TaxTMI 
TaxTMI 
2018 (10) TMI 1583
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....mstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of Rs. 82,51,140/- being provision for warranty & maintenance expenses without appreciating the fact that the said provision is in the nature of unascertained liability only and needed to be added back to the total income as well as to the book profit of the assessee. 2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 3. The assessee is engaged in the business of manufacturing & trading of electrical and electronic appliances. The AO observed during the course of assessment proceedings u/s. 143(3) r.w.s. 143(2) that the assessee has not added back the provision of warranty expenses amounting to Rs. 82,51,140/- out of total provision of Rs. 2,22,51,139/- debited to Profit and Loss Account while computing the income. The assessee was asked by the AO to explain the same , to which the assessee submitted before the AO as under:- ".......We are in business of manufacture and trading in Electric....
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....see and held that Rs. 82,51,140/- is not a provision for warranty & maintenance expenses rather it is an excess provision for warranty & maintenance expenses which was written back during the year, but not credited to Profit and Loss Account. It was observed by the AO that the assessee was required to add back such written back provision while computing the total income under the normal provisions . The AO directed to add back the said excess provision for warranty and maintenance expenses amounting to Rs. 82,51,140/- to the income of the assessee under the normal provisions as in the view of the AO the same is unascertainable and contingent liability . The AO also observed that the assessee has also not followed any scientific and consistent method to ascertain the expenses that could accrue on account of warranty and maintenance. The AO thus directed to add back the said provision which is in excess of the warranted expenses to the tune of Rs. 82,51,140/- to the income of the assessee both under the normal provisions as well while computing book profit u/s 115JB of the 1961 Act, as in the opinion of the AO the said amount of Rs. 82,51,140/- towards warranty provision is purely a ....
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....e has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised." 1.4 Thus, a provision is a liability which can be measured only by using a substantial degree of estimation. 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 these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise embodying economic benefits. A past event that leads to a present obligation is called as an obligating event which is an event that creates an obligation which results in an outflow of resources. It is only those obligations arisin....
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....to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act, 1956 as well as by the Accounting Standards which require accrual concept to be followed. The second option is also inappropriate, since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on a matching concept. Under the matching concept, if revenue is recognized, the cost incurred to earn that revenue including warranty costs has to be fully provided for. In the instant case, when consumer appliances were sold and the warranty cost was an integral part of that sale price, then the assessee had to provide for such warranty cost in its account for the relevant year, otherwise the matching concept would fail. In such a case, the second option is also inappropriate. Under the circumstances, the third option is the most appropriate because it fulfills accrual concept as well as the matching concept. The assessee company makes assessment of the warranty provisioning policy and scrutinises the historical trend of warranty provisions made and the actual expenses incurred against it. ....
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....a large number of sophisticated goods were being manufactured in the past and 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 from the gross receipts under section 37. b) IBM India Ltd. v. CIT(A) 105 ITD 1 (Bang.) Wherein it was held that the liability towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. c) Commissioner of Income-Tax, Patiala v. Jay Bee Industries [2008] 171 Taxmann 386 (PUNJ. & HAR.) Wherein it was held that provision of warranty for repairs/replacement is an existing liability at time of sale and is allowable as deduction. d) Chicago Pneumatic India Ltd. v. DCIT 15 SOT (Mum.) Wherein it was held that, the provision for warranty claims was made on the basis of claims received and report of service engineers. The followed the method of making provision in a scientific manner based upon the terms and conditions of warranty agreement, hence, it was an....
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....B. He held that the said provision was for meeting unascertained liabilities within the meaning of clause (c) of Explanation I to section 115JB (2) of the Income Tax Act, 1961. In this regard, it is submitted that the appellant company is engaged in the business of Manufacturing and trading of consumer electrical and electronic appliances. On account of the business requirement, the appellant Company has to maintain a warranty provision for meeting the warranty claims of the customers. Such claims arise after the sales are affected and these provisions are already inbuilt in the sale price. Further, considering the nature of business of the company, it will be appreciated that the warranty claims from the customers are bound to occur year after year in different degrees. Therefore, the said liability of provision cannot be said to be unascertained in nature and hence is not covered within meaning of clause (c) of Explanation 1 to section 115JB(2) of the Act. 2.3 It is submitted that the appellant company has made the said provision in accordance with the requirements of Accounting Standard-29 on 'Provisions, Contingent Liabilities and Contingent Assets' (A....
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.... with Schedule VI require every company to prepare its accounts in accordance with the Accounting Standards issued by National Advisory Committee on Accounting Standards or by Institute of Chartered Accountants of India. It will be appreciated that the said provision is required to be made as per AS-29. Since, in the present case, book-profits have been computed by complying with the requirements of AS-29 and in accordance with provisions of the Companies Act, 1956; no further additions can be made to the book-profit under section 115JB for the purpose of computing minimum alternate tax payable by the company. 2.5 Furthermore, it is also submitted that as per explanation (c) to section 115JB, Liabilities other than ascertained liabilities, i.e. only unascertained liabilities can be added back to the profit for calculating the book profit under section 115JB. The word 'ascertained' as per the Webster's II New Riverside University Dictionary means 'to make certain'. Thus, ascertained liability means a liability which is certain or known. In the instant case provisions made for granting warranty by the appellant is for ascertained liability. Therefore, the....
