Seshachala, learned senior standing counsel appearing for the revenue that it will become a speculative nature of expenditure depending on the contingency of warranty claim being put forth by purchaser of product in event of the product having revealed a manufacturing defect which the assessee may accept or may not as a manufacturing defect. 57. Therefore, the exception as indicated by the supreme court and as is now examined by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra], cannot be enlarged to put it on par with a present expenditure incurred or laid out which is the requirement under section 37 of the Act for claiming such an expenditure as a deductible expenditure for the purpose of arriving at computing profits of the assessee. 58. In the while of the assessee not having placed any material to indicate that the method of providing for future warranty claims was based on past experience and past actual expenditure incurred due to the claims that the assessee had received, the method as was sought to be placed before the authorities and as has been exempted by this court is not a method which fetches the approval of this court on the touchstone of the law laid down by the supreme court in ROTORK CONTROLS INDIA (P) LTD [supra]. 59. 59. Therefore, the question of remanding the matter to the authorities for recording a finding of fact in the absence of any material with reference to which a finding of fact is to be recorded is an exercise in futility and therefore we have to inevitably reject the submission made on behalf of the assessee even for a remand to the authorities to record the so called finding of fact regarding method being based on past experience of the assessee. 60. In the absence of any material on record to indicate that the assessee had filed returns for the earlier assessment years indicating the actual claims that it had received from its customers and the actual expenditure incurred or laid out, we are not even encouraged to remand the matter to the authorities for enabling the assessee to place such material before the authorities henceforth. Even such a possibility in our considered view is not an event that is productive, but only one postponing the finalization of the assessment proceedings which was already reached level of this court and relating to the assessment years 1998-99 and 2000-01. 61. These two appeals are allowed. 62. The orders passed by the Tribunal and the first appellate authority are set aside and the order passed by the assessing officer is restored by answering the questions posed for our examination in these two appeals in favour of the revenue and against the assessee. The parties are left to bear their respective costs.