2018 (4) TMI 1122 - AT - Income Tax

Disallowing of provisions(s) of five year warranty provision - whether provision made on as scientific and systematic basis? - Held that - The assessee admittedly is a manufacturer of air conditioner cooling units. It appears to have provided for two kinds of warranties i.e. five years and one year. Case file suggests that the above latter warranty represents service charges paid to dealers which has gone unrebutted from Revenue side. Former five year warranty provision appears to be cost of compressor replacement in the event of the same being turning out to be a defective one. The assessee s computation seems to be based on some products of model-wise number of units sold and per unit rate of five year warranty provision for the impugned assessment years. Coupled with this, it has also filed before us a detailed compilation chart of the impugned warranty provisions as well as sales figures of finished goods from financial year 2004- 05 to 2010-11 relevant amounts involved in two types of warranties DR fails to controvert the fact that the assessee has been following consistent method in creating similar warranty provision in subsequent assessment years as well. Relevant assessment order in such a case dated 30.04.2015 for assessment year 2011-12 indicates that there is no such disallowance made at the Revenue s behest. The assessee is assessed at the same rate throughout. All the above narrated facts therefore make it crystal clear that the assessee has satisfied the relevant conditions for claiming the impugned warranty provisions as deduction Ad-hoc 10% disallowance on various expenditure being stores and spares, expenses on service operators and salary, wages and staff welfare expenses - Held that - Assessee had produced all the relevant bills/vouchers in the first round of lower appellate proceedings (supra). The relevant issue is that on normal business expenditure wherein the Revenue has not made out any case of challenging its genuineness. We afforded sufficient opportunity to the learned Departmental Representative to rebut the CIT(A) s above extracted findings under challenge deleting the impugned ad hoc disallowance in absence of any question of allowability as well as genuineness. There is no such cogent material on record to uphold the Assessing Officer s conclusion therefore. - Decided in favour of assessee

Summary

List of Issues:
1. Disallowance of warranty provisions.
2. Double disallowance of warranty provisions.
3. Disallowance of sales and warranty commission.
4. Disallowance of stores and spares expenses.
5. Disallowance of service operation expenses.
6. Disallowance of salary and wages and staff welfare expenditure.
7. Admission of additional evidence violating Rule 46A of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Disallowance of Warranty Provisions:
The assessee challenged the CIT(A)'s action confirming the assessment findings disallowing its provisions of five-year warranty of ?28,29,848/- and ?52,47,094/- for the respective assessment years. The CIT(A) upheld the disallowance of the five-year warranty expenses due to the absence of details supporting the scientific basis of the provision. The assessee's method of calculating the provision was based on past compressor failure ratios, but the necessary details for the relevant years were not provided. Thus, the disallowance was upheld.

2. Double Disallowance of Warranty Provisions:
The assessee alleged a double disallowance of the warranty provisions as expenditure actually incurred but adjusted against the relevant provision. However, the CIT(A) found that the one-year warranty charges represented service charges paid to dealers for maintenance services and were made on a scientific basis. The excess provision of ?94,080/- was considered minimal, and the disallowance was deleted.

3. Disallowance of Sales and Warranty Commission:
The Revenue sought to revive the disallowance of sales and warranty commission of ?1,48,80,783/- and ?8,93,27,906/- for the respective assessment years. The CIT(A) deleted the disallowance of sales commission, treating it as part of warranty expenses. The assessee's actual warranty expenditure was only ?2,05,40,479/- and ?3,11,08,478/- for the respective years, excluding sales commission. The CIT(A) deleted the disallowance of sales commission, and the ITAT upheld this deletion.

4. Disallowance of Stores and Spares Expenses:
The Revenue challenged the deletion of disallowance of stores and spares expenses of ?19,40,000/- for the first assessment year. The CIT(A) found that these expenses pertained to normal repairs and maintenance of the manufacturing facility and were not related to warranty expenses. The ITAT upheld the deletion of this disallowance.

5. Disallowance of Service Operation Expenses:
The Revenue sought to revive the disallowance of service operation expenses of ?76,68,400/- and ?91,73,000/- for the respective assessment years. The CIT(A) found that these expenses included installation charges, AMC expenses, and were not related to warranty expenses. The ITAT upheld the deletion of this disallowance.

6. Disallowance of Salary and Wages and Staff Welfare Expenditure:
The Revenue challenged the deletion of disallowance of salary and wages and staff welfare expenditure of ?88,10,000/- and ?1,20,50,800/- for the respective assessment years. The CIT(A) found that these expenses were normal business expenditures and not related to warranty expenses. The ITAT upheld the deletion of this disallowance.

7. Admission of Additional Evidence Violating Rule 46A of the Income Tax Rules:
The Revenue alleged that the CIT(A) violated Rule 46A by admitting additional evidence. However, the CIT(A) had obtained a remand report from the Assessing Officer, who had accepted the details provided by the assessee. The ITAT found that the CIT(A) had followed due process and upheld the deletion of the impugned disallowance.

Conclusion:
The ITAT allowed the assessee's appeals and dismissed the Revenue's appeals, upholding the CIT(A)'s deletion of various disallowances and accepting the assessee's warranty provisions as computed on a scientific basis. The ITAT found that the assessee had followed a consistent method in creating warranty provisions and that the CIT(A) had duly considered the relevant evidence and remand reports.