2015 (2) TMI 579 - AT - Income Tax

Disallowance of 50% of the provisions out of the expenditure claimed under the head post sales expenses for warranty expenses - CIT(A) deleted the addition - Held that - We do not find any consistency in the provision for warranty. At the time of hearing before us, the learned counsel for the assessee was unable to state the method by which such provision for warranty was computed. Considering the totality of the facts, we deem it proper to set aside the orders of authorities below and restore the matter to the file of the Assessing Officer. We direct the assessee to submit before the Assessing Officer the basis by which the provision for the liability of warranty was computed. Thereafter, the Assessing Officer is directed to examine the reasonableness of the same in the light of the parameters laid down by Hon ble Apex Court in the case of Rotork Controls India P.Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA). We direct the Assessing Officer to allow the liability which is found to be reasonable considering the facts and circumstances of the case. We further direct the Assessing Officer that if any part of the liability is disallowed, he will ensure that if the same is written back in the subsequent year, then, in the subsequent year, the tax may not be levied on the provision written back which is disallowed in this year, otherwise, it would amount to double taxation which is not permissible in law. Decided in favour of Revenue for statistical purposes.

Summary

Issues:
Disallowance of provisions for warranty expenses under post sales expenses for AY 2007-08.

Analysis:
The appeal by the Revenue challenged the order of the CIT(A)-X, New Delhi regarding the disallowance of provisions for warranty expenses under post sales expenses for the AY 2007-08. The Revenue contended that the CIT(A) erred in deleting the disallowance of 50% of the provisions, which was actually 100% disallowed by the Assessing Officer. The Revenue requested to modify the ground of appeal to reflect the correct disallowance percentage. The counsel for the assessee agreed to the modification, and the appeal proceeded on merits with the disallowance set at 100%.

During the hearing, the Revenue referred to the decision of the Supreme Court in the case of Rotork Controls India P.Ltd. Vs. CIT, emphasizing the need for a reliable estimate of warranty expenses liability based on business nature, product, and accounting method. The Revenue argued that the assessee's provisions were excessive and lacked a scientific basis, urging for the restoration of the Assessing Officer's disallowance.

In response, the assessee's counsel highlighted the global warranty liability experience of the Fiamm Group, to which the assessee belonged, and the subsequent write-back of provisions based on actual claims experience. The counsel supported the CIT(A)'s decision as fair and reasonable, suggesting that any disallowed provision should not be taxed when written back in subsequent years to avoid double taxation.

The Tribunal considered the Supreme Court's decision in Rotork Controls India P.Ltd., emphasizing the need for a reliable estimate of warranty liability based on various factors. Upon reviewing the inconsistent provision for warranty expenses and lack of clarity on computation method, the Tribunal set aside the lower authorities' orders. The Tribunal directed the Assessing Officer to reassess the provision basis, ensuring reasonableness per the Supreme Court's guidelines. Additionally, the Assessing Officer was instructed to avoid double taxation if any disallowed provision was written back in subsequent years. The Tribunal allowed the assessee an opportunity to present their case before the Assessing Officer.

Conclusively, the appeal of the Revenue was treated as allowed for statistical purposes, with the matter remanded to the Assessing Officer for readjudication in line with the Tribunal's directions and the Supreme Court's decision in Rotork Controls India P.Ltd.