Jurisdiction objections must be timely, DTAA benefits apply to DDT

Jurisdiction objections must be timely, DTAA benefits apply to DDT, and accrued provisions are allowable.

Issue

Whether an assessment order passed by an Additional CIT authorized under section 120(4)(b) is void ab initio if the assessee fails to raise a jurisdictional objection within the statutory timeline of section 124.
Whether Dividend Distribution Tax (DDT) levied under section 115-O on dividends paid to a non-resident shareholder can be restricted to the lower, beneficial tax rate prescribed in the applicable Double Taxation Avoidance Agreement (DTAA).
Whether provisions for liquidated damages and warranties are allowable in principle, and how excess estimations should be adjusted to prevent double taxation upon reversal.
Whether an inventory valuation addition under section 145A is sustainable if the assessee demonstrates that its “exclusive method” accounting adjustment is revenue-neutral.
Whether commercial expenditure allowability is governed by its accounting nomenclature or its true transaction substance.
Whether actuarially valued provisions for long service awards and post-retirement medical benefits constitute deductible accrued liabilities.

Facts

Issue I (Jurisdiction): The Additional CIT assumed jurisdiction and completed the assessment under section 143(3) pursuant to a specific administrative order passed by the CIT under section 120(4)(b). The assessee did not object to this jurisdiction during the assessment proceedings under section 124.
Issue II (DDT & Treaty): The assessee declared dividends totaling Rs. 29.82 crores, including Rs. 16.46 crores paid to Siemens AG, Germany. The company paid domestic DDT under section 115-O but later claimed that the tax rate should be restricted to the 10% cap specified under Article 10 of the India–Germany DTAA.
Issue III & IV (Damages & Warranty Provisions): The assessee created project-based provisions for liquidated damages and contract-based provisions for warranties (Rs. 24.16 crores) using technical estimates. The Assessing Officer (AO) disallowed them entirely as contingent. The Commissioner (Appeals) found them allowable in principle but empirically excessive, sustaining a 50% disallowance while ordering tax offsets on future reversals.
Issue V (Inventory Method): The assessee used the “exclusive method” for MODVAT/CENVAT accounting under Accounting Standard-2 (AS-2). The AO loaded outstanding excise duty into the closing stock value under section 145A, resulting in a profit addition of Rs. 18.01 crores. The assessee submitted a full reconciliation showing the shift to the inclusive method was entirely profit-neutral.
Issue VI (Nomenclature): The assessee paid Rs. 18.50 lakhs to Apex Medi Equipment for purchasing physical equipment accessories. However, the transaction was erroneously recorded under the bookkeeping head “commission.” The AO disallowed the claim based on the label.
Issue VII (Employee Benefits): Based on formal actuarial valuations, the assessee created provisions for long service awards and post-retirement medical benefits reflecting current service obligations. The AO disallowed these as non-crystallized, contingent liabilities.

Decision

Held, in favor of Revenue (Issue I): The assessment is valid. Objections to the exercise of jurisdiction between departmental authorities are governed by section 124. Since no timely objection was raised before the AO, the completed assessment cannot be invalidated.
Held, matter remanded (Issue II): The DDT rate under section 115-O can be restricted to the beneficial tax rate under Article 10 of the India–Germany DTAA, subject to the administrative verification of treaty eligibility documents.
Held, partly in favor of assessee (Issue III & IV): Provisions for contractual damages and warranties are not purely contingent because the obligations arise at the time of sale/contract. The 50% ad-hoc disallowance sustained by the CIT(A) for over-estimation was upheld, with directions to the AO to adjust subsequent reversals to prevent double taxation.
Held, in favor of assessee (Issue V): The addition of Rs. 18.01 crores was deleted. Since the comprehensive tax reconciliation demonstrated that the overall impact on business profits was revenue-neutral, no separate addition under section 145A was sustainable.
Held, in favor of assessee (Issue VI): The expenditure is fully deductible. The true nature and substance of a transaction prevail over its accounting classification, and a wrong head cannot invalidate a genuine business purchase.
Held, in favor of assessee (Issue VII): The disallowances were rightly deleted. Provisions created via recognized actuarial methods for services already rendered during the year represent accrued, ascertained business liabilities.

Key Takeaways

Jurisdictional Estoppel: An assessee cannot challenge the territorial or administrative jurisdiction of an Assessing Officer at the appellate stage if they failed to raise a prompt objection within the statutory window provided under section 124.
Treaty Overrides DDT: Tax distributed on dividends (DDT) is a tax on dividend income; hence, domestic rates under section 115-O yield to the more beneficial tax rate caps established in bilateral tax treaties (DTAAs).
Double Taxation Protection on Provisions: When a percentage of a business provision is disallowed and taxed in year A, the tax authorities must grant a corresponding downward adjustment when that same provision is reversed or written back in year B to prevent illegal double taxation.
Substance Over Nomenclature: The taxability or deductibility of business transactions is determined by commercial substance, purchase documentations, and third-party confirmations, rather than the internal bookkeeping labels applied by accountants.
Actuarial Certainty: Year-end provisions for long-term employee benefits are legally certain and currently deductible under the mercantile system if they are computed using scientific actuarial principles mapping out current work obligations.

IN THE ITAT MUMBAI BENCH ‘H’

Siemens Ltd

DCIT

Ms. Kavitha Rajagopal, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 4140 and 4037 (Mum) of 2019
[Assessment years 2005-06]

JUNE 16, 2026

Jeet Kamdar, Ld. AR for the Applicant. Ajay Chandra, Ld. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- These cross appeals filed by the assessee as well as the Revenue are directed against the order passed by the Commissioner of Income Tax (Appeals)-58, Mumbai [hereinafter referred to as “the CIT(A)”] dated 29.03.2019 for Assessment Year 2005-06 arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] by the Addl. Commissioner of Income Tax, Range-7(2), Mumbai [hereinafter referred to as “Assessing Officer or AO”]on 31.12.2008.Since these cross appeals were heard together and are being disposed of by way of this consolidated order for the sake of convenience and brevity.

2. At the outset, it is pertinent to note that the present cross appeals originally involved both Transfer Pricing issues as well as Corporate Tax issues arising from the order passed by the learned CIT(A) dated 29.03.2019 for Assessment Year 2005-06.The assessee filed its appeal before the Tribunal on 06.06.2019 in ITA No.4140/Mum/2019 challenging various additions/disallowances sustained by the learned CIT(A). The Revenue also preferred appeal in ITA No.4037/Mum/2019 against the relief granted by the learned CIT(A) in respect of certain additions.

3. During the pendency of the appeals before the Tribunal, the Assistant Commissioner of Income Tax, Transfer Pricing-4(1)(2), Mumbai passed an order dated 05.03.2020 giving effect to the order of the learned CIT(A) whereby the entire TP adjustment was deleted. Consequent thereto, the Assistant Commissioner of Income Tax, Circle-8(2)(1), Mumbai passed consequential order dated 16.03.2020 giving effect to the aforesaid TP order. In view of the said developments, the assessee, as directed by the Coordinate Bench, filed revised Form No.36 on 20.06.2022 withdrawing the TP grounds and retaining only the CT grounds.

4. Subsequently, the Assistant Commissioner of Income Tax, Transfer Pricing-4(1)(1), Mumbai passed an order purportedly under section 154 of the Act dated 29.03.2024 seeking to rectify the earlier order dated 05.03.2020 and thereby reinstated TP adjustment of Rs.32.21 crores pertaining to Medical DivisionDistribution segment. Consequent thereto, the assessee again revised Form No.36 on 12.04.2024 and restored the TP grounds earlier withdrawn.

5. The assessee thereafter received notice dated 20.06.2024 issued by the Assessing Officer initiating rectification proceedings under section 154 of the Act and fixing hearing on 01.07.2024. In response thereto, the assessee filed detailed objections contending, inter alia, that the rectification proceedings were barred by limitation prescribed under section 154(7) of the Act since four years had already expired from the end of the financial year in which the original order sought to be amended was passed.

6. The Assessing Officer, however, proceeded to pass rectification order under section 154 of the Act dated 29.03.2024. According to the assessee, the said order was neither served physically nor electronically and the assessee came to know about the same only while accessing the income tax portal on 17.07.2024. The assessee also contended that the rectification order was passed manually without Document Identification Number (“DIN”) contrary to CBDT Circular No.19/2019 dated 14.08.2019 and the DIN was assigned subsequently vide communication dated 10.07.2024.

7. Aggrieved thereby, the assessee filed Siemens Ltd. v. Deputy Commissioner of Income-tax /[2026] 486 ITR 181 (Bombay)/Writ Petition No.2747 of 2025 before the Hon’ble Bombay High Court challenging the validity of the rectification proceedings/order on multiple grounds including limitation under section 154(7) of the Act, absence of DIN and alleged backdating of the rectification order.

8. The Hon’ble Bombay High Court vide judgment dated 02.12.2025 allowed the writ petition and quashed the impugned rectification order as well as consequential communication. The Hon’ble High Court, after considering the factual matrix, observed that since notice under section 154(3) of the Act itself was issued only on 20.06.2024, the rectification order could not have been passed on 29.03.2024 and the same was clearly backdated to overcome the bar of limitation prescribed under section 154(7) of the Act. The Hon’ble High Court further held that the impugned order having been passed without DIN was contrary to the mandatory CBDT Circular and therefore invalid in law.

9. In paragraph 27 of the judgment, the Hon’ble Bombay High Court held as under:

“27. In view of the above, it is apparent that Respondent No.1 has acted beyond jurisdiction, and we accordingly quash and set aside the impugned order dated 29.03.2024 passed by Respondent No.1 and the impugned letter dated 10.07.2024 issued by Respondent No.1. We have not made any observations on the merits of the transfer pricing addition made by the TPO and Respondent No.1.”

10. In view of the aforesaid judgment of the Hon’ble Bombay High Court quashing the rectification order under section 154 of the Act, the TP adjustment which was sought to be revived stood annulled. Accordingly, during the course of hearing before us, it was submitted on behalf of the assessee that the TP grounds presently survive only academically and the same may be treated as infructuous at this stage, with liberty to revive the same in the event of any reversal/modification of the judgment of the Hon’ble Bombay High Court by any higher judicial forum.

11. In the above factual background, the surviving disputes requiring adjudication in the present cross appeals pertain substantially to the Corporate Tax grounds raised by the assessee.

12. The assessee has raised the following grounds of appeal before us:

Grounds pertaining to corporate tax matters:

Addition on account of alleged excess provision for warranty

1. On the facts and in the circumstances of the case and in law, the learned Assessing Officer (‘Ld AO’) erred in disallowing and the learned Commissioner of Income-tax (Appeals) [‘Ld CIT(A)’] erred in confirming the disallowance of Rs.120,801,522 being 50 percent of the provision made towards warranty. The Appellant prays that the said disallowance may please be deleted.

2. On the facts and circumstances of the case and purely as an alternative ground to the ground above, the said disallowance being a timing difference, no adjustment is called for in view of the Supreme Court’s judgment in case of M/s Excel Industries Ltd (Civil Appeal 125 of 2013).

Addition on account of alleged excess provision for Liquidated Damages (‘LD’)

3. On the fact and circumstances of the case and in law, the Ld AO erred in disallowing and Ld CIT(A) erred in confirming the disallowance of Rs.55,083,670 being 50 percent of the provision made towards LD. The Appellant prays that the said disallowance may please be deleted.

4. On the facts and circumstances of the case and purely as an alternative ground to the ground above, the said disallowance being a timing difference, no adjustment is called for in view of the Supreme Court’s judgment in case of M/s Excel Industries Ltd (Civil Appeal 125 of 2013).

Adjustment under section 145A of the Act

5. On the facts and the circumstances of the case and in law, the Ld AO and Ld CIT(A) erred in making wrong and unjustified addition to profits returned as per law by making adjustment purportedly under section 145A.

6. On the facts and the circumstances of the case and in law, the Ld AO and Ld CIT(A) ought to have accepted adjustments certified by qualified Chartered accountant as required in the tax audit report. The Ld AO and Ld CIT(A) failed to appreciate that there is no impact on the business profit notwithstanding the fact whether the Appellant follows inclusive or exclusive method. The Appellant prays that the said disallowances may please be deleted.

7. On the facts and the circumstances of the case and in law, the Ld AO erred in disallowing and Ld CIT(A) erred in confirming an adjustment of excise duty of Rs.180,181,416 by following inclusive method of accounting as against exclusive method followed by the Appellant under section 145A of the Act.

8. On the facts and the circumstances of the case and in law, the Ld AO and Ld CIT(A) erred in confirming the said disallowance without considering the excise duty liability amounting to Rs 368,247,833 incurred on manufacturing of finished goods during the year.

9. The Appellant prays that the Ld AO and Ld CIT(A) both failed to appreciate that the adjustment considered such adjustments were consistently adopted from the inception of the section and that there was no justification for adopting a different position as there is no change in facts or law on the topic.

Addition on account of Commission payments

10. On the facts and the circumstances of the case and in law, the Ld AO and Ld CIT(A) ought to have allowed Rs. 18,50,000 paid to M/s Apex Medi Equipment as business expenditure, if not as commission payment, based on the confirmation received from the party. The Appellant prays that said expenses be allowed as Business expenditure instead of Commission payment.

11. On the facts and the circumstances of the case and in law, the Ld CIT(A) erred in adjudicating the issue from the prospective of commission payment.

Other grounds

12. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the penalty proceedings may please be dropped.

13. The Appellant submits that the above grounds are independent and without prejudice to one another.

14. The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per the law.”

13. The assessee has also raised the following additional ground of appeal which is reproduced hereunder:

“35. On the fact and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the order of assessment under section 143(3) of the Act dated 31.12.2008 which was without jurisdiction since the learned Additional Commissioner of Income-tax, who framed the impugned assessment was not empowered or authorized or directed under the provisions of section 120(4)(b) read with section 2(7A) of the Act to exercise the powers or perform the functions of Assessing Officer and as such, the same was without jurisdiction, invalid and deserve to be quashed as such.

That the learned Commissioner of Income Tax (Appeals) has otherwise too failed to appreciate that the assessment order was passed without jurisdiction in absence of an order transferring jurisdiction under section 127 of the Act from the learned Dy Commissioner of Income-tax, Range 7(2), Mumbai to learned Additional Commissioner of Income-tax, Range 7(2), Mumbai.”

14. During the course of hearing, the assessee further moved another application dated 11.02.2026 seeking admission of an additional ground in relation to levy of Dividend Distribution Tax (“DDT”) under section 115-O of the Act. The said ground is –

On the facts and circumstances of the case and in law, the learned AO erred in not allowing the benefit of Article 10 of the India-Germany Double Taxation Avoidance Agreement, on the dividend declared by the Assessee to Siemens Aktiengesellschaft, Germany (‘Siemens AG’). The learned AO erred in not holding that Dividend paid to Siemens AG is liable to DDT at the rate of 10% instead of 13.069% and consequently erred in not granting refund of excess DDT of Rs. 50,50,303.

15. The Revenue has raised the following grounds of appeal before us:

1. Whether, on the facts and in the circumstances of the case, the learned CIT(A), erred in deleting the disallowance of Rs.2,14,58,000/- towards provision made for anniversary program without appreciating the fact that the AO had given clear findings in the assessment order that the same was not crystalized during the year?

2. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.49,60,000/-towards provision made for medical benefit of the employees without appreciating the fact that the AO had given clear findings in the assessment order that the same was not crystalized during the year.?

3. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary.

4. The appellant prays that the order of CIT(A)’s on the above grounds to be set aside and that of the AO restored.

Assessee’s Appeal in ITA No.4140

16. First we deal with assessee’s appeal.

Additional Ground of the assessee relating to jurisdiction

17. We shall first take up the additional ground raised by the assessee, since the same challenges the very jurisdiction of the learned Additional Commissioner of Income-tax, Range-7(2), Mumbai to frame the impugned assessment under section 143(3) of the Act and therefore goes to the root of the validity of the assessment proceedings.

18. During the course of hearing, the learned Authorised Representative (AR) appearing on behalf of the assessee submitted that the assessee has raised an additional ground challenging the very validity and jurisdiction of the assessment order passed under section 143(3) of the Act dated 31.12.2008 by the learned Addl. Commissioner of Income-tax, Range-7(2), Mumbai. It was submitted that the issue raised in the additional ground goes to the very root of the assessment proceedings and concerns the legal competence and authority of the officer who framed the impugned assessment order.

19. The learned AR submitted that the jurisdictional challenge raised by the assessee rests on two fundamental aspects. Firstly, where assessment proceedings are initiated by one Assessing Officer and the assessment order is ultimately passed by another officer, the Revenue is required to establish valid transfer of jurisdiction in accordance with section 127 of the Act. Secondly, where the assessment order is passed by an Additional Commissioner of Income-tax or Joint Commissioner of Incometax, the Revenue must demonstrate that such officer was specifically empowered and authorised in terms of section 120(4)(b) read with section 2(7A) of the Act to exercise powers and perform functions of an Assessing Officer.

20. It was further submitted that in absence of the requisite statutory authorisation under section 120(4)(b) and/or transfer order under section 127 of the Act, the impugned assessment order becomes wholly without jurisdiction, bad in law and liable to be quashed. The learned AR submitted that despite repeated requests made before the Assessing Officer and even through applications filed under the Right to Information Act, the Department failed to furnish any notification, authorisation or transfer order evidencing lawful assumption of jurisdiction by the learned Addl. Commissioner of Income-tax, Range-7(2), Mumbai.

21. The learned AR submitted that the issue raised by the assessee is a pure legal issue arising from facts already borne out from assessment records and therefore does not require any fresh investigation into facts. It was submitted that the notices issued during assessment proceedings, designation of officers issuing notices, and designation of the officer passing the assessment order are all part of assessment records already available before the authorities. Therefore, the additional ground deserves to be admitted and adjudicated.

22. In support of admissibility of the additional ground, reliance was placed upon the judgment of the Hon’ble Supreme Court in the case of Jute Corpn. of India Ltd. v. Commissioner of Income-tax [1990] 88 CTR 66/[1991] 187 ITR 688/ (SC), wherein the Hon’ble Apex Court held that an appellate authority possesses all plenary powers which the original authority may have while deciding the matter before it and there is no justification to curtail powers of appellate authorities in entertaining additional grounds raised by an assessee.

23. Reliance was also placed upon the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. Commissioner of Income-tax [1999] 157 CTR 249/[1998] 229 ITR 383 (SC), wherein it was held that the Tribunal has jurisdiction to examine a question of law arising from facts already available on record even though such question was not raised before lower authorities.

24. The learned AR further relied upon the Full Bench judgment of the Hon’ble Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. v. Commissioner of Income-tax [1992] 106 CTR 78/[1993] 199 ITR 351 (Bombay) (FB), wherein it was held that jurisdiction of the Tribunal is not confined merely to points arising from orders of lower authorities and the Tribunal possesses widest possible powers to permit additional grounds to be raised provided they arise out of subject matter of tax proceedings.

25. It was submitted that the present challenge concerns inherent lack of jurisdiction and legal competence of the officer himself to act as Assessing Officer and not merely territorial or procedural irregularity contemplated under section 124 of the Act. According to the learned AR, if the officer lacked jurisdiction in law, the order passed by such officer would be void ab initio and such defect cannot be cured by acquiescence, consent or participation of the assessee in assessment proceedings.

26. In support of the aforesaid proposition, reliance was placed upon the judgments in the cases of Inventors Industrial Corpn. Ltd. v. Commissioner of Income-tax [1991] 96 CTR 206/[1992] 194 ITR 548 (Bombay),P.V. Doshi v. Commissioner of Income tax [1978] 113 ITR 22 (Gujarat), andValvoline Cummins Ltd. v. Deputy Commissioner of Income-tax, Circle 17(1) [2008] 217 CTR 292/307 ITR 103 (Delhi), wherein it has been held that challenge to jurisdiction can be raised even at a later stage since such defect strikes at the root of authority to act.

27. The learned AR further submitted that section 124 of the Act does not bar the present challenge as the dispute raised by the assessee is not with regard to territorial jurisdiction but pertains to inherent lack of authority and legal competence of the officer to assume jurisdiction and frame assessment in the capacity of an Assessing Officer.

28. The learned AR also relied upon several decisions of coordinate benches wherein similar jurisdictional challenges involving absence of authorisation under section 120(4)(b) and/or absence of valid transfer orders under section 127 were admitted and adjudicated in favour of assessees. Reliance was placed upon the following decisions:

Tata Sons Ltd. v. Asstt. CIT, Circle-2(3) [2017] 162 ITD 450 (Mumbai);

ii.

