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2022 (10) TMI 273 - AT - Income TaxDisallowing the provision for warranty - HELD THAT - We noted from the order of CIT(A) that neither the AO nor CIT(A) has examined the details filed before them during the set aside assessment proceedings or even remand proceedings by the AO and simply noted that the assessee could not establish that all the conditions prescribed in the decision in the case of Rotork Controls India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT are satisfied. We noted that the authorities below have neither examined the issue nor gone into the details and just simpliciter confirmed the disallowance. Assessee could not produce before the AO or the CIT(A) as to how the provision is made based on historical trend and a realiable estimate as held by Hon ble Supreme Court. Now the assessee has filed the details before us but we have no mechanism to verify the same and accordingly, the matter needs to go back to the file of the AO. One more fact that assessment for assessment year 2010-11 is pending before AO and the AO can examine the issue in assessment year 2010-11 according to above observation of ours and the directions of the Tribunal in AY 2010-11. Hence, we set aside these three appeals to the file of the AO for fresh adjudication in term of the above directions. Appeals filed by the assessee allowed for statistical purposes.
Issues Involved:
1. Disallowance of provision for warranty. Detailed Analysis: 1. Disallowance of Provision for Warranty: The primary issue in these appeals is the disallowance of the provision for warranty amounting to Rs. 5.66 Crores for AY 2011-12, Rs. 4.65 Crores for AY 2012-13, and Rs. 10.14 Crores for AY 2013-14. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance made by the Assessing Officer (AO), which was contested by the assessee. Background: The assessee is engaged in the manufacturing of tyres. The matter had previously been set aside by the ITAT to the AO for reconsideration in light of the Supreme Court's decision in Rotork Controls India Pvt. Ltd. vs. CIT, which provides guidelines on the scientific basis for warranty provisions. Despite this, the AO reiterated the disallowance, stating that the provisions were made on an unscientific basis. Arguments by the Assessee: The assessee argued that the warranty provisions were based on historical data and trends, and provided detailed calculations for the relevant assessment years. They referenced the Supreme Court's decision in Rotork Controls India Pvt. Ltd., asserting that the provision for warranty should be allowed as it was a reliable estimate based on past experience. Findings of the CIT(A): The CIT(A) upheld the AO's disallowance, noting that: - The assessee could not satisfactorily establish that all conditions prescribed by the Supreme Court were met. - The provision for warranty constituted a contingent liability not entitled to deduction under Section 37 of the Income Tax Act, 1961. Tribunal's Observations: The Tribunal observed that neither the AO nor the CIT(A) had thoroughly examined the details provided by the assessee. The Tribunal noted that the assessee had submitted detailed workings of the warranty provisions, which were not adequately considered by the lower authorities. The Tribunal emphasized the need to verify whether the provision was made on a scientific basis as per the Supreme Court's guidelines. Supreme Court's Guidelines in Rotork Controls: The Supreme Court in Rotork Controls India Pvt. Ltd. laid down that for a provision to be allowed: - There must be a present obligation arising from past events. - It is probable that an outflow of resources will be required to settle the obligation. - A reliable estimate of the amount of obligation can be made. Tribunal's Direction: The Tribunal set aside the appeals to the file of the AO for fresh adjudication, directing the AO to verify the details provided by the assessee. The Tribunal also noted that the assessment for AY 2010-11 was pending and should be examined in light of their observations and the Supreme Court's guidelines. Conclusion: The appeals filed by the assessee were allowed for statistical purposes, with the matter remanded back to the AO for a detailed examination and fresh adjudication based on the principles laid down by the Supreme Court in Rotork Controls India Pvt. Ltd. Order Pronouncement: The order was pronounced in the open court on 24th August 2022 at Chennai.
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