M/S. CUMMINS TECHNOLOGIES INDIA PRIVATE LIMITED,DEWAS vs. THE ACIT CIRCLE 1(1), UJJAIN

PER SHRI D.T. GARASIA, JM

Both the appeals relate to the same assessee and common grounds are taken, therefore, these are being convenience.

reads as under :-

“That, on the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming addition on account of warranty provisions in the assessment year 200708 of Rs. 30,65,282/- and in the assessment year 2010-11 of Rs.16,98,831/- .” In the assessment year 2010-11 the second ground reads

as under :-

“That, on the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs.20,38,655/- on account of provision for bad and doubtful debts.”

company is engaged in manufacturing of turbochargers.

Original assessment u/s 143 was passed on 24.11.2010. Thereafter, the Assessing Officer has disallowed provisions

of warranty expenses of Rs.30,65,282/-. The Assessing Officer was of the view that during the financial year 2003-

04 the assessee has practice of debiting warranty claim by the Hon'ble Supreme Court in the case of Rotork Control

India Private Limited; 314 ITR 62. As per the decision of the Hon'ble Supreme Court, the warranty expenses are allowable and in that case, the matter was restored to the Assessing Officer to verify whether the provision is made on structure policy of last 8 quarters of warranty cost and last

quarter sales were used for quantifying the provisions. The assessee is following these provisions based on the policy standard. The assessee has made structure policy by taking the actual warranty cost and sales of last 8 quarters

to make estimate of provisions for warranty claim. The accounting standard 29 issued by the Institute of Chartered Accountant mandates making such provision

where reliable estimate can be made. Therefore, warranty

expenses debited cannot be considered as contingent

liability. During the course of hearing, the learned counsel

for the assessee has drawn our attention to page 34 of the paper book wherein the assessee has made working of last

8 quarters which is the debit notes paid, FOC invoices,

total claims, domestic sales and % of warranty claims to domestic sales percentage. In the last 8 quarters the percentage comes to 0.12%. The variation in the provisions

made and actual warranty debited in the profit and loss

account, therefore, based on such working which is by the institute of Chartered Accountants of India. Similar

disclosure has been made in notes to accounts forming

part of audited financials regarding warranty, therefore,

considering the judgment of Hon'ble Supreme Court and comparing the facts of this case, warranty expenses are to be allowed.

submitted that the assessee was formerly following the warranty expenses on actual basis and the assessee

thereafter has changed the policy to make the provision for warranty expenses. Therefore, as per the rule of consistency, this expenditure cannot be allowed.

Looking to the facts and circumstances of the case, we find

that the assessee company is engaged in manufacturing of turbochargers and offers warranty for technical default in the product. During the financial year 2003-04 the company has practice of debiting the actual warranty

claims received during the year in the profit and loss

account. With the implementation of Accounting Standard

29 issued by the Institute of Chartered Accountants of India effective from financial year 2004-05 which mandates

making the provision on matching concept principle, the company started making the provision for warranty and this amount was debited to profit and loss account. The provisions were made and advice received from technical

and engineering team. This policy of making the provision

based on technical advice continued even for the next

financial year. During the year the company accrued warranty cost on domestic sales. In Schedule 14 of audited

financials the assessee has made disclosure on provisions

of warranty made and utilised and reversed during the year

as per the accounting standard 29 issued by the Institute

of Chartered Accountants of India. The amount was disclosed as under :-

Financial year Opening Additions Utilisation/ Closing balance Reversal balance F.Y.2006-07 16,20,000 3,471,507 2,177,465 2,914,042 F.Y.2005-06 1,200,000 1,620,000 1,200,000 1,620,000

Details of above figures are as under :- S.No. Particulars Amount F.Y.2006-07 1 Opening balance of warranty provision 16,20,000 2 Add:Provision made during the year 34,71,507 3 Less : Payment of warranty charges 17,71,240 during the year 4 Less : Reversal of credit amount lying in 4,06,225 company is as under :-

S.No. Particulars Amount F.Y. 2006-07 1 Warranty provision debited in the 30,65,282 profit and loss account 2 Payment of warranty charges 17,71,240 during the year 3 Difference being extra charge on 12,94,042 P&L of the company on account of following Accounting Standard 29 of ICAI

We find that the assessee is manufacturing a product

which requires warranty and the assessee has adopted

reversing excess provision. The assessee is making

provision of warranty applying the percentage of cost to the turnover based on past record making the process more

scientific bringing into higher degree of accuracy. The assessee is following mercantile system of accounting.

Therefore, we are of the view that the issue in controversy

is squarely covered by the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT;

314 ITR 62 wherein it is held as under :-

“Business expenditure – Allowability – Provision for warranty claims –A provision is recognized when (a) an enterprise has a present obligation as a result of a past event (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation – If the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past 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 – Assessee is manufacturing value actuators in large numbers and statistical data indicates that some of them turn out to be defective every year – Being a sophisticated item no customer is prepared to buy value actuator without warranty and, therefore, warranty became an integral part of the sale price – Assessee made a provision for warranty at the rate of 1.5 per cent of the turnover – Such provision needs to be recognised as the assessee has a present obligation as a result of past events which would result in outflow of resources and a reliable estimate can be made of the amount of the obligation – Warranty cost being an integral part of the sale price, assessee must provide for such warranty costs in its accounts for the relevant year, otherwise the matching concept fails – It is appropriate to provide for warranty as a percentage of turnover based on past experience as it satisfies the accrual concept as well as the matching concept – Therefore, assessee incurred liability during the relevant assessment years on the facts and circumstances of the case, and the provision made by it is allowable as deduction under s. 37.”

