The Tax Publishers2013 TaxPub(DT) 2321 (Mum-Trib) : (2014) 055 (II) ITCL 0103 : (2013) 026 ITR (Trib) 0406

 

Asstt. CIT v. IOT Infrastructure & Energy Services Ltd.

 

INCOME TAX ACT, 1961

--Business expenditure--AllowabilityProvision for warranty--Assessee was engaged in business of construction of oil terminals and providing engineering services and performed operation and maintenance of terminals. It commenced operations in previous year relevant to assessment year 2000-01. For assessment year 2001-02 made for warranty it made a provision for performance warranty at 5 per cent. The Tribunal observed that warranty provisions, based upon past data with assessee would be sufficient to justify the provision but since assessment year 2001-02 was the first year of assessee-company for which past data was not available, the Tribunal relied upon the report of an independent technical advisor furnished by assessee and allowed provision, made at 5 per cent. For assessment year 2004-05 assessee debited certain amount on account of provision made for performance warranty and other contractual warranty at 1.2 per cent Case of assessee before AO was that provision was made in accordance with AS-7 as prescribed by ICAI. AO disallowed it. CIT(A) held on basis of past data that provision for warranty to the extent of 0.2 per cent of contract value completed was fair and reasonable and restricted disallowance made by AO to that extent. Held: Rightly so. Provision for performance warranty made by assessee was rightly allowed by CIT(A) to the extent of 0.2 per cent of value of work completed in year under consideration being fair and reasonable.

Although the provision made by the assessee for warranty at 5 per cent, was allowed by the Tribunal for the assessment year 2001-02 which was the first year of the assessee's operation, it was observed by the Tribunal in its order for 2001-02 that such provision should be made on the basis of the relevant past data. In the assessment year 2001-02, being the first year of the assessee's operation, past data was not available but the year under consideration is the fourth year of the operation of the assessee and the past data now being available at least for the first three years, Tribunal agrees with the contention of the Departmental representative that such past of this Tribunal data should be taken into consideration to decide this issue. As per direction, the assessee has furnished the relevant data in this regard for the past three years as well as for the subsequent eight years giving details of provision made for warranty in each year, warranty expenses actually incurred in each year and the reversal of warranty provision made in each year. [Para 9] A perusal of the above details shows that no expenditure was incurred by the assessee on warranty in the first three years, i.e., 2001-02, 2002-03 and 2003-04 as well as in the year under consideration, i.e., assessment year 2004-05. In the absence of any expenditure incurred on warranty in the assessment years 2001-02, 2002-03 and 2003-04, the provision made at 5 per cent. for warranty in the assessment years 2001-02 and 2002-03 was substantially reversed by the assessee in the assessment year 2003-04. It is thus clear that when the provision for warranty was made by the assessee for the assessment year 2004-05, it was aware that no expenditure on warranty was actually required to be incurred in the earlier years, i.e., the assessment years 2001-02, 2002-03 and 2003-04 as well as in the year under consideration, i.e., 2004-05. It was also aware that the provision made for 2001-02 and 2002-03 at 5 per cent, was required to be substantially reversed in the assessment year 2003-04 and no warranty expenditure was incurred even in the year under consideration, i.e., 2004-05. Still a provision of Rs. 2.77 crores was made by the assesse being 1-2 per cent, of the value of work completed which, cannot be justified on the basis of the past data and counsel for the assessee has not been able to controvert this position when it was confronted to him. [Para 10] It is, no doubt, true that warranty expenditure of Rs. 19.41 lakhs and Rs. 15.73 lakhs was incurred by the assessee in the assessment years 2005- 06 and 2006-07. However, the said expenditure actually incurred by the assessee in the subsequent year, can only justify and support the view taken by the CIT(A) that provision to the extent of 0.2 per cent, of the value of work completed is fair and reasonable in the facts of the case. As regards the contention raised on behalf of the assessee that the provision made for warranty in the assessment year 2004-05 to the extent found to be excess has been reversed and offered to tax in the subsequent years, such reversal of provision in the subsequent year cannot justify the provision made in the year under consideration, the correctness of which is to be decided mainly on the basis of past data relating to expenditure actually incurred on warranty. Once the deduction on account of provision is not allowed to the extent it is found to be excess, the reversal of provision in the subsequent year to that extent cannot give rise to any income and if the assessee has offered such income in the subsequent years, it can seek appropriate relief from the AO who shall allow the same in accordance with law. As such, considering all the facts of the case, the provision made by the assessee for warranty was rightly allowed by the CIT(A) only to the extent of 0.2 per cent, of the value completed in the year under consideration being fair and reasonable and upholding his impugned order on this issue, Tribunal dismises ground No. 1 of the assessee's appeal as well as the Revenue's appeal. [Para 11]

SUBSCRIBE TaxPublishers.inSUBSCRIBE FOR FULL CONTENT

TaxPublishers.in

'Kedarnath', 7, Avadh Vihar, Near Nirali Dhani,

Chopasni Road

Jodhpur - 342 008 (Rajasthan) INDIA

Phones : 9785602619 (11 am - 5 pm)

E-Mail : mail@taxpublishers.in / mail.taxpublishers@gmail.com