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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the assessee against the order of the ld CIT(A)- XI, New Delhi dated 08.08.2014 for the Assessment Year 2010-11 and 2011-12. 2. The assessee has raised the following grounds of appeal for the AY 2010- 11:-
1. That the ld CIT(A) has erred on facts and in law in confirming a disallowance of Rs. 1574953/- out of the total of Rs. 1924953/- being provision for warranty expenses claimed by the appellant in its return of income. 1.1 That while upholding the disallowance of Rs. 1574953/- the ld CIT(A) has failed to appreciate that the appellant had created the provision of the basis of past history and the same was based on a scientific and reliable method and as such, the disallowance sustained by the ld CIT(A) deserves to be deleted.”
The assessee has raised the following grounds of appeal for the AY 2011- 12:-
1. That the ld CIT (A) has erred on facts and in law in confirming a disallowance of Rs. 2325950/- out of the total of Rs. 2675450/- being warranty expenses claimed by the appellant in its return of income. 1.1 The ld CIT(A) failed to consider the fact that out of Rs. 2675450/- disallowed by AO by treating the same as provisions of warranty, Rs. 207178/- was on account of actual warranty expenses materialized during the year and the provisions made for warranty expenses is restricted to Rs. 2468272/-. 1.2 That while upholding the disallowance of Rs. 2325950/- for provisions of warranty ld CIT (A) has failed to appreciate that the appellant had created the provision on the basis of past history and the same was based on a scientific and reliable method and as such the disallowance sustained by the ld CIT (A) deserved to be deleted in full.
4. Setting out the facts for AY 2010-11, Assessee is a company engaged in the business of manufacture and sale of flexible metallic tubes, hoses, exhaust connectors etc. it filed its return of income on 15.10.2010 for Rs. 38976746/-. The assessment was framed on 26.02.2013 for Rs. 40901700/-. The ld Assessing Officer examined the warranty expenses of Rs. 2043730/- debited to the profit and loss account. It was found that Rs. 118777/- was claimed received during the year and further, 0.5% provision on sales amounting to Rs. 1924953/- was made. The assessee submitted that provisions for warranty is supported with documentary evidences and supported by decision of the Hon'ble Supreme Court in 180 Taxman 422 Rotorok Controls India Pvt. Ltd. Vs. CIT. The ld Assessing Officer disallowed the above claim of Rs. 1924953/-. The assessee preferred appeal before the ld CIT(A), who confirmed the disallowance of Rs. 1574953/- treating it as excessive liability claimed by the assessee and allowed the deduction of Rs. 3.5 lacs as a reasonable and justified. Therefore, the assessee is in appeal before us.
The ld Authorised Representative vehemently submitted that assessee is creating provisions as a percentage of sales from Assessment Year 2007- Page | 2
08 @0.5% of the sales. Such provision is in accordance with accounting standard 29 and it is carried on to the provisions which is ascertained and not contingent. He stated that as sales is inclusive of the cost of warranty the above amount is charged to the profit and loss account and when actual expenditure are incurred same are debited to the provision and balance account is carried forward. He therefore, submitted that there is no infirmity in the provisions made by the assessee. With respect to 0.5%, she submitted that it is based on the history and claimed arising on the assessee. It was further contested that disallowance confirmed by the ld CIT (A) is on adhoc basis.
The ld Departmental Representative vehemently supported the orders of the lower authorities.
We have carefully considered the rival contentions and perused the orders of the lower authorities. The provision of warranty expenses have been made by the assessee @0.75% in earlier years, however, in Assessment Year 2010-11 and 2011-12 it was reduced to 0.5%. The reason for reduction is lesser amount of warranty claims registered on the assessee. For AY 2010-11 the assessee has made provision for Rs. 1924953/- and during the year the claim received on the assessee is only Rs. 118777/-. Similarly, in the earlier year the provision for warranty made of Rs 28.25 lacs and the actual warranty expenditure incurred by the assessee were only Rs. 5.48 lacs. Further, for Assessment Year 2008- 09 the actual warranty expenses incurred by the assessee were Rs. 68.41 lacs against the provision of Rs. 35.90 lacs. As per annexure A of the order of the ld CIT(A), wherein, it is apparent that for Assessment Year 2012-13 and 2013-14 assessee has not made any provision commensurating with the above percentage. Further, actual warranty expenses were also not incurred from Assessment Year 2011-12 to 2013- 14. For the Assessment Year 2010-11 there is a meager expenses of Rs. 1.18 lacs. The Hon'ble Supreme Court in case of Rotorok Control India pvt. Ltd (supra) has held that any provision made by the assessee Page | 3 because of warranty expenditure to meet the future requirement of setting goods right on account of warranty clause in agreement crystallizes as definite liability and is an allowable expenditure. It was further held by the Hon'ble Supreme Court that if the provision is made which is based on historical trends and is supported by warranty condition at the time of sale then, the assessee is entitled to deduction of the above claim u/s 37 of the Act. In the present case as per annexure- A it seems that assessee has made ad hoc provision on the sales as a fixed percentage. The ld CIT (A) has also allowed the claim of Rs 3.5 lakhs without giving any cogent reason. Further looking at the chart titled as Annexure A by the Ld. CIT (A) which shows that the amount claimed by the assessee in the profit and loss account is a net result of opening balances of the provision for warranty added thereto amount credited in provision for warranty account during the year and reduced by the provision utilized during the year for meeting the expenditure out of the opening balances and actual warranty expenses incurred during the year over and above provision utilization. In fact, assessee is entitled to the deduction of warranty expenses provided for, if it is made based on history and some scientific methodology but not on ad hoc basis. Therefore, we set aside the whole issue back to the file of the Ld. assessing officer with a direction to the assessee to provide the methodology of making provision of warranty expenditure which should be based on some scientific and historical basis and then grant deduction of the appropriate amount to the assessee in terms of the decision of the Hon’ble Supreme Court. In the result ground No. 1 of the appeal of the assessee is allowed with above direction.
In the result, appeal of the assessee for assessment year 2010 – 11 is allowed for statistical purposes.
Both the parties submitted before us that the issue involved in the appeal of the assessee for assessment year 2011 – 12 is identical to the issue involved in assessment year 2010 – 11. Their arguments also remain the same. Therefore, as we’ve already set aside the issue of allowability of the warranty provision deduction to the file of the Ld. assessing officer in Page | 4