Tata Communication Ltd. v. Addl. CIT [IT Appeal No. 7071 (Mum) of 2005, dated 30-6-2017];

iii.

Tata Sons Ltd. v. ACIT [IT Appeal No. 193 (Mum) of 2006, dated 27-11-2017];

iv.

Tata Sons Ltd. v. ACIT [IT Appeal No. 2639 (Mum) of 2009, dated 11-3-2019];

Tata Communication Ltd. v. Addl. CIT [IT Appeal Nos. 2891 and 1015 (Mum) of 2010, dated 16-8-2019];

vi.

Tata Power Co. Ltd. v. ACIT [IT Appeal Nos. 3081 & 3082 (Mum) of 2009, dated 4-9-2019];

vii.

Tata Communication Ltd. v. Addl. CIT [IT Appeal No. 4452 (Mum) of 2011] and connected matters order dated 24.12.2019;

viii.

Tata Sons Ltd. v. ACIT [IT Appeal No. 4893 (Mum) of 2012] and connected matters order dated 03.02.2020;

ix.

Indian Hotels Company Ltd. v. Addl. CIT/DCIT(OSD) [IT Appeal No. 8570 (Mum) of 2011] and connected matters order dated 21.05.2021;

Kishore Vithaldas v. JCIT [IT Appeal No. 5661 (Mum) of 2017, dated 16-10-2019];

xi.

Vertiv Energy (P.) Ltd. v. Addl. CIT 65 CCH 0227 (Mum Trib.);

xii.

Tata Communication Ltd. v. Addl. CIT [IT Appeal No. 7541 (Mum) of 2011, dated 23-2-2022];

xiii.

DCIT v. Sandoz (P.) Ltd. [IT Appeal No. 3733 (Mum) of 2013, dated 9-12-2022];

xiv.

ITO (IT) TDS-2 v. Tata Steel Ltd. 207 ITD 345/[2025] 121 ITR(T) 641 (Mumbai – Trib.);

xv.

Nasir Ali v. Additional Commissioner of Income-tax, Range-23, New Delhi 181 ITD 30 (Delhi – Trib.);

xvi.

Jindal Power v. JCIT [IT Appeal No. 201 (RPR) of 2017];

xvii.

Dolphin Promoters and Builders v. Additional Commissioner of Income-tax (Raipur – Trib.); and

xviii.

Kunshan Q Tech Microelectronics (India) (P.) Ltd. v. Deputy Commissioner of Income-tax (Delhi – Trib.).

29. The learned AR accordingly submitted that in absence of statutory authorization under section 120(4)(b) and in absence of valid transfer of jurisdiction under section 127 of the Act, the assessment order passed by the learned Addl. Commissioner of Income-tax, Range-7(2), Mumbai is wholly without jurisdiction, void ab initio and liable to be quashed.

30. Per contra, the learned Departmental Representative (CIT-DR) strongly opposed admission of the additional ground raised by the assessee. The learned CIT-DR submitted that the contention of the assessee that the order passed under section 120(4)(b) of the Act was never furnished during assessment proceedings or thereafter is factually incorrect and contrary to material available on record.

31. The learned CIT-DR submitted that assumption of jurisdiction by the learned Addl. Commissioner of Income-tax was duly communicated to the assessee by issuance of notice under section 143(2) dated 08.08.2007 and subsequent notices issued under section 142(1) of the Act, all of which were duly complied with by the assessee during assessment proceedings. It was further submitted that passing of the order by CIT-7, Mumbai directing the Addl. CIT to assume jurisdiction as Assessing Officer over the pending assessment proceedings was specifically communicated to the assessee in paragraph 2 of the assessment order dated 31.12.2008 itself.

32. The learned CIT-DR submitted that despite such express communication during assessment proceedings and in the assessment order itself, the assessee never sought copy of the order passed under section 120(4)(b) of the Act for nearly fifteen years and only for the first time sought copy thereof vide letter dated 27.12.2022. According to the learned CIT-DR, the assessee has not furnished any explanation whatsoever for not calling upon the Assessing Officer to furnish copy of the order under section 120(4)(b) during all these intervening years.

33. The learned CIT-DR further submitted that the assessee has failed to demonstrate that the additional ground raised before the Tribunal is bona fide and that the same could not have been raised earlier for good and sufficient reasons. Reliance in this regard was placed upon paragraph 6 of the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra), wherein while referring to the earlier judgment in Jute Corporation of India Ltd., the Hon’ble Apex Court observed that while exercising discretion to admit an additional ground, the appellate authority must consider whether such ground is bona fide and whether there existed good reasons for not raising the same earlier. The relevant para is reproduced below:

6. In the case of Jute Corpn. of India Ltd. v. CIT [1991] Jute Corpn. of India Ltd. v. Commissioner of Income-tax [1990] 88 CTR 66/[1991] 187 ITR 688 (SC)/[1991] 187 ITR 688 (SC), this Court, while dealing with the powers of the AAC, observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The AAC must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The AAC should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.

34. It was submitted by the learned CIT-DR that the assessee has not discharged this burden. According to the learned CIT-DR, the assessee was fully aware right from inception that the learned Addl. CIT had assumed jurisdiction over the assessment proceedings and had eventually framed the assessment under section 143(3) of the Act on 31.12.2008. Despite this knowledge, the assessee remained silent for about fifteen years and thereafter sought to raise the jurisdictional ground at a belated stage only after noticing pendency of the appeal before the Tribunal.

35. The learned CIT-DR also referred to affidavit dated 30.08.2023 filed by Shri Sunil Mathur, Managing Director of the assessee company, wherein it was stated that copy of the order passed under section 120(4)(b) was not received during assessment proceedings. The learned CIT-DR submitted that Shri Sunil Mathur was not even in employment of the assessee during financial year 2007-08 when the learned Addl. CIT assumed jurisdiction and completed the assessment proceedings. Therefore, according to the learned CIT-DR, the deponent had no first-hand knowledge regarding alleged non-receipt of the order under section 120(4)(b), and consequently the affidavit lacks evidentiary value and credibility.

36. The learned CIT-DR submitted that the assessee neither denied these factual aspects nor furnished any satisfactory explanation in rejoinder filed before the Tribunal. It was accordingly contended that the conduct of the assessee in not seeking copy of the order for fifteen long years completely destroys credibility of the plea now raised before the Tribunal.

37. The learned CIT-DR further submitted that the assessee is barred by principles of acquiescence, estoppel and laches from raising the jurisdictional ground after such inordinate delay, particularly when facts relating to assumption of jurisdiction by the Addl. CIT were within knowledge of the assessee from the very beginning.

38. The learned CIT-DR also attempted to distinguish the various judicial precedents relied upon by the assessee by submitting that the facts involved in those decisions were materially different. According to the learned CIT-DR, in the present case:

(i)

the order under section 120(4)(b) had in fact been passed by CIT-7, Mumbai on 07.08.2007;

(ii)

the factum of such order and assumption of jurisdiction had been communicated to the assessee during assessment proceedings and also through the assessment order itself;

(iii)

no valid affidavit based on personal knowledge has been filed by the assessee to substantiate alleged non-service of the order under section 120(4)(b); and

(iv)

the conduct of the assessee in not seeking copy of the said order for about fifteen years clearly establishes absence of bona fides.

39. The learned CIT-DR therefore submitted that the additional ground raised by the assessee is neither bona fide nor supported by any satisfactory explanation for delay in raising the same and consequently the additional ground deserves to be rejected at threshold without entering into merits of the jurisdictional challenge.

40. Without prejudice to the objections regarding bona fides and maintainability of the additional ground, the learned CIT-DR further submitted that the issue sought to be raised by the assessee regarding jurisdiction of the learned Addl. CIT to act as Assessing Officer vis-a-vis the DCIT is not capable of being entertained in view of the specific statutory scheme contained in sections 120, 124 and 127 of the Act.

41. The learned CIT-DR submitted that entrustment of powers of an Assessing Officer upon the learned Addl. CIT by order passed under section 120(4)(b) of the Act is essentially a matter of administrative convenience and allocation of work within the Department. According to the learned CIT-DR, vesting superior authorities with powers of an Assessing Officer cannot be equated with inherent lack of jurisdiction, as sought to be contended by the assessee. It was submitted that where scrutiny proceedings had already been initiated by the DCIT, subsequent direction issued by CIT-7, Mumbai authorising the learned Addl. CIT to exercise powers and functions of the Assessing Officer was purely an administrative arrangement permissible under section 120(4)(b) of the Act.

42. The learned CIT-DR further submitted that the Act itself provides a complete machinery and specific remedy for raising objection regarding jurisdiction of the Assessing Officer under sections 124(2), 124(3) and 124(4) of the Act. It was submitted that section 124(3)(a) specifically prescribes limitation of one month from date of service of notice under section 143(2) for raising objection to jurisdiction of the Assessing Officer. Since notice under section 143(2) was issued on 08.08.2007 by the learned Addl. CIT, the assessee, if aggrieved, ought to have raised objection on or before 08.09.2007. However, the assessee never availed statutory remedy within prescribed period and remained silent for more than fifteen years.

43. The learned CIT-DR submitted that orders passed under sections 120 and 127 of the Act are administrative orders and are not appealable either before the CIT(A) under section 246A or before the Tribunal under section 253 of the Act. Therefore, according to the learned CIT-DR, the assessee cannot indirectly challenge such administrative allocation of jurisdiction by raising additional ground before the Tribunal at this belated stage.

44. Referring to scheme of Chapter XIII of the Act, the learned CIT-DR submitted that section 120 deals with jurisdiction of Income-tax Authorities, section 124 deals with jurisdiction of Assessing Officers, and section 127 deals with transfer of cases. It was contended that section 124 does not employ expression “territorial jurisdiction” and therefore scope of the provision cannot be artificially restricted only to territorial matters. According to the learned CIT-DR, section 124 encompasses all forms of jurisdictional allocation amongst Assessing Officers, including administrative assignment of jurisdiction under section 120(4)(b).

45. In support of aforesaid proposition, reliance was placed by the learned CIT-DR upon the Full Bench judgment of the Hon’ble Gauhati High Court in the case of Smt. Sohani Devi Jain v. Income-tax Officer, “A” Ward, Jorhat [1977] 109 ITR 130 (Gauhati), wherein it was held that section 124 is not confined merely to territorial jurisdiction and that objections regarding jurisdiction of Assessing Officer raised beyond prescribed time are barred by section 124 itself. The learned CIT-DR particularly relied upon observations of the Hon’ble High Court that jurisdiction includes both territorial as well as other kinds of jurisdiction and that objection raised at appellate stage would be hit by section 124(5) of the Act.

46. The learned CIT-DR further relied upon decision of the Hon’ble Delhi High Court in the case of Mega Corporation Ltd. v. Pr. CIT [IT Appeal No. 128 of 2016]. Referring to paragraph 7 of the said judgment, the learned CIT-DR submitted that even if assessee became aware subsequently that ACIT/Addl. CIT was exercising jurisdiction, objection ought to have been raised within one month stipulated under section 124(3)(a). Failure to do so precludes the assessee from subsequently urging lack of jurisdiction before appellate authorities. It was accordingly submitted that the ratio laid down by the Hon’ble Delhi High Court squarely applies to present facts since the assessee has raised the objection after nearly fifteen years. The relevant paras of the said judgement are reproduce here for the sake of brevity:

1. Following question of law arises for consideration:

“Did the Income Tax Appellate Tribunal (ITAT) fall into error in interpretation of provisions of Section 124(3)(a) and holding that the ACIT could not have completed the assessment by virtue of Section 120(4)(b)?”

2. . For the first time, the assessee voiced the submission that the ACIT who completed the assessment did not possess jurisdiction to do so, before the ITAT. Since this ground was raised for the first time, the ITAT remitted the matter to the CIT(A) for decision on merits. This was round two; the assessee could not succeed since the CIT(A) turned down the submission with regard to the lack of jurisdiction, on the basis of the assessee’s interpretation of Section 120(4)(b). The ITAT, however, considered the materials on record, including the notification dated 01.08.2007,under Section 120(2) and proceeded to hold that in the absence of specific notification under Section 120(4)(b), the ACIT could not have acted as an AO.

….

7…. I f so, at that first instance, the assessee could have raised the objection within a month having regard to the notification which existed on 01.08.2007. Secondly, even if for some reason, the assessee were unaware of the notification, it became aware that the ACIT was exercising jurisdiction when it received notice from that official in August 2008.Since that was in continuation of the proceeding by the DCIT it could well have been urged by the assessee within the stipulated time that the said officer, ACIT did not possess jurisdiction. Its failure to do so within the stipulated time, i.e. one month after receipt of notice which was in fact a condition of Section 143(2) proceeding and was treated as such by the assessee precluded it from urging lack of jurisdiction. The assessee, however, contended its omission by not urging this ground before the CIT(A) in the first ground but urging belatedly before the ITAT; precisely the situation which the provision seeks to eliminate.

…

10. In view of the above discussion that the question of law framed has to be answered in favour of the Revenue and against the assessee. The appeal is accordingly allowed.

47. In reply, the learned AR contended that the judgment of the Hon’ble Delhi High Court in the case of Mega Corporation Ltd. was rendered per incuriam and that the said decision ought not to be followed.

48. The learned CIT-DR submitted that contention of the learned AR that judgment of the Hon’ble Delhi High Court in Mega Corporation Ltd. (supra) was per incuriam cannot be accepted by the Tribunal, since Tribunal has no authority to hold binding judgment of High Court as per incuriam.

49. Further reliance was placed upon judgment of the Hon’ble Delhi High Court in the case of Commissioner of Income-tax, Delhi-XVI v. S.S. Ahluwalia (Delhi). The learned CIT-DR submitted that the Hon’ble High Court has categorically held that question of jurisdiction is not subject matter of appeal and the same is required to be decided on administrative side by Commissioner/Board. Reliance was particularly placed upon paragraphs 34 and 35 of the judgment wherein the Hon’ble Court observed that objections regarding place or authority of Assessing Officer pertain to administrative convenience and procedural allocation of functions and that failure to raise objection within time prescribed under section 124 results in forfeiture of such right altogether. The learned CIT-DR also relied upon observations made in the said judgment that sections 120, 124 and 127 relate to procedural and administrative aspects of assessment machinery and not to substantive jurisdiction affecting validity of assessment proceedings. According to the learned CIT-DR, even assuming some procedural irregularity existed in allocation of functions between DCIT and Addl. CIT, such defect would at best amount to procedural irregularity and not nullity rendering assessment void ab initio.

50. Reliance was also placed upon judgment of the Hon’ble Allahabad High Court in the case of Commissioner of Income-tax v. British India Corpn. Ltd.[2011] 337 ITR 64 (Allahabad), wherein dispute regarding jurisdiction between ITO and Inspecting Assistant Commissioner/Addl. CIT was considered. Referring to paragraphs 15 to 18 of the said judgment, the learned CIT-DR submitted that the Hon’ble High Court held that question regarding jurisdiction of Assessing Officer must necessarily be raised before Commissioner/Board within time prescribed under section 124(3), and once assessment proceedings are completed, such issue cannot thereafter be agitated before appellate forums.

51. The learned CIT-DR further relied upon observations of the Hon’ble Delhi High Court in S.S. Ahluwalia (supra) and Allahabad High Court in Hindustan Transport Co. v. Inspecting Assistant Commissioner [1991] 189 ITR 326 (Allahabad), wherein it has been observed that legislature did not intend collection of revenue to be frustrated on account of technical pleas relating to jurisdiction and that allocation of functions amongst authorities is primarily procedural and administrative in nature.

52. The learned CIT-DR further submitted that the judicial precedents relied upon by the assessee are distinguishable on facts and cannot be mechanically applied to the present case. It was contended that the first and foremost objection of the Revenue is that the additional ground itself lacks bona fides and the said issue has to be adjudicated on peculiar facts of the present case alone.

53. The learned CIT-DR reiterated that in the present case, order under section 120(4)(b) of the Act had in fact been passed by CIT-7, Mumbai on 07.08.2007 and existence of such order was specifically recorded by the learned Addl. CIT at page 2 of the assessment order itself. It was submitted that assumption of jurisdiction by the learned Addl. CIT was thus expressly communicated to the assessee during assessment proceedings. Despite such communication, the assessee neither sought copy of said order nor raised any objection for nearly fifteen years. According to the learned CIT-DR, the assessee has failed to furnish any plausible or bona fide explanation for such prolonged silence.

54. The learned CIT-DR further submitted that the factual matrix in present case materially differs from facts involved in decisions relied upon by the assessee and therefore those precedents cannot govern controversy before the Tribunal. It was submitted that none of the decisions cited by the learned AR are judgments of jurisdictional or non-jurisdictional High Courts directly supporting assessee’s plea in context of section 124 after lapse of statutory limitation. On the contrary, Revenue has relied upon several High Court decisions directly supporting its stand.

55. The learned CIT-DR further submitted that certain decisions relied upon by the assessee, particularly Tata Sons Ltd. v. Assistant Commissioner of Income-tax, Circle-2(3) [2017] 162 ITD 450 (Mumbai)/ITA No. 4497/Mum/2005 for A.Y. 2001-02), have in turn relied upon decision of ITAT Delhi Bench in case of Mega Corporation (supra). However, according to the learned CIT-DR, decision of ITAT Delhi Bench in Mega Corporation (supra) stood subsequently reversed by Hon’ble Delhi High Court. Therefore, it was submitted that any decision directly or indirectly resting upon said Tribunal order in Mega Corporation (supra) loses precedential value.

56. The learned CIT-DR also reiterated that contention of the learned AR seeking to treat judgment of Hon’ble Delhi High Court in Mega Corporation (supra) as per incuriam is wholly untenable since Tribunal cannot disregard or declare judgment of High Court as per incuriam.

57. The learned CIT-DR further submitted that many Tribunal decisions relied upon by the assessee have not considered binding observations of Full Bench judgment of Hon’ble Gauhati High Court in case of Smt. Sohani Devi Jain (supra), wherein it has been categorically held that section 124 is not confined merely to territorial jurisdiction and that objections to jurisdiction beyond prescribed limitation are barred. It was therefore contended that such Tribunal decisions rendered without considering aforesaid Full Bench judgment cannot prevail.

58. The learned CIT-DR additionally submitted that reliance placed by the assessee upon judgment of Hon’ble Bombay High Court in Bansilal B. Raisoni& Sons reported in Bansilal B. Raisoni & Sons v. Asstt. CIT, Central Circle-I, Nashik (Bombay) is misplaced. It was submitted that said judgment arose in entirely different factual and legal context involving validity of notice issued under section 153A in absence of search being conducted upon assessee. According to the learned CIT-DR, said case involved inherent lack of jurisdiction to invoke special provisions of section 153A itself and not mere administrative allocation of jurisdiction between one Assessing Officer and another under sections 120 and 124 of the Act. The learned CIT-DR emphasised that in Bansilal B. Raisoni& Sons, challenge was directed against very assumption of jurisdiction to initiate search assessment proceedings under section 153A, whereas in present case learned Addl. CIT had assumed jurisdiction pursuant to valid order passed under section 120(4)(b) by competent authority. It was therefore submitted that said judgment and other similar authorities dealing with invalid invocation of section 153A have no application to controversy arising in present appeal.

59. Summing up his submissions, the learned CIT-DR submitted that the assessee, having consciously failed to avail statutory remedy prescribed under section 124 within stipulated period, is now attempting to convert purely administrative issue concerning allocation of jurisdiction into allegation of inherent lack of jurisdiction. According to the learned CIT-DR, facts on record clearly demonstrate that jurisdiction had been validly assumed by the learned Addl. CIT pursuant to order dated 07.08.2007 passed under section 120(4)(b) by CIT-7, Mumbai and that conduct of assessee in remaining silent for fifteen years disentitles it from invoking discretionary jurisdiction of the Tribunal.

60. The learned CIT-DR accordingly prayed that the additional ground raised by the assessee challenging jurisdiction of the learned Addl. CIT may either not be admitted or, in any event, be decided against the assessee in view of statutory bar contained in section 124 of the Act and judicial precedents relied upon by the Revenue.

61. We shall first deal with the admissibility of the aforesaid additional ground challenging the jurisdiction of the learned Additional Commissioner of Income-tax to frame the assessment under section 143(3) of the Act.

62. We have thoughtfully considered the rival contentions on the preliminary issue regarding admissibility of the aforesaid additional ground challenging the jurisdiction of the Addl. CIT to frame the assessment under section 143(3) of the Act.

