2018 (5) TMI 631 - AT - Income Tax

Disallowance of provision for warranty expenses - whether the same is an ascertained liability and has been calculated based on technical estimates? - Held that - The only dispute is whether the claim made by the assessee is a reliable estimate or not but in any case, it cannot be nil. Qualification in the audit report with respect to quantification is only because of non-availability of the reliable trend for the past years. The assessee has also disclosed in the notes on accounts the details of the warranty expenses. The assessee has also stated that expenditure incurred during the year is not separately identifiable. The lower authorities have not examined these details. The provisions of the warranty expenditure is required to be estimated based on the past experience of the assessee demonstrated on the basis of past warranty liability on similar type of contracts and further it can be proved by incurring the warranty expenditure in subsequent period to the sales. This exercise has not been done either by the assessee or by the revenue. Thus set aside the whole issue back to the file of the Ld. assessing officer with a direction to the assessee to prove before the AO how the warranty provisions have been made by the assessee along with the technical inputs received from the technical team of the assessee Disallowing full credit of taxes deducted at source and taxes paid by the appellant dismissing the grounds raised by the appellant - Held that - As the amount of tax deduction at source and taxes paid by the assessee is required to be given credit from the tax liability determined by the Ld. AO if they are supported by the necessary evidences, hence we set aside this ground of appeal to the file of the AO with a direction to examine the claim made by the assessee of credit for tax deduction at source and advance tax paid.

Summary

Issues Involved:
- Allowability of warranty expenditure provision
- Levy of interest under section 234C
- Initiation of penalty proceedings under section 271(1)(c)
- Disallowance of full credit of taxes deducted at source and taxes paid

Analysis:

Issue 1: Allowability of warranty expenditure provision
The appeal focused on the disallowance of the provision for warranty expenses by the Assessing Officer. The assessee contended that the provision was based on technical estimates and should be allowed as an ascertained liability. The lower authorities disallowed the expenditure, citing lack of scientific basis and questioning the accuracy of the provision. The Tribunal noted that the warranty provision was made based on inputs from the technical team, considering labour, material, and other costs related to warranty obligations. The Tribunal emphasized that the provision was not contingent but a liability in present. It directed the Assessing Officer to reexamine the issue, considering the reliability of the estimate and past experience. The Tribunal allowed the appeal on this ground, setting aside the disallowance.

Issue 2: Levy of interest under section 234C and Issue 3: Initiation of penalty proceedings under section 271(1)(c)
The Tribunal dismissed the grounds related to the levy of interest under section 234C and the initiation of penalty proceedings under section 271(1)(c). It deemed the interest charge and penalty proceedings premature and consequential, respectively, based on the outcome of other issues. Therefore, both grounds were rejected by the Tribunal.

Issue 4: Disallowance of full credit of taxes deducted at source and taxes paid
The Tribunal allowed the appeal on this ground, directing the Assessing Officer to reexamine the claim made by the assessee regarding the credit for taxes deducted at source and advance tax paid. The Tribunal emphasized the need for necessary evidence to support the claim and instructed the Assessing Officer to consider the credit in determining the tax liability. As a result, this ground of the appeal was allowed by the Tribunal.

In conclusion, the Tribunal partly allowed the appeal of the assessee for statistical purposes, addressing the issues of warranty expenditure provision, interest levy, penalty proceedings, and tax credit disallowance. The detailed analysis of each issue provided clarity on the Tribunal's decision, emphasizing the importance of reliable estimates, procedural correctness, and evidence-based tax assessments.