9911796707
TMI Blog2012 (12) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... finished goods” - held that:- Assessee is dealing with sophisticated medical consumables which are used by the large public and if an inventory is not moving for sufficiently long period, it is considered to be non-productive or non-useable. The assessee had identified through SAP computer programme which took into consideration each and every item of slow moving finished goods lying at the end of each year and contained information in that regard. The assessee has properly identified such stock and has also followed in accordance with commercially accepted accounting principles of valuation and has put the realizable value for the purpose of valuing the same - CIT(A) was correct in law and on facts to have deleted the addition made by the AO which was based not taking into consideration the hard realities of assessee's business - The addition in our view, is properly deleted - concurrent findings as to the scientific and reasonable method adopted by the assessee in the facts of this case have been recorded after the facts were gone into in detail by the appropriate authorities. The Court does not find any reasons to disturb the said findings. On this ground too the revenue's claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by .. ….. … …. (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (i) the amount or amounts set aside as provision for diminution in the value of any asset." 9. The assessee in this case as is clear from the impugned orders has made the provision @ 4% of the sale value, as the provision for liabilities in respect of after sales warranty offered to the customers. The assessee has also supplied detailed working of the warranty provisions made. The warranty provision was created in the year of sale which according to the assessee is clearly based on some scientific and reasonable basis and now we will examine whether the same can be disallowed as an amount or amount set aside as provision for diminution in the value of an asset which can alone be the subject matter of increase to the book profit in terms of clause (i) of the aforesaid Explanation (1). In our opinion, the provision made for warranty claims in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983- 84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness realities in which he is placed, the same should be accepted. The assessee has a foolproof method of identification of slow moving or dead stock and has put the realizable value for the purpose of valuing the same. In fact, the principle of valuation is the cost or the market value whichever is lower. The market value here become obsolete or slow moving it naturally has a lower market value which the assessee has recognized. The assessee has properly identified such stock and has also followed in accordance with commercially accepted accounting principles of valuation. In our view, the CIT(A) was correct in law and on facts to have deleted the addition made by the AO which was based not taking into consideration the hard realities of assessee's business. The addition in our view, is properly deleted and we decline to interfere." 9. This Court is of the opinion that the concurrent findings as to the scientific and reasonable method adopted by the assessee in the facts of this case have been recorded after the facts were gone into in detail by the appropriate authorities. The Court does not find any reasons to disturb the said findings. On this ground too the revenue's claim h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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