63. At this stage, we are only concerned with the limited question as to whether the additional ground deserves to be admitted for adjudication. We are consciously refraining from expressing any opinion on the ultimate sustainability or merits of the jurisdictional challenge raised by the assessee, which shall be examined independently at a subsequent stage.

64. The settled legal position emerging from the judgments of the Hon’ble Supreme Court in the cases of National Thermal Power Co. Ltd. v. CIT (supra) and Jute Corporation of India Ltd. (supra), as also the Full Bench decision of the Hon’ble Bombay High Court in Ahmedabad Electricity Co. Ltd. (supra), is that the Tribunal possesses wide and plenary powers under section 254 of the Act to admit a pure question of law arising from facts already available on record, particularly where adjudication of such issue may have bearing upon the validity of assessment proceedings or determination of correct tax liability. The Hon’ble Supreme Court in the case of NTPC Ltd. (supra) has categorically held that “the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee”, and further observed that there is “no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record”. Similarly, in Jute Corporation of India Ltd. (supra), the Hon’ble Apex Court held that there may be several factors justifying raising of a new plea in appeal and that the appellate authority possesses all plenary powers necessary to entertain such ground in accordance with law and reason. The Full Bench of the Hon’ble Bombay High Court in Ahmedabad Electricity Co. Ltd. (supra) has likewise recognised that the Tribunal is not confined merely to issues arising from the order of the CIT(A) and possesses the widest possible jurisdiction to permit additional grounds to be raised, provided the same arise from the subject matter of assessment proceedings.

65. In the present case, the additional ground raised by the assessee pertains to the legal competence and jurisdiction of the authority who framed the assessment order. The foundational facts necessary for examining such issue are already borne out from the assessment records and no further investigation into fresh facts appears necessary for the limited purpose of entertaining the ground.

66. The objections raised by the Revenue with reference to sections 120, 124 and 127 of the Act, as well as the judicial precedents relied upon by the Ld. DR, undoubtedly raise substantial contentions touching upon the maintainability and ultimate validity of the jurisdictional challenge. However, those aspects relate essentially to the adjudication of the ground on merits. At the stage of deciding admissibility, what is required to be examined is whether the ground raises a legal issue arising from material already available on record and whether the Tribunal possesses jurisdiction to entertain the same.

67. In our considered view, the additional ground satisfies the aforesaid parameters. Merely because the Revenue disputes the correctness or legal sustainability of the jurisdictional objection, the same cannot by itself constitute a ground to refuse admission of the legal plea at the threshold.

68. We are therefore of the considered opinion that the additional ground raised by the assessee deserves to be admitted for adjudication. It is clarified that admission of the additional ground shall not be construed as acceptance of the assessee’s contention on merits. All rival contentions of both sides on the substantive jurisdictional issue are kept expressly open for adjudication at the appropriate stage.

69. Accordingly, the additional ground No.35 raised by the assessee is admitted for adjudication.

70. Coming now to the merits of the additional ground, the short controversy requiring adjudication is whether the assessment order dated 31.12.2008 passed under section 143(3) of the Act by the learned Addl. Commissioner of Income-tax, Range-7(2), Mumbai is without jurisdiction on account of alleged absence of valid authorisation under section 120(4)(b) read with section 2(7A) of the Act and/or absence of transfer order under section 127 of the Act.

71. The primary contention of the assessee is that the learned Addl. CIT could not have exercised powers and functions of an Assessing Officer unless specifically empowered in terms of section 120(4)(b) read with section 2(7A) of the Act and that in absence of valid transfer order under section 127 transferring jurisdiction from the DCIT to the Addl. CIT, the impugned assessment order is void ab initio.

72. Before proceeding further, it would be appropriate to briefly notice the statutory scheme governing jurisdiction of income-tax authorities. Section 2(7A) defines “Assessing Officer” to mean, inter alia, an Assistant Commissioner, Deputy Commissioner, Assistant Director, Deputy Director, Income-tax Officer or Tax Recovery Officer and also includes an Additional Commissioner or Joint Commissioner who is directed under section 120(4)(b) to exercise powers or perform functions of an Assessing Officer.

73. Section 120(4)(b) empowers the Board or competent authority to authorise a Joint Commissioner or Additional Commissioner to exercise powers and perform functions of an Assessing Officer in respect of specified persons or classes of persons. Section 124 deals with jurisdiction of Assessing Officers and subsection (3) thereof specifically provides limitation for calling in question jurisdiction of an Assessing Officer. Section 127, on the other hand, deals with transfer of cases from one Assessing Officer to another.

74. In the present case, the assessment records and the assessment order itself reveal that the learned Addl. CIT had assumed jurisdiction pursuant to an order dated 07.08.2007 passed by CIT-7, Mumbai under section 120(4)(b) of the Act. In fact, paragraph 2 of the assessment order itself specifically records that the Addl. CIT assumed jurisdiction as Assessing Officer pursuant to directions issued by the CIT. Notices under section 143(2) and section 142(1) were thereafter issued by the Addl. CIT and were duly complied with by the assessee during assessment proceedings without raising any objection whatsoever regarding jurisdiction.

75. It is also an admitted position that the assessee never invoked remedy contemplated under section 124(2) or raised objection within limitation prescribed under section 124(3)(a) of the Act. The objection regarding jurisdiction has been raised for the first time before the Tribunal after lapse of nearly fifteen years from completion of assessment.

76. In our considered view, the controversy raised by the assessee pertains essentially to exercise and allocation of jurisdiction amongst income-tax authorities under sections 120 and 124 of the Act and not to inherent lack of jurisdiction in the sense of complete absence of authority under the Act. The learned Addl. CIT is admittedly an income-tax authority recognised under the scheme of the Act and is statutorily capable of acting as an Assessing Officer upon authorisation under section 120(4)(b).

77. The challenge raised by the assessee therefore cannot be equated with cases where proceedings are initiated by an authority having absolutely no jurisdiction under the Act. The dispute, at best, concerns legality or procedural correctness of assumption of jurisdiction by one Assessing Officer vis-a-vis another Assessing Officer within departmental hierarchy.

78. In this regard, the provisions of section 124 assume considerable significance. Section 124(3)(a) specifically provides that no person shall be entitled to call in question jurisdiction of an Assessing Officer after expiry of one month from the date on which notice under section 143(2) is served upon him. The legislative intent underlying the provision is clearly to ensure certainty and finality in matters concerning jurisdictional allocation amongst assessing authorities.

79. We have carefully considered the rival submissions and the judicial precedents relied upon by both sides. The principal contention of the assessee is that the impugned assessment order is void ab initio since the learned Addl. CIT was not specifically empowered under section 120(4)(b) read with section 2(7A) of the Act and further that no valid transfer order under section 127 was passed transferring jurisdiction from the DCIT to the Addl. CIT. In support of such proposition, heavy reliance was placed by the learned AR upon the decisions of the coordinate benches, particularly, in the cases of Tata Sons Ltd. (supra) and Tata Steel Ltd. (supra).

80. In Tata Sons Ltd. (supra), the coordinate bench observed that “assignment of jurisdiction to an officer and its transfer from one officer to the other can be made only through the prescribed process of law” and further held that “the assignment of jurisdiction to an officer and its transfer from one officer to the other can be made only through the prescribed process of law. Section 127 contains provisions regarding process to be followed by the revenue Officers and their powers for transfer of cases from one Assessing Officer to the other.” The Co-ordinate Bench further observed that “it is bounden duty of the revenue to establish the authority and legal competence of its officer to pass the assessment order” and that “consent of the assessee cannot confer jurisdiction to an Assessing Officer who lacked jurisdiction under the law.” The coordinate bench accordingly held that in absence of valid transfer under section 127 and proper authorisation under section 120(4)(b), the assessment order was without jurisdiction.

81. Similarly, in Tata Steel Ltd. (supra), the coordinate bench held that “when the jurisdiction of the Additional Commissioner to conduct scrutiny assessment and pass the assessment order under the Act is under challenge, the Revenue is under an obligation to bring on record the copy of the aforesaid order(s) to justify the basis of authority of the Additional Commissioner to perform the functions, and exercise the powers of an Assessing Officer and pass the assessment order.” The Co-ordinate Bench therein further held that in absence of requisite orders under sections 120(4)(b) and 127, “the impugned final assessment order passed under section 143(3) read with section 144C(13) _was without the jurisdiction.”

82. However, the Revenue has relied upon binding judgments of various Hon’ble High Courts taking a different view regarding scope and applicability of sections 120, 124 and 127 of the Act. The Full Bench judgment of the Hon’ble Gauhati High Court in the case of Smt. Sohani Devi Jain (supra) has specifically held that “Section 124 has not used the word territorial’. The section speaks only of jurisdiction of the ITO. Jurisdiction includes both territorial and other kinds of jurisdiction.” The Hon’ble Full Bench further held that “the objection raised by the assessee only at the appellate stage was hit by section 124(5). The ITO, Jorhat, could not be said to have lacked jurisdiction.”

83. Likewise, the Hon’ble Delhi High Court in the case of S.S. Ahluwalia (supra) observed that “Sections 120, 124 and 127 recognise flexibility and choice” and further that “the Act, therefore, recognised multiple or concurrent jurisdictions.” The Hon’ble High Court further categorically held that “an assessment order passed without making reference to Commissioner/Commissioners under section 124 is not a nullity for want of jurisdiction but it results in irregularity which can be rectified.”

84. Further, in British India Corpn. Ltd. (supra), the Hon’ble Allahabad High Court held that “the question of jurisdiction of the assessing authority cannot be disputed after the completion of the assessment proceedings.”The Hon’ble High Court further observed that where the Assessing Officer had jurisdiction when assessment proceedings commenced, “subsequent change in the jurisdiction, if any, unless brought to the notice of the authority concerned, would not in any manner vitiate the assessment order in the absence of any objection with regard to lack of jurisdiction by the assessee.”

85. We further find that the Hon’ble Delhi High Court in Mega Corporation Ltd. (supra) noticed the Revenue’s contention that “the ACIT’s jurisdiction could have been challenged, if at all, within the one month of his assuming it” and that since the assessee failed to do so, “it was precluded from doing so.” The Hon’ble High Court admitted the Revenue’s appeal specifically on the question “Did the Income Tax Appellate Tribunal (ITAT) fall into error in interpretation of provisions of Section 124(3)(a) and holding that the ACIT could not have completed the assessment by virtue of Section 120(4)(b)?”

86. In the present case, unlike facts before the coordinate benches, including in Tata Sons Ltd. (supra) and Tata Steel Ltd. (supra), the assessment order itself specifically records existence of authorisation dated 07.08.2007 issued by CIT-7, Mumbai under section 120(4)(b) empowering the Addl. CIT to exercise powers and functions of Assessing Officer. It is also not in dispute that notices under sections 143(2) and 142(1) were thereafter issued by the learned Addl. CIT and assessment proceedings were participated in by the assessee without any objection regarding jurisdiction at any stage contemplated under section 124 of the Act.

87. Thus, the controversy before us does not involve a case where an authority wholly alien to the statutory framework of the Act assumed jurisdiction. The learned Addl. CIT is admittedly an income-tax authority recognized under the Act and statutorily capable of exercising powers of Assessing Officer subject to authorization contemplated under section 120(4)(b). The dispute essentially concerns validity or sufficiency of internal authorisation and allocation of jurisdiction amongst departmental authorities.

88. Having regard to the ratio laid down by the Hon’ble Full Bench of the Gauhati High Court in Smt. Sohani Devi Jain (supra), and the judgments of the Hon’ble Delhi High Court in S.S. Ahluwalia (supra) and Mega Corporation Ltd. (supra), as also the judgment of the Hon’ble Allahabad High Court in British India Corporation Ltd. (supra), we are of the considered view that objections relating to assumption or exercise of jurisdiction by one assessing authority vis-a-vis another are substantially governed by section 124 of the Act and cannot ordinarily be permitted to invalidate completed assessments where no timely objection was raised before the departmental authorities themselves.

89. We are conscious that the coordinate bench decisions relied upon by the assessee, particularly in the cases of Tata Sons Ltd. (supra) and Tata Steel Ltd. (supra), have taken a different view in peculiar factual situations where the Revenue had failed to produce any authorization under section 120(4)(b) or transfer order under section 127 despite specific directions issued by the Tribunal. However, the factual position in the present case stands materially distinguished. In the instant case, the assessment order itself specifically records that jurisdiction was assumed by the learned Addl. CIT pursuant to order dated 07.08.2007 passed by the CIT-7, Mumbai under section 120(4)(b) of the Act authorizing the Addl. CIT to exercise powers and perform functions of the Assessing Officer in the assessee’s case. Thus, unlike the facts before the coordinate benches relied upon by the assessee, existence of authorisation and assumption of jurisdiction was expressly disclosed in the assessment order itself and remained within the knowledge of the assessee throughout the assessment proceedings. Further, no objection regarding such assumption of jurisdiction was raised by the assessee within the statutory framework contemplated under section 124 of the Act. Therefore, having regard to the peculiar facts of the present case and keeping in view the binding nature of the judgments of the Hon’ble High Courts relied upon by the Revenue, we are unable to persuade ourselves to accept the contention of the assessee that the impugned assessment order is void ab initio for want of jurisdiction.

90. Before parting with the issue, we also deem it appropriate to briefly deal with the objection of the Revenue regarding bona fides of the jurisdictional challenge raised by the assessee at such belated stage. The learned CIT-DR had specifically contended that the assessee was fully aware from inception that the assessment proceedings were being conducted by the learned Addl. CIT and that paragraph 2 of the assessment order itself expressly recorded assumption of jurisdiction pursuant to order dated 07.08.2007 passed by CIT-7, Mumbai under section 120(4)(b) of the Act. Despite such explicit disclosure in the assessment order itself, the assessee neither sought copy of the said order nor raised any objection regarding jurisdiction either during assessment proceedings or before the learned CIT(A) for a considerably long period of time.

91. The learned CIT-DR had further pointed out that the assessee had actively participated in assessment proceedings before the learned Addl. CIT without any demur whatsoever and that the objection regarding jurisdiction came to be raised only after substantial lapse of time. It was also contended that the affidavit filed on behalf of the assessee regarding alleged nonreceipt of the order under section 120(4)(b) lacked evidentiary value since the deponent was not associated with the assessee company during the relevant period when jurisdiction was assumed by the learned Addl. CIT.

92. Though we have admitted the additional ground by applying the settled principles governing admission of pure legal grounds, at the same time, we find considerable force in the objection of the Revenue that the conduct of the assessee does raise certain doubts regarding bona fides of the belated jurisdictional challenge. As already observed hereinabove, the assessment order itself specifically referred to the order dated 07.08.2007 passed by CIT-7, Mumbai under section 120(4)(b) authorizing the learned Addl. CIT to exercise powers and functions of Assessing Officer. Despite such clear reference in the assessment order itself, the assessee admittedly neither invoked remedy under section 124 within prescribed period nor sought any clarification or copy of the authorization order for a substantially long duration.

93. We also find merit in the contention of the Revenue that the objection regarding jurisdiction was not raised contemporaneously when assessment proceedings were actually conducted by the learned Addl. CIT, despite the assessee being fully aware of the authority exercising jurisdiction. Though such conduct by itself may not preclude admission of a legal ground where jurisdictional issues are involved, the same nevertheless constitutes a relevant surrounding circumstance while appreciating the overall factual matrix and merits of the controversy.

94. The learned AR contended that the judgment of the Hon’ble Delhi High Court in the case of Mega Corporation Ltd. (supra) was rendered per incuriam inasmuch as certain earlier judgments including those dealing with inherent lack of jurisdiction and absence of valid authorisation under section 120(4)(b) were allegedly not brought to the notice of the Hon’ble Court. It was thus submitted that the said decision ought not to be followed.

95. We are unable to accept the aforesaid contention. Once a judgment is rendered by a Hon’ble High Court after considering the statutory provisions and rival submissions, it is not open for us to sit in judgment over correctness thereof and declare the same as per incuriam. Judicial discipline mandates that subordinate judicial forums are bound by decisions of constitutional courts so long as such judgments continue to hold the field. In fact, we find that the Hon’ble Delhi High Court in Mega Corporation Ltd. (supra) specifically examined the precise controversy relating to exercise of jurisdiction by ACIT/Addl. CIT and applicability of section 124(3)(a). After considering sections 2(7A), 120 and 124, the Hon’ble Court held as under:

“Section 124(3)(a) enacts a statutory bar as it were to the question of jurisdiction.”

96. The Hon’ble Court thereafter further observed:

“Secondly, even if for some reason, the assessee were unaware of the notification, it became aware that the ACIT was exercising jurisdiction when it received notice from that official in August 2008. Since that was in continuation of the proceeding by the DCIT it could well have been urged by the assessee within the stipulated time that the said officer, ACIT did not possess jurisdiction. Its failure to do so within the stipulated time, i.e. one month after receipt of notice which was in fact a condition of Section 143(2) proceeding and was treated as such by the assessee precluded it from urging lack of jurisdiction.”

97. The Hon’ble High Court ultimately answered the issue in favour of Revenue by holding:

“The assessee, however, contended its omission by not urging this ground before the CIT(A) in the first ground but urging belatedly before the ITAT; precisely the situation which the provision seeks to eliminate.”

98. Thus, the very contention now advanced before us regarding challenge to jurisdiction of Addl. CIT/ACIT after completion of assessment proceedings stood directly examined and rejected by the Hon’ble Delhi High Court.

99. Even otherwise, the doctrine of per incuriam is to be sparingly applied by courts of coordinate or superior jurisdiction and not by subordinate appellate forums like the Tribunal. As long as the judgment continues to operate and has neither been stayed nor overruled, this Tribunal remains bound to follow the same irrespective of reservations canvassed by either party regarding correctness thereof. Accordingly, the contention of the assessee that the judgment in Mega Corporation Ltd. (supra) should be disregarded as per incuriam is rejected.

100. Accordingly, while we have entertained and adjudicated the additional ground in exercise of our appellate jurisdiction under section 254 of the Act, the surrounding facts and circumstances pointed out by the Revenue materially weaken the assessee’s plea that the alleged defect in jurisdiction was wholly unknown to it during earlier proceedings.

101. Accordingly, the additional ground No.35 raised by the assessee is dismissed.

Additional Ground relating to beneficial rate in respect of DDT

102. We shall now take up the second additional ground raised by the assessee relating to applicability of beneficial rate prescribed under Article 10 of the India-Germany Double Taxation Avoidance Agreement (“DTAA”) in respect of Dividend Distribution Tax (“DDT”) paid under section 115-O of the Act.

103. In support of the aforesaid additional ground, the learned AR submitted that the issue raised is a pure legal issue arising from undisputed facts already available on record and therefore no further investigation into facts is required.

104. Referring to the factual matrix, the learned AR submitted that during the year under consideration the assessee paid dividend aggregating to Rs. 29,82,45,627/- to its shareholders, which was subjected to Dividend Distribution Tax (“DDT”) under section 115-O of the Act at the rate of 13.069%. It was submitted that out of the aforesaid dividend, dividend amounting to Rs. 16,45,71,937/- was paid to Siemens AG, Germany, being the promoter shareholder of the assessee company. According to the assessee, such dividend ought to have been subjected to tax at the concessional treaty rate of 10% under Article 10 of the India-Germany DTAA and consequently DDT payable would work out to Rs. 1,64,57,194/- as against actual DDT paid of Rs. 2,15,07,496/-. It was accordingly contended that excess DDT of Rs. 50,50,303/- had been paid by the assessee.

105. The learned AR further relied upon the judgment of the Hon’ble Bombay High Court in the case of Colorcon Asia (P.) Ltd. v. Joint Commissioner of Income-tax [2026] 486 ITR 476 (Bombay) and particularly referred to paragraph nos. 55 to 61 thereof to contend that beneficial DTAA rate would be applicable even in respect of DDT paid under section 115-O of the Act. Reliance was also placed upon the decision of the coordinate bench in the case of Hindustan Unilever Ltd. v. Deputy Commissioner of Income-tax (Mumbai – Trib.) and specifically paragraph nos. 80 and 81 thereof, wherein following the judgment of the Hon’ble Bombay High Court, relief had been granted in respect of excess DDT paid beyond treaty rate.

106. On strength of the aforesaid judicial precedents, the learned AR submitted that the assessee is entitled to refund of excess DDT paid over and above the rate prescribed under the India-Germany DTAA and accordingly prayed that suitable directions be issued to the Assessing Officer to grant consequential refund of Rs. 50,50,303/-.

