2000 (4) TMI 144 - AT - Income Tax

Tribunal upholds assessee's warranty provision, rejects AO's accounting method, directs deletion of Rs. 98,24,911

The Tribunal ruled in favor of the assessee, finding that the provision for warranty was justified based on actual business practices and supported by ... Method Of Accounting, Rejection Of Accounts Issues Involved:1. Addition of Rs. 98,24,911 by the Assessing Officer for the provision made on account of warranty.2. Rejection of the method of accounting followed by the assessee u/s 145 of the Income-tax Act, 1961.Summary of Judgment:Issue 1: Addition of Rs. 98,24,911 for Warranty ProvisionThe main dispute is the addition of Rs. 98,24,911 made by the Assessing Officer (AO) for the provision on account of warranty. The assessee, engaged in manufacturing Mass Transfer equipment, made a warranty provision equivalent to the performance bank guarantee furnished to various customers. The AO rejected the assessee's contention that the amount covered by the bank guarantee does not become due until satisfactory performance of the supplied equipment. The AO considered the provision as contingent and not an ascertained liability, relying on several judicial pronouncements, and added Rs. 98,24,911 to the trading account without adjusting the amount of Rs. 15,47,914 credited on account of reversal of the provision.Issue 2: Rejection of Method of Accounting u/s 145The CIT(A) upheld the AO's decision, endorsing that the method of accounting followed by the assessee was not correct and invoked the provisions of section 145. The assessee argued that the method of accounting, consistently followed since 1984-85 and accepted by tax authorities, was unjustifiably rejected without any fresh material. The assessee cited several decisions to support their contention that the method of accounting should not be changed without material reasons.Tribunal's Decision:1. Provision for Warranty: The Tribunal found that the warranty provision made by the assessee was in line with the actualities and realities of the business, supported by the terms of the contracts and the irrevocable, unconditional bank guarantees provided to customers. The Tribunal noted that the customers, including government undertakings and corporate giants, had on several occasions encashed the bank guarantees unilaterally, confirming the genuine nature of the provision.2. Method of Accounting: The Tribunal held that the method of accounting followed by the assessee was in conformity with the Accounting Standards issued by the Institute of Chartered Accountants of India, particularly AS 9 and AS 4, which deal with the recognition of revenue and contingencies. The Tribunal emphasized that the method had been consistently followed and provided a true and fair view of the financial results. The Tribunal also noted that the method had been accepted by the tax authorities in the past, and there was no justification for the AO to reject it without any new material.Conclusion:The Tribunal concluded that the method of accounting followed by the assessee was not liable to be rejected u/s 145 and directed the deletion of the addition of Rs. 98,24,911 upheld by the CIT(A).