2023 (9) TMI 748 - AT - Income Tax

Ad-hoc disallowance of power and fuel expenses - As per AO documents submitted by the assessee could not satisfactorily lead to co-relation between production and increasing power and fuel expenses - HELD THAT - It is found that the assessee accepted the proposed addition made by the A.O. during the assessment proceedings and consequent to which addition made by the A.O. and now he cannot find fault with the Authorities in making addition. It was not demonstrated before us that the Assessee's Representative had agreed the said addition before the A.O. by mistake of fact or law or it was agreed before the A.O. without the authority from the assessee himself. Being so, agreed addition cannot be challenged before us. Therefore, we find no merit in the Ground Disallowance of Warranty expenses - DR submitted sales has decreased in comparison to the preceding years but the total warranty expenses have increased more than 250% and the provision for warranty expenses around 300% similarly in the Assessment Year 2005-06 as well, though the sales remained almost static, but the warranty expenses increased more than 200% - HELD THAT - The provision of warranty has been made in very arbitrary manner as the assessee is not following consistent method of making provision for warranty. We are aware of the judgment of Rotork Controls 2009 (5) TMI 16 - SUPREME COURT wherein it is held that if the warranty is based on the past experience i.e. historic trends, the estimate can be said to be reliable. When the assessee makes provision for warranty following scientific method and the same is not arbitrarily made, the reliable estimation made by the assessee to be allowed as deduction. In the present case, the assessee made provisions for warranty in arbitrary manner which is not supported by any scientific method which cannot be allowed as deduction, accordingly, we find no error in the order of the Lower Authorities. Thus, we confirm the addition made by the authorities and dismissing the Ground of the assessee.

Summary

Issues Involved:
1. Ad-hoc disallowance of power and fuel expenses.
2. Disallowance of provision for warranty expenses.
3. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Summary:

Issue 1: Ad-hoc Disallowance of Power and Fuel Expenses
The assessee claimed power and fuel expenses amounting to INR 95,89,257/-. The Assessing Officer (AO) made an ad-hoc disallowance of INR 10,00,000/- due to the inability to satisfactorily correlate the expenses with production. The CIT(A) upheld this disallowance. The Tribunal noted that the assessee had agreed to the proposed disallowance during the assessment proceedings, and thus, cannot challenge it now. The Tribunal dismissed Ground No. 2 to 2.1, stating that the agreed addition cannot be challenged unless it was demonstrated that the agreement was made by mistake or without authority.

Issue 2: Disallowance of Provision for Warranty Expenses
The assessee claimed total warranty expenses of INR 1,02,59,968/-, out of which INR 35,98,902/- was a provision for warranty expenses. The AO disallowed the provision, stating that provisions are not allowable as expenditure. The CIT(A) upheld this disallowance, noting that the provision was made arbitrarily without following a scientific method or historical trend. The Tribunal confirmed this view, citing the Supreme Court's decision in Rotork Controls India (P) Ltd, which allows deduction for warranty expenses based on historical trends and scientific methodology, not on an ad-hoc basis. The Tribunal found no error in the lower authorities' orders and dismissed Ground No. 3 to 3.2.

Issue 3: Initiation of Penalty Proceedings
The Tribunal did not adjudicate on the initiation of penalty proceedings under section 271(1)(c) as it was not addressed by the CIT(A).

Conclusion:
The appeal filed by the assessee was dismissed in its entirety. The Tribunal upheld the disallowance of both the power and fuel expenses and the provision for warranty expenses. The order was pronounced in open court on 13th September 2023.