9911796707
TMI Blog2018 (10) TMI 1583X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in deleting the disallowance of Rs. 82,51,140/- being provision for warranty & maintenance expenses without appreciating the fact that the said provision is in the nature of unascertained liability only and needed to be added back to the total income as well as to the book profit of the assessee. 2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 3. The assessee is engaged in the business of manufacturing & trading of electrical and electronic appliances. The AO observed during the course of assessment proceedings u/s. 143(3) r.w.s. 143(2) that the assessee has not added back the provision of warranty expenses amounting to Rs. 82,51,140/- out of total provision of Rs. 2,22,51,139/- debited to Profit and Loss Account while computing the income. The assessee was asked by the AO to explain the same , to which the assessee submitted before the AO as under:- ".......We are in business of manufacture and trading in Electrical & Electronic Appliances which involves substantial material cost which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses which was written back during the year, but not credited to Profit and Loss Account. It was observed by the AO that the assessee was required to add back such written back provision while computing the total income under the normal provisions . The AO directed to add back the said excess provision for warranty and maintenance expenses amounting to Rs. 82,51,140/- to the income of the assessee under the normal provisions as in the view of the AO the same is unascertainable and contingent liability . The AO also observed that the assessee has also not followed any scientific and consistent method to ascertain the expenses that could accrue on account of warranty and maintenance. The AO thus directed to add back the said provision which is in excess of the warranted expenses to the tune of Rs. 82,51,140/- to the income of the assessee both under the normal provisions as well while computing book profit u/s 115JB of the 1961 Act, as in the opinion of the AO the said amount of Rs. 82,51,140/- towards warranty provision is purely a provision towards an unascertained liability and therefore is required to be added to income of the assessee both under the normal provisions as well und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised." 1.4 Thus, a provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise embodying economic benefits. A past event that leads to a present obligation is called as an obligating event which is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events which exist independently of the future conduct of the business of the enterprise, that are recognized as a provision. For a liability to qualify for recognition, there must be not only present obligation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on a matching concept. Under the matching concept, if revenue is recognized, the cost incurred to earn that revenue including warranty costs has to be fully provided for. In the instant case, when consumer appliances were sold and the warranty cost was an integral part of that sale price, then the assessee had to provide for such warranty cost in its account for the relevant year, otherwise the matching concept would fail. In such a case, the second option is also inappropriate. Under the circumstances, the third option is the most appropriate because it fulfills accrual concept as well as the matching concept. The assessee company makes assessment of the warranty provisioning policy and scrutinises the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis, a sensible estimate is made. The warranty provision for the products is based on the estimate at the year end of future warranty expenses. Such estimates are reassessed every year. Hence, on the facts and circumstances of the instant case, provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision of warranty for repairs/replacement is an existing liability at time of sale and is allowable as deduction. d) Chicago Pneumatic India Ltd. v. DCIT 15 SOT (Mum.) Wherein it was held that, the provision for warranty claims was made on the basis of claims received and report of service engineers. The followed the method of making provision in a scientific manner based upon the terms and conditions of warranty agreement, hence, it was an ascertained liability The provision made was deductible even if the actual amount incurred was a little less than the provision. e) 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranty 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. Therefore, the said liability of provision cannot be said to be unascertained in nature and hence is not covered within meaning of clause (c) of Explanation 1 to section 115JB(2) of the Act. 2.3 It is submitted that the appellant company has made the said provision in accordance with the requirements of Accounting Standard-29 on 'Provisions, Contingent Liabilities and Contingent Assets' (AS-29) and on the basis of the past experience in respect of such expenditure of the appellant company. AS-29 came into effect in respect of accounting periods commencing on or after 1-4-2004. Paragraph 14 of the AS 29 is as under: "14. A provision should be recognized when: (a) an enterprise has a present obligation as a result of a past event: (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting minimum alternate tax payable by the company. 2.5 Furthermore, it is also submitted that as per explanation (c) to section 115JB, Liabilities other than ascertained liabilities, i.e. only unascertained liabilities can be added back to the profit for calculating the book profit under section 115JB. The word 'ascertained' as per the Webster's II New Riverside University Dictionary means 'to make certain'. Thus, ascertained liability means a liability which is certain or known. In the instant case provisions made for granting warranty by the appellant is for ascertained liability. Therefore, the said provision for warranty liability being made on basis of calculation as per past experience cannot be added back while computing book profit under section 115JB. Reliance is placed on the decision in the case of Bharat Earth Movers (SC) 112 Taxman 61/ 245 ITR 428.which states that if a business liability has definitely 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added back these provisions while computing book profit. We would like to invite your attention towards the decisions of the Hon'ble Delhi High Court and Hon'ble Income Tax Appellant Tribunal on the same identical facts: 1. CIT vs. Becton Dickinson India (P) Limited [Delhi High Court] ITA No. 39/2012 2. Samay Electronics (P) Ltd. Vs. DCIT [2006] 99 ITD 236 (Rajkot) 3. ACIT Vs. BalarampurChini Mills Ltd [2007] 109 ITD 146 (Kol). The Hon'ble Supreme Court in Apollo Tyres Limited Vs. CIT [2002] 255 1TR 273 (SC) had held the same rationale as explained above. The Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act. Where the accounts of a company has been prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and section 115J is made for the limited purpose of empowering the Assessing Officer 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the retrospective amendment to section 115JB by Finance Act (No. 2) 2009 w..e.f. 1-4-2001, by inserting clause (i) to Explanation 1 of the said section, we have to submit that the same applies to provision made for diminution in value of any asset. It will be appreciated that this provision is in respect of a liability and not for value in any asset. 2.11 In view of the above submissions and the judicial decisions, the appellant respectfully prays that provision for warranty should not be added back while computing book profit u/s 115JB of the Act as the same is an ascertained provision." 6. The contentions as were made by the assessee before learned CIT(A) found favour with Ld. CIT(A) who was pleased to delete the additions as were made by the AO , vide appellate order dated 27.01.2017 passed by learned CIT(A), by holding as under:- "5. DECISION I have carefully 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 Rs. 82,51,140/- being amount of provision for warranty & ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not applicable in the afore-stated facts of the appellant's case. Hence, the addition so made by the assessing officer is deleted. Thus, this ground of appeal is allowed. 5.1.4 I find that it is not in dispute that the vast array of products manufactured by the appellant are sophisticated consumer appliances. The appellant has also been in the business for long enough to have known the trend of defects. It is also a known fact that consumers of expensive appliances give preference to goods with warranty and hence, the warranty becomes an integral part of the sale price for the manufacturer because of the brand image and, therefore, the sales turnover depends on such warranties. Therefore, I find that the principles laid down in the judgement of Hon'ble Supreme Court in Rotork Controls India (P) Ltd. V. CIT 314 ITR 62 (SC) are applicable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its utilization(pb/page1) , detailed as under:- "Details of utilization of provision for 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% 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 Rs. 84,57,758/- and for the preceding year ended 31.03.2010 is stated to be Rs. 74,13,640/- . Our attention was also drawn to page 32/paper book wherein under schedule-13/Manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tractual obligations towards warranties and maintenance attached to sales made in preceding years are debited to Provisions for Warranties and Maintenance account. The assessee has placed on record , the provision made for assessment year 2010-11, 2011-12 and 2012-13 (pb/page 1) and utilization of the warranty and maintenance provision as under:- "Details of utilization of provision for 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 provision cannot be termed as unascert ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
