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TMI Blog2018 (10) TMI 1583X X X X Extracts X X X X X X X X Extracts X X X X ..... with Accounting Standard 29 issued by ICAI and the said provision cannot be termed as unascertained liability. The assessee has computed its provision for warranties and maintenance based on past experience which cannot be simply brushed aside as the onus which stood on the assessee stood discharged and it was for the Revenue to have brought incriminating material/evidences to demolish the basis of computing such provision. The detailed elaboration were made by the assessee to that effect to substantiate its contentions vide written submissions filed before the learned CIT(A) . CIT(A) has passed a well reasoned order deleting additions both under normal provisions as also under provisions of Section 115JB while computing book profits , and we have no reason to interfere with the well reasoned order - Decided against revenue - I.T.A. No.3518/Mum/2017 - - - Dated:- 22-10-2018 - Shri Joginder Singh, Vice President And Shri Ramit Kochar, Accountant Memb For the Revenue : Shri. Chaudhary Arun Kumar Singh For the Assessee : Shri. Mayank Chauhan Shri. Bhupendra Karkhanis ORDER PER RAMIT KOCHAR, ACCOUNTANT MEMBER: This appeal, filed by Revenue, being ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability within the meaning of clause (c) of Explanation I to section 115JB(2) of the Act. A warranty provision is a liability in present and is ascertained based on the customers' claims record. There is obligation on the company to attend to warranty claims which arise no sooner the sales are affected. We rely on the following decisions wherein it has been held that the liability under warranty claims arises no sooner the sales are affected, which has definitely arisen in the accounting year and is allowable on estimate on the basis of past record. 1. IBM India Ltd v. CIT(A) 105 ITD 1 (Bang.) 2. Voltas Ltd. v. DCIT 64 ITD 232 (Mum) 3. Majestic Auto Ltd. 296 ITR 309 P H 4. Usha Martin Inds Ltd. 288 ITR 63, AT., Cal. S.B. 5. Bharat Earth Movers, 245 ITR 428 S, C. which held that liability had actually arisen and deduction is allowable even if quantified and paid later. 6. Rotork Controls (I) Ltd. 314 ITR 62 S.C. - allowed as integral part of sale price. Thus, warranty provision cannot be said to be a provision to meet an unascertained liability and hence does not get covered under clause (c) of the Explanation I to section 115JB(2) or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd maintenance expenses by debiting a sum of ₹ 82,51,140/- (net) in the Profit and Loss A/c for meeting the claims of customers to whom the products have been sold. The details of such provision for warranty and maintenance expenses are given in Note No. 13 of Schedule 15 of Notes to Accounts and the balance in provision is reflected in schedule 8B of provisions. Thus, the said provision is debited to profit and loss account to arrive at the Net Profit and the book profit u/s. 115JB of the Act. 1.2 It is submitted that the appellant company is engaged in the business of Manufacturing and Trading of Electrical and Electronic appliances. On account of the warranty given with the products sold by the appellant Company, it has to maintain a warranty provision for meeting the warranty claims of the customers. Such claims arise after the sales are affected and these provisions are already inbuilt in the sale price. Further, considering the nature of business of the company, it will be appreciated that the warranty claims from the customers are bound to occur year after year in different degrees. The amount of such claims likely to arise on the number of products sold is determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... single item, the provision for warranty can constitute a contingent liability not entitled to deduction under section 37. 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 but to settle that obligation. In the instant case, the assessee had been manufacturing and selling electrical and electronic appliances. It has been in the business since past many years. Over the years, the assessee had been manufacturing these consumer electronic appliances in large numbers. Being sophisticated items, customers prefer to purchase these items only with warranty. Therefore, warranty became an integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. Therefore, warranty provision needed to be recognized because the assessee was an enterprise having a present obligation as a result of past events resulting in an outflow of resources. A reliable estimate is made of the amount of the obligation. In short, all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Therefore, all the three conditions for recognizing a liability for the purpose of provisioning stood satisfied in the instant case. 1.6 Thus, the company has made the provision for warranty and maintenance expenses as the same falls within the above criteria and meets the conditions stated in AS-29. The company has made such provision on regular basis in earlier as well as subsequent years, which is evident from the accounts of the company for subsequent years. A sum of ₹ 10,44,118/- is appearing as provision for warranty maintenance expenses under the head Current Liabilities and Provisions on the liability side of Balance Sheet of the appellant company as at 31st March, 2011. Note No. 13 of notes to account gives the details of provision for warranty maintenance, which is reproduced below: As-, requires by Accounting Standard 29 Provisions, Contingent Liabilities and Contingent Assets issued by institute of Chartered Accountants of India, the disclosure with respect to provision for warranty and maintenance expenses is as follows: Rupees a) Amount at the beginning of the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3), Mumbai [2009] 120 ITD 237. Wherein it was held that A.O. could not make addition of provision of performance warranties to net profit of assessee for arriving at its book profit for the purpose of section 115JB. g) Hero Briggs Stratton Auto Ltd. v. CIT 161 Taxman 127 (Delhi) Wherein it has been held that once assessee is maintaining his account on mercantile system and a liability has accrued, though to be discharged at a future date, it would be proper to allow deduction of same while working out profit and loss accounts of his business under section 115JA. h) Voltas Ltd. v. DCIT 64 ITD 232 (Mum.) Wherein it was held that the liability on account of warranty claim for the unexpired period was in present and although it was liable to be discharged at a future date, the taxpayer was entitled for deduction on account of provision made for the said liability. He also held that the said provision for warranty being not for an unascertained liability, the addition thereof made by AO while computing the book profit u/s 115JB was not permissible. In view of the above, the assessee prays that the expenditure in form of provision for warranty expenses be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. Thus, the