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2017 (5) TMI 293 - AT - Income TaxAddition on account of warranty provisions - Held that - We find that exercise of warranty claim during the year is from the provision account which does not affect profit and loss account. Under new policy percentage of last 8 quarters of warranty cost vs. last 8 quarterly sales were used for making the warranty expenses provision. We find that the assessee is manufacturing a product which requires warranty and the assessee has adopted reversing excess provision. The assessee is making provision of warranty applying the percentage of cost to the turnover based on past record making the process more scientific bringing into higher degree of accuracy. The assessee is following mercantile system of accounting. Therefore, we are of the view that the issue in controversy is squarely covered by the decision in the case of Rotork Controls India (P) Ltd. vs. CIT 2009 (5) TMI 16 - SUPREME COURT OF INDIA wherein allowed the claim of provision for warranty stating that, with making of provision on the basis of estimated present value of contingent liability holds good during the assessment years in question qua warranty claims - Decided in favour of assessee. Disallowance on account of provision for bad and doubtful debts - Held that - Following the decision the case of T.R.F. Limited 2010 (2) TMI 211 - SUPREME COURT we are of the view that the assessee s claim of bad debt and doubtful debt is covered by the decision of the Hon ble Supreme Court and as per the decision of the Hon ble Supreme Court wherein the Hon ble Supreme Court has categorically restored this matter to the file of the Assessing Officer to examine whether the bad debt or part thereof has been written off in the accounts of the assessee, the matter has to be examined by the Assessing Officer de novo and considering all the above aspect, the matter may be decided. We, therefore, restore this issue to the file of the Assessing Officer to do the needful after providing the assessee reasonable opportunity of being heard.
Issues Involved:
1. Addition on account of warranty provisions. 2. Disallowance on account of provision for bad and doubtful debts. Issue-wise Detailed Analysis: 1. Addition on Account of Warranty Provisions: The assessee, engaged in manufacturing turbochargers, had its original assessment under section 143 passed on 24.11.2010. The Assessing Officer (AO) disallowed provisions for warranty expenses amounting to ?30,65,282/- for the assessment year 2007-08 and ?16,98,831/- for the assessment year 2010-11. The AO noted that the assessee initially debited actual warranty claims received during the year in the profit and loss account but later started making provisions for warranty expenses without clear quantification or rationale for the policy change. The assessee argued that it followed the mercantile system of accounting and made provisions based on the advice from technical personnel, using the last quarter's warranty cost and sales data. The assessee cited the Supreme Court's decision in Rotork Control India Private Limited (314 ITR 62), which allowed warranty expenses as deductible if based on a structured policy and reliable estimates. The Tribunal considered the submissions and noted that the assessee's practice of making provisions was in line with Accounting Standard 29 issued by the Institute of Chartered Accountants of India, which mandates provisions where reliable estimates can be made. The Tribunal found that the assessee's method of calculating provisions based on the last 8 quarters’ data was scientific and accurate. The Tribunal also referred to the Supreme Court's judgment in Rotork Controls India (P) Ltd. vs. CIT, which supported the allowance of such provisions as they align with the accrual and matching concepts. Conclusion: The Tribunal allowed the assessee's claim for warranty expenses for both assessment years, following the Supreme Court's precedent. 2. Disallowance on Account of Provision for Bad and Doubtful Debts: For the assessment year 2010-11, the AO disallowed ?20,38,655/- on account of provision for bad and doubtful debts. The AO argued that the provision was made based on the age of debtors without distinguishing between good and bad debtors, which is not the intention of section 36(1)(vii) of the Income Tax Act. The assessee contended that section 36(1)(vii) allows deduction for any bad debt or part thereof, and it is not necessary for the entire debt to become irrecoverable. The assessee cited the Supreme Court's decision in T.R.F. Limited vs. CIT (190 Taxman 391), which clarified that post-1.4.1989, it is sufficient if the bad debt is written off in the accounts. The Tribunal noted that the AO had not examined whether the debt was actually written off in the assessee's accounts. Referring to the Supreme Court's decision in T.R.F. Limited, the Tribunal remitted the matter back to the AO to verify if the bad debt or part thereof was written off in the accounts of the assessee. Conclusion: The Tribunal restored the issue to the AO for de novo consideration, directing the AO to examine the write-off of bad debts in the assessee's accounts. Final Judgment: - ITA No. 258/Ind/2015 (warranty provisions) was allowed. - ITA No. 232/Ind/2016 (provision for bad and doubtful debts) was partly allowed for statistical purposes. Pronouncement: The order was pronounced in open Court on 19th January, 2017.
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