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....eting and there after filed before the Registrar of Companies who has the statutory obligation to examine and to be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. There is also no adverse opinion by the auditors in this regard. Sub-section (2) of section 115JB does not empower the Assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. Therefore, the Learned Assessing Officer, in the present case has acted against the provisions of the Act and wrongly added back these provisions while computing book profit. We would like to invite your attention towards the decisions of the Hon'ble Delhi High Court and Hon'ble Income Tax Appellant Tribunal on the same identical facts: 1. CIT vs. Becton Dickinson India (P) Limited [Delhi High Court] ITA No. 39/2012 2. Samay Electronics (P) Ltd. Vs. DCIT [2006] 99 ITD 236 (Rajkot) 3. ACIT Vs. BalarampurChini Mills Ltd [2007] 109 ITD 146 (Kol). The Hon'ble Supreme Court in Apollo Tyres Limited Vs. CIT [2002] 255 1TR 273 (SC) had held the same rationale as explained above. Th....
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....ofits and gains of assessee's business. e) Indian Oiltanking Ltd. v. ITO , 10(3)(3), Mumbai [2009] 120 ITD 237. Wherein it was held that A.O. could not make addition of provision of performance warranties to net profit of assessee for arriving at its book profit for the purpose of section 115JB. f) Hero Briggs & Stratton Auto Ltd. v. CIT 161 Taxman 127 (Delhi) wherein it has been held that once assessee is maintaining his account on mercantile system and a liability has accrued, though to be discharged at a future date, it would be proper to allow deduction of same while working out profit and loss accounts of his business under section 115JA. 2.10 As regards the retrospective amendment to section 115JB by Finance Act (No. 2) 2009 w..e.f. 1-4-2001, by inserting clause (i) to Explanation 1 of the said section, we have to submit that the same applies to provision made for diminution in value of any asset. It will be appreciated that this provision is in respect of a liability and not for value in any asset. 2.11 In view of the above submissions and the judicial decisions, the appellant respectfully prays that provision for war....
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....duct is covered under warranty. In the past, provisions have been made and utilised for payments under warranty. Thus, the provision cannot be said to be for any unascertained liability. Even the judgements relied upon by the appellant clearly hold that the provision for warranty is not an unascertained liability and hence, cannot be added to book profit computed u/s. 115JB of the Act. It is thus recognised that a provision for warranty sells a number of items and past experience shows that in some cases defects are found resulting in settling a warranty obligation. The liability has to be estimated in a reliable manner based on past experience. In view of the above, clause 'c' of section 115JB of the Act which deals with unascertained liabilities is not applicable in the afore-stated facts of the appellant's case. Hence, the addition so made by the assessing officer is deleted. Thus, this ground of appeal is allowed. 5.1.4 I find that it is not in dispute that the vast array of products manufactured by the appellant are sophisticated consumer appliances. The appellant has also been in the business for long enough to have known the trend of defects. It is also ....
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....nd electronic appliances and once goods are sold then the assessee has to offer warranties against defects etc which may arise during the period of warranties offered as per contract at the time of sales which leads to warranties and maintenance liabilities arising in next 2 to 3 years as per contracted period at the time of sale of equipments and appliances for which necessary provisions are to be provided in the books of accounts by estimating warranties liability which may arise with respect to equipment sold by the assessee which is computed on the basis of past experience of the claims received against warranties and maintenance . Our attention was drawn to the details of warranties and maintenance expenses provision for 3 years i.e. AY 2010-11, 2001-12 and 2012-13 and its utilization(pb/page1) , detailed as under:- "Details of utilization of provision for warranty and maintenance expenses during A.Y. 2010-11, A.Y. 2011-12 and A.Y. 2012-13. Particulars Assessment Year 2010-11 2011-12 2012-13 Opening Balance 53,87,289 74,13,640 84,57,758 Add:- Provisions made during the year 73,18,868 82,51,140 60,77,432 Less:- Payment made for....
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....s for the financial years 2009-10 , 2010-11 and 2011-12(page 2-46/pb). The assessee is incurring warranty & maintenance expenses every year which are debited to Profit and Loss Account , while provisions for liability which may arise in future years towards warranties and maintenance of the equipment/appliance already sold per contractual term is also provided which stood credited to the Provisions account under the head current liabilities and provisions. Thus, the assessee is also making provision for warranties and maintenance expenses every year which may arise in future out of present obligations arising from sales concluded with warranties and maintenance obligations contracted by the assessee along with sale transaction. The obligation on account of warranties and maintenance which arose during the current year out of contractual obligations towards warranties and maintenance attached to sales made in preceding years are debited to Provisions for Warranties and Maintenance account. The assessee has placed on record , the provision made for assessment year 2010-11, 2011-12 and 2012-13 (pb/page 1) and utilization of the warranty and maintenance provision as under:- "D....