TMI Blog2015 (5) TMI 1241X X X X Extracts X X X X X X X X Extracts X X X X ..... ot produced any basis on which the provision of warranty was determined before the Assessing Officer. However, it has produced actual working of warranty before the CIT(Appeals). It is not clear that what extent the liability actually required in the assessment year under consideration while framing the assessment by the AO. The provision made whether on actual quantification or not, was not verified by the AO. CIT (A) after getting the assessee s actual working of warranty not get verified from the AO and he has decided himself that it is correct. Therefore, in our opinion it is appropriate to remit the issue to the file of the Assessing Officer to examine the actual quantification of the provisions made towards warranty and decide in the light of the judgment of Supreme Court in the case of Rotork Controls India Pvt. Ltd. [ 2009 (5) TMI 16 - SUPREME COURT ] Disallowance of provision towards electricity, additional energy and demand charges and provision for interest on VABAL - AO observed that an amount as shown as provision made during the year towards litigation and related disputes in addition to the amount outstanding as at the beginning of the year - HELD THAT:- It is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of warranty provision. 3. The Assessing Officer observed that an amount of ₹ 27,06,54,000/- has been debited towards warranty . In the profit and loss account, it was shown as a provisional entry. When this was questioned by the Assessing Officer, the assessee stated that the company was accounting for warranty based on claims preferred by customers. Since replacement of product based on the warranty is a contractual obligation, which the company will have 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 percen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excess warranty provision created during F.Y. 2009-10 (₹ 23.86 ₹ 18.64). The assessee in its submission before the Assessing Officer stated that unutilized warranty provision i.e., remaining unutilized after F.Y. 2011-12 (AY. 2012-13) would be netted off in the provision made for the subsequent years. The Assessing Officer stated that this method of netting off unutilized warranty provision by the assessee cannot be accepted for the year under consideration. 3.3 The Assessing Officer further stated that Going by the matching concept, it would be appropriate that this excess provision is added back to the income of the same year in which it 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 ₹ 5.22 crores. 4. On appeal, the Commissioner of Income-tax(Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 19.06 crores and for the second year of sale was arrived at ₹ 4.80 crores, which was debited in the profit and loss accounts. According to him, the ratio laid down by the Supreme Court in the case of Rotork Control India P. Ltd. (supra), is applicable to the assessee s case. He also submitted that the assessee is following system of accounting consistently year to year and when 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer. The provision made whether on actual quantification or not, was not verified by the Assessing Officer. The Commissioner of Incometax( Appeals) after getting the assessee s actual working of warranty not get verified from the AO and he has decided himself that it is correct. Therefore, in our opinion it is appropriate to remit the issue to the file of the Assessing Officer to examine the actual quantification of the provisions made towards warranty and decide in the light of the judgment of Supreme Court in the case of Rotork Controls India Pvt. Ltd. (supra). 8. The next ground is with regard to disallowance of provision towards electricity, additional energy and demand charges of ₹ 10,54,60,961/- and provision for interest on VABAL of ₹ 3,18,54,282/-. 9. The facts of the case are that the Assessing Officer observed that an amount of ₹ 23,31,05,399/- is shown as provision made during the year towards litigation and related disputes in addition to the amount of ₹ 4,50,92,000/- outstanding as at the beginning of the year. Out of the total provision of ₹ 27,81,97,399/- only an amount of ₹ 3 crores has been paid during the year, leavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount is ascertained and payable. Therefore, provision is required for the liability and in support of his argument, he relied on the judgment in the case of Andhra Ferro Alloys P. Ltd. v. CIT (213 Taxman 408). 12. Regarding the provision for electricity, additional energy and demand charges has not been paid and the assessee has challenged the order of the TANGEDCO Regulatory Commission. The demand raised by TANGEDCO was disputed by the assessee and still the matter is pending before the court. As we are informed that the basic dispute in this case indicates that there is a challenge regarding the demand. No one is sure, as to when the case will be decided and at the time what would be the demand. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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