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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
Appellant by Mr. Vishal Kalra and Ms. Samisha Murgai, Advs. Respondent by Mr. Vivek Kumar Upadhyay, Sr. DR Date of Hearing 08/08/2023 Date of Pronouncement 13/09/2023 ORDER PER YOGESH KUMAR U.S., JM:
This appeal by Assessee is filed against the order of Learned Commissioner of Income Tax (Appeals)-28 New Delhi [“Ld. CIT(A)”, for short], dated 01/02/2018 for Assessment Year 2008-09.
Grounds taken in this appeal are as under:
“1. That the impugned order of Ld. CIT(A) sustaining the addition/ disallowance made by the Ld. AO and consequent income-tax demand
Senior India Pvt. Ltd. vs. ITO raised upon the Appellant are erroneous on facts and in law and deserve to be set aside.
2. That Ld. CIT(A) has erred both on facts and in law in confirming ad-hoc disallowance of power and fuel expenses amounting INR 10,00,000 incurred by the Appellant, in an arbitrary manner: 21. That Ld. CIT(A) has disregarded the explanations and evidences furnished by the Appellant in the course of appellate proceedings and has proceeded to uphold the disallowance merely by relying on the assessing officer's observations in the fresh assessment order.
3. That Ld. CIT(A) has erred both on facts and in law in confirming a disallowance of INR 35,98,902 in respect of provision for warranty made by the Appellant:
3.1. That Ld. CIT(A) has erred in facts and in law in disregarding the method of computing provision for warranty based on past history of claims, and in stating that the Appellant has claimed warranty expenses at its own will without following any scientific or reasonable method to calculate the expenses 3.2. The Ld. CIT(A) has erred in facts and in law in stating that the provision for warranty expenses does not have any co-relation with sales of respective years.
4. That on facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act, as not adjudicated upon by the Ld. CIT(A). The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary at any time either before or during the hearing.”
Brief facts of the case are that, return of income was filed declaring an Income of Rs. 3,54,56,540/-, the case was selected for scrutiny and the assessment order passed by the AO making additions on three grounds namely (1) Trading additions, (ii) Warranty expenses & (iii) Sales commission expenses.
The assessee preferred an appeal and the Ld. CIT(A) decided the matter partially in favour of the assessee and relief was provided only on the issue of Senior India Pvt. Ltd. vs. ITO warranty expenses and it was held that warranty expenses are allowable on the basis of actual incurrence. A relief of Rs. 66,61,066/- was provided by Ld. CIT(A) on account of actually incurred warranty expenses during the year and additional amount of Rs. 35,98,902/- on account of provision of warranty was sustained. The assessee again preferred appeal before the Tribunal and the Tribunal vide order dated 15.04.2014, referred all the three issues to the file of the AO for fresh examination of books of account. In pursuance to the directions of the Tribunal, the AO initiated the reassessment proceedings and examined the books of account and thereafter made additions of Rs. 10,00,000/- on account of excess claim of expenses on power & fuel, and Rs. 35,98,902/- for provisions of warranty expenses, but accepted the claim of Rs. 52,11,793/- as sales commission as claimed by assessee. Aggrieved by the assessment order dated 31/03/2016, the assessee preferred Appeal before the CIT(A), the CIT(A) vide order dated 01/02/2018 dismissed the Appeal filed by the assessee. As against the order of the CIT(A) dated 01/02/2018 the assessee preferred the present Appeal on the grounds mentioned above.
Ground No. 1 is general in nature which requires no adjudication. The Ground No. 2 to 2.1 are regarding ad-hoc disallowance of power and fuel expenses of Rs. 10,00,000/-. During the year under consideration the assessee claimed power and fuel expenses amounting to Rs. 95,89,257/-. The A.O. made ad-hoc disallowance amounting to Rs. 10,00,000/- on account of power and fuel expenses on the ground that documents submitted by the Senior India Pvt. Ltd. vs. ITO assessee could not satisfactorily lead to co-relation between production and increasing power and fuel expenses. The said addition made by the A.O. has been upheld by the CIT(A).
The Ld. Counsel for the assessee made following written submission before us:-
“-One to one match between consumption of power ./fuel and production of goods is not possible due to the inherent nature of products manufactured, process/time involved in manufacturing, process of raising invoices by electricity authorities and various other factors beyond the control of the Appellant.
-The power consumption for different kinds of products is different. Some products manufactured by the Appellant consume more units of power than other products manufactured by the Appellant. Therefore, consumption of power and fuel expenses in a period largely depends on the quantities in which each good is manufactured.
-The electricity expenses are paid to Dakshin Haryana Bijii Vitran Nigam Ltd. (DHBVN). DHBVN is a division of Haryana State Electricity Board (HSEB) and a wholly state owned corporation.
-All the payments have been made by the Appellant vide account payee cheques. All the power expenditure has been duly vouched for and recorded in the books of accounts.
