2012 (12) TMI 210 - HC - Income Tax

Book profit u/s 115JB - Provision for warranty @4% of total sale value of products on scientific analysis - as provision for diminution in the value of assets - in case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction u/s 37 - obligations arising from past events have to be recognized as provisions as a result of past events resulting in an outflow of resources. As decided by court in case of M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA in concluding such warranty provisions were not contingent liabilities would apply with greater force to negate the claim by the revenue that such provisions are made for diminution in the value of any asset so as to be covered by Explanation 1(i) to Section 115 JB of the Act - no substantial question of law arises for consideration. Provision in respect of slow moving finished goods - held that - Assessee is dealing with sophisticated medical consumables which are used by the large public and if an inventory is not moving for sufficiently long period it is considered to be non-productive or non-useable. The assessee had identified through SAP computer programme which took into consideration each and every item of slow moving finished goods lying at the end of each year and contained information in that regard. The assessee has properly identified such stock and has also followed in accordance with commercially accepted accounting principles of valuation and has put the realizable value for the purpose of valuing the same - CIT(A) was correct in law and on facts to have deleted the addition made by the AO which was based not taking into consideration the hard realities of assessee s business - The addition in our view is properly deleted - concurrent findings as to the scientific and reasonable method adopted by the assessee in the facts of this case have been recorded after the facts were gone into in detail by the appropriate authorities. The Court does not find any reasons to disturb the said findings. On this ground too the revenue s claim has to fail. In view of the decision CIT Vs. Hindustan Zinc Ltd. 2007 (5) TMI 195 - SUPREME COURT decided in favor of assessee.

Summary

Issues Involved:
1. Treatment of provision for warranty as provision for diminution in the value of assets under Explanation 1(i) to Section 115JB of the Income Tax Act, 1961.
2. Justification for setting aside the disallowance in respect of "slow moving finished goods."

Issue-wise Detailed Analysis:

1. Treatment of Provision for Warranty:
The primary issue was whether the Tribunal erred in treating the provision for warranty as a provision for diminution in the value of assets, which should be added to the 'book profit' under Explanation 1(i) to Section 115JB of the Income Tax Act, 1961. The assessee, engaged in the manufacture and trading of medical consumable devices and diagnostic equipment, claimed a provision for warranty service based on a scientific analysis, amounting to 4% of the total sale value of its products. The assessing officer disallowed this claim uniformly across the assessment years in question, adding back the amount. The Tribunal, however, ruled in favor of the assessee, stating that the provision for warranty claims, created in the year of sale and based on scientific and reasonable grounds, could not be treated as a provision for diminution in the value of assets. The Tribunal referenced the Supreme Court's decision in Rotork Controls India P. Ltd. vs. CIT, which held that such provisions were not contingent liabilities and were deductible. The Court agreed with the Tribunal's reasoning, noting that the considerations from the Rotork Controls case applied with greater force to negate the revenue's claim. Consequently, it was determined that no substantial question of law arose for consideration on this issue.

2. Justification for Setting Aside Disallowance of "Slow Moving Finished Goods":
The second issue concerned the Tribunal's setting aside of the disallowance related to "slow moving finished goods." The assessee justified this provision by identifying products that were slow-moving or non-productive, using detailed information and SAP computer programs. The Tribunal upheld the assessee's method, noting that the assessee consistently followed a method of accounting that accounted for the business realities of dealing with sophisticated medical consumables. The Tribunal found no infirmity in the assessee's approach, which involved valuing slow-moving stock at realizable value based on commercially accepted accounting principles. The Court supported the Tribunal's findings, emphasizing that the concurrent findings of a scientific and reasonable method adopted by the assessee were well-founded. The Court also referenced a supporting judgment in CIT vs. Hotline Teletube & Components Ltd., which relied on the Supreme Court's decision in CIT vs. Hindustan Zinc Ltd. Consequently, the Court found no reason to disturb the Tribunal's findings, and the revenue's claim on this ground also failed.

Conclusion:
The Court dismissed the appeals, answering all questions of law against the revenue and in favor of the assessee.