107. Per contra, the learned CIT-DR opposed admission of the aforesaid additional ground and submitted that the issue sought to be raised by the assessee cannot be adjudicated merely on the basis of facts presently available on record. The learned CIT-DR invited our attention to a very recent decision of the coordinate bench, in the case of Assistant Commissioner of Income-tax v. Citigroup Global Markets India (P.) ltd. (Mumbai – Trib.)/ITA No. 7871/Mum/2025 and CO No. 34/Mum/2026 dated 27.03.2026, wherein according to him, the Co-ordinate Bench had declined to admit an identical additional ground relating to application of DTAA rate on DDT on the ground that foundational and mandatory facts necessary for adjudication of the claim were not available on record.

108. Elaborating the aforesaid objection, the learned CIT-DR submitted that Form No. 10F prescribed under Rule 21AB read with section 90 of the Act and Tax Residency Certificate (“TRC”) of the non-resident shareholder are mandatory jurisdictional documents for claiming treaty benefit under the applicable DTAA. It was contended that neither Form No. 10F nor the TRC of Siemens AG, Germany, was furnished either before the Assessing Officer or before the learned CIT(A), nor are the same forming part of the assessment records presently available before the Bench.

109. The learned CIT-DR further submitted that Form No. 10F itself contains various material particulars including status of the assessee, country of incorporation or residence, tax identification number, period for which residential status is applicable and address of the non-resident in the treaty jurisdiction, and therefore existence and verification of such statutory documents constitute foundational facts necessary for adjudication of treaty entitlement. According to the learned CIT-DR, in absence of such primary facts being available on record, the additional ground cannot be characterised as a pure legal ground requiring no further factual enquiry.

110. The learned CIT-DR accordingly submitted that the facts of the present case are materially identical to those before the coordinate bench in Citigroup Global Markets India Pvt. Ltd. (supra), inasmuch as material facts pertaining to DTAA entitlement are not available on record. It was therefore contended that the additional ground deserves to be rejected at the threshold itself for want of foundational facts necessary to adjudicate the claim raised by the assessee.

111. We have thoughtfully considered the rival submissions on the issue of admissibility of the aforesaid additional ground relating to applicability of DTAA rate to dividend distribution tax paid under section 115-O of the Act. We have also carefully examined the judicial precedents relied upon by both the parties.

112. The assessee has contended that the aforesaid ground is purely legal in nature and all material facts are already available on record. Reliance, again, has been placed upon the judgments of the Hon’ble Supreme Court in the cases of National Thermal Power Corporation (supra) and Jute Corporation of India Ltd. (supra) for the proposition that the Tribunal is empowered to admit a pure legal ground even if not raised before the lower authorities.

113. On the other hand, the learned CIT-DR strongly opposed admission of the aforesaid additional ground and submitted that the issue sought to be raised by the assessee cannot be adjudicated merely on the basis of facts presently available on record. According to the Revenue, mandatory foundational facts necessary to adjudicate treaty entitlement are absent from assessment records. Specific reference was made to Form No.10F prescribed under Rule 21AB and TRC of the non-resident shareholder Siemens AG, Germany, which according to the Revenue were neither furnished before the Assessing Officer nor before the learned CIT(A).

114. The learned CIT-DR further placed heavy reliance upon the very recent decision of the coordinate bench in the case of Citigroup Global Markets India Pvt. Ltd. (supra), wherein according to him, the Co-ordinate Bench declined to admit an identical additional ground for want of foundational facts such as Form No.10F and TRC.

115. Before proceeding further, we may briefly note that the Hon’ble Supreme Court in the cases of National Thermal Power Co. Ltd. v. CIT (supra) and Jute Corporation of India Ltd. (supra) has consistently held that the Tribunal possesses wide powers to admit a pure legal ground arising from facts already available on record, particularly where such ground has bearing upon correct determination of tax liability and does not require fresh investigation of facts.

116. The aforesaid principles clearly establish that a pure legal issue can be permitted to be raised before the Tribunal provided adjudication thereof does not require investigation into fresh facts outside the existing record. The crucial test therefore is whether all foundational and material facts necessary to adjudicate the legal claim are already available on record.

117. At this stage, it becomes necessary to notice the recent decision of the Hon’ble Bombay High Court in the case of Colorcon Asia (P.) Ltd. (supra), wherein the Hon’ble jurisdictional High Court held that DDT paid under section 115-O is entitled to benefit of treaty rate under the relevant DTAA. The Hon’ble High Court held as under:

“DDT is squarely covered under article 11 of the DTAA. On its plain reading the payment being covered under definition of dividend under article 11(3) which is paid by the Company, resident of India to a resident of UK and therefore, article 11(1) is automatically triggered, consequently triggering the restriction in rate of tax under article 11(2).”

118. The Hon’ble Bombay High Court further observed:

“Section 90(2) allow the appellant to apply the lower rate under the DTAA and article 11(2) restrict tax rate of such dividend income to 10 per cent and there is no embargo in article 11 of the DTAA on the appellant to apply the lower tax rate stipulated in article 11(2).”

119. Following the aforesaid judgment of the Hon’ble jurisdictional High Court, the coordinate bench in the case of Hindustan Unilever Ltd. (supra) held as under:

“Where an Indian company, paid dividend to its non-resident shareholder company, since such payment was in nature of dividend covered under definition of ‘dividend’ under DTAA and section 115-O, assessee was entitled to restrict tax rate on dividends distributed by it to its non-resident shareholder company to rate of tax provided under DTAA.”

120. After reproducing the relevant paras from the judgement of Colorcon Asia (P.). Ltd. (supra), the Co-ordinate Bench restored the issue to the file of the AO for de novo adjudication, after necessary examination of various aspects, such as applicability of the DTAA, rate of DDT levied under section 115-O of the Act visa-vis the rate of tax on dividend provided in the respective DTAA, etc.

121. However, it is equally important to note that in the case relied upon by the Revenue, namely Citigroup Global Markets India Pvt. Ltd. (supra), the coordinate bench appears to have proceeded on the footing that Form No.10F and TRC were not available on record and therefore material foundational facts necessary for adjudication of DTAA entitlement were absent.

122. In the present case, however, we find that the assessee has specifically identified the non-resident shareholder namely Siemens Aktiengesellschaft, Germany and the exact quantum of dividend distributed to such shareholder during the relevant year. The assessee has also specifically quantified the alleged excess DDT paid. More importantly, the entitlement sought to be canvassed by the assessee arises directly from the subsequent declaration of law by the Hon’ble jurisdictional High Court in Colorcon Asia (P.) Ltd. (supra), which admittedly was not available when the assessment proceedings were completed.

123. We further find that the issue sought to be raised substantially turns upon interpretation and applicability of treaty provisions vis-a-vis section 115-O of the Act in light of subsequent binding judicial pronouncement of the Hon’ble jurisdictional High Court. The relevant facts relating to declaration of dividend, identity of non-resident shareholder and payment of DDT are already borne out from record. The objection of the Revenue regarding Form No.10F and TRC pertains more to ultimate allowability of treaty claim rather than to maintainability of the legal ground itself.

124. At the stage of admission of additional ground, we are not expected to conclusively adjudicate the claim on merits. The limited question is whether the assessee should be permitted to urge the legal contention before the appellate forum. In our considered opinion, once the foundational facts relating to payment of dividend to a specifically identified treaty resident shareholder and payment of DDT are already available on record, the assessee cannot be shut out from canvassing the legal plea merely because certain supporting treaty documents may require verification at the stage of adjudication on merits.

125. We are therefore unable to accept the contention of the Revenue that the additional ground deserves outright rejection at threshold. The judgments of the Hon’ble Supreme Court in National Thermal Power Co. Ltd. (supra) and Jute Corporation of India Ltd. (supra) confer wide powers upon the Tribunal to admit a pure legal ground where adjudication thereof has bearing on correct determination of tax liability.

126. Having admitted the additional ground for adjudication, we shall now examine whether the assessee has made out a prima facie legally sustainable claim warranting restoration of the issue to the file of the Assessing Officer for verification.

127. The core contention of the assessee is that dividend amounting to Rs.16,45,71,937/- was distributed during the relevant previous year to Siemens Aktiengesellschaft, Germany and DDT amounting to Rs.2,15,07,496/- was paid under section 115-O of the Act at the domestic rate of 13.069%. According to the assessee, in view of Article 10 of the India-Germany DTAA, the tax incidence in respect of such dividend could not have exceeded 10%, and therefore excess DDT of Rs.50,50,303/-deserves to be refunded.

128. We find that this controversy now stands substantially governed by the judgment of the Hon’ble jurisdictional Bombay High Court in the case of Colorcon Asia (P.) Ltd. (supra). The Hon’ble High Court, after considering the scheme of section 115-O and treaty provisions, held that though DDT is payable by the domestic company, the levy is intrinsically connected with the dividend income of the shareholder and therefore the DTAA rate applicable to dividend income cannot be ignored while computing DDT liability.

129. The Hon’ble Bombay High Court in para 59 of the judgment observed as under:

“The fact that the dividend is not taxable in the hands of the shareholder but in the hands of the domestic company would not take away the fact that the tax paid by the domestic company under section 115-O is nothing but a tax on dividend and therefore the benefit of DTAA, if any available, cannot be denied.”

130. Further, in para 61, the Hon’ble High Court held:

“Once the treaty allocates taxing rights and also prescribes a rate of tax in respect of dividend income, the domestic law cannot impose tax at a higher rate indirectly through the mechanism of section 115-O.”

131. The aforesaid judgment of the Hon’ble jurisdictional High Court constitutes binding precedent and materially alters the legal position which earlier stood concluded against the assessee by the Special Bench decision in Total Oil India Pvt. Ltd. relied upon by the assessee itself in its application for raising additional ground.

132. We further find that the assessee has specifically identified:

the non-resident shareholder namely Siemens AG, Germany;

ii.

the amount of dividend distributed;

iii.

the quantum of DDT paid; and

iv.

the treaty provision invoked, namely Article 10 of India-Germany DTAA.

133. Thus, the foundational facts necessary to examine the legal claim are broadly available on record. The assessee has specifically contended that dividend amounting to Rs.16,45,71,937/- was distributed to Siemens AG, Germany and DDT amounting to Rs.2,15,07,496/- was paid under section 115-O of the Act at the domestic rate of 13.069%, whereas according to the assessee, the tax incidence in terms of Article 10 of the India-Germany DTAA could not have exceeded 10%, thereby resulting into excess levy of DDT amounting to Rs.50,50,303/-.

134. The objection of the learned CIT-DR, however, is that the assessee has not placed on record Tax Residency Certificate (“TRC”), Form No.10F and other treaty related foundational documents as contemplated under section 90(4), section 90(5) read with Rule 21AB of the Income-tax Rules. It was submitted that entitlement to treaty protection is not automatic and the assessee must necessarily establish compliance with statutory treaty conditions before any relief can be granted. Reliance in this regard has been placed upon the recent decision of the coordinate bench in the case of Citigroup Global Markets India Pvt. Ltd. (supra), wherein according to the learned CIT-DR, the Tribunal declined to entertain a similar additional ground noticing absence of foundational treaty documents and factual material necessary to adjudicate treaty entitlement.

135. We have carefully considered the aforesaid objection. It is true that section 90(4) mandates furnishing of TRC as condition precedent for claiming DTAA benefit and Rule 21AB further prescribes furnishing of Form No.10F containing prescribed particulars where all details are not available in the TRC itself. The statutory framework thus contemplates that treaty entitlement cannot be granted merely on assertion but must be substantiated through prescribed documentary requirements.

136. In the case of Citigroup Global Markets India Pvt. Ltd. (supra)relied upon by the learned CIT-DR, the coordinate bench was dealing with an additional ground seeking application of DTAA rate on DDT paid under section 115-O in respect of dividend distributed to foreign shareholders namely Seven Worlds Holdings, Citigroup Financial Products Inc.and Citigroup Global Markets Pacific Holding Company Inc. Even in that case, identities of the foreign shareholders and the treaty claim were specifically disclosed. However, the coordinate bench found that foundational treaty documents such as TRC and Form No.10F were not available on record and therefore the issue could not be adjudicated merely as a pure legal issue in absence of verification of treaty eligibility conditions. The coordinate bench accordingly declined to entertain the claim at appellate stage in absence of foundational treaty material.

137. Thus, the ratio emerging from the aforesaid decision is not that a DTAA-based claim in respect of DDT can never be entertained through additional ground. Rather, the underlying principle is that treaty relief cannot be granted mechanically without verification of statutory treaty requirements contemplated under section 90(4), section 90(5) and Rule 21AB of the Rules.

138. In our considered opinion, the aforesaid objection of the learned CIT-DR certainly has relevance while examining ultimate allowability of treaty relief on merits. However, at the same time, the same cannot be elevated to a threshold bar completely shutting out examination of the legal claim itself, particularly when the legal position regarding applicability of DTAA rate to DDT now stands governed by the binding judgment of the Hon’ble jurisdictional Bombay High Court in the case of Colorcon Asia (P.) Ltd. (supra). As noticed hereinabove, the Hon’ble Bombay High Court has categorically held that though DDT is payable by the domestic company, the levy remains intrinsically connected with dividend income of the shareholder and therefore treaty protection cannot be denied while computing DDT liability.

139. We further find that the coordinate bench in the case of Hindustan Unilever Ltd. (supra), while dealing with an identical controversy concerning applicability of the beneficial treaty rate to tax paid under section 115-O of the Act, has extensively relied upon and reproduced the judgment of the Hon’ble Bombay High Court in Colorcon Asia (P.) Ltd. (supra).

140. The Co-ordinate Bench, after taking note of the ratio laid down by the Hon’ble jurisdictional High Court that the levy under section 115-O is in substance a tax on dividend distribution and that the beneficial provisions of an applicable DTAA cannot be denied merely because the incidence of collection is fastened upon the domestic company, restored the matter for verification of the foundational facts necessary for grant of treaty relief. The Co-ordinate Bench thus recognized that the issue is not merely academic but raises a substantial legal claim founded upon the law declared by the Hon’ble jurisdictional High Court.

141. The aforesaid decision, in our considered view, lends considerable support to the contention of the assessee that the claim for application of the beneficial rate prescribed under Article 10 of the India-Germany DTAA to dividend distribution tax paid under section 115-O of the Act cannot be regarded as ex facie untenable or devoid of merit. At the same time, the coordinate bench did not grant relief as a matter of course and instead considered it necessary to verify the foundational facts relevant for claiming treaty benefit. Therefore, while the legal claim raised by the assessee deserves consideration in light of the law declared in Colorcon Asia (P.) Ltd. (supra), the actual entitlement to such relief necessarily remains subject to examination of the requisite factual and documentary conditions prescribed under the treaty.

142. The assessee would therefore necessarily be required to establish:

tax residency of Siemens AG, Germany;

ii.

availability and validity of TRC;

iii.

compliance with Form No.10F requirements;

iv.

beneficial ownership and treaty eligibility;

applicability of Article 10 of the India-Germany DTAA; and

vi.

correctness of computation of excess DDT claimed.

143. We also find that the learned CIT-DR had further submitted that though the assessee has relied upon the judgment of the Hon’ble jurisdictional Bombay High Court in the case of Colorcon Asia (P.) Ltd. (supra), the Revenue has already sought reconsideration/reference of the said issue before a larger bench of the Hon’ble High Court and therefore the issue has not attained finality.

144. We have duly considered the aforesaid submission. However, mere pendency of proceedings seeking reconsideration before a larger bench or pendency of further challenge against a judgment does not dilute the binding nature of a judgment presently holding the field. Unless the operation of the judgment is stayed, reversed or overruled by a competent forum, the same continues to constitute binding precedent upon subordinate authorities and we are duty bound to follow the law as declared by the Hon’ble jurisdictional High Court. In this regard, the settled principle laid down by the Hon’ble Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd. [1991] 55 ELT 433 (SC), clearly mandates that subordinate authorities are bound to follow binding appellate decisions notwithstanding pendency of further proceedings against such judgments.

145. Accordingly, at this stage, we are unable to accept the contention of the Revenue that the claim of the assessee should be rejected merely because the Revenue has sought reconsideration of the judgment before a larger bench. Nevertheless, since the issue requires verification of foundational treaty documents and related factual aspects, we deem it proper, following the broad framework indicated by the coordinate bench in Citigroup Global Markets India Pvt. Ltd. (supra), to restore the issue to the file of the Assessing Officer for limited factual verification rather than adjudicating the treaty entitlement conclusively at this stage on incomplete factual record.

146. Before parting, we may also briefly examine the statutory framework governing grant of consequential relief in cases involving claim of excess DDT allegedly paid under section 115-O of the Act.

147. Prior to abolition of DDT regime by the Finance Act, 2020, section 115-O imposed additional income-tax upon the domestic company declaring, distributing or paying dividend and such payment was treated as discharge of tax liability under a special charging mechanism. At the relevant point of time, the statute did not provide any separate or specific machinery for subsequent treaty-based recomputation of DDT liability pursuant to later judicial interpretation of DTAA provisions. Consequently, claims of this nature ordinarily arose either:

during assessment proceedings;

ii.

in appellate proceedings; or

iii.

through rectification/refund proceedings consequent upon subsequent judicial pronouncements.

148. We further find that after the judgment of the Hon’ble jurisdictional Bombay High Court in the case of Colorcon Asia (P.) Ltd. (supra), the available procedural avenues for seeking such consequential relief may broadly include:

adjudication in pending appellate proceedings;

rectification under section 154 where permissible in law;

consequential refund pursuant to appellate directions; or

recourse to section 119(2)(b) before the competent authority in appropriate cases involving procedural or limitation related difficulties.

149. In the present case, since the assessee’s appeal itself is pending before us and the additional ground has already been admitted for adjudication, we are of the considered view that the interests of substantial justice would be better served by restoring the issue to the file of the Assessing Officer for limited factual verification and consequential adjudication rather than rejecting the claim at the threshold merely because the requisite treaty-related documents were not examined during the original assessment proceedings.

150. We may observe that a TRC issued by the tax authorities of the contracting State constitutes the primary statutory evidence of residence for the purposes of claiming treaty benefits under section 90 of the Act, while Form No.10F supplements the particulars necessary for availing treaty relief where such particulars are not fully contained in the TRC itself. Both these requirements are intended to facilitate verification of treaty entitlement and are essentially evidentiary in nature. Therefore, where the foundational facts relating to treaty eligibility otherwise exist, the claim ought not to be rejected merely on technical or procedural considerations without affording an opportunity to furnish and verify the requisite documents. The doctrine of substance over form, repeatedly recognized in tax jurisprudence, requires that a legitimate treaty claim be examined on its substantive merits rather than being defeated solely on account of procedural deficiencies capable of being cured through verification.

151. Accordingly, the Assessing Officer shall verify:

existence and validity of the Tax Residency Certificate (“TRC”) of Siemens AG, Germany for the relevant period;

ii.

compliance with the requirements of Form No.10F and other supporting treaty documentation;

iii.

residential status and treaty eligibility of Siemens AG, Germany under the India-Germany DTAA;

iv.

fulfilment of beneficial ownership and other relevant treaty conditions, if applicable;

applicability of Article 10 of the India-Germany DTAA to the dividend distribution in question;

vi.

correctness of the computation of excess DDT claimed to have been paid by the assessee; and

vii.

consequential relief or refund, if any, admissible in accordance with law.

152. The Assessing Officer shall thereafter adjudicate the claim afresh in accordance with law and in the light of the binding judgment of the Hon’ble Bombay High Court in Colorcon Asia (P.) Ltd. (supra), after affording adequate opportunity of hearing to the assessee and after considering all documentary evidence that may be furnished in support of the treaty claim. Accordingly, the additional ground raised by the assessee is allowed for statistical purposes.

153. The remaining grounds raised by the assessee pertain to various corporate tax issues arising from the assessment order passed under section 143(3) of the Act.We shall now proceed to deal with the aforesaid grounds issue-wise and ground-wise separately.

Addition on account of alleged excess provision for Liquidated Damages („LD’)

154. Ground Nos. 3 and 4 raised by the assessee relate to disallowance sustained by the learned CIT(A) to the extent of Rs.5,50,83,670/-, being 50% of the provision made towards liquidated damages (“LD”). Ground No.4 is an alternative ground contending that the disallowance, if any, merely results in a timing difference and therefore no adjustment is warranted in view of the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income-tax v. Excel Industries Ltd. [2013] (SC)/Civil Appeal No.125 of 2013.

