2020 (2) TMI 833 - AT - Income Tax

Revision u/s 263 - provision towards warranty was wrongly allowed by the AO - provision for warranty allowed based on past figures of claims against provisions made and hence said claim of provision towards warranty was wrongly allowed by the AO - HELD THAT - We find the method adopted for making claim for provision for warranties as fair and reasonable and in our considered view the AO did formed an proper opinion after making due enquiries and verification while allowing claim of deduction of provisions for warranties for the impugned ay while framing scrutiny assessment , as also it is observed that it was a recurring issue for AO which is arising every year after year as it framed scrutiny assessment against assessee for preceding ay s also for ay 2010-11 to 2012-13 and in those years also the assessee made claim for deduction towards provision for warranties which was allowed by the AO in scrutiny assessment and Revenue finally accepted those orders so far as claim for deduction towards provision for warranties is concerned and it could not be shown that these orders for ay 2010-11 to 2012-13 were interfered by Revenue by invoking provisions of Section 147 or Section 263 or any other provisions of the 1961 Act. It is settled proposition now that claim for deduction towards provisions for warranties made on the basis of past experience based on statistical data by adopting scientific method to fulfill contractual obligation arising out of concluded contracts of sale/services is an ascertained liability . Reference is drawn to decision of Hon ble Supreme Court in the case of Rotork Controls India Private Limited v. CIT 2009 (5) TMI 16 - SUPREME COURT . Under these circumstances based on totality of facts and circumstances of the instant case before us, we are inclined to quash the revisionary order dated 30.03.2019 passed by learned PCIT u/s.263 of the Act and hold that the assessment order dated 27.02.2017 passed by AO was not erroneous in so far as prejudicial to the interest of Revenue. We order accordingly.

Summary

Issues Involved:
1. Jurisdiction to set aside the assessment order under section 263 of the Income-tax Act, 1961.
2. Merits of the provision for warranty of INR 1,40,45,352.

Issue-wise Detailed Analysis:

Issue 1: Jurisdiction to set aside the assessment order under section 263 of the Income-tax Act, 1961

The appellant challenged the revisionary order passed by the learned Principal Commissioner of Income Tax (PCIT) under section 263 of the Income-tax Act, 1961, which held the assessment order dated 27.02.2017 to be erroneous and prejudicial to the interest of the Revenue. The appellant argued that the PCIT erred in exercising powers under section 263, as the assessment order did not meet the twin conditions of being 'erroneous' and 'prejudicial to the interest of the revenue'. The appellant contended that the Assessing Officer (AO) had adopted one of the possible views on the matter and that the jurisdiction under section 263 cannot be exercised merely to substitute the view taken by the AO. The appellant also argued that the proceedings under section 263 were initiated based on audit objections and that the PCIT failed to dispose of the objections raised by the appellant.

The tribunal noted that the AO had made specific inquiries about the provision for warranty during the assessment proceedings and that the appellant had provided detailed responses, which were accepted by the AO. The tribunal held that the AO had formed a conscious opinion after making due inquiries and verifications, and the assessment order could not be termed as erroneous in so far as prejudicial to the interest of the Revenue. The tribunal emphasized that the PCIT cannot substitute its opinion with that of the AO unless it is shown that the AO did not make any opinion or made an opinion without proper inquiry or verification.

Issue 2: Merits of the provision for warranty of INR 1,40,45,352

The PCIT held that the provision for warranty claimed by the appellant was based on subsequent year figures rather than past figures of claims against provisions made, and hence, the claim was wrongly allowed by the AO. The PCIT observed that there was a significant gap between the provision made and its utilization, indicating that the obligation and outflow of resources were not correctly estimated. The PCIT concluded that the AO had not made complete verification with respect to these aspects and had passed the assessment order without proper and diligent application of mind.

The appellant argued that the provision for warranty was made on a scientific basis, considering historical experience and past trends of warranty expenses, in line with the ruling of the Hon'ble Supreme Court in Rotork Controls India P Ltd v CIT and the Jurisdictional High Court decision in Commissioner of Income-tax Vs Luk India (P.) Ltd. The appellant provided detailed workings and explanations for the provision, demonstrating that the method adopted was fair and reasonable.

The tribunal observed that the provision for warranty made during the year under consideration was 0.18% of the Gross Revenue from operations, compared to 0.36% in the previous year and 0.15% in the year before that. The tribunal noted that the AO had allowed similar claims for provision for warranty in preceding years under scrutiny assessments, and the Revenue had accepted those orders. The tribunal held that the method adopted by the appellant for making the provision for warranty was fair and reasonable and that the AO had formed a proper opinion after making due inquiries and verifications.

The tribunal concluded that the assessment order was not erroneous in so far as prejudicial to the interest of the Revenue, and the revisionary order passed by the PCIT under section 263 was quashed.

Conclusion:

The tribunal quashed the revisionary order passed by the PCIT under section 263 of the Income-tax Act, 1961, and held that the assessment order dated 27.02.2017 was not erroneous in so far as prejudicial to the interest of the Revenue. The appeal filed by the appellant was allowed.