Thuse Elektronics Pvt.Ltd, Pune V. Income-tax Officer, Ward - 7(5), Pune

ITA 2672/PUN/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 2450 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 25-02-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 17-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Revenue expenditure
• Section: 143(3)

Judgement Text

, - IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE , . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM . / ITA NO.2672/PUN/2017 / ASSESSMENT YEAR : 2012-13 THUSE ELEKTRONICS PVT. LTD., PLOT NO.33A, SECTOR-7, PCNDTA, BHOSARI, PUNE-411003. PAN : AAACT6285F . /APPELLANT VS. ITO, WARD-7(5), PUNE. . / RESPONDENT / APPELLANT BY : SHRI C.H. NANIWADEKAR / RESPONDENT BY : SHRI RAJESH GAWALI / DATE OF HEARING : 25.02.2019 / DATE OF PRONOUNCEMENT: 12.03.2019 / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)-5, PUNE DATED 24.07.2017 FOR THE ASSESSMENT YEAR 2012-13. 2. THE EFFECTIVE GROUND RAISED BY THE ASSESSEE IS AS UNDER :- 1. DISALLOWANCE OF WARRANTY EXPENSES THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW BY CONFIRMING THE DISALLOWANCE OF WARRANTY EXPENSES OF RS.5,20,977/- ON THE GROUND THAT THERE IS NO BASIS FOR THE PROVISION MADE FOR THE WARRANTY EXPENSES AND IS PURELY AN ADHOC PROVISION. SHE FAILED TO APPRECIATE THE FACT THAT THE PROVISION WAS MADE ON THE BASIS OF REJECTED MATERIAL RECEIVED FROM THE IFB AND NOT ON ADHOC BASIS. 3. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIVITIES OF ELECTRONIC CONTROL CARDS FOR HOME APPLIANCES. THE ASSESSEE FILED THE RETURN OF INCOME DECLARING LOSS OF RS.14,86,983/-. ITA NO.2672/PUN/2017 - 2 - THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT AND THE ASSESSED INCOME WAS DETERMINED AT RS.9,65,367/-. THE ASSESSING OFFICER MADE ADDITION OF RS.5,20,977/- ON ACCOUNT OF WARRANTY EXPENSES . THE CONTENTS OF PARA 4 OF THE ASSESSMENT ORDER ARE RELEVANT IN THIS REGARD. FOR THE SAKE OF COMPLETENESS, THE SAME ARE EXTRACTED HEREUNDER :- (4) THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.12,79,023/- UNDER THE HEAD WARRANTY PROVISION. THE ASSESSEE HAS FILED DETAILED ACCOUNT OF WARRANTY PROVISION ACCOUNT. ON PERUSAL OF THIS ACCOUNT, IT IS SEEN THAT THE ASSESSEE HAS MADE A PROVISION OF RS.18,00,000/-. HOWEVER, OUT OF THIS PROVISION, THE ACTUAL EXPENDITURE IS ONLY RS.12,79,023/-. AFTER MAKING A PROVISION OF RS.18,00,000/-, THE BALANCE AMOUNT OF RS.12,79,023/- WAS TRANSFERRED TO WARRANTY PROVISION ACCOUNT UNDER THE MAJOR HEAD SELLING AND DISTRIBUTION EXPENSES. THE ISSUE OF WARRANTY EXPENSES AND PROVISION THEREOF, HAS BEEN DISCUSSED AT LENGTH IN THE ASSESSMENT ORDER FOR A.Y. 2010-11 WHEREIN AN ADDITION OF RS.4,84,853/- WAS MADE. SINCE THE FACTS FOR THIS YEAR ARE ALSO SIMILAR AND APPLY MUTATIS MUTANDIS FOR THIS YEAR ALSO, EXCESS WARRANTY AMOUNT DEBITED