2020 (12) TMI 1225 - AT - Income Tax

Method of determination of provision of warranty, liability movement of warranty provisions - AR submitted that the provision of warranty is recognized by the assessee in compliance with the Accounting Standard-29 (AS-29) as prescribed by the ICAI at the time of sale and not at the time of settlement - HELD THAT - As the assessee has been consistently following this method, which has been found by the Hon ble ITAT, to be scientific and the conditions laid down by the Hon ble Apex Court in in Rotork Controls India (P) Ltd 2009 (5) TMI 16 - SUPREME COURT is also met, supra, which has also been upheld by the Hon ble High Court, 2020 (8) TMI 768 - KARNATAKA HIGH COURT Therefore, we do not find any merit in the Revenue s appeal and hence, dismiss the same.

Summary

Issues:
Disallowed provision of warranty due to vast variation in ratio between actual expenses & provision created, upheld by Ld.CIT(A), remitted back to AO by Tribunal, AO sustained disallowance, Ld.CIT(A) allowed appeal based on ITAT's decision in previous years, Revenue appealed against Ld.CIT(A)'s order.

Analysis:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of provision for warranty made by the Assessing Officer (AO) for the assessment year 2010-11. The AO disallowed the provision mainly due to a significant difference in the ratio between actual expenses and the provision created by the assessee, M/s. Amco Batteries Ltd., engaged in manufacturing and trading of batteries. The Ld.CIT(A) upheld the assessment, leading to an appeal by the assessee to the Tribunal. The Tribunal remitted the issue back to the AO for re-examination. In the subsequent revision order, the AO maintained the disallowance, which was confirmed by the Ld.CIT(A), resulting in the assessee filing an appeal before the Commissioner of Income Tax (A). The Ld.CIT(A) allowed the appeal after considering the ITAT's decisions in favor of the assessee for previous assessment years, indicating a similar claim acceptance. The Revenue challenged this decision with various grounds, including the alleged lack of scientific basis for the provision of warranty and failure to provide cogent evidence for the increase in provision. The case was presented before the ITAT through video conferencing, where the Revenue sought to restore the AO's order, while the assessee argued that the provision was made in compliance with Accounting Standard-29 (AS-29) based on sales and historical trends. The assessee provided detailed materials and explanations supporting the scientific calculation of the provision, emphasizing that the method had been consistently upheld by previous decisions of the ITAT and the High Court.

The ITAT analyzed the historical context of the issue, noting that the Ld.CIT(A) had allowed similar claims by the assessee in previous years, which were also supported by the ITAT. However, in a specific case related to the assessment year 2008-09, the Ld.CIT(A) disallowed the claim due to a perceived lack of scientific basis in the provision estimation. This decision was challenged, leading to the ITAT allowing the appeal and the subsequent affirmation by the High Court. The ITAT reviewed the relevant portions of the judgment related to the assessment year 2008-09, highlighting the substantial questions of law raised and the assessment of the provision for warranty. The ITAT examined the principles laid down by the Supreme Court in Rotork Controls India Pvt. Ltd. case and the application of those principles in the estimation of the provision for the said assessment year. The ITAT emphasized that the conditions set by the Supreme Court for assessing a provision were met in the case at hand, indicating the scientific nature of the provision calculation by the assessee. The ITAT concluded that the method followed by the assessee was consistent, scientific, and in line with legal standards, as evidenced by previous decisions and the High Court's affirmation. Therefore, the ITAT dismissed the Revenue's appeal, upholding the Ld.CIT(A)'s decision to allow the assessee's appeal based on the established scientific basis of the provision for warranty.

In conclusion, the ITAT dismissed the Revenue's appeal, affirming the allowance of the provision for warranty by the Ld.CIT(A) based on the scientific calculation method followed by the assessee in compliance with AS-29 and supported by previous judicial decisions.