Prakash Babu Raghuvanshi Vs. State of Madhya Pradesh - Court Judgment

Excerpt:
criminal - essential commodities act , 1955 - sections 2, 3, 7, 7(1) - constitution of india - article 162 - conviction of appellant for allegedly committing offences under section 3 r/w section 7 (1) (a) (ii) - appeal against conviction - contention that primary requirement for attracting section 7 being violation of an order, prosecution erred in relying upon madhya pradesh sarvajanik purti vitran scheme - validity - for bringing an application under section 7 , essential requirement is an order , violation of which is alleged - neither before trial court nor high court , any effort was made to place on record the order the violation of which was alleged - as it was necessary for prosecution to place on record the 'order' which according to it , was foundation for taking action against accused appellant , matter remitted back to high court for decision afresh - section 37: [s.h. kapadia & aftab alam, jj] business expenditure - provision for product warranty against defective items - in the instant case the assessee company sells valve actuators. bulk of the sales is to bhel. at the time of sale assessee provides a standard warranty whereby in the event of any becon rotork actuator or part thereof becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch, whichever is earlier, the company undertakes to rectify or replace the defective part free of charge. this warranty is given under certain conditions stipulated in the warranty clause. for the assessment year 1991-92, the assessee made a provision for warranty at rs. 10,18,8000/- at the rte of 1.5% of the turnover. this provision ws made by the assessee on account of warranty claims likely to arise on the sales effected by the appellant assessee and to cover up that expenditure. it may be noted that since the provision made was for rs. 10,18,800/- which exceeded the actual expenditure, the appellant reversed rs. 5,00,246/- as reversal of excess provision. consequently, the assessee claimed deduction in respect of the net provision of rs. 5,18,554/- which was disallowed by the assessing officer (a.o.) on the ground that the liability was merely a contingent liability not allowable as a deduction under section 37 of the income tax act, 1961. held, the disallowance by a.o. was unjustified. the statistical data indicates that every year some of the manufactured actuators are found to be defective. the statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. therefore, warranty become integral part of the sale price of the valve actuators. in other words, warranty stood attached to the sale price of the product. these aspects are important, and obligations arising from past events to be recognized as provisions. these past events are known as obligating events. in the present case, therefore, warranty provision needs to be recognised because the assessee company is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. in this case one is concerned with product warranties. to give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. the said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it make a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). the first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the companies act as well as by the accounting standards which require accrual concept to be followed. in the present case, the department is insisting on the first option which, is erroneous as it rules out the accrual concept. the second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). in other words, it is not based on matching concept. under the matching concept if revenue is recognized the cost incurred to earn that revenue including warranty costs had to be fully provided for. when the valve actuators are sold and the warranty costs are an integral part of that sale price then the assessee has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. in such a case the second option is also inappropriate. under the circumstances, the third option is most appropriate because it fulfils accrual concept as well as the matching concept. for determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. thus, the decision on the warranty provision should be based on past experience of the company. a detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. on this basis a sensible estimate should be made. a reliable estimate of the obligation was also possible. therefore, the assessee has incurred a liability, on the facts and circumstances, of this case, during the relevant assessment year which was entitled to deduction under section 37 of the 1961 act. therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. it is important to note that there are four important aspects of provisioning. they are-provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. keeping in mind all the four aspects, the high court should not have interfered with the decision of the tribunal allowing claim of assessee under section 37 of income-tax act. [(2007) 293 itr 311 (mad.), reversed]. - 2. an interesting point has been raised in the appeal, which unfortunately does not appear to have been canvassed before the courts below. [1982]1scr750 ,it was observed that a scheme like the one at hand is framed under article 162 of the constitution of india, 1950 (in short 'the constitution'). that being so, it was necessary for the prosecution to place on record the 'order' which, according to it, was the foundation for taking action against the accused-appellant.arijit pasayat, j.1. leave granted.2. an interesting point has been raised in the appeal, which unfortunately does not appear to have been canvassed before the courts below. the appellant was convicted for allegedly committing offence in terms of section 3 read with section 7(1)(a)(ii) of the essential commodities act, 1955 (in short 'the act'). he was found guilty by the learned sessions judge, vidisha in sessions case no. 11 of 1996. the conviction and the sentence of one years rigorous imprisonment and a fine of rs. 2,000/-as had been imposed, came to be confirmed by a learned single judge of the high court of madhya pradesh, gwalior bench by the impugned judgment.3. mr. s.b. upadhyay, learned counsel appearing for the appellant submitted that for attracting section 7 of the act, the primary requirement is that there must be violation of an order. what the prosecution seems to have relied upon is madhya pradesh sarvajanik purti vitaran scheme, 1991 (in short the 'scheme'). according to him, the scheme cannot be equated with an order, as required under the act. learned counsel for the respondent-state, on the other hand, submitted that such a plea which essentially would need factual adjudication, was not canvassed before either the trial court or the high court.4. though there is a substance in the plea raised by learned counsel for the state, yet, for bringing an application under section 7 of the act, the essential requirement is an order, the violation of which is alleged. unfortunately, neither before the trial court nor the high court, any effort was made to place on record the order the violation of which was alleged. in madhya pradesh ration vikreta sangh society and ors. v. state of madhya pradesh and anr. : [1982]1scr750 , it was observed that a scheme like the one at hand is framed under article 162 of the constitution of india, 1950 (in short 'the constitution'). that being so, it was necessary for the prosecution to place on record the 'order' which, according to it, was the foundation for taking action against the accused-appellant.5. section 7 refers to contravention of any order made under section 3. it is essential for bringing in application of section 7 to show that some order has been made under section 3 and the order has been contravened. section 3 deals with powers to control production, supply, distribution etc. of essential commodities. exercise of such powers, can be done by 'order'. according to section 2(c) 'notified order' means an order notified in the official gazette, and section 2(cc) provides that 'order' includes a direction issued thereunder.6. in the circumstances, without expressing any opinion on the merits of the case, we remit the matter to the high court to hear the matter afresh. the parties shall be permitted to 'place materials in support of their respective stands. it would be incumbent upon the state to file materials to show as to which 'order' was violated. if the document in question is placed before the high court, it goes without saying that the issue shall be examined with reference thereto and necessary adjudication shall be done.7. we are told that the accused-appellant has been in custody for nearly four months. the order of bail granted by this court shall continue till the fresh adjudication is done by the high court.8. we make it clear that by giving this direction, no opinion about his culpability or otherwise is expressed by us.9. the appeal is disposed of accordingly.