SEW EURPDRIVE INDIA PVT. LTD.,,VADODARA vs. THE DY. CIT., CIRCLE-2(1)(1),, VADODARA

The learned CIT(A) and the learned Assessing Officer ('AO') erred in law and on facts in not considering the detailed submission/written- submissions and documents furnished by the appellant.

The learned CIT(A) erred in law and facts in disallowing the provisions for warranty of Rs. 12,04,523 debited to profit & loss account.

The learned CIT(A) erred in law and facts by holding that no scientific basis was there for calculation of warranty provision, whereas the appellant has provided the scientific basis of calculation of provision for warranty both before the learned AO as well as the learned CIT(A). Also, the learned CIT(A) erred in law by mentioning that decision of Hon'ble Supreme Court in case of Rotork Controls India Private Limited v. CIT 314 ITR 62 is not applicable in appellant's case.

The learned CIT(A) as well as the learned AO failed to understand accounting treatment done by the appellant in its books of accounts in connection with provisions for warranty. Also, they failed to appreciate that even alternate treatment suggested by them was followed by the appellant would have resulted into same claim of expenditure.

The learned CIT(A) erred in upholding the disallowance of bad-debt claim of appellant amounting to Rs. 88,21,126. 3. 1. The learned CIT(A) erred in law and on facts by holding that individual account of one of the bad-debt parties viz. Diacarb Tolls Private Limited was not written-off, without appreciating the specific accounting entry showing the writing off the account of said party, furnished by the appellant before the learned CIT(A). The learned CIT(A) further failed to appreciate Hon’ble Supreme Court decision in case of Vijaya Bank Vs. CIT 323 ITR 166, wherein it was held that assessee is not required to close the individual account of each debtor in its books.

Without foregoing to above, the appellant has written-off the individual account of Diacarb Tolls Private Limited in its books of accounts, which was also apparent from the accounting entry furnished by the appellant before the learned AO. Asstt. Year 2011-12 3

The ground no.1 raised by the assessee is general, and therefore, it does not require any separate adjudication.

The issue raised by the assessee in the ground no. 2 is that Ld.CIT (A) erred in disallowing the provision for warranty amounting to Rs.12,04,523/- only.

The facts of the case are that the assessee is a private limited company and engaged in the business of manufacturing/assembling of gear motors/boxes, inverters, etc. The assessee in the year under consideration has debited its profit and loss account for Rs. 12,04,523/- on account of the provision of warranty. However, the assessee claimed that it was required to create the provision for warranty for the year under consideration for Rs. 33,04,523/- only. It is because it has claimed actual expenses against the provision for warranty by debiting profit and loss account for Rs. 22,16,881/- only. As such the actual warranty expenses were not adjusted against the provision made for the warranty expenses in the earlier year. Thus the opening balance as on 1st April 2010 carried forward from the earlier year amounting to ₹ 21 lakhs remained intact. Accordingly, the assessee created a provision in the year under consideration at ₹ 12,04,523.00 which has become ₹ 33,04,523.00 as on 31st of March 2011. Therefore a difference of Rs.12,04,523 (Rs.3304523 – 2216881) was debited in the profit and loss account. Asstt. Year 2011-12 4

1 Assessee also claimed that the provision was created in the books of accounts on a scientific basis which was accepted in the earlier assessment years. However, the AO was of the view that the provision of warranty is representing the contingent liability. Therefore the same cannot be allowed as deduction. Accordingly, the AO disallowed the sum of Rs.33,04,523/- and added to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that it had created provision on the scientific basis and therefore the same is an allowable deduction in view of the judgment of Hon’ble Supreme Court in the case of Rotork Controls India (P) 12,04,523/- on account of the provision of warranty expenses. Therefore the Ld. CIT(A) restricted the disallowance to the extent of Rs. 12,04,523/- only.

Being aggrieved by the order of the Ld.CIT (A) assessee is in appeal before us.

