2008 (1) TMI 417 - AT - Income Tax

Tribunal Allows Deduction for Performance Warranty Provision, Remits Interest Issue, Dismisses Revenue's Appeal on Expenditure.

Indian Oiltanking Limited. Versus Income-Tax Officer.

Indian Oiltanking Limited. Versus Income-Tax Officer. - [2009] 308 ITR 217, ITD 120, 237, TTJ 120, Issues Involved:1. Disallowance of provision for performance warranty.2. Addition to book profits under Section 115JB.3. Interest levied under Section 234D.4. Deletion of addition of preliminary and deferred revenue expenditure.Detailed Analysis:1. Disallowance of Provision for Performance Warranty:The assessee contested the CIT(A)'s decision to uphold the AO's disallowance of a performance warranty provision of Rs. 4,83,72,135 under normal income tax provisions and Section 115JB. The AO disallowed this provision citing that the liability was not crystallized and was contingent. The CIT(A) agreed, stating that the liability was not definite or ascertained and thus could not be considered an allowable expenditure.Upon appeal, the assessee argued that the provision was based on a detailed technical assessment and was in compliance with AS-7 of ICAI. The assessee also cited various judicial precedents supporting the allowance of such provisions. The Tribunal noted that the assessee had followed prudent accounting practices and that the provision was based on a technical assessment vetted by an independent agency. The Tribunal concluded that the provision was an ascertained liability and directed the AO to allow the deduction under normal provisions and Section 115JB.2. Addition to Book Profits under Section 115JB:The AO had added the performance warranty provision to the book profits under Section 115JB, considering it a contingent liability. The CIT(A) upheld this addition. However, the Tribunal held that since the provision was an ascertained liability, it should not be added to the book profits under Section 115JB. The Tribunal directed the AO to exclude the provision from the book profits computation.3. Interest Levied under Section 234D:The assessee challenged the interest levied under Section 234D, arguing that the refund was received before the enactment of Section 234D. The Tribunal noted that the issue of interest under Section 234D for refunds granted before its enactment was referred to a Special Bench. The Tribunal set aside the CIT(A)'s order on this aspect and remitted the matter back to the AO for fresh consideration in light of the Special Bench's directions.4. Deletion of Addition of Preliminary and Deferred Revenue Expenditure:The Revenue contested the CIT(A)'s deletion of an addition of Rs. 1,00,18,189 for computing net profit under Section 115JB. The AO had added this amount, citing a change in the assessee's accounting policy. The CIT(A) deleted the addition, relying on the Supreme Court's decision in Apollo Tyres Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the adjustment was not permissible under the Explanation to Section 115JB and that the assessee had followed the prescribed accounting standards and policies.Conclusion:The assessee's appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to allow the deduction for the performance warranty provision and to exclude it from the book profits computation under Section 115JB. The issue of interest under Section 234D was remitted back to the AO. The Revenue's appeal was dismissed, with the Tribunal upholding the deletion of the addition of preliminary and deferred revenue expenditure.