We respectfully following the same, allow the claim of the assessee in both the years.

11 the Assessing Officer held that the assessee has created

and calculated the provision of doubtful debt on the basis

of age of the debtor. In the cases where the age of debtor

was more than 720 days, 100% outstanding bill was written off in cases where outstanding bills are between

541 to 720 days, 75% of the amount has been provided

and in cases where bills are outstanding between 361 to 540 days, 50% of the amount has been provided. The distinction between good and bad debtors have not been kept in mind and by making provision of bad debts on the basis of age of outstanding bills, good debtors have also been provided which is not the intention of section 36(1)(vii)

of the Act. The Assessing Officer, therefore, was of the view

that under section 36(1)(vii) of the Act the bad debt cannot

be allowed.

7 During the course of hearing, the learned counsel for the assessee has argued that as per the provision of section 36(1)(vii) of the Act, the provision used the words “the amount of any bad debt or part thereof” which clearly

implies that it is not necessary that whole of the debt must

become bad and doubtful to claim a deduction. Even a part

of such bad and doubtful debt is entitled for claim of deduction under the provision. In order to claim deduction

under section 36(1)(vii) of the Act, one of the conditions

that it required to be satisfied is laid down under section 36(1)(vii) of the Act. The condition stipulated in first limb of clause (i) of sub-section 36 is that no deduction on account

of bad debt or part thereof shall be allowed unless such off or an earlier previous year. The second limb of clause (i)

of sub-section (2) of section 36 says that the said condition

is not applicable where such debt represents money lent in the ordinary business of banking or money lending which is carried on by the assessee. Therefore, second limb of clause (i) of sub-section (2) of section 36 is not relevant.

Section 36(1)(vii) of the Act is for computing the total

income of the assessee and bad debt or part thereof has to be taken into account. It is well settled by the decision of the Hon'ble Supreme Court in the case of T.R.F. Limited vs.

CIT; 190 Taxman 391(SC) which specifies that the proposition of 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 assessee. Therefore, in the instant case, the decision of the Hon'ble Supreme Court in the case of Vijaya Bank; 323 ITR

166 (SC) is completely applicable and, therefore, relying

upon the decision of the Hon'ble Supreme Court and following the decision of the Hon'ble Bombay High Court in the case of Tainwala Chemicals & Plastics India Ltd. (2013)

34 taxmann.comn. 159 (Bom), it must be allowed.

of T.R.F. Ltd. (supra) after 1.4.1989 if the bad debt is written off as irrecoverable in the accounts of the assessee,

it is allowable as bad debt. The learned DR submitted that the assessee has relied upon the decision in the case of Vijaya Bank (supra) which is completely misplaced because

the assessee company is not doing the business of banking

or money lending. Therefore, the judgment of Vijaya Bank (supra) is not applicable to the facts of the case of the assessee.

of the Hon'ble Supreme Court in the case of T.R.F. Limited,

wherein the Hon'ble Supreme Court has categorically held

as under :-

“ 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.”

Following the above decision of the Hon'ble Supreme Court,

we are of the view that the assessee’s claim of bad debt and doubtful debt is covered by the decision of the Hon'ble

Supreme Court and as per the decision of the Hon'ble

Supreme Court wherein the Hon'ble Supreme Court has categorically restored this matter to the file of the Assessing

Officer to examine whether the bad debt or part thereof has been written off in the accounts of the assessee, the matter

has to be examined by the Assessing Officer de novo and considering all the above aspect, the matter may be decided. We, therefore, restore this issue to the file of the Assessing Officer to do the needful after providing the assessee reasonable opportunity of being heard.

of this case are identical with the facts of the case of Vijaya

Bank (supra), we find that in the decision of the Hon'ble

Supreme Court, the case related to Vijaya Bank and the bank is in the business of money lending and in that case

the Hon'ble Supreme Court has held that after 1.4.1989 as net provision for impugned bad debt. We are of the view

that the assessee is not in money lending business,

therefore, this decision is not applicable to the facts of this case. During the course of hearing, the learned counsel for the assessee was specifically asked by the Bench as to whether the assessee wants to pursue this decision and still he wants to argue the matter or he wants the matter to be restored to the file of the Assessing Officer as per the decision of the Hon'ble Supreme Court in the case of T.R.F.

Ltd. (supra), the learned counsel for the assessee

specifically submitted that it is the wisdom of the Tribunal.

Thereafter, again the same question was put to the learned decision of the Hon'ble Supreme Court. Therefore, we have restored this matter to the file of the Assessing Officer to decide the same as per the decision of the Hon'ble Supreme

Court in the case of T.R.F. Ltd. (supra).

No.232/Ind/2016 is partly allowed for statistical purposes.

The order has been pronounced in open Court on 19th January, 2017. (ओ.पी.मीना) (डी.ट".गरा"सया) लेखा सद"य "या"यक सद"य (O.P.Meena) (D.T.Garasia) Accountant Member Judicial Member

"दनांक /Dated : 19th January, 2017. Dn/ 18