The Ld. AR, before us, submitted that the assessee has been claiming provision for warranty for the last several years and in none of the assessment year the disallowance on account of provision for warranty was made though the assessments u/s143(3) of the Act were framed. Asstt. Year 2011-12 5

1 The Ld.AR, further submitted that it had debited its profit and loss account on account of provision for warranty by an amount of Rs. 12,04,523/- only. It is because the assessee has claimed the expenses against the provision for warranty in the profit and loss account with the full amount. As such the actual expenses were incurred against the provision created in the earlier years.

On the other hand Ld. DR vehemently supported the order of the authorities below.

We have heard the rival contentions and perused the materials available on record. In the instant case, the issue relates to the disallowance made by the AO on account of provision for the warranty expenses. It is an undisputed fact that the assessee has been claiming provision for warranty consistently, and there was no disallowance made by the Revenue in the Assessment Order framed u/s 143(3) of the Act. As there was no change in the facts and circumstances, therefore we are of the view that the principle of consistency will apply in the case on hand. In this regard, we find support and guidance from the judgment of the Hon’ble Supreme Court in case of Radhasoami Satsang reported in 193 ITR 321 wherein it was held as under:

1 It is a settled law that the provision created on a scientific basis is an allowable deduction in view of the judgment of Hon’ble S.C in the case of Rotork Controls India Pvt. Ltd. (supra) wherein it was held as under: “From analysis of the various decision of the Supreme Court, in which a similar issue was decided, the principle which emerges is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and if the facts established show that defects existed in some of the items manufactured and sold, then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. It would all depend on the data systematically maintained by the assessee

2 In view of the above we are inclined to hold that the provision created by the assessee were based on scientific criteria and accordingly the same deserves to be allowed as deduction. Hence we set aside the order of Ld.CIT (A) and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed.

The next issue is that Ld.CIT (A) erred in confirming the disallowance made by the AO for Rs. 88,21,126/- on account of bad debt written-off.

The assessee in the year under consideration has written-off the balance of the debtor namely Diacard Tolls Pvt. Ltd. as bad debts amounting to Rs. 88,21,126/- only. Thus the assessee claims the deduction u/s 36(1)(vii) r.w.s. 36(2) of the Act. Asstt. Year 2011-12 7

However, the AO found that the assessee has not written-off bad debts in the individual account of the ledger. Therefore he disallowed the same and added to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld.CIT (A) who has also confirmed the order of the AO by observing that bad debt has not been written-off in the individual account of the party.

Being aggrieved by the order of the Ld.CIT (A) assessee is in appeal before us.

The Ld.AR, drew our attention on the copy of ledger of the party M/s Diacarb Tolls Pvt. Ltd. placed on page 160 to 162 and demonstrated that the amount of bad debts had been written-off in the individual ledger of the party. Thus the Ld. AR claimed that it had fulfilled the condition as specified u/s 36(1)(vii) r.w.s 36(2) of the Act.

On the other hand Ld. DR vehemently supported the order of the authorities below.

We have heard the rival contentions and perused the materials available on record. On perusal of the copy of the ledger of the party as discussed above, we note that the bad debts have written-off in the ledger account of the party. Therefore in our considered view, the allegation of the AO is not sustainable.

1 The Ld. DR, has also not brought on record any evidence contrary to the argument advanced by the Ld.counsel for the assessee. Asstt. Year 2011-12 8

2 In view of the above we hold that the assessee had fulfilled the condition as specified u/s 36(1)(vii) r.w.s. 36(2) of the Act and accordingly conclude that the assessee is eligible for deduction on account of bad debts written-off. In this regard, we also found support and guidance from the judgment of Hon’ble S.C in the case of TRF limited Vs CIT reported in 323 ITR 397. “This position in law is well-settled. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off.”

3 In view of the above we hold that the assessee is eligible for deduction on account of bad debts written-off in the year under consideration. Accordingly, we set aside the order of the Ld.CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

In the result appeal of the assessee is allowed.

""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT(A)

"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण / DR, ITAT, 6. गाड" फाईल / Guard file. आदेशानुसार/BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.