AI Drafter 
TaxTMI 
TaxTMI 
2015 (5) TMI 1241
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to comply with, the company from this year, changed the accounting of warranty expenditure on accrual basis, for which the company had made a scientific ascertainment of the possible liability that would arise on account of the warranty clause in respect of sales for the year. A provision was made for such technical ascertainment. The assessee stated that the warranty provision had to be recognized because the assessee had a present obligation as a result of the past events resulting in an outflow of resources and a reliable estimate could be made on the amount of the obligation. The retail sale and actual warranty paid for 9 months was taken, to arrive at the percentage of warranty to sales. This warranty percentage was further split into truck and non-truck segment. Such percentage of warranty to sales was adopted for the year under consideration and the warranty requirement for first year was arrived at Rs. 19.06 crores and for the second year of sales was arrived at Rs. 4.80 crores, totaling to Rs. 23.86 crores. The assessee clarified that the amount of Rs. 27.06 crores debited to the profit and loss account includes Rs. 3.20 crores relating to earlier assessment year viz., 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t was created. Particularly, when the excess warranty provision is not reversed as on date and the assessment proceedings for the year in which warranty provision was created is pending, there is no need to accept the statement of the assessee that the unutilized warranty provision would be netted off against warranty provision of a future assessment year viz., 2013-14. Accordingly, the Assessing Officer disallowed the unutilized warranty provision of Rs. 5.22 crores. 4. On appeal, the Commissioner of Income-tax(Appeals) observed that the assessee has been following the practice of providing warranties, which are ascertained based on its earlier trend of such claims and for the year under consideration, the provision has been made on the basis of actual expenditure incurred up to the date of finalization of accounts. The assessee has produced before him during the course of appellate proceedings the excel sheets with the exercise of actual working of warranty. The warranty provided and the warranty claimed are bound to vary since it is an estimate based on earlier experiences and historical trends. The claim from the customers may vary year to year. It could be more than or less....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en it was not required, the assessee reversed it in the next year and offered for taxation. He relied on the order of the Commissioner of Income-tax(Appeals). 7. We have heard both the sides and perused the materials on record. According to the ld. AR, the assessee has adopted the financial year 2008-09 as base year. The retail sale and actual warranty paid for 9 months was taken to arrive at the percentage of warranty to sales. This warranty percentage was further split into truck and non-truck segment. Such percentage of warranty to sales was adopted for the year under consideration and the warranty requirement was debited in the profit and loss accounts of the assessee. Further, when the provision created is more than the claim, it is reversed in the next year and this provision was consistently followed by the assessee. In the light of the circumstances, a legal obligation to make payment in future said to have been accrued. According to the AR, it is not required to wait for the contingency to offer and it can be inferred that a better liability has definitely arisen in the assessment year under consideration though the quantification is discharged on this warranty liabilit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and demand charges of Rs. 10,54,60,961/- and provision for interest on VABAL of Rs. 3,18,54,282/-. 9. The facts of the case are that the Assessing Officer observed that an amount of Rs. 23,31,05,399/- is shown as provision made during the year towards litigation and related disputes in addition to the amount of Rs. 4,50,92,000/- outstanding as at the beginning of the year. Out of the total provision of Rs. 27,81,97,399/- only an amount of Rs. 3 crores has been paid during the year, leaving the balance provision as on 31.3.2010 at Rs. 24,81,97,399/-. The AO asked the assessee to furnish the complete break-up details of the claim and the same was furnished by the assessee. The details furnished by the assessee are not accepted by the Assessing Officer regarding the provisions 'electricity - additional energy and demand charges - Thiruvottiyur and Arakonam Units, Rs. 10,54,60,961/-, which was disallowed. Against this, the assessee went in appeal before the Commissioner of Income-tax(Appeals). 10. On appeal, the Commissioner of Income-tax(Appeals) observed that the assessee has created the provisions in both the cases based on certain demands raised by the concerned departments.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. In these circumstances, nobody can reasonably state that what amount is required to be paid and the action of the assessee making provision for the said payments in the assessment year is not proper, though the assessee is following mercantile system of accounting. The purpose of mercantile system of accounting is to derive the correct and true financial result. Therefore, it is necessary to make provision for ascertained liability towards expenses at the end of the year. In this background, in the accounting frame work, the assessee ought to have recorded the expenses in the relevant accounting year, wherein the liability to incur such expenses arisen. The ld. A.R. tried to justify the assessee's case that it has issued demand notice seeking the payment and it was crystallised the expenditure in this assessment year only. He is not able to say whether that expenditure entirely relates to the assessment year under consideration or not. The assessee's accounts are mandatorily audited both, under the provisions of the Company's Act as well as Income-tax Act, 1961. Therefore, the assessee should be made the provisions in the relevant accounting period for the expenses based upon th....