TaxTMI 
TaxTMI 
2017 (5) TMI 293
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....ision for bad and doubtful debts." 2. The short facts of the case are that the assessee company is engaged in manufacturing of turbochargers. Original assessment u/s 143 was passed on 24.11.2010. Thereafter, the Assessing Officer has disallowed provisions of warranty expenses of Rs. 30,65,282/-. The Assessing Officer was of the view that during the financial year 2003-04 the assessee has practice of debiting warranty claim received during the year in profit and loss account. Subsequently, the company has started making provision for warranty and this amount was debited in profit and loss account. The quantification of provision made is not clear as to how the assessee has quantified and debited. The company has also not specified the reason regarding changing the policy. The assessee claimed that the quantification has been done under the advice from technical person and the average last quarter of the warranty cost vs. last vs. last quarter of sales were used for making the provision. The assessee has not given working. Therefore, the Assessing Officer was of the view that there is difference of expenses on account of provision made and actual expenses incurred by the assessee on....
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....g the judgment of Hon'ble Supreme Court and comparing the facts of this case, warranty expenses are to be allowed. 4. On the other hand, the learned DR relied upon the orders of the authorities below. Moreover, the learned DR submitted that the assessee was formerly following the warranty expenses on actual basis and the assessee thereafter has changed the policy to make the provision for warranty expenses. Therefore, as per the rule of consistency, this expenditure cannot be allowed. 5. We have considered the submissions of both the sides. Looking to the facts and circumstances of the case, we find that the assessee company is engaged in manufacturing of turbochargers and offers warranty for technical default in the product. During the financial year 2003-04 the company has practice of debiting the actual warranty claims received during the year in the profit and loss account. With the implementation of Accounting Standard 29 issued by the Institute of Chartered Accountants of India effective from financial year 2004-05 which mandates making the provision on matching concept principle, the company started making the provision for warranty and this amount was debited to profi....
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....sy is squarely covered by the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT; 314 ITR 62 wherein it is held as under :- "Business expenditure - Allowability - Provision for warranty claims -A provision is recognized when (a) an enterprise has a present obligation as a result of a past event (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation - If the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction - Assessee is manufacturing value actuators in large numbers and statistical data indicates that some of them turn out to be defective every year - Being a sophisticated item no customer is prepared to buy value actuator without warranty and, therefore, warranty became an integral part of the sale price - Assessee made a provision for warranty at the....
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....t limb of clause (i) of sub-section 36 is that no deduction on account of bad debt or part thereof shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or an earlier previous year. The second limb of clause (i) of sub-section (2) of section 36 says that the said condition is not applicable where such debt represents money lent in the ordinary business of banking or money lending which is carried on by the assessee. Therefore, second limb of clause (i) of sub-section (2) of section 36 is not relevant. Section 36(1)(vii) of the Act is for computing the total income of the assessee and bad debt or part thereof has to be taken into account. It is well settled by the decision of the Hon'ble Supreme Court in the case of T.R.F. Limited vs. CIT; 190 Taxman 391(SC) which specifies that the proposition of law is well settled after 1.4.1989. It is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Therefore....
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.... of the Hon'ble Supreme Court and as per the decision of the Hon'ble Supreme Court wherein the Hon'ble Supreme Court has categorically restored this matter to the file of the Assessing Officer to examine whether the bad debt or part thereof has been written off in the accounts of the assessee, the matter has to be examined by the Assessing Officer de novo and considering all the above aspect, the matter may be decided. We, therefore, restore this issue to the file of the Assessing Officer to do the needful after providing the assessee reasonable opportunity of being heard. 10. In respect of the assessee's contention that the facts of this case are identical with the facts of the case of Vijaya Bank (supra), we find that in the decision of the Hon'ble Supreme Court, the case related to Vijaya Bank and the bank is in the business of money lending and in that case the Hon'ble Supreme Court has held that after 1.4.1989 the assessee is required not only to debit the profit and loss account but also simultaneously reduce the loans and advances or debtors from the asset side of the balance sheet to extend the corresponding amount, so at the end of the year the amount ....