2014 (1) TMI 1354 - AT - Income Tax

Deletion of disallowance of provisions for warranty Held that - The FAA had given a finding of fact that assessee was following a scientific method based on the past experience - for arriving at the conclusion that a logical system was followed by the assessee, FAA had considered the chart submitted by the assessee The decision in Court in the case of Rotork Controls India P. Ltd Versus Commissioner of Income Tax, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA followed - if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 thus, the opinion of FAA is correct Decided in favour of Assessee. Deletion of adjustment in book profits u/s 115JB of the Act - Provision of warranty, gratuity and leave encashment adjustment Held that - The decision in Deputy Commissioner of Income-tax, Circle 1(2), Baroda Versus Inox Leisure Ltd. 2013 (2) TMI 353 - GUJARAT HIGH COURT followed - addition of gratuity as unascertained liability under clause (c) to explanation 1 to section 115JB was not warranted - The provision for warranty is an ascertained liability and cannot be added back for computing book profit u/s.115JB of the Act - provision towards leave encashment of employees was unascertained liability and added it book profit - The Tribunal had rightly held that provision for leave encashment could not be considered contingent liability for computing book-profit u/s.115JB of the Act Decided against Revenue.

Summary

Issues:
1. Disallowance of provision for warranty
2. Adjustments in book profits for provision of warranty, gratuity, and leave encashment
3. Reopening of assessment under Section 147
4. Addition to book profits for provision towards warranties

Analysis:

Issue 1 - Disallowance of provision for warranty (AY.2003-04):
The Assessing Officer (AO) disallowed the provision for warranty made by the assessee, considering it unascertained and not allowable. However, the First Appeal Authority (FAA) allowed the provision, stating it was based on scientific method and past experience. The FAA's decision was supported by the Supreme Court's judgment in Rotork Controls India P. Ltd. The Tribunal upheld the FAA's decision, ruling in favor of the assessee.

Issue 2 - Adjustments in book profits (AY.2003-04):
The AO made adjustments to book profits by adding provisions for warranty, gratuity, and leave encashment. The FAA held that these provisions were based on past experience and actuarial valuation, not contingent liabilities. The Tribunal agreed with the FAA, citing relevant case law and provisions of Section 115JB of the Act, ruling against the AO's adjustments.

Issue 3 - Reopening of assessment under Section 147 (AY.2003-04):
The assessee challenged the reopening of assessment under Section 147, arguing it was bad in law. The FAA did not address this ground, leading to the issue remaining unresolved.

Issue 4 - Addition to book profits for provision towards warranties (AY.2007-08):
The AO added a provision towards warranties to book profits, which the FAA deleted. The Tribunal, following its decision on a similar issue in AY.2003-04, ruled against the AO's addition, dismissing the appeal filed by the AO for AY.2007-08.

In conclusion, the Tribunal upheld the FAA's decisions on the provision for warranty and adjustments in book profits for AY.2003-04. The issue of reopening assessment under Section 147 remained unresolved. For AY.2007-08, the Tribunal ruled against the AO's addition to book profits, dismissing the appeals filed by the AO for both AYs.2003-04 and 2007-08, and treating the Cross-objection filed by the assessee as dismissed.