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Income Tax Appellate Tribunal, D Bench, Mumbai
Before: Shri Shamim Yahya & Shri Ravish Sood
O R D E R
Per Ravish Sood, JM
The present appeal filed by the revenues is directed against the order passed by the CIT(A)-3, Mumbai, dated 31.03.2017, which in turn arises from the order passed by the A.O under Sec.143(3) r.w.s. 147 of the Income Tax Act, 1961 (for short ‘Act’), dated 31.03.2016 for A.Y. 2013-14. The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-3, Thane erred in deleting the addition of Rs. 1,81,67,595/- made on account of provision for warranty without appreciating the fact that the provisions were made arbitrarily and considering the past experience and as per the guidelines of AS-29 of the ICAI.
The appellant prays that the order of the Ld. CIT(A)-3, Thane, may be set-aside and that of the Assessing Officer be restored.
The appellant craves leave to add, amend or alter or alter any ground/grounds, which may be necessary.”
P a g e | The Dy. Commissioner of Income Tax Vs. M/s Medirays Corporation 2. Briefly stated, the assessee firm which is engaged in the business of repairing, refurbishing, sale and installation of medical equipments had e- filed its return of income for A.Y. 2013-14 on 26.09.2013 declaring income at Rs.2,04,26,250. The return of income filed by the assessee firm was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).
3. In the course of the assessment proceedings, it was observed by the A.O that the assessee had made provision for warranties to the tune of Rs.1,81,67,595/-. The A.O noticed, that the provision so made by the assessee worked out to about 10% of the sale price of machines. Further, it was observed by him that the assessee had not fully used the provision amount in the earlier years, and had been reversing major portion of the provision made in the earlier years after the expiry of the warranty period. It was observed by the A.O, that in the backdrop of the records of the assessee for the past 9 financial years, it stood revealed that while for the assessee had provided for an amount of Rs.5,07,36,653/- towards provision for warranties in its books of account, however, as against the same an amount of Rs.3,18,73,720/- i.e 62.82% of the total provisions which was not utilised had been written back. On the basis of his aforesaid observations, it was gathered by the A.O that as the assessee had utilised only 37.18% of the actual provisions during the past 9 financial year, hence it could safely be gathered that for provisioning of 10% of sales by the assessee being excessive, unrealistic and arbitrary could not be allowed as an expense under Sec. 37(1) of the Act. It was further observed by the A.O, that not only the facts as regards the reversal of the substantial amount of provisions by the assessee was unrealistic and excessive, but even otherwise the same was not in accordance with possible estimate prescribed under the Accounting Standard-29 issued by the Institute of Chartered Accountants of India. Thus, the A.O on the basis of his aforesaid observations was of a strong conviction that the provisions for warranty was clearly excessive and disproportionate to the actual present obligation of the assessee, as could be safely gathered from its past results. Further, the A.O observed that the P a g e | The Dy. Commissioner of Income Tax Vs. M/s Medirays Corporation judgment of the Hon’ble Supreme Court in the case of Bharat Earth Movers Vs. CIT (2000) (245 ITR 428) (SC) and Rotork Controls India OVT Ltd. Vs. CIT (314 ITR 62) (SC), relied upon by the assessee to buttress his aforesaid claim were distinguishable on facts. On the basis of his aforesaid deliberations the A.O disallowed the assessees claim of provision of Rs.1,81,67,595/- for warranty expenses. Before parting, it was also observed by the A.O that though a similar disallowance of provisions for warranties made by the A.O in the case of the assessee for A.Y 2011-12 had been deleted by the CIT(A)-3, Thane, however the said order had been assailed by the revenue before the Tribunal, and was pending disposal as on date.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee was persuaded to subscribe to the same. It was observed by the CIT(A), that as warranty was an integral part of the sale price, therefore, the assessee who had incurred a liability towards the same during the year, was thus entitled for deduction under Sec.37 of the Act, as regards the same. Further, the CIT(A) noticed that a similar claim of the assessee was earlier allowed by him while disposing of its appeal for A.Y. 2011-12. The CIT(A) observed that his order passed in the assesses own case for A.Y 2011-12, therein allowing the provision for warranty expenses had been upheld by the Tribunal viz. ITAT ‘B’ Bench, Mumbai in dated 22.03.2017. On the basis of his aforesaid observations, the CIT(A) allowed the appeal of the assessee.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short ‘A.R’) at the very outset of the hearing of the appeal submitted that the issue was covered by the order of the Tribunal in the assesses own case for A.Y. 2011-12 i.e ACIT-Circle-2 Vs. M/s Medirays Corporation, Thane, [ITA No. 190/Mum/2016; dated 22.03.2017] (copy placed on record). Further, the ld. A.R submitted that the aforesaid order for A.Y 2011-12 was thereafter P a g e | The Dy. Commissioner of Income Tax Vs. M/s Medirays Corporation followed by a coordinate bench of the Tribunal i.e. ITAT ‘I’ Bench Mumbai in the assesses own case for A.Ys 2008-09 to 2010-11 in DCIT, Circle-2 Vs. M/s Medirays Corporation, Thane [ITA No. 6218 to 6220/Mum/2016; dated 23.05.2018] (copy placed on record). On the basis of the aforesaid contentions, it was averred by the ld. A.R that the matter involved in the present appeal was squarely covered by the aforementioned orders of the coordinate benches of the Tribunal. Per contra, the ld. Departmental Representatives (for short ‘D.R’) though relied on the order of the A.O, but did not controvert the fact that the issue involved in the present appeal was squarely covered by the aforesaid orders.
We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find that the only issue involved in the present appeal pertains to the allowability of the assesses claim of deduction towards provision for warranties. We have perused the order of the Tribunal passed in the assessee’s own case for A.Y. 2011-12 i.e. ACIT, Circle-2 Vs. M/s Medirays Corporation, Thane [ITA No. 190/Mum/2016; dated 22.03.2017] and find that the issue involved herein is squarely covered by the aforesaid order. We find that the Tribunal after deliberating at length on the issue as regards the allowability of the assesses claim of deduction towards provision for warranties, had observed as under: “9. On a careful perusal of the order passed by Ld.CIT(A), we notice that th e f irst appel l ate aut hor i ty has ex ami ned the cl ai m of the assessee by f ollowing the principles laid down by Hon ’ble Supreme Court in the case of Rotork Controls (India) Ltd (supra) and has further noticed that the assessee has spent a sum of Rs.85,28,300/- in the succeeding years out of the warranty amount provided for during the instant year. The Ld.CIT(A) has also taken into account the fact that t h e m a c h i n e r y s o l d b y t h e a s s e s s e e a r e i m p o r t e d s e c o n d h a n d machines and hence they may require f requent attendance/repairs. Since the assessee has been declaring prof its at a higher level year af ter year, the Ld. CIT(A) has also observed that the creation of provision and reversal of the same are revenue neutral. In any case, a business man would provide f or such warranty claims on estimated b a s i s f o r p o s s i b l e c l a i m s o n l y a n d i t i s n o t n e c e s s a r y t h a t t h e prov isio n so m ade sho ul d he f ul l y spen t. T he ac tu al e xpe nd i ture wo ul d d e p e n d up o n t he war r a n ty c l ai m s a c t u al l y l od ge d b y t he c us to mers, which may vary year af ter year. In the instant case, it is no t t he c as e of the AO