TaxTMI 
TaxTMI 
2024 (2) TMI 981
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....of disallowance made u/s 14A r.w.r. 8D of Rs. 6,98,717/- without appreciating facts that no expenses were attributed by the assessee towards the earning of exempt income. 3. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer be restored." Ground No.1:- Ld. CIT(A) erred in deleting addition of Rs. 2,43,58,181/- made on account of provision made on performance guarantee/warranty. 3. The brief facts in relation to this ground of appeal are that the assessee is a private limited company engaged in the business of manufacturing of gasifier machines and spare parts. During the course of assessment, the Assessing Officer disallowed a sum of Rs. 2,43,58,181/- being provision for performance guarantee / warranties debited to the Profit & Loss Account, on the alleged ground that the same is contingent in nature and therefore, this account has been shown only to be used as a tool to reduce tax liability and evasion of tax and therefore, the same is liable to be added to the assessee's total income. The Assessing Officer observed that the provisions made for guarantee / warranties are not based on any scientific calculation. The ....
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....wed the appeal of the assessee with the following observation:- "5.3. All the facts of the case, the assessment order, the submissions of the appellant and the decisions relied upon by the appellant are considered. During the previous year relevant to assessment year 2014-15, the appellant had made provision of Rs. 4,66,28,129/- on account of performance guarantee expense and made reversal of provisions of preceding year of Rs. 3,08,92,498/- reduced by guarantee of Rs. 86,22,550/- during the year and as such arrived at net balance of Rs. 2,22,69,948/- which was deducted from the new performance guarantee of Rs. 4,66,28,1297- and the net claim of Rs. 2,43,58,181/- was made u/s 37 of the Act. The AO disallowed the performance guarantee claim of Rs. 2,43,58,181/- following the assessment orders of A.Y. 2012-13 & A.Y. 2013-14. The appellant has submitted that in the immediately preceding assessment year i.e. A.Y. 2012-13, Ld. CIT(A)-1, Rajkot in appeal No. CIT(A)-170089/15-16 in appellant's own case on the same issue has allowed the appeal of the appellant. Further, the Hon'ble ITAT, Rajkot Bench, Rajkot in the appellant's own case for A.Y. 2011-12, vide order dated 08.07....
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....1-12 in ITA No. 156/Rjt/2015, wherein the ITAT decided the issue of the assessee with the following observations:- "14.1 Admittedly the guarantee/warranty is provided to the customer as per the scheme designed by the company. Accordingly, the guarantee/warranty is subject to various terms and conditions provided in the scheme. Such scheme is always made available to the buyers. If there arises any defect any product supplied to the customer, it (the customer) can always approach the company either for the replacement of the product or repair of the product, as the case may be. Indeed, the sales made by the assessee is the income in the hands of the assessee but the same is subject to liability which may arise to it by virtue of the guarantee/warranty provided by it to the customers. Thus when the assessee is making sales of its product with the guarantee/warranty, the question arises whether the assessee is required make the provision for the guarantee /warranty against the sales made by it. The answer stands in positive. It is for the reason that there is correlation between the sales and the guarantee/warranty extended by the assessee. Once a revenue has been recognized in the ....
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.... should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumsta....
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....sales made by it cannot be taken at nil value merely it has not been crystallized in the earlier years. As per the purchase agreement, the assessee was exposed to such liabilities on account of warranty/guarantee provided by it. 14.5 At this juncture, it is also important to note that the assessee before the learned CIT-A has contended that it is providing satisfactory services to its clients from time to time in the form of maintenance and repairs of the products sold by it. As such the assessee was receiving the complaints from its clients about the technical defects, breakage, under capacity which were timely handled by it. The corresponding expenses were debited under the respective heads. The relevant submission made by the assessee before the learned CIT-A reads as under: After goods are sold the appellant has to provide various after sales service, supervision, maintenance and repairs from time to time. No guarantee in invoked because of the satisfactory performance of the machinery and satisfactory after sales service and support. It does not mean that there is no liability for your appellant towards the claim. Your appellant did receive complains from the customers r....
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....and which are in excess of investment of Rs. 13.35 crores and Rs. 13.60 crores as on 01.04.2013 and 31.03.2014 respectively. However, the Ld. AO by applying of provisions of Rule 8D made disallowance of Rs. 6,98,717/- being 0.5% of average investments. The assessee submitted that it is evident from Para 5 of assessment order that no dividend income / exempt income was earned by the assessee during the year under consideration. Further, the assessee submitted that even from the computation of income filed by the assessee, it is evident that the assessee had not earned any exempt income during the year under consideration. Accordingly, the Counsel for the assessee placed reliance on judicial precedents in support of his contention that in order to invoke Section 14A of the Act, the assessee should have earned exempt income during the year under consideration. Further, the assessee submitted that on identical facts, disallowance under Section 14A of the Act was deleted by Ld. CIT(A)-1, Rajkot in assessee's own case for A.Y. 2011-12 and the same has also been upheld by Hon'ble ITAT, Rajkot Bench. In view of the above arguments, Ld. CIT(A) allowed the appeal of the assessee with the fol....
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....e Guwahati ITAT 2022-140 taxmann.com 164, has held as follows: Explanation to sec 14A inserted by FA 2022 has retro effect and applies even if exempt income is less than expenses incurred in relation to it. The Court had to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive. The ITAT held that- Where the Legislature clarifies its intent, it is regarded as being declaratory of the law as it always stood and is therefore, construed to be retrospective. However, in a latest decision, the Hon'ble High Court Of Delhi At New Delhi, ITA 204/2022 & CM APPL.31445/2022, case of PCIT (Central) -2 Vs Era Infrastructure (India) Limited (Delhi High Court), Dated-20th July, 2022, the Subject was-whether amendment to Section 14A as made by Finance Act,2022 is retrospective and hence applicable to disallowance made for AY 2013-14? The Hon'ble Delhi High court in this case was considering the disallowance of Rs 3.62 crores which was deleted by ITAT Delhi benches following the decision in the case of ILFS Energy Development Corporation ltd (2017) SCC Online 9893 which matter though....
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....he Supreme Court in the SLP filed in the case of PCIT vs. IL & FS Energy Development Company Ltd (supra)* [*2017 SCC Online Del 9893] 6.3.2. In view of the decision of the Hon'ble Hon'ble Delhi High court PCIT (Central)-2 Vs Era Infrastructure (India) Limited (Supra), the appeal on Ground no. 4 is allowed." 13. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A) deleting the addition on this issue. 14. Before us, the Ld. D.R. placed reliance on the observation made by the Assessing Officer. 15. In response, the Counsel for the assessee submitted that the issue is directly covered in favour of the assessee by decision of ITAT Rajkot Bench in assessee's own case for A.Y. 2011-2 in ITA No. 156/Rjt/2015. Accordingly, it was submitted that there was no infirmity in the order of Ld. CIT(A) so as to call for any interference. 16. We have heard the rival contentions and perused the material on record. It would be useful to reproduce the relevant extracts of the ITAT ruling for ready reference:- "39. The last issue raised by the revenue is that the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer u/s 14A r.w. Rul....