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2015 (5) TMI 1241 - AT - Income TaxAddition made in respect of warranty provision - AO stated that if the assessee's estimation of warranty provisions is considered in the light of above observation of the Supreme Court, it can be seen that the assessee has not made its working in a proper manner - HELD THAT - Supreme Court in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT held that if a business liability has definitely arisen in a financial year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though actual quantification with accuracy may not be possible, if these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. In the present case, the assessee has not produced any basis on which the provision of warranty was determined before the Assessing Officer. However, it has produced actual working of warranty before the CIT(Appeals). It is not clear that what extent the liability actually required in the assessment year under consideration while framing the assessment by the AO. The provision made whether on actual quantification or not, was not verified by the AO. CIT (A) after getting the assessee s actual working of warranty not get verified from the AO and he has decided himself that it is correct. Therefore, in our opinion it is appropriate to remit the issue to the file of the Assessing Officer to examine the actual quantification of the provisions made towards warranty and decide in the light of the judgment of Supreme Court in the case of Rotork Controls India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT Disallowance of provision towards electricity, additional energy and demand charges and provision for interest on VABAL - AO observed that an amount as shown as provision made during the year towards litigation and related disputes in addition to the amount outstanding as at the beginning of the year - HELD THAT - It is necessary to make provision for ascertained liability towards expenses at the end of the year. In this background, in the accounting frame work, the assessee ought to have recorded the expenses in the relevant accounting year, wherein the liability to incur such expenses arisen. A.R. tried to justify the assessee s case that it has issued demand notice seeking the payment and it was crystallised the expenditure in this assessment year only. He is not able to say whether that expenditure entirely relates to the assessment year under consideration or not. The assessee s accounts are mandatorily audited both, under the provisions of the Company s Act as well as Income-tax Act, 1961. Therefore, the assessee should be made the provisions in the relevant accounting period for the expenses based upon the consumption/bill. The contention of the assessee that it is following mercantile system of accounting consistently, does not help the cause of the assessee in asmuch as, as if a practice is adopted, which is not correct as per the law, then claim is liable to be rejected, as said practice violated the principles of matching of cost with revenue and also resulting in hybrid system of accounting, which is not at all permitted now. Accordingly, in our opinion, it is not allowable expenditure in this year under consideration. In other words, in our opinion, the disputed dues of electricity charges for earlier years are not to be allowed in this assessment year and claim of deduction relating to the present assessment year to the extent it is ascertained to be allowed in this assessment year. The issue of disallowance of provision for interest on VABAL is to be considered on similar line as in para 12 above and this ground is partly allowed. Accordingly, both these two issues are remitted back to the AO to consider afresh in the light of our observations.
Issues Involved:
1. Deletion of addition made in respect of warranty provision. 2. Disallowance of provision towards electricity, additional energy, and demand charges. 3. Disallowance of provision for interest on VABAL. Issue-wise Detailed Analysis: 1. Deletion of Addition Made in Respect of Warranty Provision: The Revenue's appeal concerns the deletion of an addition related to a warranty provision. The Assessing Officer (AO) noted that the assessee had debited Rs. 27,06,54,000 towards 'warranty' in the profit and loss account, which was shown as a provisional entry. The assessee explained that the warranty provision was based on a scientific ascertainment of potential liability due to warranty claims, as per the Supreme Court judgment in Rotork Controls India P. Ltd. v. CIT (314 ITR 62). The AO, however, argued that the estimation was improper, as it considered only the previous year's warranty expenses for nine months, leading to an inaccurate provision. The AO disallowed Rs. 5.22 crores as excess warranty provision. On appeal, the Commissioner of Income-tax (Appeals) (CIT(A)) observed that the assessee had been consistently following a practice of providing warranties based on historical trends and actual expenditure. The CIT(A) found that the assessee had been reversing excess provisions in subsequent years and allowed the assessee's claim. The Revenue contended that the assessee did not provide the actual working of the warranty before the AO, which was later submitted to the CIT(A). The Tribunal noted that the assessee had adopted a method based on past experience and split the warranty percentage into truck and non-truck segments. The Tribunal, referencing the Supreme Court's judgment in Bharat Earth Movers v. CIT (245 ITR 428), held that if a business liability has arisen in a financial year, it should be allowed as a deduction even if it is to be discharged at a future date. However, since the actual basis of the warranty provision was not verified by the AO, the Tribunal remitted the issue back to the AO for examination in light of the Supreme Court's judgment in Rotork Controls India Pvt. Ltd. 2. Disallowance of Provision Towards Electricity, Additional Energy, and Demand Charges: The AO observed that the assessee had shown a provision of Rs. 23,31,05,399 towards litigation and related disputes, with only Rs. 3 crores paid during the year. The AO disallowed Rs. 10,54,60,961 related to electricity, additional energy, and demand charges, as the liability was not considered ascertained. On appeal, the CIT(A) allowed the provision, stating that the assessee created it based on demands raised by relevant departments, pending finality in courts. The CIT(A) held that as the assessee maintained a mercantile system of accounting, the provision was justified. The Tribunal, however, noted that the demand raised by TANGEDCO was disputed and pending in court. It held that the liability was not ascertained and the provision was not allowable in the assessment year under consideration. The Tribunal emphasized that the assessee should have recorded the expenses in the relevant accounting year based on consumption/bills. The Tribunal remitted the issue back to the AO to consider afresh, allowing the deduction to the extent it is ascertained. 3. Disallowance of Provision for Interest on VABAL: The AO disallowed Rs. 3,18,54,282 as provision for interest on VABAL, treating it similarly to the disallowed electricity charges. The Tribunal considered this issue on similar lines as the electricity charges. It held that the provision for interest on VABAL was not allowable in the assessment year under consideration and remitted the issue back to the AO for fresh consideration in light of the Tribunal's observations. Conclusion: The appeal filed by the Revenue was partly allowed for statistical purposes, with the issues remitted back to the AO for fresh examination and decision based on the Tribunal's observations and relevant Supreme Court judgments. The Tribunal emphasized the need for accurate quantification and verification of provisions to determine their allowability as deductions.
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