2022 (3) TMI 1518 - AT - Income Tax

Disallowance of provision for warranty - Methodology of the appellant company for the computation of provision of warranty - HELD THAT - We have gone through the orders of lower authorities and find that though the lower authorities had considered the decision in the case of Rotork Controls India (P.) Ltd. 2009 (5) TMI 16 - SUPREME COURT had not applied the ratio of the said decision in right perspective. The appellant company also has failed to demonstrate before us as to how the methodology adopted by it for computation of provision for warranty satisfies the parameters laid down (supra). Accordingly this ground of appeal is remitted back to the file of AO for de novo consideration and decide this issue in accordance with ratio of decision in the case of Rotork Controls India (P.) Ltd. vs. CIT (supra) after providing a reasonable opportunity of hearing to the assessee. Thus ground of appeal No.1 filed by the assessee stands partly allowed for statistical purposes. Provision for obsolete stock - allowance of provision for obsolescence of finished goods and spares - HELD THAT - There can be no dispute that inventory should be valued either at cost or market price whichever is lower. In the present case the appellant company followed inventory valuation policy based on which item-wise analysis was carried out to determine whether a particular item or a part of finished goods has become obsolete or not and it also adopted a methodology for identification of obsolete finished goods etc. Thus the provision for obsolete items is clearly allowable in view of the settled position of law that inventory should be valued at cost or market price whichever is lower in view of decision of Alfa Laval India 2003 (9) TMI 43 - BOMBAY HIGH COURT is clearly applicable. Provision for obsolete stock is allowable but it requires to be satisfied that the value of obsolete items of finished goods is valued on the cost or market price whichever is less. In the circumstances we remand the matter back to the file of AO with a direction that the provision for obsolete stock be allowed as deduction subject to satisfying himself that the valuation is done based on the principle that at cost or market price or net realizable value whichever is less. Thus this ground of appeal is allowed for statistical purposes. CIT(A) not admitting the ground of appeal challenging the denial of claim for allowance of difference between net present value of deferred sales tax and the deferred sales tax liability - HELD THAT - CIT(A) had clearly fell in error in not admitting and adjudicating this ground of appeal since this ground of appeal is purely legal in nature and requires no verification of facts we admit this ground of appeal for adjudication. The issue in this ground of appeal is decided in CIT Vs. Sulzer India Ltd. 2014 (12) TMI 267 - BOMBAY HIGH COURT wherein the Hon ble High Court upheld the decision of Special Bench of Tribunal. Respectfully following this decision of the Hon ble High Court we direct the AO to reduce the sum from the taxable income on account of difference between the net present value of deferred sales tax and deferred sales tax liability. Thus this ground of appeal filed by the assessee shall stands allowed.

Summary

Issues Involved:
1. Disallowance of provision for warranty.
2. Disallowance of provision for obsolete stock.
3. Denial of claim for allowance of difference between net present value of deferred sales tax and the deferred sales tax liability.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Warranty:
The appellant, a company involved in the manufacturing and trading of electrical applications, made a provision for warranty amounting to Rs.4,79,66,000/- for the assessment year 2011-12. The AO disallowed Rs.33,96,000/- of this provision, arguing that the provision was not based on a scientific method or historical data, and termed it as a contingent liability. The appellant contended that the provision was calculated using a scientific method in line with the Supreme Court's decision in Rotork Controls India (P.) Ltd. vs. CIT. However, the AO and subsequently the CIT(A) rejected this claim. The Tribunal found that neither the lower authorities nor the appellant adequately demonstrated the methodology's compliance with the Supreme Court's parameters. Consequently, the Tribunal remanded the issue back to the AO for a de novo consideration in accordance with the Supreme Court's decision in Rotork Controls India (P.) Ltd. vs. CIT.

2. Disallowance of Provision for Obsolete Stock:
The appellant made a provision for obsolete inventory amounting to Rs.97,00,000/- based on its internal Inventory Value Policy. The AO disallowed this provision, stating that inventory should be valued at cost or market price, whichever is lower, and not based on the company's internal policy. The CIT(A) upheld this view. The appellant cited precedents, including the Bombay High Court's decision in Alfa Laval India Vs. DCIT, to support its claim. The Tribunal acknowledged that inventory should indeed be valued at cost or market price, whichever is lower, and remanded the matter back to the AO. The AO was directed to verify that the provision for obsolete stock was valued correctly and allow the deduction accordingly.

3. Denial of Claim for Allowance of Difference Between Net Present Value of Deferred Sales Tax and the Deferred Sales Tax Liability:
The appellant had a deferred sales tax amount of Rs.2,12,67,332/- and paid the net present value of Rs.57,36,372/-, resulting in a difference of Rs.1,55,30,960/-. The appellant claimed this difference should be treated as a capital receipt, referencing the Special Bench decision in Sulzer India Ltd vs. JCIT, which was upheld by the Bombay High Court. The CIT(A) rejected this claim, considering the issue debatable. The Tribunal held that the CIT(A) erred in not admitting the ground of appeal, as the High Court's decision is binding. The Tribunal directed the AO to reduce the sum of Rs.1,55,30,960/- from the taxable income, following the High Court's decision.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remanding the issues of provision for warranty and obsolete stock back to the AO for re-evaluation. The Tribunal also directed the AO to allow the claim regarding the difference between the net present value of deferred sales tax and the deferred sales tax liability, in line with the High Court's ruling.