TaxTMI 
TaxTMI 
2021 (4) TMI 1186
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....ssessee has failed to maintain a scientific and consistent method for estimation of/determination of its provision of warranty. 3. Whether on the facts & circumstances of the case, the ld. CIT (A) had erred in law and in facts in disallowing the addition of Advances & Deposits written off, without allowing the AO to examine whether the entries were actually written off in the books and ledger of the assessee." 3. In ITA No. 4664/Del/2017, following grounds have been raised by the revenue: "1. Whether on the facts & circumstances of the case, the ld. CIT (A) had erred in law and in facts in disallowing the addition of provisions for liquidated damages, without examining the issue involved and the finding of the AO. 2. Whether on the facts & circumstances of the case, the ld. CIT (A) had erred in law and in facts in disallowing the addition of provisions for warranty, as the assessee has failed to maintain a scientific and consistent method for estimation of/determination of its provision of warranty." 4. In CO No. 190 / Del/2017, following grounds have been raised by the assessee: "1. That on the facts and circumstances of the case and in la....
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.... turn relates to written off of advances on rent and vendors amounts. Provision for Liquidated Damages: 8. For the sake of ready reference and brevity, the relevant part of the Assessment Order is reproduced as under: "On perusal of records furnished by asseessee it is observed that the asseessee company debited its P&L a/c by a sum of Rs. 14,45,09,240/- toward provision for liquidated Damages (L.D.). It was observed that such provision was made in the preceding year which was debited to P&L a/ c but was disallowed in the assessment for AY 2009-10 and 2010-11. In the course of assessment proceedings, the assessee company was asked to furnish the details and basis for claim of deduction on account of provision for liquidated damages made for current year and explain the admissibility of its claim for deduction. In response, the assessee company filed various details including the client' s name, description of delay etc. The submission of the assessee is briefly summarized as under: "As per the submission made by the assessee in this regard, it was stated that the company makes provisions for liquidated damages is respect of defaults in providing....
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....essarily follow the effort to prove actual damages. Although the concept behind LDs appears straight forward, liquidated provision are very often disputed in Courts. The provision for liquidated damages and its allow ability is a question of fact requires a close.examination of the facts, including the contract, the language of the specific contract provision and the methods used to compute the liquidated damages rate. However, it may be seen that Liquidated damages provision are not in the nature of penalty. The distinction between a contractual penalty and valid provision for Liquidated damages is that a penalty, in effect, is a scrutiny for performance. While a provision of LDs require a certain sum to be paid as compensation for a breach of contact. In respect of a provision for Liquidated damages, the two primary considerations are: (i) the reasonableness of the amount stipulated and' (ii) the difficulty of determining and proving actual damages in the event of the breach. First, it requires to be examined if the stipulated amount is conscionable. This means that the amount stipulated is reasonable in view of the contract' s value and the probable or ....
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....future contingencies cannot be allowed as a valid claim of deduction in the P&L a/c of the assessee. Furthermore, by the assessee's own admission, the provision for liquidated damages is made on the basis of contractual terms between the assessee and its customers where it is of view that the same may be payable for non- fulfillment of its obligations under such contracts. Thus, the assessee had itself agreed that the estimates are based on a perception of non-fulfillment of contractual obligation. Furthermore, the case laws and the judicial precedents cited by the assessee are distinguishable from the facts and circumstances of the present case. Further the revenue also filed an appeal before the Hon'ble ITAT on the issue of disallowance of liquidated damages in AY 2010- 11 and 2011-12. Hence the issue is in dispute and didn't get finality." 9. The ld. CIT (A) deleted the addition based on the order of the ld. DRP. The issue has attained finality by the Tribunal in the case of the assessee for the assessment year 2008-09 and for the subsequent assessment year. The relevant part of the order (para 13) of the ITAT in ITA No.2295/ Del/2013 dated 31.10....
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....e it is not the charge of the Assessing Officer that assessee has made some kind of excessive provision in this year in relation to past. The finding and observations of the Id. CIT (A), are based on correct appreciation on facts and law, hence, we confirm the order of ld. CIT (A) on this score and accordingly, ground No.1 raised by the Revenue is dismissed." 10. Since, the matter stands adjudicated and allowed for several years prior, in the absence of any material changes, we hereby hold that the addition made by the AO cannot be sustained. Disallowance of provision for warranty: 11. For the sake of ready reference and brevity, the relevant part of the Assessment Order is reproduced as under: "It is observed that the assessee company debited a sum of Rs. 17,61,74,571/- towards provision for warranty. The assessee company was asked to furnish details of such provision, method adopted to make the provision and explain the admissibility of its claim for deduction. In response, the assessee company made the following submission, the relevant portions of which is reproduced as under: During the AY 2012-13, the assessee anticipates that expe....
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....aimed that it require incurring of expenditure for repair, modification, defects, deficiencies and damages to the equipment. However, on consideration of the details of the provision for warranty and the submission made by the asseessee company, it is seen that the provision made are not based upon any scientific methodology. Further, in most of the years, such provisions were not incurred by way of utilization. Therefore, the claim of the asseessee company that the provision for warranty based on past trend is not justified and established. Rather, it indicates that such provisions are created to reduce the taxable profit of the current year. Furthermore, as per point No. 2 (xii) of Schedule O of notes to the financial statements it is stated that a provision is made for future warranty cost future cost in respect of completed contracts where the warranty period has not expired. Further, it may be noted that 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....
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....ssessee shall do the needful and for this purpose it has been making provision for making such guarantee. The Id. CIT (A) has also taken note of the actual expenses incurred on warranty by the assessee in earlier years and also calculated the percentage of such expenditure (as noted by us herein above). If based on such actual expenditure incurred on warranty, assessee has made the provision for warranty, then ostensibly it can be held that, not only assessee has made the provision as per past experience but there was a certain degree of certainty while making such estimate. The ratio laid down by the Hon'ble Apex Court in the case of Rotork Controls India (P) Ltd. Vs CIT (supra) is squarely applicable wherein the Hon' ble Apex Court had made the following important observations:- "In this case we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) ....
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....sessee must be necessarily deducted in the ascertainment of profits of the business u/s 28 of the Act. On the basis of various judgments of the Hon' ble Courts, in order that an item of loss can be taken into account in computing the profits of the business, it should fulfill the following conditions: * It should be a real loss, not notional or fictitious; * It should be a loss on revenue account and not on capital account; * It must have actually arisen and been incurred, not merely anticipated as certain to occur in future; * It should be one that is incidental to the carrying on of the business and must arise directly from or be incidental to the carrying out of an operation of the business; and * There should be no prohibition in the Act, express or implied, against the deductibility thereof. 19. In Pondicherry Railway Co Ltd Vs CIT [1931 ] 5 ITC 363 (PC)/ Badridas Daga Vs CIT [1958] 34 ITR 10 (SC)/ Calcutta Co Ltd Vs CIT [1959 ] 37 ITR 1 (SC)/ CIT Vs Bai Shirinbai K Kooka [1962] 46 ITR 86 (SC)/ Kamalpat Motilal Vs CIT [1976] 104 ITR 783 (SC) it was held that subject to the special requirements of the Act, the profit to be assesse....