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TMI Blog2024 (7) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... excess provision and similar feature appeared in the earlier years and assesee had payments for liquidated damages on delay of deliverables, then no adverse view can be taken, because it is not the charge of the AO that assessee has made some kind of excessive provision in this year in relation to past. Decided against revenue. Provisioning for warranty - To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding Counsels For the Respondent : Mr. Arijit Chakravarty, Adv. ORDER 1. The Commissioner seeks to impugn the order of the Income Tax Appellate Tribunal [ ITAT ] dated 31 October 2017 and has framed the following questions for our consideration: - 2.1 Whether the Ld. ITAT erred in deleting the disallowance of Provision of Liquidated Damages of Rs. 8.98 crores without appreciating that the said amount was on account of unascertained liability for which there did not exist a probability of outflow of resources? 2.2 Whether a provision can be allowed only on the basis of a clause of liquidated damages contained in an agreement without actually quantifying the amount payable to the other party and without raising any bill on account of the said contract? 2.3 Whether the Ld. ITAT erred in allowing the claim of warranty of Rs. 7.06 crores by applying the ratio decidendi of the Hon'ble Apex Court in the case of Rotork Controls India (P) Ltd. v. CIT, (2009) 180 Taxman 422 despite the fact that the Assessee grossly failed to discharge the onus of providing any reasonable basis to arrive at the said amount of claim and also the fact that the Assessee failed to provide details of claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also reversed the provision for liquidated damages in the year in which clients waived the said liquidated damages and the write back amount has been offered to tax by the assessee. Whence a provision is arising out of a contractual obligation and the basis of providing the provision is based on past experience and such a reasonable basis of estimation has been regularly followed by the assessee in the past, then ostensibly it cannot be held that the basis of estimation of working of the provision is not correct. Further, once it is brought on record that assssee on the year of reversal has paid taxes on excess provision and similar feature appeared in the earlier years and assesee had payments for liquidated damages on delay of deliverables, then no adverse view can be taken, because it is not the charge of the Assessing Officer that assessee has made some kind of excessive provision in this year in relation to past. The finding and observations of the ld. CIT(A), are based on correct appreciation of facts and law, hence we confirm the order of CIT(A) on this score and accordingly, ground No.1 raised by the Revenue is dismissed. 3. As would be manifest from the above, there is a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on 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. When value actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfils accrual concepts as well as the matching concept. 5. Bearing in mind the aforesaid conclusion, we find that no substantial question stands raised in ITA 285 of 2019. 6. While dealing with ITA 284 of 2019, the following additional questions have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no notice has been given to the assessee and wherein there will be an increased tax liability on the assessee. The Hon'ble Apex Court in the case of Chockalingam Meyyappan Vs. CIT reported in (1963) 48 ITR 34 is precisely holding that principle of natural justice has to be followed by the authorities. As per Section 154(3) of the Act amendment/rectification which has the effect of enhancement of an assessment or reducing a refund or otherwise increasing the liability of the assessee shall not be made unless the authority concerned gives notice to the assessee of its intention to do so. Therefore, it is obligatory under the statute to issue notice by the tax authority to give a reasonable opportunity of being heard to the Assessee. This is clearly set out u/s 154 of the Income Tax Act and it has to be followed by the tax authorities at the initial stages. If this procedure of issuing the notice and giving reasonable opportunity of being heard is not followed, any further exercise will be non est. Therefore, the order itself becomes void ab initio. In the circumstances, we have no other option to set aside the impugned rectification order as being void ab initio. We thus find no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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