155. During the course of assessment proceedings, the Assessing Officer observed that the assessee had created total provision for liquidated damages amounting to Rs.11,01,67,341/- during the relevant previous year. The Assessing Officer noted that the provision account reflected opening balance, fresh provision created during the year, utilisation during the year and reversals made during the year. The details recorded by the Assessing Officer were as under:

Particulars	Amount
Opening balance	Rs.35,89,57,410/-
Add: Fresh provisions made during the year	Rs.11,01,67,341/-
Less: Utilised during the year	Rs.2,36,07,354/-
Less: Released or reversed during the year	Rs.3,05,06,069/-

156. The assessee explained before the Assessing Officer that the company followed consistent accounting policy of creating provisions for LD wherever delays occurred in execution of projects or delivery of goods in terms of contractual conditions. It was submitted that whenever contracts contained LD clauses, provision was created immediately upon anticipated delay in execution. It was further explained that where final settlement with customers resulted in lower liability or no liability, the unutilized provisions were subsequently reversed and offered to tax. The assessee also submitted that the provisions were supported by detailed calculations and internal vouchers.

157. The Assessing Officer thereafter examined contract-wise details in respect of provisions exceeding Rs.10 lakhs. The assessment order discusses several illustrative instances involving customers such as Jindal Steel & Power Ltd., UPCL, Hindalco, BSES Yamuna Power Ltd., Tata Paricha, Tata Power Co. Ltd., Diesel Locomotive Works and Western Railway. The Assessing Officer noted that in these cases the provisions had been created with reference to contractual LD clauses prescribing specified percentages for delayed completion or delayed delivery.

158. However, after analysing the examples, the Assessing Officer concluded that the assessee had merely created provisions in anticipation of claims that may possibly be made by customers in future and that no enforceable or crystallized liability had arisen during the relevant year. According to the Assessing Officer, no actual claims had been lodged by customers in many cases and the provisions were based merely upon existence of LD clauses in the contracts. The Assessing Officer further observed that execution delays could arise due to reciprocal obligations of customers themselves, including delayed approvals, delayed release of site fronts, delayed advances and other operational factors.

159. The Assessing Officer further held that breach of contractual terms only gives rise to a right to claim damages and such right does not automatically crystallize into enforceable liability. According to the Assessing Officer, the eventual liability, if any, would depend upon negotiations, counterclaims, arbitration or dispute resolution process between parties. The Assessing Officer therefore held that till an actionable claim is established through due process, no accrued liability could be said to exist.

160. For arriving at the aforesaid conclusion, the Assessing Officer relied upon several judicial precedents and held that the provision represented contingent liability and accordingly disallowed the entire provision of Rs.11,01,67,341/-.

161. In appeal, the learned CIT(A) observed that similar issue had arisen in assessee’s own case for A.Y. 2007-08. The learned CIT(A) noted that in A.Y. 2007-08 he had accepted the proposition that provision for LD was otherwise allowable expenditure but had restricted the disallowance on grounds of reasonableness. The learned CIT(A) observed as under:

“Since, I had taken a decision in AY 2007-08 that provision for liquidated damages is an allowable expense and has confined myself to reasonableness, I stick to same decision. Accordingly, I hold that the expenses per se is eligible expense and modify disallowance based on reasonableness.”

162. The learned CIT(A) thereafter referred to paragraphs 15 and 16 of his appellate order for A.Y. 2007-08 wherein utilisation pattern of provisions created in earlier years had been analysed. The learned CIT(A) observed that utilisation percentages in earlier years fluctuated substantially and therefore scaling down of the provision was justified on reasonable basis. The learned CIT(A) also accepted the assessee’s alternative contention that where provisions disallowed in earlier years were subsequently written back and offered to tax, corresponding adjustment should be granted to avoid double taxation.

163. Following the reasoning adopted in A.Y. 2007-08 and for the sake of consistency, the learned CIT(A) held that though provision for LD was in principle allowable business expenditure, the extent of provision created by the assessee was excessive. The learned CIT(A), therefore, restricted the disallowance to 50% of the total provision and sustained addition of Rs.5,50,83,670/- while granting partial relief to the assessee.

164. During the course of hearing before us the learned AR reiterated that the assessee is engaged in diversified business activities including manufacturing, turnkey projects and trading operations, wherein contractual obligations relating to timely delivery and project execution are integral to business operations. It was submitted that wherever contractual timelines were likely to be exceeded, the assessee consistently created provision towards liquidated damages (“LD”) in accordance with contractual terms and its regularly followed accounting policy.

165. The learned AR submitted that during the year under consideration the assessee had created LD provision amounting to Rs.13,67,42,995/- and furnished movement of the provision account showing opening balance, fresh creation, release/utilisation and closing balance. It was specifically pointed out that the opening balance of LD provision had been wrongly mentioned by the Assessing Officer in the assessment order and the correct figures were furnished before the authorities below.

166. The learned AR further submitted that the Assessing Officer erred in treating the provision as contingent liability merely because no formal claim had yet been raised by customers. According to the learned AR, in contracts entered into with Government undertakings and Public Sector Enterprises, LD clauses are generally non-negotiable and are mechanically enforceable once contractual milestones are breached. It was contended that the liability arose from contractual obligations themselves and not from subsequent adjudication or dispute resolution.

167. The learned AR submitted that the assessee follows mercantile system of accounting and accordingly provision for LD was created on accrual basis whenever delivery or commissioning timelines exceeded or were likely to exceed contractual schedules. It was argued that the provision represented foreseeable business loss determined on scientific and contractual basis. The learned AR further submitted that wherever subsequent negotiations resulted in waiver or reduction of liability, corresponding provisions were reversed and offered to tax in the year of reversal.

168. In support of the aforesaid contention, reliance was placed upon the decision of the Mumbai Bench of the Tribunal in the case of Jacobs Engineering India (P.) Ltd. v. Assistant Commissioner of Income-tax 8(2), Mumbai (Mumbai), wherein provision towards foreseeable contractual losses was held allowable by relying upon the judgment in Commissioner of Income-tax v. Woodward Governor India (P.) Ltd. [2007] 210 CTR 354/294 ITR 451 (Delhi). Reliance was also placed upon the judgment of the Hon’ble Supreme Court in Bharat Earth Movers v. CIT [2000] 162 CTR 325/245 ITR 428 (SC) for the proposition that if business liability has definitely arisen during the accounting year, deduction cannot be denied merely because liability may have to be quantified and discharged at future date.

169. The learned AR further drew support from Accounting Standard principles and Notification issued under section 145(2), emphasising the principle of prudence requiring recognition of known liabilities and foreseeable losses even where exact quantification may not be possible. It was submitted that the provisions were duly supported by vouchers, file notes, internal calculations and customer contracts prepared and approved by technical and functional heads. Sample documentation in respect of contracts with Jindal Steel & Power Ltd. and Hindalco Industries Ltd. was also referred to.

170. The learned AR further submitted that the LD provision created during the year constituted only 0.61% of turnover and therefore there was no basis for treating the same as excessive. It was contended that the learned CIT(A) arbitrarily sustained 50% disallowance merely on ad hoc basis without identifying any specific defect in the methodology adopted by the assessee.

171. Without prejudice to the primary contention, the learned AR submitted that the issue at best represented timing difference because provisions disallowed in one year were subsequently either reversed and offered to tax or utilised without separate deduction claim. Reliance in this regard was placed upon the judgment of the Hon’ble Supreme Court in Excel Industries Ltd. (supra). The learned AR accordingly submitted that disallowance of provision would ultimately result in double taxation unless corresponding deduction is granted in year of utilisation or reversal adjustment is made.

172. The learned DR, strongly supporting the orders of the Assessing Officer and the learned CIT(A), submitted that the provision created by the assessee towards liquidated damages does not satisfy the conditions laid down by the Hon’ble Supreme Court for recognition of an allowable provision under section 37(1) of the Act. Reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT, Chennai [2009] 223 CTR 425/314 ITR 62 (SC), wherein the Hon’ble Apex Court held that for a provision to qualify for deduction, there must exist a present obligation arising from past events, there must be probability of outflow of resources and a reliable scientific estimate of the obligation must be possible. The learned DR submitted that the Hon’ble Supreme Court specifically emphasised that provisions must be based upon historical trend, scientific estimation and systematic data maintained by the assessee regarding actual utilisation and reversals of earlier provisions.

173. The learned DR submitted that in the present case the assessee failed to demonstrate any scientific methodology or reliable actuarial or statistical basis for estimating the LD provision. It was argued that the substantial opening balance of provision carried forward year after year, coupled with recurring reversals and low actual utilisation, itself establishes that the provisions were excessive and not based on any robust estimation process. According to the learned DR, had the estimation truly been scientific and based upon historical experience, large accumulated balances and regular reversals would not have continued over multiple years.

174. The learned DR further submitted that the assessee failed to establish existence of liability in praesenti during the relevant assessment year. It was argued that mere existence of LD clause in the contract does not automatically result in accrual of liability. Reliance in this regard was placed upon the decision of the Hon’ble Madras High Court in the case of CIT v. Seshasayee Industries Ltd. [2000] 242 ITR 691 (Madras), wherein it was held that where no demand had been raised by the customer, no adjudication had taken place and the assessee itself had not admitted responsibility for delay, the liability for damages remained wholly inchoate and contingent and therefore not allowable merely because entries were passed in books of account. The learned DR pointed out that the Hon’ble High Court specifically observed that it is not the mere accounting entry which determines accrual of liability and unless the assessee admits liability or the same is adjudicated, the claim remains contingent in nature.

175. The learned DR further relied upon the judgment of the Hon’ble Allahabad High Court in the case of A.P.S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709 (Allahabad), wherein it was held that before a deduction can be allowed, the liability must be an actual liability in praesenti and not merely contingent or de futuro. It was submitted that the Hon’ble High Court held that unless enforceable liability had crystallised, the claim could not be treated as allowable expenditure.

176. The learned DR submitted that the assessee had not furnished project-wise details establishing that delays were attributable to the assessee itself. According to the learned DR, delays in infrastructure and turnkey contracts may occur for multiple reasons including customer defaults, force majeure situations, delayed approvals, change in specifications and external circumstances. However, the assessee failed to identify contracts where liability had actually crystallised due to its own admitted default. It was further argued that in many cases no claim had even been raised by customers and therefore the alleged liability was merely anticipatory and hypothetical.

177. The learned DR also submitted that the assessee’s own conduct was inconsistent with recognition of accrued liability inasmuch as invoices were raised for full contract value and no contemporaneous debit notes or deductions by customers were shown. According to the learned DR, unless customers either invoke LD clauses, reduce payments or raise enforceable claims, the liability cannot be said to have crystallized merely because the assessee internally estimated a possible future exposure.

178. The learned DR accordingly contended that the provision created by the assessee represented only a contingent and anticipated liability lacking scientific basis and reliable estimation as contemplated in Rotork Controls India (P.) Ltd. (supra) and therefore the disallowance made by the Assessing Officer deserved to be sustained.

179. The learned AR, by way of rebuttal to the submissions advanced on behalf of the Revenue, submitted that the very factual premise adopted by the Assessing Officer as well as emphasised by the learned DR regarding abnormal accumulation of provision was itself erroneous inasmuch as the opening balance of provision for Liquidated Damages had been incorrectly considered in the assessment order. In this regard, the learned AR submitted that the correct movement of LD provision during the year was as under:

Particulars	Amount (Rs.)
Opening balance as on 01.04.2004	23,49,86,407/-
Provision created during the year	13,67,42,995/-
Release / reversal during the year	4,92,41,256/-
Utilisation during the year	83,20,949/-
Closing balance as on 31.03.2005	31,41,67,196/-

180. The learned AR submitted that the Assessing Officer, while discussing the issue in the assessment order, had incorrectly adopted the opening balance at Rs. 35,89,57,004/- instead of the correct figure of Rs. 23,49,86,407/-. According to the learned AR, the entire reasoning of the Assessing Officer as well as the arguments subsequently canvassed by the learned DR regarding alleged excessive accumulation of provision and lack of scientific basis stood materially vitiated on account of this factual error.

181. The learned AR further submitted that once the correct opening balance is considered, the allegation regarding disproportionate carry forward of provisions loses much of its force. It was contended that the Revenue authorities proceeded on an inflated opening figure and consequently drew adverse inference that the assessee was continuously creating excessive provisions without corresponding utilisation. According to the learned AR, such conclusion was factually incorrect and contrary to the actual provision movement reflected in the books of account.

182. The learned AR further invited our attention to the projectwise details and provision vouchers placed in the paper book, wherein detailed workings had been furnished demonstrating the basis on which the provision for liquidated damages was computed contract-wise. It was submitted that the assessee had not created the provision on ad hoc or arbitrary basis, but had undertaken detailed project-specific evaluation considering contractual delivery schedules, extent of delay, applicable LD clauses, percentage of LD prescribed under respective contracts and estimated exposure arising therefrom. The learned AR, in continuation of the aforesaid submissions, specifically invited our attention to the sample provision vouchers and project-wise calculation sheets placed in the paper book to demonstrate that the provision for liquidated damages was not created on ad hoc basis but was backed by detailed contractual and technical evaluation. Referring to the sample provision relating to Jindal Steel & Power Ltd. (paper Book page No. 79-80), the learned AR submitted that the working itself records:

(i)

contractual delivery date;

(ii)

expected dispatch / delivery date;

(iii)

delay period in weeks;

(iv)

order value;

(v)

maximum LD percentage permissible under the contract; and

(vi)

actual LD provision computed on the basis of contractual formula.

183. The learned AR pointed out that the computation sheet specifically reflected: “LD @ 1% up to 10% maximum of delayed value”, along with item-wise delay weeks and corresponding computation of estimated exposure. It was submitted that the provision was thus linked directly to contractual clauses and actual project execution status rather than any arbitrary estimation. The learned AR emphasised that the said voucher was duly approved through internal authorisation mechanism and supported by calculation sheets forming part of the paper book. According to the learned AR, these contemporaneous documents clearly establish that the provision was created after project-wise evaluation and technical assessment carried out by responsible officials based upon contractual obligations.

184. It was therefore submitted that the allegation of the Revenue that the provision lacked scientific basis or was merely a contingent or hypothetical liability is contrary to the documentary evidence placed on record. According to the learned AR, the very existence of detailed computation sheets, contractual references, delay analysis and approval mechanism demonstrates that the provision represented a bona fide business estimate of foreseeable contractual liability arising during the year.

185. We have carefully considered the rival submissions and perused the material placed on record. We have also gone through the assessment order, the impugned order of the learned CIT(A), the detailed project-wise provision workings furnished by the assessee and the judicial precedents relied upon by both the sides.

186. At the outset, it is pertinent to note that the learned CIT(A), while deciding the issue for the year under consideration, has substantially proceeded on the basis of his earlier order passed in assessee’s own case for A.Y. 2007-08. The learned CIT(A) himself recorded that though the Assessing Officer had disallowed the entire provision treating the same as contingent liability, in A.Y. 2007-08 the issue had already been examined in detail and the disallowance had ultimately been restricted to 50% on the ground that the provision was excessive and not entirely unsupported by contractual obligations. The learned CIT(A), following the same line of reasoning, adopted the very same estimation approach in the year under consideration also.

187. We find that in the order for A.Y. 2007-08, the learned CIT(A) had accepted the foundational position that provision for liquidated damages (“LD”) is, in principle, an allowable business expenditure arising out of contractual obligations. The relevant findings recorded by the learned CIT(A) in A.Y. 2007-08 read as under:

“At outset it is stated that liquidated damages (not penal in nature) is an allowable expense. The Assessing Officer has accepted deduction of provision for liquidated damages but stated that provision is excessive and made the disallowance.”(para 13)

188. The learned CIT(A) thereafter noted the methodology followed by the assessee and recorded the following findings:

“II.

LD are provided based on the contractual terms when the delivery / commissioning dates of an individual project have exceeded or are likely to exceed the delivery / commissioning dates as per the respective contracts.

III.

In case of delay, the Company is committed to pay LD as per contract. The Company is accrual method of accounting and hence no sooner the delivery time gets into an over run triggering liquidated damages the Appellant calculates such amount for the delay and recognized it in its accounts and reverses in case there is an abatement, in the year of such abatement.

IV.

The LD has been provided in the books of accounts only as per the legally enforceable written contract with the customers. Accordingly, as per the terms of the contract the Appellant makes provision for LD. Each and every provision made is duly supported by vouchers, file notes and calculations prepared by the technical team and also approved by the Senior Officers.”

189. Thus, from the aforesaid findings itself, it becomes evident that the learned CIT(A) in A.Y. 2007-08 accepted:

existence of legally enforceable contractual obligations;

accrual-based recognition policy followed by the assessee;

project-wise evaluation mechanism;

supporting vouchers and technical calculations; and

the essential allowability of provision for LD.

190. However, the learned CIT(A), while examining historical utilisation trends for several years, observed that the actual utilisation and reversals reflected that the provisions created by the assessee were substantially higher than the amounts ultimately crystallised. On that basis, he concluded that the provision created was excessive to a certain extent. The relevant observations are reproduced herein below:

“The last column in the data above shows that, on an average of 10 years in respect of the items evaluated, the utilisations were only 31% of the amounts provided in respect of these items only. Ironically, the percentage increases to 37% if the gross amounts are taken. This means, where Rs. 31 or 37 were actually required to be provided, Rs. 100 were provided for by the company. This is hard evidence which cannot be ignored. This as per the actual, not any empirical data.

Hence, it is concluded that the company has made excessive provisions under this head. It is clarified that in principle, the allowability of provisions under this head is accepted. But, on the facts of the case of the assessee company, it is held that the provisions created is considered excessive.”

191. Ultimately, considering the overall factual matrix, the learned CIT(A) restricted the disallowance to 50% of the provision created. Simultaneously, the learned CIT(A) also accepted the alternate plea of the assessee regarding avoidance of double taxation and directed corresponding adjustment in subsequent years in respect of reversals/write-backs. The relevant findings read as under:

“No income can be taxed twice. Unutilised provisions is reversed at end of concerned period. Thus for e.g. provision created for 2 yrs in AY 200405 to the extent unutilised is reversed in AY 2006-07. Thus any disallowance made for 2004-05, if adjustment not made in AY 2006-07 will result in same income taxed in AY 2006-07. The request of appellant is fair and reasonable. Hence the Assessing Officer is directed to effect suitable modification in income offered as income as provision for liquidated damages written back in AY 2006-07 but simultaneously disallowed for earlier Assessment Years.”

192. From the aforesaid findings, it clearly emerges that even the learned CIT(A) in A.Y. 2007-08 did not hold that the liability itself was wholly contingent or inadmissible in law. Rather, the disallowance was sustained only on estimated basis considering alleged excessiveness of provisioning.

193. In the present year also, we find that the assessee has furnished detailed project-wise workings, contractual clauses, provision vouchers, delay computations and internal approvals demonstrating that the provision was linked to specific contractual obligations and delay analysis. The assessee has also demonstrated that the provisions were regularly reviewed and partly reversed or utilized depending upon subsequent settlement or crystallisation.

194. At the same time, we also cannot ignore the factual pattern highlighted by the Revenue as well as noticed by the learned CIT(A) in A.Y. 2007-08 that substantial reversals have consistently taken place over the years and the actual utilisation percentages were significantly lower than the gross provisions created. The historical data relied upon by the learned CIT(A) does indicate that the provisioning methodology adopted by the assessee resulted in sizeable accumulation of balances over a long period.

195. The judgment of the Hon’ble Supreme Court in Rotork Controls India (P.) Ltd. lays down that for recognition of provision, the assessee must establish:

existence of present obligation arising from past events;

ii.

probability of outflow of resources; and

iii.

reliable estimation based on scientific method and historical trend.

196. Similarly, the Hon’ble Madras High Court in Seshasayee Industries Ltd. emphasised that mere existence of contractual clause does not automatically result in accrued liability unless the obligation has reasonably crystallised.

197. In the present case, we find that the assessee has undoubtedly established the existence of contractual clauses and project-specific delay analysis. However, the historical trend simultaneously demonstrates substantial variation between provisions created and liabilities ultimately crystallized. Therefore, while the liability cannot be treated as wholly contingent in nature as done by the Assessing Officer, the question regarding reasonableness and scientific quantification of the provision still survives.

198. We further find merit in the alternate contention of the assessee that where the provisions disallowed in one year are subsequently reversed and offered to tax in later years, suitable corresponding adjustment becomes necessary to avoid double taxation of the same amount. Even the learned CIT(A) in A.Y. 2007-08 accepted this principle and issued consequential directions.

199. Considering the entirety of facts, the consistent past history, the detailed contractual material furnished by the assessee, the historical utilisation trends noticed by the Revenue authorities and the principles laid down in Rotork Controls India (P.) Ltd. (supra), we are of the considered view that the approach adopted by the learned CIT(A) in treating the provision as allowable in principle but excessive to some extent constitutes a fair and balanced approach on the peculiar facts of the present case.

