2017 (9) TMI 431 - AT - Income Tax

Provision for warranty made @1% of weighted average turnover - AO disallowed the warranty Provisions -Nature of Contingent Liability - Matching Concept - Provision made on scientific estimation keeping in mind the anticipated liabilities likely to arise in the future. - Held That - matter remitted back to the file of the Assessing Officer to examine the entire details of the provisions made by the assessee in the earlier years and also in the subsequent years and also to see whether such a provision made has some rational and scientific evaluation and no excess provision is being made with this direction. -Appeal of revenue is allowed for statistical purposes. Cash Discounts for early payments - Disallowances on basis of no material evidences - Quantum of Cash Discounts - MUL provided statement of claims of cash discounts of its purchases on weekly basis - Held That - Tribunal set aside this issue to the file of the Assessing Officer to verify the details of cash discount and if it is found that the customers while making the payment before 30 days have deducted the cash discount, then same is to be allowed. - Appeal of revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition on account of warranty expenses.
2. Deletion of addition on account of cash discount expenses.
3. Cross objections by the assessee regarding the appeal filed by the DCIT and rectification of the assessment order.

Detailed Analysis:

1. Deletion of Addition on Account of Warranty Expenses:
The primary issue revolves around the deletion of an addition of ?1,34,21,722 made by the Assessing Officer (AO) on account of warranty expenses. The assessee, engaged in manufacturing 'Power Steering', claimed warranty expenses of ?1,46,98,694, which included ?12,76,973 for warranty defects claimed by Maruti Suzuki India Ltd. and ?1,34,21,722 as a provision for warranty made at 1% of weighted average turnover.

The AO disallowed the provision for warranty expenses, considering them contingent liabilities. However, the CIT(A) allowed the claim, noting that the provision was made based on scientific estimation and historical data, and was reduced to 0.50% from 0.75% in the previous year. This decision was supported by the Supreme Court judgment in M/s. Rotork Controls India Pvt. Ltd. vs. CIT, which upheld that provisions made on a proper estimate are deductible under section 37.

The Tribunal, after reviewing the findings, remitted the matter back to the AO to examine the details of provisions made in earlier and subsequent years to ensure the estimation was rational and no excess provision was made.

2. Deletion of Addition on Account of Cash Discount Expenses:
The second issue concerns the deletion of an addition of ?94,62,769 made by the AO on account of cash discount expenses. The AO disallowed the expenses due to a lack of material evidence supporting the claim, including details such as the total amount of the bill, date, and description of goods supplied.

The CIT(A) allowed the claim, noting that cash discounts were provided to customers paying within 30 days, calculated at the State Bank of India’s PLR rate. The CIT(A) observed that the details provided by Maruti Udyog Ltd. (MUL) supported the claim.

However, the Tribunal set aside the issue to the AO to verify the details and ensure the cash discount was correctly claimed, following the Tribunal's direction in the earlier year.

3. Cross Objections by the Assessee:
The assessee raised several grounds in the cross-objection, primarily supporting the CIT(A)'s order and challenging the AO's actions, including the rectification of the assessment order under section 154. However, the grounds were deemed infructuous as they supported the CIT(A)'s decision, and the cross-objection was dismissed.

Conclusion:
The Tribunal allowed the revenue's appeal for statistical purposes, remitting the issues of warranty and cash discount expenses back to the AO for further verification. The assessee's cross-objection was dismissed. The order was pronounced in the open court on 06.09.2017.