company has made the provision for warranty and maintenance expenses as the same falls within the above criteria and meets the conditions stated in AS-29. The company has made such provision on regular basis in subsequent years, which is evident from the accounts of the company for subsequent years. A sum of ₹ 10,44,118/- is appearing as provision for warranty maintenance expenses under the head Current Liabilities and Provisions on the liability side of Balance Sheet of the appellant Company as at 31st March, 2011. Note No. 13 of notes to account gives the details of provision for warranty, which is reproduced below: As requires by Accounting Standard 29 Provisions, Contingent Liabilities and Contingent Assets issued by institute of Chartered Accountants of India, the disclosure with respect to provision for warranty and maintenance expenses is as follows: Rupees a) Amount at the beginning of the year 74,13,640 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 2.6 Further, the accounts of a company are prepared by following the provisions of the Companies Act 1956 and section 209 (3) of the companies Act directs that accounts of a company should show fair view of the state of affairs and the provisions of Part II of schedule VI to the Companies Act had to be applied in the context of the method of accounting followed by the appellant. If cash method of accounting is followed, it will not be necessary to make a provision for outstanding liabilities/assets. As per Companies Act, the every company is required to follow mercantile method of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to rely upon the authentic statement of accounts of the company. Subsection (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company and accordingly held that while determining the 'book profit' under section 115J, the Assessing Officer could not recompute the profits in the profit and loss account by excluding provisions made for arrears of depreciation. 2.9 Reliance is also placed on the following decisions: a) M/s Sony India (P) Limited v. Deputy Commissioner of Income Tax 118 TTJ 865 (Del) Wherein it was held that no addition can be made to the book profits u/s 115JB of the Act in the case of provision for warranty expenses as. the. same constitute an ascertained liability. b) IBM India Ltd. v. CIT(A) 105 ITD 1 (Bang.) Wherein it was held that the liability towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. c) Commissioner of Income-Tax, Patiala v. Jay Bee Industries [2008] 171 Taxmann 386 {PUNJ. HAR.) Wherein it was held that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arefully considered the facts of the case, assessment order, submissions and contention of the appellant as summarised above and the relevant case laws pertaining to the issues to be decided . 5.1 Ground No. 1 2 5.1.1 These grounds relate to disallowance of ₹ 82,51,140/- being amount of provision for warranty maintenance expenses and consequential addition to book profit u/s 115JB. The assessing officer has discussed this issue at para 4 of his order. He has observed that the impugned amount is not provision for warranty and maintenance but excess provision which has written back during the year but not credited in P L account. He further observed that the appellant has not followed any scientific and consistent method to ascertain the expenses that could accrue on account of warranty and maintenance. With these observations, the assessing officer has made the disallowance and consequential addition to book profit u/s 115 JB. 5.1.2 There is no dispute that the appellant company is engaged in the business of manufacturing and trading in electrical and electronic appliances. On account of the warranty given with the products sold by the appellant Company, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable in the instant case. 5.1.5 I also find that the assessing officer has not given due consideration to the principles laid down by Hon'ble Supreme Court and other judicial authorities. He has dismissed the contentions of the appellant in a summary manner. The assessing officer has not required the appellant to give any statistical analysis or basis of calculating provisions for warranty. He has not given any reasons to refute the para 13 of Notes to Accounts of the appellant's duly audited accounts. Nothing has been brought forth by the assessing officer to disprove these observations made by an auditor. Therefore, I find no reason to differ from the decision of my Id. Predecessor in appellant's appeal for AY 2010-11 on the same issue with similar facts and circumstances and decided in Appeal no. CIT(A}-7/DCIT 3(1)/IT-33/12-13 order dated 03.05.2013. Accordingly, these grounds are allowed. 7. Aggrieved by the deletion of additions by learned CIT(A) vide appellate order dated 27.01.2017, Revenue has come in an appeal before the tribunal . The Ld. DR relied upon the assessment order passed by AO and submitted that the AO made the additions as the assessee di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of payment vis a vis provision made during the last year 98.24% 97.21% 98.60% The assessee also drew our attention to the audited financial statements of the assessee for financial year 2010-11 ,2011-12 and 2012-13 which are placed in paper book/page 2-46. Our attention was also drawn to page no. 31/paper book wherein in schedule-8( current liabilities and provisions) to audited financial statements for the year ended 31.03.2011 , provisions for warranties and maintenance expenses as at 31-03-2011 is stated to be ₹ 84,57,758/- and for the preceding year ended 31.03.2010 is stated to be ₹ 74,13,640/- . Our attention was also drawn to page 32/paper book wherein under schedule-13/Manufacturing other expenses , the warranties and maintenance expenses are stated to be ₹ 2,22,51,139/- for the year ended 31.03.2011 while the said expenses were to the tune of ₹ 73,18,868/- for the year ended 31.03.2010. The assessee relied upon decision of Hon ble Supreme Court in the case of Rotork Controls India P. Ltd. v. CIT reported in (2009) 180 taxman 422(SC). The assessee also relied upon the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty and maintenance expenses during A.Y. 2010-11, A.Y. 2011-12 and A.Y. 2012-13. Particulars Assessment Year 2010-11 2011-12 2012-13 Opening Balance 53,87,289 74,13,640 84,57,758 Add:- Provisions made during the year 73,18,868 82,51,140 60,77,432 Less:- Payment made for against Provisions 52,92,517 72,07,022 83,39,112 Closing Balance 74,13,640 84,57,758 61,96,078 % of payment vis a vis provision made during the last year 98.24% 97.21% 98.60% We have observed assessee has made regular provisions towards warranties and maintenance expenses which may arise in future on account of sale already made as contracted while making sales of equipment/appliances, which is in consonance with Accounting Standard 29 issued by ICAI and the said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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