2018 (10) TMI 1583 - AT - Income Tax

Disallowance of provision for warranty & maintenance expenses - as per assessee it is not a provision for warranty & maintenance expenses rather it is an excess provision for warranty & maintenance expenses which was written back during the year, but not credited to Profit and Loss Account - MAT computation - Held that - The assessee is also making provision for warranties and maintenance expenses every year which may arise in future out of present obligations arising from sales concluded with warranties and maintenance obligations contracted by the assessee along with sale transaction. The obligation on account of warranties and maintenance which arose during the current year out of contractual obligations towards warranties and maintenance attached to sales made in preceding years are debited to Provisions for Warranties and Maintenance account As observed assessee has made regular provisions towards warranties and maintenance expenses which may arise in future on account of sale already made as contracted while making sales of equipment/appliances, which is in consonance with Accounting Standard 29 issued by ICAI and the said provision cannot be termed as unascertained liability. The assessee has computed its provision for warranties and maintenance based on past experience which cannot be simply brushed aside as the onus which stood on the assessee stood discharged and it was for the Revenue to have brought incriminating material/evidences to demolish the basis of computing such provision. The detailed elaboration were made by the assessee to that effect to substantiate its contentions vide written submissions filed before the learned CIT(A) . CIT(A) has passed a well reasoned order deleting additions both under normal provisions as also under provisions of Section 115JB while computing book profits , and we have no reason to interfere with the well reasoned order - Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance of ?82,51,140/- being provision for warranty & maintenance expenses.
2. Addition of ?82,51,140/- to book profit computed u/s 115JB being provision for warranty & maintenance expenses.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of ?82,51,140/- Being Provision for Warranty & Maintenance Expenses:

The assessee, engaged in manufacturing and trading of electrical and electronic appliances, did not add back the provision for warranty expenses of ?82,51,140/- while computing income. The AO contended that this provision was an unascertained liability and needed to be added back to the total income. The assessee argued that the provision for warranty was a present liability, arising at the time of sale, based on past customer claims and was not an unascertained liability. The AO rejected the assessee's contention, stating that the provision was not scientifically or consistently calculated and added back the amount to the income under normal provisions and Section 115JB.

The CIT(A), however, accepted the assessee's argument, noting that the provision was based on past experience and was an ascertained liability. The CIT(A) referred to several judicial precedents, including the Supreme Court's decision in Rotork Controls India (P) Ltd. v. CIT, which supported the deduction of such provisions. The CIT(A) concluded that the provision for warranty was not an unascertained liability and allowed the assessee's appeal, deleting the addition made by the AO.

2. Addition of ?82,51,140/- to Book Profit Computed u/s 115JB Being Provision for Warranty & Maintenance Expenses:

The AO added back the provision for warranty expenses to the book profit under Section 115JB, arguing that it was an unascertained liability. The assessee contended that the provision was made in accordance with Accounting Standard-29 (AS-29) and was based on past experience, making it an ascertained liability. The CIT(A) agreed with the assessee, stating that the provision for warranty was part of the sale price and was a present obligation arising from past events. The CIT(A) cited several judicial decisions, including the Supreme Court's ruling in Bharat Earth Movers, which held that liabilities arising in the accounting year should be allowed as deductions even if quantified and paid later.

The CIT(A) emphasized that the provision was made following AS-29 and was reflected in the audited financial statements. The AO's failure to provide evidence against the assessee's method of calculating the provision further weakened the Revenue's case. Consequently, the CIT(A) deleted the addition to the book profit under Section 115JB.

Tribunal's Decision:

The Tribunal upheld the CIT(A)'s decision, noting that the assessee's provision for warranty expenses was based on past experience and complied with AS-29. The Tribunal found no reason to interfere with the CIT(A)'s well-reasoned order, supported by multiple judicial precedents. The Tribunal confirmed the deletion of the additions made by the AO under both normal provisions and Section 115JB, dismissing the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decision to delete the disallowance and addition of ?82,51,140/- for warranty and maintenance expenses under both normal provisions and Section 115JB. The provision was deemed an ascertained liability based on past experience and in compliance with AS-29, supported by judicial precedents.