What did the Tribunal hold?

The Tribunal held that the provision for free service coupons was made on a scientific empirical basis, considering past trends and occurrence rates. Since this provision was part of the sales obligation, similar to warranty provisions accepted by the CIT(A), it should be allowed as an expenditure.

The assessee, Mahindra Two Wheelers Limited, made a provision for free service coupons amounting to Rs 81,84,727/-. The Assessing Officer disallowed this provision, treating it as a contingent liability. The assessee contended it was an ascertained liability made on a scientific basis.

What were the issues?

Whether a provision for free service coupons, made on a scientific basis, constitutes an allowable business expenditure or a contingent liability.

Mahindra Two Wheelers Ltd, Mumbai vs The Asstt Comm of Income Tax… | s.143(3) | ITAT Mumbai 2022

Income Tax Appellate Tribunal, ‘F‘ BENCH

Before: SHRI M.BALAGANESH & SMT KAVITHA RAJAGOPAL

For Appellant: Shri Viral Shah

For Respondent: Shri Ratnakar Shelke

Hearing: 05/09/2022Pronounced: 30/09/2022

आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal in A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals) National Faceless Appeal Centre (NFAC) in appeal No.CIT(A)-13, Mumbai/10687/2016-17 dated 30/05/2022 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 13/12/2016 by the ld. ACIT CIR 7(2)(1), Mumbai (hereinafter referred to as ld. AO).

M/s. Mahindra Two Wheelers Limited

The only issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the dislalownace made on account of provision for service coupon in the sum of Rs 81,84,727/- treating it as a contingent liability, in the facts and circumstances of the case.

We have heard the rival submissions and perused the materials available on record. We find that the assessee is engaged in the business of manufacturing and selling motorized two wheelers. The return of income for the Asst Year 2014-15 was filed by the assessee company on 28/11/2014 declaring total loss of Rs 455,79,18,161/-. The ld. AO observed that the assessee had made provision for warranty of Rs 1,42,25,900/- and provision for free service coupons of Rs 81,84,727/- and claimed the same as deduction in the return of income. The assessee filed its replies in justification of the claim of deduction together with the manner of making provisions vide letters dated 04/08/2016 and 09/12/2016. In the opinion of the ld. AO, the said provisions are contingent in nature and would fall under the category of provisions made for unascertained liabilities. The ld. AO observed that these provisions were not actually paid by the assessee company on or before the due date of filing the return of income ; that the assessee could not prove the business expediency of making the provisions and that the provisions were not made based on any actuarial valuation report. Accordingly, the ld. AO disallowed the same while completing the assessment.

3.1. The assessee contended that the aforesaid provisions represent ascertained liability and were made in the regular course of its business. The assessee during the course of assessment proceedings had submitted that the said provisions were made on scientific empirical basis and hence to be construed as wholly and exclusively for the purpose of its business.

M/s. Mahindra Two Wheelers Limited We find that the ld. CIT(A) had deleted the disallowance made on account of provision for warranty. Against this, the ld. DR stated that the revenue is not in appeal before us. Hence we confine our discussions only with regard to provision for free service coupons. The assessee explained the purpose of making provision for free service coupons as under:-

Free Service Coupons Amount (in Rs.) Total Expected Cost 146,987,077 Less : Booking 103,893,887 Net 43,093,190

Already Provided up to March 34,908,463 2013 (Opening provision) Net Provision required 8,184,727 3.2. We find that the assessee had duly furnished the workings for arriving at the provision for free service coupons figure before the lower authorities, which is admittedly based on the past trend of claims made in the last 5 years and also based on the occurrence rate i.e on the basis of percentage of coupons surrendered by the customers vis a vis the coupons issued to the customers. This is certainly scientific method of determining the provisions as it is part and parcel of the sales obligation itself which was committed by the assessee at the time of making the sales to the customers. We find that the provision made for warranty by the assessee is also part of the sales obligation which was duly accepted

M/s. Mahindra Two Wheelers Limited by the ld. CIT(A). When similar provision has been made for free service coupons , which were admittedly issued to the customers at the time of sale itself as stated supra, we do not find any justifiable reason for not accepting the said provision as an allowable expenditure. We find that the workings for making the provision for free service coupons are duly placed on record and no defects in the said workings were found by the lower authorities. We further find that all the case laws relied upon by the ld. CIT(A) are factually distinguishable in view of the fact that in all those cases, the workings on scientific basis were not provided by those assessees. Hence reliance placed on those cases would not advance the case of the revenue. 3.3. In view of the same, we direct the ld. AO to delete the disallowance made on account of provision for free service coupons in the instant case. Accordingly, the ground raised by the assessee is allowed.

In the result, the appeal of the assessee is allowed.

Order pronounced on 30/09/2022 by way of proper mentioning in the notice board.

MAHINDRA TWO WHEELERS LTD,MUMBAI vs. THE ASSTT COMM OF INCOME TAX, CIRCLE -7(1), MUMBAI

What did the Tribunal hold?

What were the facts?

What were the issues?

Which sections of the Income-tax Act were involved?

Recent GST High Court judgments