2018 (11) TMI 781 - AT - Income Tax

Disallowance of Provision for Warranty Expenses - Held that - As is evident from the refereed tables, ratio of actual expenses as to provision is in the range of 75-105% is last four years; Hence. AO s observation is erroneous and ill-founded. Assessee had made provision @ 2.5% in AY 2007-08 but thereafter, such provision has been reduced to 2,25% AY 2008-09 onwards on the basis of experience of the assessee. Thus, such estimation was based on past experience and there in not much difference in the actual expenses. Thus, in a way, approach adopted by assessee is scientific. Accordingly, AO was not correct in holding that provision was based on estimation and not backed by scientific method. Assessee s estimate is absolutely reliable as there is not much variation in the actual expenses as compared to provision for warranty and also the actual expenses are in the range of 1.79-2.37% of sales i.e. very much near to the percentage of provision. Assessee creates Provision for warranty and debits the same to P&L a/c. In the next year, such provision is reversed by crediting P&L a/c after deducting amount utilized and thereafter, various expenses incurred for warranty services like travelling and salary of CSD are debited. AO has completely overlooked the fact that excess provision is reversed by crediting P&L and therefore, even if other two expenses are separately debited, the same has nullifying effect in light of reversal of provision by crediting the P&L a/c. Thus, all the objections raised by AO are on account of not considering travelling expenses and salary cost of CSD as part of actual warranty expenses . Had AO taken pains to consider details furnished by the assessee, he would not have reached the above conclusion. Provision for warranty created by assessee satisfies all the criteria laid in the case of Rotork Controls 2009 (5) TMI 16 - SUPREME COURT OF INDIA as well as AS-29. Hence, the same is allowable as deduction u/s 37 of the Act. - Decided in favour of assessee. Disallowance of unutilized MODVAT/CENVAT credit - AO upon finding that assessee follows Exclusive method of accounting, made addition u/s 145A in respect of unutilized CENVAT credit on the count that it must be added to closing stock of raw material - Held that - AO failed to appreciate that the assessee has been consistently following Exclusive method of accounting for years. If any adjustment w.r.t. CENVAT is made in the amount of closing stock , then corresponding adjustments need to be made in the amounts of opening balance , purchases and sales as well. Once all such adjustments are made, there would be no impact on profit and loss of the year by inclusion of excise duty or other credits to the value of closing stock. It is mandatory for an assessee to follow Exclusive method of accounting for valuation of inventories in light of AS-2 on Valuation of Inventories issued by ICAI. However, as per S.145A, an assessee is to follow Inclusive method of accounting. In any case, there is no impact on profitability whether an assessee follows Exclusive method or Inclusive method . Accordingly, no addition is called for u/s 145A. Amount lying with the excise authorities could not have been claimed as refund by the assessee and hence, it cannot be treated as an income in the hands of the assessee - addition has been rightly deleted by CIT(A) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Provision for Warranty Expenses
2. Deletion of Addition on Account of Unutilized MODVAT/CENVAT Credit

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Warranty Expenses:

During the assessment proceedings, the Department disallowed the provision for warranty expenses claimed by the assessee at ?1,28,85,450/-. The provision was calculated at 2.25% of sales, though the actual utilization was consistently lower. The Department argued that the provision was not based on a scientific method and was an attempt to reduce actual profits and defer tax payments. The AO restricted the deduction to ?3,60,000/- based on the average of the past four years and disallowed the balance amount.

The assessee argued that the provision for warranty was based on past experience and was a reliable estimate. They provided a detailed analysis showing that the actual warranty expenses were in the range of 75-105% of the provision and 1.79-2.37% of sales. The assessee also clarified that the provision included the cost of materials, traveling expenses, and salary costs of the Customer Support Development (CSD) Department.

The Tribunal referred to the Supreme Court's decision in "Rotork Controls Pvt. Ltd. vs. CIT" which laid down conditions for the allowance of provisions under Section 37. The Tribunal found that the assessee's provision met these conditions, as it was a reliable estimate based on past experience. The Tribunal concluded that the provision for warranty was allowable as a deduction under Section 37 and upheld the CIT(A)'s decision to delete the disallowance.

2. Deletion of Addition on Account of Unutilized MODVAT/CENVAT Credit:

The AO made an addition of ?52,43,994/- under Section 145A for unutilized CENVAT credit, arguing that it must be added to the closing stock of raw materials. The assessee followed the exclusive method of accounting, which the AO did not appreciate. The Tribunal noted that if adjustments were made to the closing stock, corresponding adjustments should also be made to the opening balance, purchases, and sales, resulting in no impact on profitability.

The Tribunal cited various judgments, including "CIT vs. Indo Nippon Chemicals Ltd." and "ACIT vs. Narmada Chematur Petrochemicals," which supported the assessee's method of accounting. The Tribunal concluded that the exclusive method of accounting was appropriate and that the addition under Section 145A was unwarranted. The Tribunal upheld the CIT(A)'s decision to delete the addition.

Separate Judgments for Different Assessment Years:

For the assessment years 2011-12 and 2012-13, the Tribunal followed the same reasoning as in the assessment year 2010-11. The Tribunal dismissed the Department's appeals for these years as well, upholding the CIT(A)'s decisions to delete the disallowances and additions.

Conclusion:

In conclusion, the Tribunal upheld the CIT(A)'s decisions for all the assessment years involved. The provision for warranty expenses was deemed allowable under Section 37, and the addition for unutilized CENVAT credit under Section 145A was deleted. The appeals filed by the Department were dismissed.