200. Accordingly, following the reasoning adopted by the learned CIT(A) in assessee’s own case for A.Y. 2007-08, we uphold the restriction of disallowance to 50% of the provision created during the year. However, we direct the Assessing Officer to grant corresponding deduction/adjustment in subsequent years to the extent the very same provision stands reversed and offered to tax or utilised against actual crystallised liability so as to ensure that the same amount is not subjected to tax twice. The Assessing Officer shall verify the reconciliation of reversals/utilisations furnished by the assessee and grant appropriate consequential relief in accordance with law. Thus, the ground of appeal is partly allowed.

Grounds relating to disallowance of provision for warranty

201. Ground Nos. 1 and 2 raised by the assessee relate to the action of the Assessing Officer in disallowing provision created towards warranty obligations and the confirmation thereof by the learned CIT(A) to the extent of 50% of such provision. The assessee has also raised an alternative contention that the impugned disallowance merely results in a timing difference and therefore no addition is warranted in view of the ratio laid down by the Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra).

202. During the course of assessment proceedings, the Assessing Officer observed that the assessee had debited an amount of Rs. 24,16,03,044/- towards provision for warranty during the year under consideration. The Assessing Officer noted the movement in the warranty provision account as under:

Particulars	Amount
Opening Balance	Rs. 29,08,80,000/-
Add: Creation during the year	Rs. 24,16,03,044/-
Less: Reversed / released during the year	Rs. 6,76,06,605/-
Utilised during the year	Rs. 5,04,53,999/-

203. The Assessing Officer called upon the assessee to furnish details of warranty provisions exceeding Rs. 15 lakhs. Upon examination of the sample provision vouchers and supporting notes furnished by the assessee, the Assessing Officer observed that the assessee was making estimated provisions towards future servicing obligations, replacement costs, manpower requirements and material consumption during the warranty period.

204. The Assessing Officer referred to several sample entries examined during assessment proceedings. In one instance relating to CESE, provision of Rs. 50,00,000/- was made on the basis of estimated manpower requirement considering 12 months’ warranty after acceptance of the system. In another case relating to JSL A/c Gridco, provision of Rs. 36 lakhs was made since substation automation systems supplied earlier were yet to be commissioned and the bank guarantee remained valid. Similarly, provisions were made for Chittaranjan Locomotive Works, Diesel Locomotive Works, Vestas Wind System Denmark and Suzlon based on estimated servicing costs, replacement of defective components, expected field failures and other future contingencies.

205. The Assessing Officer further observed that in several cases the provision was based merely on estimates, projected servicing costs or percentage of turnover. In some instances, negotiations with customers were still pending and actual liability had not crystallised. The Assessing Officer noted that the assessee had not furnished actual expenditure incurred during the relevant previous year corresponding to such provisions.

206. After analysing the sample cases, the Assessing Officer concluded that the assessee was creating provisions for anticipated future expenditure relating to free servicing, free spares, rectification, replacement and similar after-sales obligations. According to the Assessing Officer, such expenditure was not necessarily attributable solely to sales effected during the year but also related to customer retention, future sales promotion, obtaining customer feedback, post-sales business opportunities and product development.

207. The Assessing Officer further observed that warranty services constituted an ongoing process and the related expenditure could not be matched exclusively with current year sales. It was held that the provisions represented contingent liabilities which had not crystallised during the year. The Assessing Officer was of the view that the provisions were not allowable under the matching principles of accountancy and accordingly disallowed the entire provision for warranty holding the same to be contingent and unascertained in nature.

208. The assessee carried the matter in appeal before the learned CIT(A) and submitted that the warranty commitment constituted an integral term of the sale contract and therefore the liability to honour the warranty obligation arose simultaneously with execution of the sale itself. It was contended that the Assessing Officer erred in treating the provision as contingent in nature without appreciating that the warranty obligation was embedded in the contractual terms agreed with customers.

209. The assessee further contended that the revenue arising from the sale contracts had been brought to tax by the department and therefore it was impermissible to selectively disregard the corresponding contractual obligations arising from the same contracts. It was submitted that the assessee had consistently followed the same accounting practice over the years and the same had been accepted in earlier assessment years without any adverse finding.

210. The assessee also submitted before the learned CIT(A) that the provisions were made strictly in terms of contractual obligations and in accordance with established accounting principles and statutory requirements. It was argued that the Assessing Officer wrongly presumed the expenditure to be merely towards free servicing or marketing efforts whereas, in fact, the warranty commitments represented enforceable contractual obligations which were required to be recognised while determining the profits of the year under mercantile system of accounting.

211. The learned CIT(A) noted that the Assessing Officer had disallowed the entire warranty provision of Rs. 24,16,03,044/-holding the same to be contrary to matching principles of accountancy and contingent in nature. However, the learned CIT(A) observed that a similar issue had arisen in earlier assessment years and had already been adjudicated in appellate proceedings for A.Y. 2007-08.

212. The learned CIT(A), following the approach adopted in the earlier appellate order, held that the disallowance was required to be restricted on the basis of adequacy of the provision and not by disallowing the entire claim. Accordingly, following the directions contained in appellate order for A.Y. 2007-08 and the methodology adopted therein, the learned CIT(A) directed the Assessing Officer to restrict the disallowance to 50% of the provision created towards warranty. The learned CIT(A) further directed the Assessing Officer to follow corresponding directions issued in earlier years so as to avoid double taxation in respect of reversals or write-backs of provisions disallowed in preceding assessment years. Thus, the ground of appeal of the assessee was partly allowed.

213. The learned AR assailed the disallowance sustained by the learned CIT(A) and submitted that the provision for warranty represented a contractual and legally enforceable obligation arising directly from the sale contracts entered into by the assessee with its customers. It was submitted that failure to honour such warranty commitments exposed the assessee to legal consequences as well as serious reputational risks in the market. The learned AR submitted that the assessee created warranty provisions on the basis of technical estimates prepared by the concerned business and engineering teams after considering expected repair cost, replacement cost, material consumption, servicing requirements and past experience relating to warranty obligations. Thus, according to the learned AR, the provision represented a present obligation arising out of past events, settlement of which was expected to result in outflow of resources, and therefore satisfied the test laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra).

214. The learned AR further submitted that the assessee was consistently following mercantile system of accounting and therefore was duty bound to recognize the warranty commitment in the same year in which the corresponding revenue from sale transactions was recognized. It was argued that the department could not accept the revenue arising from the contracts while simultaneously disregarding the corresponding contractual warranty obligations embedded in the very same agreements. According to the learned AR, the warranty commitment formed an inseparable part of the commercial understanding with customers and therefore the liability accrued simultaneously with the execution of sales.

215. The learned AR also relied upon the decision of the Coordinate Bench in the case of Jacobs Engineering India (P.) Ltd. (supra), wherein, following the judgment of the Hon’ble Delhi High Court in Woodward Governor India (P.) Ltd. (supra), it was held that foreseeable business losses are allowable deductions. Reliance was also placed upon the judgment of the Hon’ble Supreme Court in Bharat Earth Movers (supra), for the proposition that once a business liability has arisen during the accounting year, deduction cannot be denied merely because the liability is to be quantified and discharged at a future date. The learned AR submitted that the warranty provision constituted a foreseeable business loss arising out of contractual obligations and therefore was fully allowable.

216. Referring to Notification No. 9949 [S.O. 69(E)] dated 25.01.1996 issued by CBDT under section 145(2), the learned AR submitted that the accounting standard notified therein specifically recognizes the principle of prudence and mandates creation of provision for all known liabilities and losses even if the exact amount cannot be determined with certainty and only best estimates are available. Accordingly, it was contended that the assessee had acted strictly in accordance with notified accounting standards and accepted accounting principles.

217. The learned AR further submitted that the provisions created during the year were duly supported by provision vouchers, internal file notes, technical evaluations and calculation sheets prepared by functional and technical teams and approved by senior officers of the assessee company. Our attention was invited to sample vouchers and supporting documents placed in the paper book in respect of CESC Limited and Suzlon Energy Ltd. to demonstrate that the provisions were created on the basis of detailed project-wise technical evaluation and contractual obligations and not on ad hoc basis.

218. The learned AR also submitted that the warranty provision created during the year constituted merely 1.08% of the turnover and therefore the observation of the learned CIT(A) that the provision was excessive in nature was factually incorrect and arbitrary. It was submitted that utilisation rates varied significantly from year to year and therefore no uniform mathematical formula could be adopted to conclude that the provision was excessive. According to the learned AR, in some years utilisation rates were as high as 44.19% and 71.49%, thereby clearly establishing that warranty liabilities fluctuated depending upon nature of products and projects executed.

219. The learned AR further submitted that the warranty provisions created during the year were either subsequently utilised against actual warranty expenditure or reversed and offered to tax in subsequent years. Therefore, according to the learned AR, disallowance of the provision in the year of creation would inevitably lead to double taxation because reversals were already subjected to tax and utilisations were not separately claimed as deduction.

220. The learned AR also placed reliance upon the orders of the Co-ordinate Bench in assessee’s own case for A.Ys. 2001-02 to 2003-04 and A.Y. 2004-05 wherein proceedings initiated under section 263 on this very issue were quashed. Drawing our attention to the observations of the Tribunal, the learned AR submitted that the Tribunal had specifically noted that nowhere had the Principal CIT alleged that the warranty provision was not made on scientific basis and therefore the issue already stood accepted in earlier years. It was accordingly argued that on principles of consistency also no disallowance was warranted in the year under consideration.

221. Without prejudice to the above submissions, the learned AR submitted that the impugned disallowance merely represented a timing difference and would not result in any additional tax revenue to the department. Reliance in this regard was placed upon the judgment of the Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra), wherein the Hon’ble Apex Court observed that where the tax rate remains the same in both years and the dispute pertains merely to year of taxability, continuation of litigation becomes academic and revenue neutral. It was therefore submitted that even assuming without admitting that part of the provision was excessive, no disallowance was called for since the same would ultimately be taxed upon reversal in subsequent years.

222. Lastly, the learned AR submitted that without prejudice to the principal claim, suitable directions ought to be issued to ensure that reversals or utilisations of warranty provisions disallowed in the current year are allowed as deduction in subsequent years so as to avoid double taxation of the same amount.

223. The learned DR, on the other hand, strongly relied upon the orders of the Assessing Officer and the learned CIT(A). It was submitted that the issue involved in the present ground was substantially similar to the issue relating to provision for liquidated damages dealt with earlier and therefore the same principles would equally apply to the provision created towards warranty obligations. The learned DR also drew support from the decision of the Hon’ble Telangana High Court in Healthware (P.) Ltd. v. Assistant Commissioner of Income-tax (Telangana), wherein the deduction claimed in respect of provision for warranty was disallowed on the ground that no liability had arisen during the relevant year and the assessee had merely made a provision for a future contingency.

224. We have carefully considered the rival submissions and perused the material placed on record. The issue involved in the present ground pertains to disallowance of Rs.12,08,01,522/-, being 50% of provision for warranty created by the assessee during the year. We find that identical issue had arisen in assessee’s own case for A.Y. 2007-08, wherein the learned CIT(A) had examined the entire methodology adopted by the assessee for creation of warranty provision, historical utilisation pattern, reversals, supporting documents and legal position governing allowability of warranty provisions.

225. In the said order for A.Y. 2007-08, the learned CIT(A), at the outset, accepted the settled legal position flowing from the judgment of the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra), that provision for warranty is, in principle, an allowable deduction under section 37(1) of the Act where the assessee demonstrates existence of present obligation arising from past events coupled with reasonable estimation based on scientific methodology and historical experience.

226. The learned CIT(A), however, simultaneously proceeded to examine whether the assessee’s estimation mechanism actually reflected a realistic and scientific assessment of expected warranty obligations. In this regard, detailed analysis of ten-year data relating to warranty provisions, reversals and actual utilisation was undertaken. The learned CIT(A) reproduced the following statistical data furnished by the assessee itself.

227. The learned CIT(A), after analysing the aforesaid data, recorded a categorical finding that actual utilisation and reversals demonstrated that the assessee was consistently creating provisions substantially in excess of actual warranty obligations. 228. The learned CIT(A) specifically observed that while only approximately 35% of the amounts provided were eventually required towards crystallized claims, the assessee had continued to create provisions at substantially higher levels leading to continuous accumulation in closing balances over the years.

229. The learned CIT(A) further noted that the assessee itself had revised its methodology after reviewing actual warranty cost trends over preceding years. The revised policy, as reproduced in the appellate order, itself indicated that earlier estimates were excessive and required downward modification. The learned CIT(A), therefore, came to the conclusion that although provision for warranty was allowable in principle, the quantification adopted by the assessee lacked proper calibration with actual utilisation experience and consequently contained substantial excess component.

230. At the same time, the learned CIT(A) also accepted the without prejudice contention of the assessee that reversals/write-backs of provisions already offered to tax in subsequent years could not again be subjected to tax where corresponding provision itself had been disallowed in earlier years. Accordingly, directions were issued to grant consequential relief so as to avoid double taxation.

231. We find that in the year under consideration also, the learned CIT(A) has followed the same approach adopted in A.Y. 2007-08 and restricted the disallowance to 50% of the provision created during the year. The assessee, before us, has reiterated that the warranty provision is created on scientific basis supported by technical estimates, contractual obligations, historical experience and internal evaluation mechanism. Reliance has been placed upon the decision of the Hon’ble Supreme Court in Rotork Controls India (P.) Ltd. (supra), Bharat Earth Movers (supra), and the decision of Co-ordinate Bench in Jacobs Engineering India (P.) Ltd. (supra).

232. We find merit in the broad proposition canvassed by the assessee that warranty provision, being founded upon contractual obligation arising at the time of sale itself, cannot be regarded as a purely contingent liability. The Hon’ble Supreme Court in Rotork Controls India (P.) Ltd. (supra) has clearly recognized allowability of warranty provision where reliable estimation mechanism exists based on historical trend and scientific evaluation.

233. However, at the same time, the Hon’ble Supreme Court has also emphasised that estimates must be reassessed every year and should reflect realistic expected outflow based upon historical trend and available data. In the present case, the material placed on record, particularly the detailed findings recorded by the learned CIT(A) in A.Y. 2007-08, demonstrates that actual utilisation percentages over a long period remained substantially lower than provisions created. The data also reveals continuous accumulation in provision balances over successive years. Further, the assessee itself revised its methodology after reviewing actual warranty trends, thereby indicating that earlier estimation parameters required moderation.

234. Before parting with this aspect, we may also deal with the reliance placed by the learned DR on the judgment of the Hon’ble Telangana High Court in Healthware (P.) Ltd. (supra). In our considered view, the said decision does not advance the case of the Revenue on the peculiar facts obtaining before us. A careful reading of the judgment reveals that the Hon’ble High Court affirmed the disallowance primarily because the assessee therein had failed to establish that the warranty liability had arisen during the relevant year and, more importantly, the quantification of the provision was not shown to be based upon any scientific analysis or reliable historical experience. The Tribunal, whose findings were approved by the Hon’ble High Court, had specifically recorded that the assessee was in the first year of creating such provision, there was no material demonstrating historical warranty trends, the quantification lacked scientific basis, and nearly 90% of the provision was written back in the succeeding year, thereby evidencing absence of reasonable certainty in estimation. It was in these peculiar factual circumstances that the Hon’ble High Court held that no liability had arisen during the year and that the provision represented merely a future contingency.

235. In the present case, however, the allowability of warranty provision in principle is not in dispute. The assessee has been consistently creating warranty provisions over several years based upon contractual obligations arising from sales effected during the year and supported by historical experience. In fact, the learned CIT(A) himself has accepted the existence of a warranty obligation and has merely examined the reasonableness of its quantification by analysing long-term utilisation and reversal trends. Thus, unlike the facts before the Hon’ble Telangana High Court, the present dispute is not whether a warranty liability exists at all, but whether the quantum of provision created is excessive having regard to actual experience. Therefore, the ratio of Healthware (P.) Ltd. (supra) does not militate against the settled principle laid down by the Hon’ble Supreme Court in Rotork Controls India (P.) Ltd. (supra); rather, it reinforces the proposition that while a scientifically estimated warranty provision is allowable, the estimation must be founded upon reliable data and reasonable certainty. It is precisely on that touchstone that the learned CIT(A) examined the assessee’s claim and sustained disallowance only to the extent the provision was found excessive. Consequently, the reliance placed by the learned DR on the aforesaid decision does not persuade us to take a view different from the one already arrived at hereinabove.

236. In our considered view, therefore, the authorities below were justified in examining the reasonableness and adequacy of the quantum of provision notwithstanding the general allowability of warranty provision in principle. The learned CIT(A), after considering the entirety of facts and historical utilisation pattern, adopted a moderate approach by sustaining disallowance only to the extent of 50% of the provision created. We do not find any perversity in the said approach warranting interference.

237. At the same time, we also concur with the without prejudice directions issued by the learned CIT(A) in A.Y. 2007-08 that reversals/write-backs or subsequent utilization relatable to provisions disallowed in earlier years cannot again result in taxation of the same amount. Accordingly, the Assessing Officer is directed to ensure that suitable adjustment is granted in respect of reversals/utilisation to the extent corresponding provisions stand disallowed in the present year so as to avoid double taxation.

238. In view of the foregoing discussion, the ground raised by the assessee is partly allowed for statistical purposes in terms aforesaid.

239. Before moving to next grounds of appeal, we shall now deal with the alternative contention raised by the assessee relating to both provision for liquidated damages as well as provision for warranty, wherein it has been contended that the impugned disallowances merely give rise to timing differences and therefore no adjustment is warranted in view of the judgment of the Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra).

240. We have carefully considered the aforesaid alternative plea. We find that the assessee has consistently followed mercantile system of accounting and the provisions in question are subsequently either utilized against actual expenditure/liability or reversed back and offered to tax in subsequent years. The learned CIT(A), while adjudicating identical issue in assessee’s own case for A.Y. 2007-08, had also accepted this fundamental aspect and accordingly directed the Assessing Officer to grant consequential adjustment in respect of reversals/utilisations corresponding to provisions disallowed in earlier years so as to avoid double taxation of the same income.

241. The Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra) held that where the dispute is essentially tax neutral and pertains merely to year of taxability, no useful purpose is served by continuing litigation particularly when the rate of tax remains the same in subsequent years. The relevant observations of the Hon’ble Supreme Court read as under:

“The real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.”

242. Applying the aforesaid principle to the facts of the present case, we find considerable force in the contention of the assessee that the impugned disallowances substantially represent timing differences inasmuch as reversals/write-backs are admittedly offered to tax in subsequent years and actual utilisation is not separately claimed as deduction to the extent relatable to earlier provisions. At the same time, however, it cannot be overlooked that deferment of tax due to creation of excessive or inflated provisions carries economic implications inasmuch as postponement of tax collection results in corresponding loss of time value of money to the Revenue and concomitant undue benefit to the assessee. Therefore, merely because the amount may ultimately suffer tax in subsequent years, it cannot be laid down as an inflexible proposition that the Revenue is precluded from examining the correctness, adequacy or reasonableness of the provision claimed in the year under consideration.

243. Accordingly, since we have already upheld the action of the learned CIT(A) in estimating and sustaining partial disallowance on the ground that the provisions created were excessive in nature, the alternative plea founded upon the judgment of the Hon’ble Supreme Court in Excel Industries Ltd. (supra) cannot render the entire disallowance otiose. Nevertheless, in order to ensure that the same amount is not subjected to tax twice over in different years, we direct the Assessing Officer to grant consequential relief by excluding from taxation subsequent reversals/write-backs or by allowing corresponding utilisation to the extent relatable to provisions disallowed in the impugned assessment year both under the head provision for liquidated damages and provision for warranty.

244. Accordingly, the alternative ground raised by the assessee is partly allowed in aforesaid terms.

Grounds relating to adjustment under section 145A of the Act

245. Ground Nos. 5 to 9 raised by the assessee pertain to the addition made by the Assessing Officer by invoking the provisions of section 145A of the Act in respect of valuation of inventory and excise duty adjustment. The grievance of the assessee is that the authorities below erred in disturbing the method of accounting consistently followed by the assessee and in making adjustment by adopting inclusive method of accounting as against the exclusive method regularly followed by the assessee in its books of account.

