2020 (5) TMI 649 - AT - Income Tax

Disallowance of provision for warranty - assessee is engaged in the business of manufacturing and trading of toys for heavy vehicles, which are sold along with warranty, the moment the sale takes place, the assessee places itself under the obligation to replace during the warranty period, free of cost, any competent suffering from manufacturing defects - HELD THAT - As rightly pointed out by the Ld. AR, assessment order nowhere show that the learned AO considered the details furnished by the assessee along with the letter dated 17/02/2014 not ready comment on such details as to their consistency and genuineness. It is only on verification of the record CIT(A) found that the learned AO added in observing that no details are scientific method of computation of provision for warranty was filed by the assessee, because such details to be found in record being filed alongwith the reply dated 17/02/2014. There is no reason for us not to believe the factual findings returned by the Ld. CIT(A) after going through the record. A reading of the orders of the authorities below not support the argument advanced on behalf of the Revenue. From the record that against the order of the Ld. CIT(A) for assessment year 2010-11 2019 (3) TMI 1782 - ITAT DELHI . Tribunal while following the decision of the Hon ble Supreme Court in the case of Rotork Controls India Ltd 2009 (5) TMI 16 - SUPREME COURT upheld the findings of the Ld. CIT(A) in deleting the disallowance. There is no dispute that the facts involved for this year are similar to the facts involved for the immediately preceding year, i.e. 2010-11 - we uphold the findings of the Ld. CIT(A) and while allowing ground No.1, direct the learned Assessing Officer to delete the disallowance and consequential addition. Addition on account of processing fee and interest paid - HELD THAT - Having accepted that the assessee had offered ₹ 66,18,000/- paid as processing fee for taxation, the assessing officer shall not be heard to say anything contrary. Finding of the Ld. CIT(A) do not suffer any legal infirmity. Insofar as the amount of ₹ 5,78, 387/- is concerned, assessee had deducted the TDS on interest amount and, therefore, the addition is unsustainable. Ground No. 2 of the Revenue s appeal is devoid of merits and is dismissed.

Summary

Issues involved:
1. Disallowance of provision for warranty expenses.
2. Disallowance of expenditure comprising processing fee and interest on a loan.

Detailed Analysis:

1. Disallowance of provision for warranty expenses:
The appellant challenged the deletion of additions to the tune of ?7,27,77,300 on account of disallowance of provision for warranty. The appellant contended that the provision was made towards warranty expenses due to the obligation to replace defective components during the warranty period. The Assessing Officer disallowed the provision, stating it lacked a scientific basis and proof of actual liability. However, the Commissioner of Income Tax (Appeals) found that the assessee had provided a computation of the provision for warranty, which was similar to a previous case where such an addition was deleted. The Commissioner relied on the decision of the Apex Court and allowed the deletion of the addition. The Revenue argued for remand to verify the computation method, but it was rejected as the Commissioner found the Assessing Officer's observations incorrect and based on factual findings.

2. Disallowance of expenditure comprising processing fee and interest on a loan:
The second ground related to the disallowance of expenditure amounting to ?71,96,387, including processing fee and interest on a loan. The assessee argued that the processing fee and interest were disallowed as they were added back in the computation of income under 'TDS not deducted.' The Assessing Officer disallowed the processing fee, but the Commissioner deleted it, stating it had already been accounted for. The Revenue contended that the TDS deduction on the remaining interest amount needed verification. However, the Commissioner found the argument untenable as the TDS had been deducted on the interest amount. Consequently, the second ground of the Revenue's appeal was dismissed, and the overall appeal was also dismissed, upholding the findings of the Commissioner.

In conclusion, the judgment addressed the disallowance of provision for warranty expenses and the disallowance of expenditure related to processing fee and interest on a loan. The decision was based on detailed analysis of facts, legal precedents, and computations provided by the assessee, ultimately resulting in the dismissal of the Revenue's appeal.