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

The ITAT Rajkot ruled in favor of the assessee on two issues. First, regarding provision for performance guarantee/warranty, the AO disallowed the provision claiming it was used to evade tax, but CIT(A) deleted the addition. ITAT upheld CIT(A)'s decision, noting that provisions made in one year were reversed in the next year by offering as income, and the assessee consistently accounted for opening balances. Second, on disallowance under section 14A read with rule 8D, ITAT confirmed CIT(A)'s deletion of the addition since no dividend income was earned by the assessee.

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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/Warranty
The 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. 8D
During 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.

Conclusion
The 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.

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