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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri N.V. Vasudevan & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-XII, Kolkata in appeal No.451/CIT(A)-XII/11/2011-12 dated 29.11.2012. Assessment was framed by ACIT, Range-11, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 29.12.2011 for assessment year 2009-10. Revenue has the following grounds:- “1. That on the facts and circumstances of the case, Ld. CIT(Appeals) was not justified in deleting the addition made on account of Material Warranty of Rs.2,22,02,014/- without appreciating the findings of the AO DCIT Cir-11, Kol. V. M/s Estern Metec Pvt. Ltd. Page 2 as well as facts of the case that the said expenses is nothing but contingent liability, which is not allowable as per I.T. Act, 1961.
2. That on the facts and circumstances of the case, Ld. CIT(A) was not justified in restricting the disallowance to 10% on account of Outstanding liability without appreciating the findings of the AO as well as facts of case that the assessee could not substantiate the genuineness of the such expenditure.”
Briefly stated facts are that assessee is private limited company engaged in the business of engineering, designing , drawing and supply of furnace spares. The assessee filed its return of income declaring a profit of Rs. 2,53,33,214/-. The AO on the scrutiny of profit and loss account noticed that the assessee claimed a provision for a sum of Rs. 2.22 crores being 5% of the sales volume as material warranty claim during the year. The same amount of provision was also shown in the balance sheet as other liability. The AO noticed that the assessee is creating provision for every year and claiming the expenses for the same on year to year basis for the material warranty claim. No amount of the money spent out of the provision created by the assessee for material warranty claim till date. The AO calls upon the assessee to justify the claim for material warranty, the assessee submitted that the assessee-company started its operation in the AY 2007-08 and selling the products with the warranty/ guarantee for the five years. So in case of any defect in the product for the next five years the assessee-company undertakes the warranty/ guarantee to repair/replace the same as the case may be. Therefore such provisions were created. However the assessee disregarded the claim by stating that these provisions are merely contingent liabilities and no expenditure has been incurred in actually so far. The AO has also cited the case laws in regard to assessee’s claim as detailed below:- Hon’ble Supreme court in the case of Shri Sajjan Mills Ltd. v, CIT 156 ITR 585 (SC) and Hon’ble Madras High court in the case of CIT Vs. Rotork Controls India Ltd. (2007) 293 ITR 311 (Mad)
DCIT Cir-11, Kol. V. M/s Estern Metec Pvt. Ltd. Page 3 Before the CIT(A) the assessee has pointed out that the judgment of the Hon’ble supreme Court has reversed the judgment of the Hon’ble Madras High Court in the case of Rotork Controls India Ltd. (supra). Therefore the Ld. CIT(A) has allowed the appeal in favour of the assessee. Aggrieved by this order of Ld. CIT(A) Revenue came in appeal before us.
We have heard the rival contentions and perused the materials before us. Before us Ld. DR relied on the orders of AO whereas Ld. AR of the assessee submitted the case law of Hon’ble Supreme Court in the case of Rotork Controls India Ltd (supra) wherein it was held that the assessee has been manufacturing and selling Valve Actuators in large number since 1983- 84 onwards. Statistical data indicates that every year some Actuators found to be defective. The date over the years also indicate that every year that, being sophisticated item no customer is prepared to buy the Valve Actuators without a warranty. Therefore, warranty became an integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty was allowable. In the aforesaid matter the AO rejected the claim of the assessee citing the case law of Hon’ble Madras High court in the case of Rotork Controls India Ltd. (supra). The AO did not quote the case law of the Hon’ble Supreme Court where the same case was reversed by the Hon’ble Supreme Court wherein the provision for warranty were allowed. However the Ld. CIT(A) has quoted the same case in his order and allowed assessee’s ground. We find in the present case the past history for the claim of the warranty has not been considered by the Ld. CIT(A). We need to have the historical data to work out the provision for warranty in scientific manner. It is also pertinent to note that the assessee-company has exceeded more than 5 years of experience. So the company must have the desired data to work out the base for the provision of warranty. Simply allowing the assessee to create the provision @ 5% of the sales does not seem appropriate. In view of the above and in the interest of justice, we deem it fit to restore the file to the AO DCIT Cir-11, Kol. V. M/s Estern Metec Pvt. Ltd. Page 4 for allowing him to create the provisions in scientific manner. In the result this ground of Revenue’s appeal is allowed for statistical purpose.
Coming to Revenue’s second ground. During the assessment proceedings assessee has shown in the balance sheet for the outstanding payable as detailed below:- Sl.No. Head of account Balance sheet P&L a/c figures 1 Job work 1,22,29,153/- 1,48,55,401/- 2 Site expenses 1,12,59,000/- 1,60,80,137/- 3 Transportation charges 1,07,67,890/- 2,33,93,067/- During the course of assessment the AO could verify the Job work & site work expenses and transport charges only to the extent of 30%. On explanation by the AO from the assessee, the assessee could not substantiate the genuineness by producing the proper bills and vouchers. Therefore the AO has disallowed the expenses appearing as outstanding at the year end to the tune of 70%. (Rs. 8560407.00 being 70% of 1,48,55,401/- job work and Rs. 78,81,300/- being 70% of 1,60,80,137/- site expenses and Rs.75,27,143/- towards the Transportation charge). The AO added the expenses disallowed to the total income of the assessee. Aggrieved, assessee preferred appeal before Ld.CIT(A). Before Ld. CIT(A) the AR has submitted that the assessee has to incur various expenses at various sites by taking the casual labours and deploying local resources , so it may not be possible all the time to get proper bills from such casual labours. Accordingly Ld. CIT(A) restricted the disallowance of the aforesaid expenses to 10%. Aggrieved by the order of Ld. CIT(A) on the aforesaid issues, the Revenue preferred an appeal before the Tribunal, raising grounds set out in the earlier part of this order.
We find that the AO has disallowed the said expenses @ 70% on ad hoc basis. The reason for the disallowance to the tune of 70% is that assessee could not produce the necessary documents. It appears to us that the disallowance to the true of 70% does not hold any merit as it is very much DCIT Cir-11, Kol. V. M/s Estern Metec Pvt. Ltd. Page 5 on the higher side. Under the normal condition of the manufacturing business where labour is involved, the labour cost constitute the significance cost of the total cost. Therefore, considering the size of the business and the labour cost, we are inclined not to interfere in the order of the Ld. CIT(A).