2008 (1) TMI 417 - AT - Income Tax

Addition on Provisions for Performance Warrantee - computation of the income - Minimum Alternate Tax (MAT) - Computation of the book profit u/s 115JB - new activity in the form of construction of terminals on behalf of the clients in the relevant previous year - provided 10 per cent of contract value as security deposit - HELD THAT - On a perusal of its technical assessment for possible warranty liability we find that such assessment was vetted by M/s Dalal Consultants Engineers Ltd. an independent agency. The types of defects and performance failures that could arise under various components of the project have been succinctly summarized by the technical consultants in their report. Assessee had followed percentage completion method for accounting its income which is a prudent one as evident from AS-7 of ICAI and no doubt vide s. 211(3) of the Companies Act 1956 a company is bound to follow the Accounting Standards promulgated by ICAI. In the type of contract that assessee had with M/s IOC no doubt recognition of revenue on percentage completion basis is itself an estimation since such profits are so estimated even before a project is complete. Therefore it is only prudent that all possible expenditures are also taken into account. Since accrual system has to be followed by a company it is very much necessary that liabilities that are crystallised though difficult to be quantified are accounted for. It is true that there are inter-head variations between the technical estimates and actual spending but that is well explained from the fact that one is an estimate and the other actual. Thus assessee has been able to justify the provisioning and its quantum in a reasonable manner. The Madras High Court decision in CIT vs. Rotork Controls 2007 (2) TMI 200 - MADRAS HIGH COURT what can be discerned is that warranty provisioning is allowable if supported by sufficient data to justify such provisioning and is based on statistical or other relevant data. We have no hesitation in the facts of the case to hold that 5 per cent of the warranty provisioning done by the assessee was made against ascertained liability very much reasonable and made on relevant data. Hence we hereby set aside the CIT(A) s order confirming non-allowance of deduction of performance warranty in computing the income of the assessee under the normal provision of the IT Act. AO is directed to allow the deduction of the provision for warranty as claimed by the assessee for computing its income under normal provisions of the Act. Computation of the book profit u/s 115JB - Addition amount was preliminary and deferred revenue expenditure written off by the assessee during the relevant previous year - HELD THAT - Provision for warranty made by the assessee company is an ascertained liability it follows that AO cannot make any addition thereof to the net profit of the assessee company for arriving at its book profits for the purpose of s. 115JB. Therefore we set aside the orders of the CIT(A) and AO on this aspect and delete the addition made by the AO to the net profit for computing assessee s book profit under s. 115JB. Thus Grounds 1 and 2 of the assessee are allowed. In the result appeal of the assessee is partly allowed for statistical purpose. Addition for computing the net profit under s. 115JB - HELD THAT - There is no case for the Revenue that assessee had adopted any different set of standards or policies vis-a-vis the accounts laid by it before the AGM. By writing off the balance remaining under its head Preliminary and deferred revenue expenditure assessee was only doing what was prudent in that it was removing from the asset side of its balance sheet a non-productive item and which in any case was not an asset at all. Therefore it was not doing anything contrary to any ICAI guidelines. CIT(A) was very much right in following the law laid down by Hon ble Supreme Court in Apollo Tyres 2002 (5) TMI 5 - SUPREME COURT according to which but for the limited power of making increase and reductions as provided in the Explanations to s. 115J AO has to accept results as declared by the company if the accounts have been properly maintained in accordance with Companies Act and certified so by authorities under that Act. This principle is very much applicable for the book profit computation under s. 115JB also. Thus we find no reason to interfere with the order of learned CIT(A) deleting the addition being the preliminary deferred revenue expenditure written off by the assessee made by the AO in the relevant previous year for computing book profit I for the purpose of s. 115JB. Hence Grounds 1 and 2 of the Revenue are dismissed. In the result appeal of the Revenue is dismissed. To sum-up assessee s appeal is partly allowed for statistical purposes and Revenue s appeal is dismissed.

Issues Involved:
1. Disallowance of provision for performance warranty.
2. Addition to book profits under Section 115JB.
3. Interest levied under Section 234D.
4. Deletion of addition of preliminary and deferred revenue expenditure.

Detailed Analysis:

1. Disallowance of Provision for Performance Warranty:
The assessee contested the CIT(A)'s decision to uphold the AO's disallowance of a performance warranty provision of Rs. 4,83,72,135 under normal income tax provisions and Section 115JB. The AO disallowed this provision citing that the liability was not crystallized and was contingent. The CIT(A) agreed, stating that the liability was not definite or ascertained and thus could not be considered an allowable expenditure.

Upon appeal, the assessee argued that the provision was based on a detailed technical assessment and was in compliance with AS-7 of ICAI. The assessee also cited various judicial precedents supporting the allowance of such provisions. The Tribunal noted that the assessee had followed prudent accounting practices and that the provision was based on a technical assessment vetted by an independent agency. The Tribunal concluded that the provision was an ascertained liability and directed the AO to allow the deduction under normal provisions and Section 115JB.

2. Addition to Book Profits under Section 115JB:
The AO had added the performance warranty provision to the book profits under Section 115JB, considering it a contingent liability. The CIT(A) upheld this addition. However, the Tribunal held that since the provision was an ascertained liability, it should not be added to the book profits under Section 115JB. The Tribunal directed the AO to exclude the provision from the book profits computation.

3. Interest Levied under Section 234D:
The assessee challenged the interest levied under Section 234D, arguing that the refund was received before the enactment of Section 234D. The Tribunal noted that the issue of interest under Section 234D for refunds granted before its enactment was referred to a Special Bench. The Tribunal set aside the CIT(A)'s order on this aspect and remitted the matter back to the AO for fresh consideration in light of the Special Bench's directions.

4. Deletion of Addition of Preliminary and Deferred Revenue Expenditure:
The Revenue contested the CIT(A)'s deletion of an addition of Rs. 1,00,18,189 for computing net profit under Section 115JB. The AO had added this amount, citing a change in the assessee's accounting policy. The CIT(A) deleted the addition, relying on the Supreme Court's decision in Apollo Tyres Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the adjustment was not permissible under the Explanation to Section 115JB and that the assessee had followed the prescribed accounting standards and policies.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to allow the deduction for the performance warranty provision and to exclude it from the book profits computation under Section 115JB. The issue of interest under Section 234D was remitted back to the AO. The Revenue's appeal was dismissed, with the Tribunal upholding the deletion of the addition of preliminary and deferred revenue expenditure.

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