REQUIRES TO BE DISALLOWED. SINCE IT IS PURELY AN ADHOC PROVISION AND HAS NOT JUSTIFICATION AS REVENUE EXPENDITURE, AN AMOUNT OF RS.5,20,977/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 4. IN THE FIRST APPELLATE PROCEEDINGS, THE ASSESSEE RAISED THE ISSUE OF ADDITION OF RS.5,20,977/- I.E. (RS.18,00,000/- MINUS RS.12,79,023/-) ON ACCOUNT OF WARRANTY PROVISION. THE ASSESSEE FILED A WRITTEN SUBMISSION BEFORE THE CIT(A). EVENTUALLY, THE CIT(A) DISCUSSED THIS ISSUE IN PARA 4.4 OF HIS ORDER AND CONFIRMED THE SAID ADDITION. ASSESSEE COULD NOT DEMONSTRATE THAT THE PROVISION OF RS.18 LAKHS IS WORKED OUT BASED ON ANY SCIENTIFIC BASIS. 5. AGGRIEVED WITH THE ABOVE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US QUESTIONING THE DISALLOWANCE OF RS.5,20,977/- ON ACCOUNT OF WARRANTY EXPENSES. 6. BEFORE US, AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR ISSUE CAME UP BEFORE THE TRIBUNAL FOR ADJUDICATION IN ASSESSEES OWN CASE IN ITA NOS.1130 TO 1132/PUN/2016 FOR THE ASSESSMENT YEARS 2007-08, 2008-09 AND 2010-11 DATED 06.02.2019 AND THE TRIBUNAL, AFTER ITA NO.2672/PUN/2017 - 3 - DISCUSSING THE FACTS OF THE ADDITION AND DECIDING THE ISSUE AGAINST THE ASSESSEE, REMANDED THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR QUANTIFICATION REASONS. THE CONTENTS OF PARAS 6 TO 9 ARE RELEVANT IN THIS REGARD. FOR THE SAKE OF COMPLETENESS, THE SAID PARAS 6 TO 9 OF THE ORDER OF THE TRIBUNAL (SUPRA) ARE EXTRACTED HEREUNDER :- 6. GROUND NO.2 IS AGAINST DISALLOWANCE OF WARRANTY EXPENSES. THE FACTS OF THIS ISSUE ARE THAT THE ASSESSEE CREATED WARRANTY PROVISION FOR THE YEAR AT RS.22 LAKHS AGAINST SALES TO IFB AT RS.3.78 CRORE. THIS WAS IN CONTRAST TO THE WARRANTY PROVISION OF RS.9 LAKHS AGAINST THE SALE TO IFB AT RS.3.81 CRORE FOR THE A.Y. 2006-07 AND WARRANTY PROVISION OF RS.3.90 LAKHS AGAINST SALES TO IFB AT RS.2.55 CRORE FOR THE A.Y. 2005-06. THE ASSESSING OFFICER OBSERVED THAT NO EXPENDITURE WAS ACTUALLY INCURRED FOR THE A.YS. 2005-06 AND 2006-07 AND ONLY A SUM OF RS.11,39,474/- WAS DEBITED BY IFB FOR THE EXTANT YEAR. HE FURTHER OBSERVED THAT THE WARRANTY PROVISIONS OF RS.20 LAKHS AND RS.15 LAKHS WERE CREATED FOR THE A.Y. 2008- 09 AND 2009-10 AS AGAINST THE ACTUAL EXPENDITURE INCURRED OF RS.4.65 LAKHS AND RS.3.19 LAKHS FOR SUCH YEARS. CONSIDERING THE INCREMENTAL INCREASE IN WARRANTY PROVISION, THE AO DISALLOWED RS.13 LAKHS (RS.22 LAKHS PROVISION FOR THE YEAR AND RS.9 LAKHS PROVISION FOR IMMEDIATELY PRECEDING YEAR). THE LD. CIT(A) DID NOT ALLOW ANY RELIEF ON THIS ISSUE, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA (P) PVT. LTD. VS. CIT (2009) 314 ITR 62 (SC) HAS HELD THAT A PROVISION MADE BY AN ASSESSEE FOR WARRANTY CLAIM ON THE BASIS OF ITS EXPENDITURE IS ALLOWABLE AS DEDUCTION U/S.37 OF THE ACT. WHILE ALLOWING DEDUCTION ON ACCOUNT OF WARRANTY PROVISION, THE HONBLE APEX COURT