246. The assessee has further contended that the adjustments furnished in the tax audit report duly certified by the Chartered Accountant were ignored by the lower authorities and that there was no impact on the ultimate business profits irrespective of whether inclusive or exclusive method of accounting was followed. The assessee has also specifically challenged the adjustment of excise duty amounting to Rs.18,01,81,416/- and contended that the authorities below failed to consider corresponding excise duty liability incurred on finished goods manufactured during the year amounting to Rs.36,82,47,833/-.

247. During the course of assessment proceedings, the Assessing Officer observed that in the tax audit report, the assessee had enclosed an annexure containing a working to demonstrate that there was no impact on the profits on account of adjustments under section 145A of the Act. The Assessing Officer, however, was of the view that the working furnished by the assessee was not in accordance with the provisions of section 145A.

248. The Assessing Officer noted that as per section 145A, the assessee is required to prepare accounts in accordance with the regular method of accounting followed and thereafter make adjustments to purchases, sales and inventory by including taxes, duties, cess or fees actually paid or incurred for bringing the goods to their location and condition as on the date of valuation. According to the Assessing Officer, the explanation to section 145A makes it clear that taxes and duties are required to be included notwithstanding the availability of MODVAT/CENVAT credit. Therefore, even if the assessee was entitled to MODVAT credit on duties and taxes paid on purchases, such duties and taxes were still required to be considered for valuation under section 145A.

249. The Assessing Officer further observed that while making adjustments to inventory comprising raw material, work-inprogress and finished goods, the excise duty element attributable thereto was necessarily required to be included. Likewise, in respect of purchases, excise duty paid at the time of purchase was required to be included irrespective of whether MODVAT credit was available or utilized during the year. Similarly, in relation to sales, excise duty collected on sales was also required to be considered while computing adjustments under section 145A.

250. The Assessing Officer further held that while making the aforesaid adjustments, excise duty collected and payable on current year’s sales, whether through utilization of MODVAT credit or actual cash payment, had to be adjusted to arrive at the profits of the year. Accordingly, the Assessing Officer worked out the adjustment under section 145A in the following manner:

Particulars	Amount
Sales	Rs.1,31,01,80,909/-
Add: Closing stock	Rs.18,01,81,416/-
Total	Rs.1,49,03,62,325/-
Less: Opening stock	Rs.7,28,11,165/-
Add: Purchases	Rs.1,00,07,83,397/-
Total	Rs.1,07,35,94,562/-
Balance	Rs.41,67,67,763/-
Less: Excise duty liability of the year over and above MODVAT credit taken	Rs.23,65,86,347/-
Adjustment to profits	Rs.18,01,81,416/-

251. Based on the above working, the Assessing Officer concluded that the assessee was required to make adjustment of Rs.18,01,81,416/- to the profits under the head “Profits and Gains of Business or Profession”.

252. The assessee contended before the Assessing Officer that the adjustments under section 145A had been carried out in accordance with the guidelines issued by the Institute of Chartered Accountants of India and that the same methodology had been consistently followed over the years. The assessee further submitted that excise duty included in the valuation of closing stock could not once again be debited separately to the Profit & Loss Account and that there was no overall impact on profits whether inclusive or exclusive method was followed.

253. The Assessing Officer, however, rejected the submissions of the assessee by observing that the provisions of section 145A are unambiguous and that closing stock is required to be valued by including excise duty and other taxes paid for bringing the goods to their condition and location. According to the Assessing Officer, the excise duty element embedded in the closing stock had already been paid at the time of purchase of goods and services and stood debited to the Profit & Loss Account through adjustments to purchases. Therefore, there was no justification for separately debiting excise duty relatable to closing stock once again to the Profit & Loss Account.

254. The Assessing Officer further observed that the assessee had collected excise duty of Rs.1,31,01,80,909/- on sales, which constituted the liability payable by the assessee, whereas MODVAT credit available in opening stock and purchases aggregated to Rs.1,07,35,94,562/-. Consequently, according to the Assessing Officer, only the differential amount of Rs.23,65,86,347/- represented allowable deduction and the balance amount of Rs.18,01,81,416/- was liable to be added back.

255. The Assessing Officer also rejected the assessee’s contention based on section 43B by observing that the excise duty element included in closing stock was not in the nature of liability but represented cost incurred by the assessee on purchase of goods and services. The Assessing Officer thus held that valuation of closing stock by including excise duty did not create any further liability deductible from profits.

256. Accordingly, rejecting the explanations of the assessee, the Assessing Officer made an addition of Rs.18,01,81,416/- under the head “Profits and Gains from Business or Profession”.

257. Before the learned CIT(A), the assessee challenged the addition made under section 145A of the Act and contended that the Assessing Officer had erred in making an unjustified adjustment to the profits returned by the assessee. The assessee submitted that the adjustments certified by the Chartered Accountant in the tax audit report ought to have been accepted and that the methodology adopted by the assessee had been consistently followed from the inception of section 145A without there being any change either in facts or in law.

258. The assessee further contended that the Assessing Officer had proceeded on a hypothetical basis while computing the excise duty adjustment and had ignored the authentic excise records maintained by the assessee. It was submitted that once raw materials enter the manufacturing process and become part of work-in-progress or finished goods, the same lose their independent identity and, therefore, any attempt to artificially determine the raw material duty component in work-in-progress and finished goods solely for the purpose of section 145A adjustment was unjustified both on facts and in law. The assessee also contended that the notional excise duty element attributable to closing stock of finished goods had already been considered by the assessee and, in any event, corresponding deduction ought to have been allowed under section 43B of the Act.

259. The assessee further submitted that the Assessing Officer was not justified in extending the deeming fiction under section 145A beyond its permissible scope and that the methodology consistently adopted by the assessee correctly neutralized the effect of inclusive and exclusive methods of accounting, resulting in no impact on the ultimate business profits.

260. The learned CIT(A) observed that identical issue had arisen in assessee’s own case for A.Y. 2007-08 and the same had already been adjudicated therein. Following the appellate order for A.Y. 2007-08, the learned CIT(A) directed the Assessing Officer to allow the claim in the same manner as decided in the appellate order for A.Y. 2007-08.

261. The learned CIT(A) further observed that the assessee’s request for corresponding adjustment to opening stock was fair and reasonable and held that whatever closing stock valuation had been adopted in the immediately preceding year was necessarily required to be considered as opening stock for the year under consideration. However, insofar as the assessee’s plea for deduction under section 43B on adjustment to closing stock was concerned, the learned CIT(A) rejected the same by observing that the issue under consideration pertained to valuation and not deduction and further that no such claim had been made before the Assessing Officer.

262. Accordingly, the learned CIT(A) partly allowed the grounds raised by the assessee and directed the Assessing Officer to grant consequential relief in terms of the appellate order passed for A.Y. 2007-08.

263. The learned AR reiterated the submissions advanced before the lower authorities and submitted that the assessee consistently follows the net/exclusive method of accounting for CENVAT credit in its books of account in accordance with Accounting Standard-2 on “Valuation of Inventories” issued by the ICAI. It was submitted that both the inclusive as well as exclusive methods are revenue neutral and have no impact whatsoever on the ultimate profit or loss of the assessee, which was also evident from clause 12(a) and 12(b) of the tax audit report duly certified by the Tax Auditor.

264. The learned AR submitted that the methodology adopted by the assessee had consistently been followed over the years and had also been accepted by the Department in earlier years as well as in the immediately succeeding assessment year. It was contended that despite there being no change either in facts or in law, the Assessing Officer disregarded the assessee’s explanation and proceeded to make an addition of Rs.18,01,81,416/- under section 145A of the Act, which was subsequently upheld by the learned CIT(A).

265. The learned AR further submitted that the adjustments contemplated under section 145A are inherently tax neutral and do not alter the business profits of the assessee. Elaborating the contention, it was submitted that inclusion of taxes, duties and cess in purchases, sales and inventories necessarily requires corresponding adjustments to opening stock, purchases and closing stock and, therefore, even if unutilized CENVAT credit is added to the value of closing stock, corresponding additions to opening stock and purchases would neutralize the entire impact resulting in nil effect on the Profit & Loss Account.

266. In support of the aforesaid proposition, reliance was placed upon the supplementary publication of the ICAI dated 12.10.2007 in connection with the Guidance Note on Tax Audit under section 44AB of the Act, wherein it was clarified that adjustments envisaged under section 145A would not have any impact on the trading account and that irrespective of whether exclusive or inclusive method of accounting is followed, the gross profit in the trading account would remain the same.

267. The learned AR also placed reliance upon the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income-tax v. Indo Nippon Chemicals Co. Ltd. [2003] 182 CTR 291/261 ITR 275 (SC), wherein the Hon’ble Apex Court held that MODVAT credit available upon purchase of duty-paid raw material does not constitute income liable to tax. It was submitted that though the aforesaid decision pertained to the period prior to insertion of section 145A, the ratio laid down therein continued to hold the field even after insertion of section 145A since the statutory provision nowhere contemplates taxation of MODVAT credit as income.

268. The learned AR further submitted that for A.Y. 2004-05, the coordinate bench of the Tribunal, after considering identical submissions, had held that no adjustment under section 145A was warranted and, therefore, on the principle of consistency also, no addition ought to have been made in the year under consideration.

269. Without prejudice to the aforesaid submissions, the learned AR submitted that even assuming that any adjustment under section 145A was required, the same merely represented a timing difference and did not result in any additional revenue to the Department. Reliance in this regard was placed upon the judgment of the Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra).

270. Without prejudice to the primary contention, the learned AR further submitted that the Assessing Officer had incorrectly recomputed the adjustment under section 145A by ignoring the amount of excise duty liability actually paid during the year amounting to Rs.36,82,47,401/-. It was contended that if proper effect is given to the said excise duty liability, the resultant adjustment, if any, would stand restricted to Rs.4,85,20,362/- as per the detailed working furnished before the authorities below.

271. The learned AR also drew our attention to the detailed reconciliation statement furnished in the paper book showing estimated excise duty on opening stock, purchases, sales and closing stock for the year ended 31.03.2005. Referring to the said working, it was submitted that after considering the corresponding adjustments to opening stock, purchases and excise duty liability over and above MODVAT credit availed, the net impact on profits was either nil or substantially reduced. The learned AR also referred to the detailed workings regarding estimated raw material content in work-in-progress and the corresponding excise duty element therein and submitted that the Assessing Officer had proceeded merely on estimations and assumptions without appreciating the actual manufacturing and accounting methodology consistently followed by the assessee.

272. Per contra, the learned DR strongly relied upon the findings and reasoning contained in the assessment order.

273. We have carefully considered the rival submissions and perused the material available on record including the assessment order, appellate order, written submissions of the assessee, tax audit disclosures, and the judicial precedents relied upon by both sides.

274. At the outset, we find from the material placed before us that the assessee has consistently followed the exclusive method of accounting for MODVAT / CENVAT in conformity with Accounting Standard-2 issued by ICAI. The tax audit report itself contained detailed quantitative reconciliation and computation of the impact of section 145A. The assessee has demonstrated through working statements that corresponding adjustments to opening stock, purchases, sales and closing stock would render the entire exercise revenue neutral. The assessee has also furnished detailed workings showing inclusion of excise duty component in work-in-progress and finished goods together with corresponding impact on opening stock and purchases.

275. We further notice that identical issue had arisen in assessee’s own case in earlier assessment years and the learned CIT(A), while deciding the appeal for A.Y. 2005-06, categorically held that the matter stood covered by the appellate order for A.Y. 2007-08 and directed the Assessing Officer to follow the same. The learned CIT(A) further accepted the assessee’s contention that whatever valuation is adopted for closing stock of preceding year has necessarily to be adopted as opening stock for the year under consideration. The relevant finding of the learned CIT(A) reads as under:

“Whatever is the closing stock adopted for AY 2004-05 determined, the same is to be considered as opening stock for this year.”

276. The aforesaid finding, in our considered opinion, correctly reflects the settled legal position governing section 145A.

277. The Hon’ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. has clearly laid down that the Assessing Officer cannot adopt one method for valuation of purchases and another method for valuation of closing stock. The Hon’ble Supreme Court observed that if the “gross method” is adopted for purchases, then the same method has to be consistently adopted for valuation of inventories as well. Similarly, if the “net method” is adopted, it has to be uniformly applied throughout. The Hon’ble Supreme Court categorically held as under:

“We are unable to accept the view of the Assessing Officer that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act.”

278. The Hon’ble Supreme Court further held:

“The Assessing Officer adopted the ‘gross method’ at the time of purchase, and the net method’ of valuation at the time of valuation of the stock on hand. By this method, which is wholly erroneous in our view, he assumed that the income, to the extent of the Modvat credit on the unconsumed raw material, was generated.”

279. The ratio laid down by the Hon’ble Supreme Court squarely applies to the facts of the present case. Here also, the Assessing Officer has selectively attempted to load the excise duty component only into closing stock without granting corresponding effect to opening stock, purchases and sales. Such unilateral adjustment distorts the true profits and defeats the scheme of section 145A itself.

280. We also find considerable force in the submission of the assessee that the exercise undertaken by the Assessing Officer is wholly revenue neutral. Once corresponding adjustment is granted to opening stock, purchases and sales, no real income survives for taxation merely on account of accounting presentation. The ICAI Guidance Note relied upon by the assessee also clarifies that section 145A adjustments do not alter the gross profit where the method is applied consistently. The assessee had also furnished a detailed reconciliation in Clause 12(b) of Form 3CD appended to the Tax Audit Report demonstrating the impact of deviation from the method of valuation prescribed under section 145A and its consequential effect on the Profit & Loss Account. The same reads as under:

Adjustments required under Section 145A	Debits (Rs.)	Credits (Rs.)
1 Opening Stock:
a Add: Increase due to inclusion of excise duty on which Modvat credit is available	33,492,005
2 Purchase Cost of Raw Material:
a Add: Increase due to inclusion of excise duty on which Modvat credit is availed	1,000,783,397
b Less: Excise duty/Sales Tax set-off claimed and allowed	195,164,697
c Others	17,090,047
3 Cost of Sales:
Add: Increase due to inclusion of Excise Duty paid on manufacture	368,247,401
4 Sales Tax payable	679,374,833
Profit before tax as per Profit & Loss Account	2,927,145,210
Adjustments required under Section 145A:
Profit before tax as per Profit & Loss Account		2,927,145,210
1 Sales
a Add: Increase due to inclusion of Excise Duty and Sales Tax collected		1,310,180,909
b Less: Decrease due to inclusion of Sales Tax		891,423,972
2 Closing Stock of Raw Materials
Add: Increase due to inclusion of Excise Duty availed		92,547,499
Total	5,221,297,590	5,221,297,590

281. The note appended to the Tax Audit Report further clarified that:

“Net impact on the Profit & Loss Account after adjustments under Section 145A is NIL.”

282. The aforesaid reconciliation assumes significance because it clearly demonstrates that the assessee had not merely adjusted the closing stock while ignoring corresponding effect on opening stock, purchases and sales. On the contrary, the assessee had carried out a comprehensive reconciliation in conformity with the inclusive method contemplated under section 145A and demonstrated that the overall impact on business profits was revenue neutral.

283. The Co-ordinate Bench in assessee’s own case in Siemens Ltd. v. Pr. CIT [IT Appeal No. 4355 (Mum) of 2010, dated 30-11-2022], while dealing with identical controversy has elaborately considered the effect of section 145A and held that inclusion of MODVAT / excise duty element in opening stock, purchases, sales and closing stock would ultimately result in no impact on profits and would remain revenue neutral. The Coordinate Bench observed as under:

“From the aforesaid table, it becomes amply clear that Modvat, tax due, cess, etc. have to be included by the assessee in respect of all the items, i.e. opening stock, purchases, sales and closing stock and pursuant to such inclusion, there will be no deviation in the profits of the assessee company. It is effectively revenue neutral as is evident from the aforesaid workings.”

284. The coordinate bench further held that while giving effect to section 145A, corresponding adjustment must necessarily be made in opening stock also.

285. We further find merit in the assessee’s contention that excise duty attributable to work-in-progress and finished goods cannot be artificially estimated on hypothetical basis without proper quantitative correlation. The Assessing Officer has proceeded merely on estimated allocation without demonstrating any defect in books of account or in the tax audit working furnished by the assessee. No material has been brought on record to show that the accounting method consistently followed by the assessee failed to disclose true and correct profits.

286. It is also pertinent to note that the assessee has consistently followed the same accounting methodology over the years and the same has been accepted in earlier as well as subsequent years. No change in facts or law has been pointed out by the Revenue warranting deviation from the accepted position. The principle of consistency therefore also supports the case of the assessee.

287. In view of the foregoing discussion, respectfully following the ratio laid down by the Hon’ble Supreme Court in Indo Nippon Chemicals Co. Ltd. (supra) and the coordinate bench decision in assessee’s own case, we hold that the addition made by the Assessing Officer under section 145A is unsustainable. The Assessing Officer has erred in making isolated adjustment only to closing stock without granting corresponding effect to opening stock, purchases and sales. Such approach is contrary to settled law and results in distorted computation of profits.

288. Accordingly, the addition made under section 145A is directed to be deleted. Ground raised by the assessee is allowed.

Grounds relating to disallowance of commission payment to M/s Apex Medi Equipment

289. Ground Nos. 10 and 11 raised by the assessee pertain to the disallowance of payment of Rs.18,50,000/- made to M/s Apex Medi Equipment. The grievance of the assessee is that the authorities below erred in treating the impugned payment solely from the perspective of commission expenditure and failed to appreciate that the payment was incurred wholly and exclusively for the purposes of business. The assessee has contended that even assuming the payment was not allowable as commission, the same ought to have been allowed as business expenditure under section 37(1) of the Act, particularly in view of the confirmation furnished by the recipient party and the surrounding business circumstances. The assessee has also challenged the approach of the learned CIT(A) in adjudicating the issue exclusively from the standpoint of commission payment without examining the alternative claim of allowability as a business expenditure.

290. During the course of assessment proceedings, the Assessing Officer observed that the assessee had debited an aggregate amount of Rs.7.93 crore towards commission payments. In order to verify the genuineness of such expenditure, notices under section 133(6) of the Act were issued to selected parties. According to the Assessing Officer, in certain cases either no response was received or discrepancies were noticed between the confirmations furnished by the parties and the books of account of the assessee. One such party was M/s Apex Medi Equipment, Raipur, to whom the assessee had claimed to have paid commission of Rs.18,50,000/-.

291. The Assessing Officer noted that M/s Apex Medi Equipment did not confirm receipt of any commission. Instead, a letter dated 26.12.2008 furnished by the assessee during assessment proceedings stated that the amount of Rs.18,50,000/- had been received against supply of bought-out items and local accessories pursuant to purchase order no.45267923 and that the said concern had never acted as a commission agent for the assessee. The Assessing Officer observed that there was a contradiction between the assessee’s claim that the payment represented commission expenditure and the recipient’s assertion that the amount pertained to supply of goods. The Assessing Officer further recorded that the assessee had failed to explain the precise nature of the bought-out items, the purpose of such purchases, and the business nexus thereof. According to him, there existed an unexplained discrepancy between the version of the assessee and that of the recipient, giving rise to doubt regarding the true character of the transaction. Holding that the expenditure could not be accepted either as commission payment or as a genuine business expenditure in the absence of satisfactory explanation and supporting evidence, the Assessing Officer disallowed the amount of Rs.18,50,000/- and added the same to the total income.

292. Before the learned CIT(A), the assessee submitted that the impugned disallowance had arisen merely because the payment had been booked under the head “commission” whereas the recipient had treated the same as consideration for supply of bought-out items and local accessories. The assessee pointed out that by letter dated 29.12.2008 it had placed on record the confirmation received from M/s Apex Medi Equipment, wherein the recipient had categorically acknowledged receipt of Rs.18,50,000/- from the assessee against supply of bought-out items and local accessories and had clarified that it had never acted as a commission agent. It was contended that the payment had in fact been incurred for the purposes of business and that a mere mistake in accounting classification could not render the expenditure non-genuine or non-business in nature. The assessee accordingly urged that even if the amount was not allowable as commission expenditure, the same ought to be allowed as business expenditure since the recipient had admitted receipt of the amount and the expenditure itself was not disputed.

293. The learned CIT(A) admitted additional evidence and called for a remand report from the Assessing Officer. After considering the assessment order, remand report and submissions of the assessee, the learned CIT(A) observed that the recipient had classified the transaction as purchase of accessories and had specifically denied receipt of any commission. According to the learned CIT(A), the assessee had failed to place on record satisfactory evidence establishing that commission services were rendered or that the payment represented commission expenditure. The learned CIT(A) further held that no sufficient indirect corroborative evidence supporting the assessee’s claim had been furnished. Proceeding on the premise that the issue before him was the allowability of commission payment, he concluded that the necessary evidence for payment of commission was absent and accordingly upheld the disallowance corresponding to M/s Apex Medi Equipment. Thus, the addition of Rs.18,50,000/- made by the Assessing Officer came to be sustained by the learned CIT(A).

