2019 (1) TMI 1792 - HC - Income Tax

Revision u/s 263 - provision for warranty - Tribunal quashing the revision order of CIT-A - HELD THAT - Provision made on the basis of turnover on same or similar percentage year after year follows a rationale and scientific method of making a provision for such warranty. The actual claims made by the customers against such warranty provision cannot be the sole criteria, to be labelled as the scientific method, as contended by the Revenue, before us. It is the consistency and the commercial prudence of the assessee, in which the assessee chose to make a provision for warranty based on his total turnover figure, which cannot be said to be unscientific, by any stretch of imagination. Such decisions, taken in normal commercial prudence, cannot be interfered with or superseded by the tax authorities. Tribunal was perfectly justified in holding that the revisional proceedings under section 263 of the Act in such circumstances were not at all justified. Accordingly, we answer the question of law, framed above, in favour of the assessee

Summary

Issues:
1. Interpretation of provision for warranty in assessment year 2004-05.
2. Validity of revision order under section 263 of the Income-tax Act.

Analysis:
1. The first issue revolves around the interpretation of the provision for warranty in the assessment year 2004-05. The Tribunal found that the provision made by the assessee was based on a scientific method adopted consistently from year to year. The Tribunal referred to a decision of the Madras High Court and held that the Revenue's attempt to disallow the provision for warranty was unjustified. The Tribunal emphasized that the provision was computed based on a method that had been consistently followed by the assessee, and the assessing officer had considered the details provided by the assessee before completing the assessment. The Tribunal concluded that the order of the assessing officer did not suffer from any error prejudicial to the interests of the Revenue in this regard.

2. The second issue pertains to the validity of the revision order under section 263 of the Income-tax Act, specifically regarding the carry forward of loss of an amalgamating company. The Tribunal noted that the assessee had not explicitly pointed out the losses of the amalgamating company for set off under section 72A of the Act. Despite the approval of the amalgamation scheme by the High Court, the Tribunal found that there was insufficient disclosure by the assessee and lack of examination by the assessing officer regarding the quantum of loss available for set off. Consequently, the Tribunal agreed with the Commissioner of Income-tax that the order of the assessing officer was erroneous and prejudicial to the interests of the Revenue concerning the issue of carry forward of amalgamated loss.

In conclusion, the High Court dismissed the Revenue's appeal, upholding the Tribunal's decision that the revisional proceedings under section 263 were not justified. The Court found that the provision for warranty was made based on a consistent and rational method by the assessee, and the assessing officer had duly considered the details provided. The Court also highlighted the importance of commercial prudence in decision-making by the assessee and affirmed that such decisions should not be interfered with by tax authorities.