-Other power and fuel expenses comprise of diesel expenses for generators used in the factory of the Appellant. The Appellant has Senior India Pvt. Ltd. vs. ITO installed high power generators in its factory to run its production activities in case of power cuts and power failures. Cost of own generation of power through generators is higher than the cost of power supplied by DHBVN. It is almost 1.5 times the cost of power supplied by DHBVN. Hence, in a period when DHBVN power supply is less, power and fuel expenses will increase irrespective of increase in production. Hence, these expenses cannot be correlated directly in proportion to production.
-The diesel used to run these generators is purchased from external vendors. All the payments to diesel vendors are made through account payee cheques. Ali the expenses have been duly vouched for and recorded in the books of accounts and the same have undisputedly been accepted by the AO.”
Per contra, the Ld. Departmental Representative relying on the findings of the Lower Authorities sought for dismissal of the Ground No. 2.
We have heard both the parties and perused the material available on record. It is found that the assessee accepted the proposed addition made by the A.O. during the assessment proceedings and consequent to which addition made by the A.O. Thus, the assessee one hand agreed for proposed disallowance of expenses on power and fuel made to Rs. 10,00,000/- during the assessment proceedings, on the other hand, disregarding the said agreement, the Appeal has been filed. It is observed that since the assessee has agreed for the disallowance through his Assessee's Representative, the A.O.
Senior India Pvt. Ltd. vs. ITO did not made any enquiry to examine the genuineness of the expenditure or verify the evidence produced by the assessee.
Considering the fact that the assessee himself through its AR agreed for the proposed disallowance of expenses on power and fuel amounting to Rs. 10,00,000/-, now he assessee cannot find fault with the Authorities in making addition. It was not demonstrated before us that the Assessee's Representative had agreed the said addition before the A.O. by mistake of fact or law or it was agreed before the A.O. without the authority from the assessee himself. Being so, agreed addition cannot be challenged before us. Therefore, we find no merit in the Ground No. 2 to 2.1, accordingly we dismiss the Ground No.2 to 2.1.
Ground No. 3 to 3.2 are regarding disallowance of Rs. 35,98,902/- in respect of provision of warranty expenses. During the year under consideration, the assessee claimed total warranty expenses amounting to INR 1,02,59,968/- out of the total claim for warranty of INR 1,02,59,968, INR 66,61,066/- was the amount claimed to be actually incurred during the year and remaining amount of INR 35,98,902/- represents the provisions for warranty which was recognized at 0.75% of the current year's sales to cover the warranty claims pertaining to the year when the sales were made and its revenue is recognized. For the year under consideration, the total sales (net of excise duty) for the period amounted to INR 48,27,77,110/- and the provision made for warranty at the rate of 0.75% amounts to INR 35,98,902/-.
Senior India Pvt. Ltd. vs. ITO
The warranty expenses has been disallowed by the A.O. on account of being mere provision and the provisions of expenses are not allowable as expenditure, while computing the taxable income the provisions for warranty must be ignored while computing the taxable income and the warranty expenses is claimed only when the same is actually incurred. The said disallowance of the warranty expenses has been upheld by the CIT(A) in following manners:-
“6.2 I have considered the facts of issue, basis of disallowance made by AO and submissions of the appellant. As can be seen from the assessment order as well as earlier appellate order, the expenses on account of warranty has been disallowed being provisional in nature. It can be seen from the fact that out of the total expenses of Rs. 102,59,968/-, the actual expenditure of Rs. 68,41,062/- has been allowed but the provisions made for Rs. 35,98,902/- has been disallowed. Appellant has taken stand that it has treated the provision on contingent basis, considering the trend of past five years. It is further submitted that the provisions for warranty has been created on the basis of reliable estimate to meet the obligation as a result of the past event, which was recognized on the probability of resources which would be required to settle the obligation. It has further relied on the decision of Hon'ble Supreme Court in the case Rotork Controls India (P) Ltd 180 Taxman 422 wherein it is held that the warranty expenses should be computed on the basis of historical trend and scientific methodology. Incidentally, on the identical issue in A.Y. 2010-11 & 2011-12, Hon'ble ITAT vide their order dated 02.01.2018, have also rejected the claim of the appellant after analyzing the warranty expenses claimed by the appellant in these years and concluded that the Page 7 of 13
Senior India Pvt. Ltd. vs. ITO assessee is entitled to the deduction of warranty expenses provided for, if it is made based on history and scientific methodology but not on ad-hoc basis.