ADDED A CAVEAT BY OBSERVING IN PARA NO.44 OF ITS JUDGMENT THAT : IT WOULD DEPEND ON THE NATURE OF BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING BEING ADOPTED BY THE ASSESSEE. IT WILL ALSO DEPEND ON THE HISTORICAL TREND. IT IS CLEAR FROM THE RATIO DECIDENDI IN ROTORK CONTROLS INDIA (P) LTD. (SUPRA) THAT THOUGH WARRANTY PROVISION IS A PERMISSIBLE DEDUCTION BUT THE PROVISION MUST BE MADE ON A SCIENTIFIC BASIS. ANY WARRANTY PROVISION MADE DE HORS ANY SCIENTIFIC CALCULATION OR CONSIDERING THE PAST TREND OF SALES AND ACTUAL EXPENDITURE ETC., CANNOT QUALIFY FOR DEDUCTION. 8. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND FROM PARA NO.4 OF THE ASSESSMENT ORDER THAT THE ASSESSEE CREATED PROVISION OF RS.3.90 LAKH FOR THE A.Y. 2005-06 BUT THE EXPENDITURE INCURRED ON REPAIR WAS NIL. FOR THE A.Y. 2006-07, PROVISION WAS MADE FOR RS.9 LAKH BUT THE EXPENDITURE INCURRED WAS AGAIN NIL. SUCH PROVISION OF RS.9 LAKH WAS MADE AS AGAINST SALES TO IFB AT RS.3.81 CRORE. FOR THE YEAR UNDER CONSIDERATION, WHEN THE AMOUNT OF SALES DIPPED TO RS.3.78 CRORE, AMOUNT OF PROVISION INCREASED MULTIFOLD FROM RS.9 LAKH TO RS.22 LAKH AS AGAINST THE ACTUAL EXPENDITURE INCURRED ON REPAIRS STANDING ONLY AT RS.11,39,474/-. THIS NARRATION OF FACTS AMPLY PROVES THAT THE CREATION OF WARRANTY PROVISION WAS NOT BASED ON ANY SCIENTIFIC CALCULATION BUT WAS RATHER AN AD HOC EXERCISE. UNDER SUCH CIRCUMSTANCES, WE CANNOT GRANT DEDUCTION IN RESPECT OF WARRANTY PROVISION . 9. ONCE IT IS HELD THAT THE CREATION OF PROVISION CANNOT BE ALLOWED AS DEDUCTION, IT IS FURTHER CLARIFIED THAT THE REVERSAL OF PROVISION SHOULD ALSO NOT BE BROUGHT TO TAX, IF THE CREATION OF SUCH PROVISION WAS EARLIER NOT ALLOWED AS DEDUCTION. TO PUT IT SIMPLY, NEITHER THE CREATION OF PROVISION NOR ITS REVERSAL, IF EARLIER NOT ALLOWED AS DEDUCTION AT THE TIME OF MAKING IT, WOULD LEAD TO DEDUCTION OR TAXABILITY OF ANY SUM BUT THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE ON REPAIRS ON YEAR TO YEAR BASIS WOULD QUALIFY FOR DEDUCTION. WITH THESE OBSERVATIONS, WE SET ASIDE THE IMPUGNED ORDER TO THIS EXTENT AND ITA NO.2672/PUN/2017 - 4 - REMIT THE MATTER TO THE FILE OF AO FOR DECIDING THE ISSUE IN ACCORDANCE WITH OUR ABOVE DIRECTIONS. 7. WITH THE SIMILAR DIRECTIONS, WE DIRECT THE ASSESSING OFFICER TO FOLLOW THE DIRECTIONS OF THE TRIBUNAL GIVEN IN THE ASSESSEES OWN CASE (SUPRA) AND DECIDE THE SAME AFTER GRANTING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THUS, THE GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 12 TH DAY OF MARCH, 2019. SD/- SD/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; DATED : 12 TH MARCH, 2019. SUJEET / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-5, PUNE; 4. THE CCIT, PUNE; 5. , , - / DR SMC, ITAT, PUNE; 6. / GUARD FILE. / BY ORDER, //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE