2024 (2) TMI 981 - AT - Income Tax

Provision for performance guarantee allowed when consistently accounted and reversed next year as income

Assistant Commissioner of Income Tax, Circle-1 (1) Versus M/s. Radhe Renewable Energy Development Pvt. Ltd., Rajkot

The ITAT Rajkot ruled in favor of the assessee on two issues. First, regarding provision for performance guarantee/warranty, the AO disallowed the ... Addition on account of provision made on performance guarantee/warranty - AO concluded that the assessee was using provision for contingent liability as a tool to reduce taxable income and thereby evading the payment of tax, provision for performance guarantee / warranty was disallowed - CIT(A) deleted the addition - HELD THAT:- As decided in assessee’s own case for A.Y. 2011-12 [2022 (7) TMI 548 - ITAT RAJKOT] provisions made in one year was reversed in the next year by offering the same as income. Therefore, it is not the case of the assessee that it has been claiming deduction on account of the provisions made against the sales of each year consistently without giving effect of the opening balance of the provision for the guarantee/warranty - No infirmity in the claim made by the assessee in its books of accounts for the provisions against the sales made in the year under consideration. Thus we reverse the order of the authorities below and direct the AO to delete the addition made by him. - Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D - CIT(A) deleted the addition - HELD THAT:- looking into the assessee’s facts, wherein it is not disputed that no dividend income was earned by the assessee and the decision of Hon’ble ITAT, Rajkot Bench in assessee’s own case for A.Y. 2011-12 [2022 (7) TMI 548 - ITAT RAJKOT] we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. Decided against revenue. Issues Involved:1. Deletion of addition on account of provision made on performance guarantee/warranty.2. Deletion of addition made on account of disallowance under Section 14A r.w.r. 8D.Issue 1: Deletion of Addition on Account of Provision Made on Performance Guarantee/WarrantyThe brief facts are that the assessee, a private limited company manufacturing gasifier machines and spare parts, had a provision for performance guarantee/warranties of Rs. 2,43,58,181/- disallowed by the Assessing Officer (AO) on the grounds that it was contingent in nature and used to reduce tax liability. The AO observed that the provisions were not based on scientific calculation and were used as a tool to evade tax.In appeal, the assessee argued that it consistently made provisions for performance guarantee expenses at 10% of sales, which was necessary due to the nature of its business and the complexity of the machines sold. The Ld. CIT(A) allowed the appeal, noting that similar additions had been deleted in previous years (A.Y. 2011-12 and A.Y. 2012-13) by the ITAT Rajkot Bench and CIT(A)-1, Rajkot. The ITAT Rajkot Bench had previously ruled that such provisions are necessary and should be recognized in the books of accounts.The Tribunal found no infirmity in the order of the Ld. CIT(A) and dismissed the Department's appeal on this ground.Issue 2: Deletion of Addition Made on Account of Disallowance Under Section 14A r.w.r. 8DDuring the assessment, the AO disallowed interest expenses amounting to Rs. 6,98,717/- under Section 14A r.w.r. 8D, despite the assessee not earning any dividend income during the year. The AO applied Rule 8D and disallowed the sum.In appeal, the assessee argued that the investments were made from capital and free reserves, and no exempt income was earned during the year. The Ld. CIT(A) allowed the appeal, citing judicial precedents that Section 14A cannot be invoked if no exempt income is earned. The Ld. CIT(A) also referenced a recent Delhi High Court decision which held that amendments to Section 14A introduced by the Finance Act 2022 are not retrospective.The Tribunal, relying on the decision of the ITAT Rajkot Bench in the assessee's own case for A.Y. 2011-12, found no infirmity in the order of the Ld. CIT(A) and dismissed the Department's appeal on this ground.ConclusionThe Tribunal dismissed the Department's appeal on both grounds, upholding the Ld. CIT(A)'s deletion of additions made by the AO on account of provision for performance guarantee/warranty and disallowance under Section 14A r.w.r. 8D. The judgment was pronounced in open court on 19/01/2024.