6.3 In view of the above, now the case of appellant has to be examined. As per the charts given by the appellant, it can be seen that to claim the warranty expenses, appellant has taken the average of actual warranty expenses incurred for four year I.e. 2004-05 to 2007-08. However, taking the average of figures of different years can never be considered a scientific method for arriving at a certain percentage or an amount. It is most simple method which can be applied anywhere and everywhere. Contrary to this, the figures of the sales and warranty expenses claimed in various years say the different story. As can be seen from the charts given by the appellant for A.Y. 2007-08, total expenditure of Rs. 39,12,727/- for warranty was debited in profit and loss account which included the actual expenses at Rs. 32,99,603/- and provision made at Rs. 12,13,718/- and these expenses were claimed against the total sales of Rs. 49,21,85,590/-. However, in the subsequent year 1.e., A.Y. 2008-09, total warranty expenses of Rs. 102,59,968/- has been claimed which included actual warranty expenses of Rs. 68,41,062/- & provision of Rs. 35,98,902/- against the sales of Rs. 48,27,77,110/-. Thus, the sales has decreased in comparison to preceding year but the total warranty expenses have increased more than 250 per cent and provision for warranty expenses around 300 per cent. Similarly, in the A.Y. 2005-06, warranty expenses were incurred at Rs. 20,41,698/- against the sales of Rs. 35,78,28,116/- but in the subsequent year I.e. A.Y 2006-07, though the sales remained almost static but the warranty expenses increased more than 200 per cent. Further, in earlier two
Senior India Pvt. Ltd. vs. ITO assessment years, no warranty expenses were claimed by the appellant at all. Thus, the warranty expenses have been claimed by the appellant at its will without following any scientific or reasonable method to calculate these expenses. These expenses have no co-relation with the sales of respective years which the appellant is trying to establish. Similar is the position in the subsequent years also wherein Hon'ble ITAT vide their order dated 02.01.2018, as mentioned above, vide Para 7, has observed as under:- "7. 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%. he reason for reduction is lesser amount of warranty claims registered on the assessee. For A.Y. 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 provisions 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
Senior India Pvt. Ltd. vs. ITO
Supreme Court in case of Rotorok Control India Pvt. Ltd (supra) has held that any provision made by the assessee 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 uls 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 Id 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 Senior India Pvt. Ltd. vs. ITO 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.”
6.4 In view of the above, it can be seen that the claim of appellant by taking average at the rate of 0.75 per cent is most general and unscientific method without taking into consideration the historical trend of its own figures of sales and warranty expenses. There is no consistent method of claiming the warranty expenses in the earlier or subsequent years. The appellant has claimed these expenses at its will and as per requirement by reducing or Increasing the taxable income. The principles laid by Hon'ble Supreme Court in the case Rotork Controls India (P) Ltd (Supra) have also not been followed by the appellant. Neither the historical trend nor the scientific method has been adopted by it while computing the figures of expenses for provision of warranty. In view of this, I hold that the AO has rightly disallowed the expenses of Rs. 35,98,902/- being provision of warranty expenses. I, therefore, confirm the addition made by him and dismiss the ground taken by the appellant.”
The Ld. Assessee's Representative vehemently submitted that the CIT(A) has committed error in disallowing Rs. 35,98,902/- in respect of provision for warranty made by the assessee, by completely disregarding the method of computing provision for warranty based on past history of claims and committed error in finding that the ‘assessee has claimed warranty expense on its own will without following in a scientific method to calculate the expenses’.
The Ld. Counsel has also filed detailed written submission. Page 11 of 13
Senior India Pvt. Ltd. vs. ITO
Per contra, the Ld. Departmental Representative relying on the order of the CIT(A), submitted that the sales has decreased in comparison to the preceding years but the total warranty expenses have increased more than 250% and the provision for warranty expenses around 300% similarly in the Assessment Year 2005-06 as well, though the sales remained almost static, but the warranty expenses increased more than 200%. Further in earlier two Assessment Years no warranty expenses were claimed by the assessee, thus submitted that, the warranty expenses have been claimed by the assessee at its will without following any scientific or reasonable method to calculate the expenses. The ld. CIT(A) has drawn our attention to the following observations of the Tribunal made in & 6823/Del/2014 dated 02/01/2018 i.e. “that the Assessee is entitle to the deduction of warranty expenses provided for, if it is made based on the history and some scientific methodology but not as ad- hoc basis.” Thus, the CIT(A) sought for dismissal of the Appeals while dismissing the Grounds.
Heard. In the present case, the provision of warranty has been made in very arbitrary manner as the assessee is not following consistent method of making provision for warranty. We are aware of the judgment of Hon'ble Supreme Court in the case of Rotork Controls Vs. CIT(A) (314 ITR 62) (S.C) wherein it is held that if the warranty is based on the past experience i.e. historic trends, the estimate can be said to be reliable. When the assessee makes provision for warranty following scientific method and the same is not Senior India Pvt. Ltd. vs. ITO arbitrarily made, the reliable estimation made by the assessee to be allowed as deduction. However, in the present case, the assessee made provisions for warranty in arbitrary manner which is not supported by any scientific method which cannot be allowed as deduction, accordingly, we find no error in the order of the Lower Authorities. Thus, we confirm the addition made by the authorities and dismissing the Ground No. 3 to 3.2 of the assessee.
In the result, the Appeal filed by the assessee is dismissed.