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TMI Blog2017 (10) TMI 1246X X X X Extracts X X X X X X X X Extracts X X X X ..... e also transferred to profit and loss account. Both these amounts are transferred to ‘miscellaneous expense’ under the sub head ‘provision for repair expense’. Thus the above the word ‘provision’ is a misnomer as, in reality, it is not a provision but write off of actual repair expenses (net of recovery). In view of the above, the disallowances made by the AO in AY 2009-10 and AY 2010-11 are deleted. - Decided in favour of assessee. Disallowance of provision for maintenance and free service warranty - Held that:- We find that as the expenses relating to warranty are the expenses for the year in which the elevator is sold, in accordance with the concept of matching revenue with cost, the assessee-company is making provision for the cost of warranty in the year in which the elevator are sold. In Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA), it has been held that (i) for a provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an out flow of resources and in respect of which reliable estimate of amount of obligation is possible and (ii) if historical trend ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Service/Warranty of ₹ 4,54,08,269/-. 3. Ground No. 3: Disallowance of expenditure under section 40(a)(ia) ₹ 5,44,27,004/-. On the facts and in the circumstances of the case and in law, The Ld. CIT(A) erred in upholding the addition made by the AO in respect of disallowance of ₹ 5,44,27,004/- under section 40(a)(ia) of the Act. Assessment Year 2010-11 1. Ground No. 1: Disallowance of Provision towards recovery of cost of repairs ₹ 51,73,107/- On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO in respect of provision towards recovery of cost of repairs amounting to ₹ 51,73,107/-. 3. The appellant Otis Elevator Company (India) Ltd. is engaged in the business of manufacturing, erection, installation and maintenance of lifts, escalators, elevators and travellators. We begin with the 1st ground of appeal for the AY 2009-10 and AY 2010-11. The same relates to the disallowance made by the Assessing Officer (AO) of provision towards recovery of cost of repairs amounting to ₹ 66,66,881/- in AY 2009-10 and ₹ 51,73,107/- in AY 2010-11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpunged from the orders of the authorities below. The citizens and the tax-payers of this country are participant in the nation/building and also contributor to the exchequer and to use such harsh words against them are not warranted except in exceptional proven cases. 3.3 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). He further states that the said provisions are purely contingent in nature depending upon the happening or non-happening of any event. These cannot be considered to have crystallized during the year under consideration and therefore, cannot be allowed as expenditure for the year. 3.4 We have heard the rival submissions and perused the relevant material on record. We find from the annual report that as per the accounting policy of the assessee-company, the revenue for repair contracts is recognized only on completion of repairs. Thus, on completion of repair contracts, advance received from customers and other collections after completion of repair contracts are credited to income from services in the profit and loss account and expenses incurred on repair contract and debited to Work In Progress (WIP) are transfer to the debit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in the revised computation of income and made an addition of ₹ 3,24,48,624/-. 4.1 In appeal, the Ld. CIT(A) held that (i) there is no convincing basis of estimation of provision on page no. 159 because there is no corroborative basis of various estimation, (ii) the terms and conditions of warranty are such that the appellant has to perform routine inspection and maintenance after commencement of use of elevator or lift machine; this condition refers to future responsibility and not of immediate and current liability, (iii) there is no propriety to claim expenditure by way of making provision of future happening. Therefore, the Ld. CIT(A) sustained the disallowance of expenditure of ₹ 4,54,08,269/- made by the AO. 4.2 Before us, the Ld. Counsel of the assessee submits that the company gives one-year warranty in respect of elevators sold by it. The period of one year starts from the date of completion of installation of the elevator. During the period of warranty, the company is under obligation to provide certain services and maintenance free of cost as per the agreements entered into with the customers. He drew our attention to sample copy of the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees under our direction and supervision. The required supplies and parts will be furnished except such parts as may be needed because of negligence, misuse or accident not caused by us. 4.4.1 We find that as the expenses relating to warranty are the expenses for the year in which the elevator is sold, in accordance with the concept of matching revenue with cost, the assessee-company is making provision for the cost of warranty in the year in which the elevator are sold. 4.4.2. At this juncture we refer to the disclosure at page 36 of the Financial Statements and locate that the following was the position with regard to warranty provisions made and utilized/reversed during the year: Particulars Amount (Rs.) Opening balance 3,24,48,624 New warranty provision made during the year (i.e. in respect of elevators sold and installed during the year) 8,97,94,010 Utilization/Reversal of warranty provision during the year (7,68,34,365) Closing balance 4,54,08,269 We further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings. However, the AO was not convinced with the same as the assessee-company failed to file documentary evidence to substantiate its stand. The AO also found that Annexure 7 filed by the assessee was a general letter issued by Pricewaterhouse without giving any reason and details of disallowances mentioned in the tax audit report. Therefore, the AO made a disallowance of ₹ 5,44,27,004/-. In appeal, the above disallowance was confirmed by the Ld. CIT(A) on the same reason as given by the AO. 5.1 Before us, the Ld. Counsel of the assessee relies on the certificate issued by the tax auditor. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A). 5.2 We have heard the rival submissions and perused the relevant materials on record. We find that as per Annexure 7 filed before the AO, the tax auditors have issued the following clarification While making the Tax Audit Report for the P.Y. 2008-09 (AY 2009-10) under the lead of disallowance under section 40(a)(ia) of the I.T. Act, 1961, sub-contractor charges amounting to ₹ 5,44,27,004/- were disallowed on account of payment made to sub-contractor (under the head unallocated cost in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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