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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI ABRAHAM P GEORGE
This is an appeal filed by the Revenue against the order of the CIT(A) LTU, Bangalore, dated 26/12/2013 for the assessment year 2010-11. The revenue is aggrieved by the order of the CIT(A) in deleting the addition made on account of warranty provision u/s 41(4) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short].
M/s.Falcon Tyres Ltd. Page 2 2. Brief facts of the case are that the assessee-company which is in the business of manufacture and sale of tyres and tubes, filed its return of income for the assessment year 2010-11 on 14/10/2010 declaring income of Rs.34,41,00,580/- Subsequently, on 5/12/2010 the assessee filed a revised return declaring income of Rs.30,93,06,639/-. During the assessment proceedings u/s 143(3) of the Act, the Assessing Officer (AO) noticed that the assessee has debited a sum of Rs.4,30,56,543/- as provision for warranty to the profit and loss account. The assessee was asked to furnish the details with regard to the claim of warranty. The assessee, vide letter dated 18/1/2013 furnished the required details. From these details the AO observed that they do not contain the entire required information and that the assessee has stated that they are in the process of compiling details location-wise and month-wise and the same will be submitted during the personal appearance. However, the assessee could not furnish necessary required details. After perusing the details furnished by the assessee, the AO came to the conclusion that the assessee is not following any scientific methodology or consistent past experience for creating the warranty provision. In view of the same, following the decision of the Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT (314 ITR 62), the AO disallowed the same and added back to the income. Thereafter, the AO observed that Rs.97 lakhs which is shown as closing balance for M/s.Falcon Tyres Ltd. Page 3 the assessment year 2007-08 also has to be added back to income as cessation of liability because the assessee is not able to identify the parties for whom such warranty was created during the previous year and also as the assessee is not in the possession of scientific database as assessee could not match the sale corresponding to the warranty created. He, therefore, treated the sum of Rs.97 lakhs as the income of the assessee as cessation of liability u/s 41(4) of the Act.
3. Aggrieved, the assessee preferred an appeal before the CIT(A) explaining the methodology followed for estimating the provision for warranty as claimed in the profit and loss account. After perusing the submissions of the assessee, the CIT(A) came to the conclusion that from the analysis of warranty provision created and utilized in the past year, it is clear that the provisions are completely utilized and there is no scope for any extra provision which was required to be written back and offered for taxation in terms of the direction prescribed by the Hon’ble Apex Court in the case of Rotork Controls India Pvt. Ltd. (cited supra). He also observed that the assessee’s business of manufacture and sale of products is covered by the warranty and therefore it creates a present obligation on it as a result of past events and the probability that an outflow of resources will be required to settle the obligation by way of warranty replacement definitely arises. He held that the provision is completely utilized in the following year and the fact there has never arisen any M/s.Falcon Tyres Ltd. Page 4 requirement for reversal of excess provision clearly shows that the past experience has been a good guide for the company in creating the provision and in avoiding over provisioning. Therefore, he deleted the disallowance made by the AO. He also deleted the addition of Rs.97 lakhs made u/s 41(4) of the Act on the ground that the actual figure of closing balance for the assessment year 2007-08 was Rs.42 lakhs and not Rs.97 lakhs and further that the said provision was fully utilized during the following financial year 2007-08 and therefore there was no cessation of liability. Aggrieved by the relief given by the CIT(A) on both the counts, the revenue is in appeal before us.
The appeal was initially fixed for hearing on 5/11/2014 and thereafter on 24/12/2014 on which date the bench did not function. However, the notices of hearing were duly served on the assessee for both the dates of hearing and the acknowledgments of receipt are on record. The appeal was thereafter fixed for hearing i.e. on 25/2/2015 and this notice was also served on the assessee. In spite of the same, none appeared for the assessee before the Tribunal on this date. Therefore, the Tribunal has proceeded to hear the learned Departmental Representative exparte qua the assessee and proceeded to dispose of the appeal as under.
As regards the first issue of making of provision for warranty, the Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (cited supra) has held that provision can
M/s.Falcon Tyres Ltd. Page 5 be made provided the assessee has followed a scientific method for creating such a provision. The assessee has not provided any details before the AO to substantiate its claim of using its past experience and scientific method for making a provision. From the data filed by the assessee which is reproduced at page 3 of the assessment order, we notice that for the assessment year 2008-09, provision for warranty was created at Rs.200.65 lakhs whereas the warranty utilized during the year was only Rs.150.65 lakhs and the closing balance of the warranty provision for the relevant year was Rs.92 lakhs and for the assessment year 2009-10 the provision created was Rs.208.22 lakhs, whereas the warranty utilized was Rs.203.22 lakhs. For the assessment year 2010-11 i.e. the relevant assessment year before us, the warranty created was Rs.430.57 lakhs whereas the warranty utilized is only Rs.268.57 lakhs with a closing balance of warranty provision being Rs.259 lakhs. Thus it is clear that the CIT(A)’s observation that the provision created was fully utilized during the relevant assessment year is not entirely correct. Further, we do not find any material brought on record by the CIT(A) to hold that the assessee has followed a scientific methodology and also the past experience to make such a provision. In view of the same, we are not inclined to accept the findings of the CIT(A) in deleting the addition made by the AO. Further, as regards the cessation of liability u/s 41(4) of the Act also, the CIT(A) has accepted that the closing
M/s.Falcon Tyres Ltd. Page 6 balance of the assessment year 2007-08 was actually Rs.42 lakhs and not Rs.97 lakhs and that Rs.42 lakhs as on 31/3/2007 was fully utilized during the financial year 2007-08 when he actual warranty cost was Rs.150.65 lakhs. The relevant assessment year before us is 2010-11 whereas the CIT(A) has considered the facts and figures relating to assessment year 2007-08 and 2008-09 which have no relevance to the assessment year before us. Therefore, we are not inclined to accept the finding of the CIT(A) on this issue also. In view of the same, we set aside the order of the CIT(A) and remand both the issues to the file of the AO for reconsideration of the issue provided the assessee files all the relevant details before the AO and does not seek adjournment without a reasonable cause. In view of the same, the revenue’s appeal is treated as allowed for statistical purposes.