294. The learned AR reiterated the submissions advanced before the lower authorities and invited our attention to the factual paper book. It was submitted that the impugned amount of Rs.18,50,000/- paid to M/s Apex Medi Equip did not represent commission expenditure at all, but pertained to purchase of accessories for a CT Scan machine, which was inadvertently grouped under the accounting head “Commission”. The learned AR submitted that the characterisation of the expenditure in the books had led to the controversy, whereas the genuineness of the payment itself stood duly established from the material available on record.

295. Referring to the letter dated 26.12.2008 issued by M/s Apex Medi Equip, it was pointed out that the recipient had unequivocally confirmed receipt of Rs.18,50,000/- from the assessee towards supply of bought-out items and local accessories against purchase order no. 45267923. The said party had merely denied that it acted as a commission agent or had received any commission. According to the learned AR, the confirmation furnished by the recipient fully supported the assessee’s case that the payment represented expenditure incurred for procurement of goods and not commission. It was further submitted that copies of the purchase order as well as cheque/payment evidences were also furnished before the Assessing Officer, thereby establishing the actual incurrence of expenditure.

296. The learned AR contended that both the Assessing Officer and the learned CIT(A) had proceeded on an erroneous premise that the assessee was required to establish rendering of commission services. According to him, once the recipient itself acknowledged receipt of the amount and explained the nature of the transaction as consideration for supply of accessories, the enquiry ought to have shifted to examining whether such expenditure was incurred wholly and exclusively for the purposes of business. Instead, the authorities below rejected the claim merely because the expenditure was not found to be commission payment.

297. The learned AR emphasized that the disallowance was founded only on a difference in nomenclature and not on any finding that the payment was bogus, fictitious or not incurred. It was submitted that the recipient had accepted receipt of the amount, the payment had been made through banking channels, the purchase order was available on record, and therefore the authenticity of the expenditure remained undisputed. According to the learned AR, a mere discrepancy in accounting classification could not justify complete disallowance of an otherwise genuine business expenditure. He accordingly pleaded that even assuming the amount was not allowable as commission expenditure, the same ought to be allowed under section 37(1) of the Act as a business expenditure incurred for purchase of accessories used in the assessee’s business operations. The learned AR therefore prayed for deletion of the addition of Rs.18,50,000/- sustained by the learned CIT(A).

298. Per contra, the learned DR strongly relied upon the findings recorded by the Assessing Officer and the learned CIT(A).The learned DR further contended that although the recipient had acknowledged receipt of the amount, the assessee had failed to place on record primary documentary evidence establishing the underlying transaction. In particular, he pointed out that no invoice or bill issued by M/s Apex Medi Equip for the alleged supply of accessories was available on record. According to him, in the absence of any invoice, delivery challan, goods receipt note, stock entry, or other contemporaneous evidence evidencing actual purchase of accessories, the assessee had failed to discharge the burden cast upon it under section 37(1) of the Act.

299. We have heard the rival submissions and perused the material available on record. The controversy before us is confined to the disallowance of Rs.18,50,000/- paid to M/s Apex Medi Equip. The Assessing Officer treated the claim as non-genuine primarily because the assessee had originally debited the amount under the head “commission” whereas the recipient, in response furnished during assessment proceedings, stated that it had never acted as a commission agent and that the amount represented consideration received towards supply of bought-out items and local accessories. The learned CIT(A) also sustained the disallowance on the premise that evidence supporting commission payment was not available on record.

300. Upon careful examination of the documents placed before us, we find that the approach adopted by the lower authorities proceeds on a misconception that the allowability of an expenditure depends upon the nomenclature under which it is booked in the accounts. It is a settled proposition that for income-tax purposes, the true nature and substance of a transaction must prevail over its accounting classification. A wrong accounting head cannot convert an otherwise genuine business expenditure into a non-deductible item.

301. In the present case, the assessee has placed on record a copy of Purchase Order No. 45267923 dated 24.05.2004 issued in favour of M/s Apex Medi Equip. The purchase order specifically records that the vendor was required to supply “local bought out items/accessories for CT Scan Machine supplied at District Hospital, Ambikapur”. The purchase order further stipulates the payment terms as “100% payment against invoice”. The value of the purchase order is exactly Rs.18,50,000/-, being the very amount under dispute.

302. Further, the payment advice placed at page 254 of the paper book evidences remittance of Rs.18,50,000/- to M/s Apex Medi Equip through banking channels. Significantly, the payment advice itself contains reference to the underlying invoice particulars and records the invoice date and reference number against which payment was released. Thus, the contemporaneous documents generated by the assessee in the ordinary course of business unmistakably establish that the payment was linked to a purchase transaction and not to any commission arrangement.

303. We further notice that the recipient itself, vide confirmation letter dated 26.12.2008, acknowledged receipt of Rs.18,50,000/-from the assessee towards supply of bought-out items and local accessories under the relevant purchase order. The recipient specifically clarified that it had never acted as a commission agent and that the payment was not in the nature of commission. Therefore, far from disproving the expenditure, the confirmation corroborates the assessee’s explanation regarding the true character of the transaction.

304. The Assessing Officer has not disputed the genuineness of payment, the identity of the recipient, or the fact that the amount was paid through banking channels. No material has been brought on record to suggest that the payment has come back to the assessee or that the transaction is sham or fictitious. The sole basis of disallowance is the perceived inconsistency between the accounting classification adopted by the assessee and the description given by the recipient. In our considered view, such inconsistency by itself cannot justify disallowance once the underlying business transaction stands independently substantiated through the purchase order, payment records and recipient’s confirmation.

305. The learned DR has pointed out that no invoice issued by the vendor is available on record. While this contention deserves consideration, we find that the purchase order itself expressly contemplated payment against invoice and the contemporaneous payment advice records the invoice date and reference particulars. More importantly, the recipient has admitted receipt of the amount against supply of accessories under the purchase order. In these peculiar facts, mere non-availability of a copy of the invoice in the paper book cannot outweigh the cumulative evidentiary value of the purchase order, banking documents and vendor confirmation, all of which consistently point towards a genuine business purchase transaction.

306. We are therefore of the considered view that the authorities below erred in examining the issue solely from the perspective of allowability of commission expenditure. The real question was whether the payment of Rs.18,50,000/- represented a genuine expenditure incurred wholly and exclusively for the purposes of business. The documentary evidence on record clearly demonstrates that the amount was paid towards procurement of bought-out items and accessories required in connection with supply of CT Scan equipment. Accordingly, even assuming that the expenditure was erroneously classified under the head “commission” in the books of account, the same would nevertheless remain allowable as business expenditure having been incurred in the ordinary course of business operations.

307. In view of the foregoing discussion, we direct the Assessing Officer to delete the disallowance of Rs.18,50,000/-. Ground Nos. 10 and 11 raised by the assessee are accordingly allowed.

308. Ground Nos. 12 to 14 are either consequential or general in nature. Insofar as Ground No. 12 challenging the initiation of penalty proceedings under section 271(1)(c) of the Act is concerned, we find that the same is premature since the present appeal arises from quantum assessment proceedings and no separate penalty order is before us. The assessee shall be at liberty to raise all legal and factual contentions, if so advised, in the course of penalty proceedings in accordance with law.Since these grounds do not give rise to any specific grievance requiring adjudication, no separate finding is called for thereon. Accordingly, Ground Nos. 12 to 14 are dismissed as not requiring separate adjudication.

309. In the result, the appeal of the assessee is partly allowed in terms indicated hereinabove.

Revenue’s Appeal in ITA No. 4037/Mum/2025

310. We shall now take up the appeal preferred by the Revenue. The Revenue has challenged the relief granted by the learned CIT(A) in respect of certain additions made by the Assessing Officer during the course of assessment proceedings. Ground Nos. 1 and 2 involve a common controversy, namely, whether the provisions created by the assessee towards anniversary programme expenses and medical benefits to employees represented accrued and crystallised liabilities allowable under the Act or were merely contingent liabilities liable to be disallowed.

Ground No. 1: Deletion of Disallowance of Rs.2,14,58,000/-towards Provision for Anniversary Awards

311. During the course of assessment proceedings, the Assessing Officer observed that the assessee had created a provision of Rs.2,14,58,000/- under the head “Other Provisions” towards anniversary awards proposed to be granted to employees upon completion of 25 years of service with the company. The assessee explained that the provision represented an employee benefit obligation determined on actuarial basis. The Assessing Officer, however, held that the liability had not crystallized during the relevant previous year since the obligation would arise only if the concerned employee continued in service and completed the stipulated period of 25 years. According to the Assessing Officer, the provision was dependent upon uncertain future events and, therefore, represented a contingent liability not allowable as deduction. He accordingly disallowed the provision and added Rs.2,14,58,000/- to the total income.

312. In appeal, the assessee contended before the learned CIT(A) that the provision was created on the basis of actuarial valuation in accordance with accepted accounting principles and represented an accrued employee benefit obligation. It was further submitted that identical accounting treatment had been consistently followed and accepted by the Department in earlier years. Reliance was placed upon the decision of the Hon’ble Delhi High Court in the case of CIT-IV, New Delhi v. Insilco Ltd. [2009] 222 CTR 641/[2010] 320 ITR 322 (Delhi)/ (ITA No.873/2008 dated 27.02.2009 )and other judicial precedents dealing with actuarially determined employee benefit liabilities. Accepting the submissions of the assessee, the learned CIT(A) held that the liability was scientifically determined through actuarial valuation and could not be regarded as contingent merely because the actual payment would be made in future years. Following the judgment of the Hon’ble Delhi High Court in Linsico Ltd. (supra), the learned CIT(A) directed the Assessing Officer to delete the addition of Rs.2,14,58,000/-.

313. The learned DR strongly relied upon the findings recorded by the Assessing Officer in the assessment order.

314. The learned AR, reiterating the submissions advanced before the lower authorities, submitted that the provision for long service awards represented an employee benefit obligation incurred in the course of business and was recognized in accordance with the mercantile system of accounting. It was submitted that the assessee had a long-standing practice of presenting anniversary awards to employees upon completion of long service, generally after completion of 25 years of service, with a view to retain and motivate employees. The liability arising from such scheme was scientifically determined through actuarial valuation (copy of the said report was placed on page No. 175 of the paper book) and, accordingly, a provision of Rs.2,14,58,000/-was created during the year. The learned AR further submitted that the provision was not an ad hoc estimate but was based upon actuarial assumptions regarding employee retention, expected future payouts and service tenure, and therefore represented a present obligation arising from services already rendered by employees. It was further contended that the same accounting treatment had been consistently followed over the years and had been accepted by the Department in earlier assessments. Reliance was placed upon the decision of the Hon’ble Delhi High Court in the case of Insilco Ltd. (supra) and various other judicial precedents including Toyota Industries Engine India (P.) Ltd. v. Deputy Commissioner of Income-tax (Bangalore – Trib.), Rural Electrification Corporation Ltd. v. DCIT [IT Appeal Nos. 5153 & 6327 (Del) of 2014], Commissioner of Income tax, Kolkata-IV v. Eveready Industries (India) Ltd. (Calcutta) and Mahindra & Mahindra Ltd. v. Dy. CIT (Mumbai – Trib.), to contend that provisions for long service awards determined on actuarial basis constitute allowable business expenditure and cannot be treated as contingent liabilities merely because the actual payment may arise in future years. The learned AR accordingly supported the order of the learned CIT(A) deleting the addition.

Ground No. 2: Deletion of Disallowance of Rs.49,60,000/-towards Provision for Medical Benefits

315. The Assessing Officer further noticed that the assessee had created a provision of Rs.49,60,000/- towards medical benefits payable to employees. The assessee explained that under its employee welfare scheme, eligible employees were entitled to reimbursement of medical expenses not covered by insurance policies and that the liability was determined on the basis of actuarial valuation. The Assessing Officer rejected the explanation and held that the expenditure was dependent upon uncertain future events, namely the occurrence of illness and future medical claims by employees. According to him, the liability had not accrued during the relevant year and was merely contingent in nature. He therefore disallowed the provision of Rs.49,60,000/- and added the same to the income of the assessee.

316. Before the learned CIT(A), the assessee submitted that the provision related to post-retirement and employee medical benefit obligations arising from contractual terms of employment and had been quantified on the basis of actuarial valuation. It was argued that under the mercantile system of accounting and the principle of prudence, provision for known liabilities estimated on scientific basis was required to be recognized in the books. Reliance was placed on the decision of the Delhi Bench of the Tribunal in Bokaro Power Supply Co. (P.) Ltd. v. DCIT [IT Appeal Nos. 4921 (Del) of 2018/149 (Del) of 2012] and it was also pointed out that similar claims had been accepted in earlier years. The learned CIT(A), after considering the submissions, held that the provision represented an actuarially determined liability arising out of contractual obligations towards employees and could not be characterized as a contingent liability. Following the decision in Bokaro Power Supply Co. (P.) Ltd. (supra) and considering the consistent practice followed by the assessee, the learned CIT(A) directed deletion of the addition of Rs.49,60,000/-. Against the said relief granted by the learned CIT(A), the Revenue has preferred the present appeal before us.

317. The learned DR strongly relied upon the findings recorded by the Assessing Officer in the assessment order.

318. The learned AR submitted that the liability arose from the assessee’s contractual obligation towards its employees under the post-retirement medical benefit scheme. It was explained that eligible employees, upon retirement, were entitled to medical benefits and, in the event of their death, such benefits continued to be available to the surviving spouse. Under the scheme, the assessee reimbursed 80% of the medical expenditure incurred by eligible employees in excess of the amount reimbursed by the insurance company, subject to the prescribed monetary limits. The learned AR submitted that the liability was not contingent or ad hoc in nature but represented a present obligation arising from the terms of employment and was quantified on the basis of actuarial valuation. It was further contended that the provision had been created in accordance with recognized accounting principles and the mercantile system of accounting and represented the present value of future obligations attributable to services already rendered by employees. The learned AR emphasised that the learned CIT(A) had rightly appreciated that the liability was actuarially determined and had correctly followed the decision of the Delhi Bench of the Tribunal in the case of Bokaro Power Supply Co. (P.) Ltd. (supra), wherein similar actuarially valued employee benefit obligations were held to be allowable deductions. Reliance was also placed upon various judicial precedents including Toyota Industries Engine India (P.) Ltd. (supra), Insilco Ltd. (supra), Rural Electrification Corporation Ltd. (supra), Eveready Industries (India) Ltd. and Mahindra & Mahindra Ltd. (supra), in support of the proposition that employee benefit obligations scientifically determined through actuarial valuation constitute accrued liabilities and cannot be disallowed merely because the actual outflow would occur in future years. Accordingly, it was submitted that the learned CIT(A) was justified in deleting the disallowance of Rs.49,60,000/- made by the Assessing Officer.

319. We have carefully considered the rival submissions and perused the material available on record. The Revenue has challenged the action of the learned CIT(A) in deleting the disallowance of (i) provision for long service award amounting to Rs.2,14,58,000/- and (ii) provision for post-retirement medical benefits amounting to Rs.49,60,000/-. The sole basis adopted by the Assessing Officer for making both the disallowances is that the liabilities had not crystallized during the year and were contingent in nature since the actual payment would arise only upon occurrence of future events.

320. From the facts available on record, we find that the provision for long service award represents the present value of the assessee’s obligation under a long-standing employee welfare scheme whereby employees become entitled to specified monetary awards upon completion of prescribed years of service. The actuarial valuation report placed before us reveals that the liability was determined by an independent actuary after considering the number of employees, withdrawal factors, salary escalation assumptions, discounting factors and expected future obligations. The actuarial report specifically quantified the liability as on 31.03.2005, which substantially corresponds with the provision created in the books. Thus, the provision was not made on an ad hoc or arbitrary basis but was founded upon scientific actuarial principles.

321. Similarly, the provision for post-retirement medical benefits represents the assessee’s obligation arising under its service conditions and employment policies. The scheme provides medical benefits to eligible employees after retirement and, in certain circumstances, even to the surviving spouse. The assessee’s obligation is not dependent upon any future discretionary decision but flows directly from the contractual terms of employment. The liability was also determined on actuarial basis taking into consideration the present value of future obligations attributable to services already rendered by employees during the year.

322. The Assessing Officer has proceeded on the assumption that since actual payment would arise in future years, no liability exists during the current year. In our considered view, such reasoning is contrary to settled principles governing mercantile accounting and recognition of employee benefit liabilities. Under the mercantile system, expenditure is allowable when the liability accrues and not merely when payment is made. The distinction between a contingent liability and an accrued liability has been repeatedly explained by the Hon’ble Supreme Court and various High Courts.

323. The Hon’ble Supreme Court in Bharat Earth Movers (supra), laid down the principle that if a business liability has definitely arisen in the accounting year, deduction should be allowed notwithstanding that the liability may have to be quantified and discharged at a future date. The Court held that where the liability is capable of being estimated with reasonable certainty, it cannot be regarded as a contingent liability merely because the actual outflow would occur in future.

324. The aforesaid principle was applied by the Hon’ble Delhi High Court in Insilco Ltd. (supra). The Court was dealing with an identical issue concerning provision for long service awards payable to employees based on actuarial valuation. The Hon’ble Court held:

“The provision for a liability is amenable to a deduction, if there is an element of certainty that it shall be incurred and it is possible to estimate liability with reasonable certainty even though actual quantification may not be possible, as such a liability is not of a contingent nature.” (para 5)

325. The Court further observed that where the provision for long service award was estimated on the basis of actuarial calculations, the deduction was allowable and the liability could not be regarded as contingent.

326. We find that the facts of the present case are materially identical to those considered by the Hon’ble Delhi High Court in Insilco Ltd. Here also the provision has been created on the basis of actuarial valuation and represents the present value of future obligations arising from services already rendered by employees.

327. The Hon’ble Calcutta High Court in Eveready Industries (India) Ltd. (supra), while considering provision for postretirement medical benefits held that such liability constitutes an accrued liability to be discharged in future and is allowable as deduction. The Court specifically upheld the Tribunal’s finding that the provision was based upon standard accounting principles and the ratio of Bharat Earth Movers.

328. Likewise, the Delhi Bench of the Tribunal in Rural Electrification Corporation Ltd. (supra), upheld the allowability of provision for post-retirement medical benefits made on actuarial basis and held that such liability constituted an accrued liability and not a contingent liability. The Bench observed that provisions created in accordance with Accounting Standard-15 and actuarial valuation represent definite liabilities notwithstanding that the actual discharge would occur in future years.

329. We further find support from the decision of the Co-ordinate Bench in Mahindra & Mahindra Ltd. (supra), wherein deduction towards provision for post-retirement housing and medical benefit schemes was allowed in respect of present employees. The Bench specifically held that deduction could not be denied merely because the benefit would be received after retirement and not during the current period.

330. Another significant aspect which cannot be ignored is the principle of consistency. The learned CIT(A) has recorded a finding that similar provisions had been allowed by the Department in earlier years. The Revenue has not brought any material on record demonstrating any change either in facts or in law which would justify a departure from the accepted position. In absence of any distinguishing feature, consistency also supports the assessee’s claim.

331. The entire approach of the Assessing Officer proceeds on the premise that because an employee may leave service before becoming eligible or may not ultimately avail the medical benefit, the liability remains contingent. Such reasoning overlooks the fundamental concept of actuarial valuation itself. Every actuarial valuation necessarily factors in probabilities such as mortality, attrition, withdrawal, salary escalation and discounting. Once these factors are scientifically incorporated into the valuation process, the resultant liability represents the best estimate of the present obligation and cannot be characterised as a contingent liability.

332. In our considered view, the liabilities in question have arisen out of services already rendered by employees during the relevant previous year. The future payment is merely the mode of discharge of an existing obligation. The liability itself stands accrued during the year and has been quantified through recognised actuarial methods. Therefore, both the provisions represent accrued and ascertained liabilities and not contingent liabilities.

333. Accordingly, respectfully following the ratio laid down by various judicial precedents, as referred above, we find no infirmity in the order of the learned CIT(A) deleting the disallowance of Rs.2,14,58,000/- towards provision for long service award and Rs.49,60,000/- towards provision for postretirement medical benefits. The findings of the learned CIT(A) are upheld and the grounds raised by the Revenue are dismissed.

334. In the combined result, the appeal of the assessee is partly allowed for statistical purposes and the appeal of the Revenue is dismissed.