2015 (8) TMI 552 - AT - Income Tax

Tribunal upholds 50% disallowance deletion for engineering goods company provision

Joint Commissioner of Income Tax, Circle-6 (1), New Delhi and Assistant Commissioner of Income Tax, Circle-6 (1), New Delhi Versus M/s MIL India Limited

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the 50% disallowance out of the provision of warranty made by the ... Disallowance of 50% provision of warranty - CIT(A) deleted addition - Held that:- As find from the figures for nine years the provision was almost equal to the actual expenditure incurred in this regard. In most of the years, the provision made was less than the expenditure incurred. Only in two years, in the financial years 2002-03 and 2008-09, the provision marginally exceeded the actual expenditure incurred. From the above chart, it is evident that the provision made by the assessee was a fair and reasonable estimate of the post sales expenses to be incurred by the assessee in respect of goods supplied by it. Therefore, on these facts, the ratio of the above decisions Rotork Controls India P. Ltd. v. CIT [2009 (5) TMI 16 - SUPREME COURT OF INDIA ] and Vinitec Corporation Pvt. Ltd. [2005 (5) TMI 54 - DELHI High Court] and Ericssion Communications P. Ltd. [2009 (9) TMI 710 - Delhi High Court] would be squarely applicable. Respectfully following the same, we uphold the order of the learned Commissioner of Income-tax (Appeals) and dismiss the appeals filed by the Revenue. - Decided against revenue. Issues involved:- Deletion of 50% disallowance out of provision of warranty by the Commissioner of Income-tax (Appeals).Analysis:1. The appeals by the Revenue were directed against the order of the Commissioner of Income-tax (Appeals) for the assessment years 2007-08, 2005-06, 2009-10, and 2010-11, focusing on the deletion of 50% disallowance out of provision of warranty.2. The assessee, engaged in manufacturing and sale of engineering goods, had made provisions for warranty for after-sales service annually. The Assessing Officer disallowed 50% of such provision, which was subsequently deleted by the Commissioner of Income-tax (Appeals) citing relevant legal precedents.3. The legal basis for recognizing provisions was established by the Supreme Court in the case of Rotork Controls India P. Ltd., emphasizing the need for a reliable estimate of obligations. Further, the jurisdictional High Court rulings in cases like Vinitec Corporation Pvt. Ltd. and Ericssion Communications P. Ltd. supported the deduction of warranty provisions based on commercial practices and consistent application of accounting principles.4. The Tribunal found that the provision made by the assessee for post-sales expenses was reasonable and aligned with actual expenditure over the years. Detailed analysis of historical post-sales expenses against provisions demonstrated a fair and accurate estimation by the assessee, with provisions mostly falling below actual expenses, indicating a conservative approach.5. Considering the consistent application of legal principles and the factual assessment of provision adequacy, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the Revenue's appeals, emphasizing the reasonable nature of the provision made by the assessee.6. The judgment was pronounced on 28th January 2015, affirming the decision to dismiss all appeals by the Revenue, thereby concluding the matter related to the deletion of 50% disallowance out of the provision of warranty.