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

आदेश /O R D E R

PER SHRI D.T. GARASIA, JM

Both the appeals relate to the same assessee and

common grounds are taken, therefore, these are being

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies disposed of by this consolidated order for the sake of

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies Officer was of the view that during the financial year 2003-

04 the assessee has practice of debiting warranty claim

received during the year in profit and loss account.

Subsequently, the company has started making provision

for warranty and this amount was debited in profit and loss

account. The quantification of provision made is not clear

as to how the assessee has quantified and debited. The

company has also not specified the reason regarding

changing the policy. The assessee claimed that the

quantification has been done under the advice from

technical person and the average last quarter of the

warranty cost vs. last vs. last quarter of sales were used for

making the provision. The assessee has not given working.

Therefore, the Assessing Officer was of the view that there

is difference of expenses on account of provision made and

actual expenses incurred by the assessee on the warranty.

Therefore, both the warranty expenses are allowable

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies expenditure but the method in which the assessee was

claiming, therefore, this was disallowed.

the assessee has mainly argued on two counts, firstly that

the assessee is following mercantile system of account and

as per this system, there are revenue expenses which are

accounted on accrual basis and the provisions by applying

match concept. Here in this case, the assessee is claiming

warranty expenses which are allowable expenditure as held

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies which was disclosed as mandated in the accounting

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies mentioned in page 29 of the paper book and in the audit

account, the assessee has clearly mentioned and disclosed

that 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. 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.

orders of the authorities below. Moreover, the learned DR

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.

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies 5. We have considered the submissions of both the sides.

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies

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 the warranty provision at the year end in the profit and loss account 5 Warranty provision debited in the profit 30,65,282 and loss account

We find that exercise of warranty claim during the year is

from the provision account which does not affect profit and

loss account. Under new policy percentage of last 8

quarters of warranty cost vs. last 8 quarterly sales were

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies used for making the warranty expenses provision.

Comparative table disclosing the impact of Accounting

Standard 29 for the Financial Year on Profit of the

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies 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 10

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies 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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies 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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies debt or part thereof has been taken into account in

computing the income of the assessee of the previous year

in which the amount of such debt or part thereof is written

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies is written off as irrecoverable in the accounts of the

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.

per the decision of the Hon'ble Supreme Court in the case

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies (supra) is not applicable to the facts of the case of the

assessee.

circumstances of the case, we find that as per the decision

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 15

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies 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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies the assessee is required not only to debit the profit and loss

account but also simultaneously reduce the loans and

advances or debtors from the asset side of the balance

sheet to extend the corresponding amount, so at the end of

the year the amount of loans of advances/debtors is shown

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

ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies counsel for the assessee and the learned counsel for the

assessee has finally conceded that the matter may be

restored to the file of the Assessing Officer as per the

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.

Sd/- Sd/-

(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