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2018 (11) TMI 781 - AT - Income TaxDisallowance of Provision for Warranty Expenses - Held that:- As is evident from the refereed tables, ratio of "actual expenses" as to "provision" is in the range of 75-105% is last four years; Hence. AO's observation is erroneous and ill-founded. Assessee had made provision @ 2.5% in AY 2007-08 but thereafter, such provision has been reduced to 2,25% AY 2008-09 onwards on the basis of experience of the assessee. Thus, such estimation was based on past experience and there in not much difference in the actual expenses. Thus, in a way, approach adopted by assessee is scientific. Accordingly, AO was not correct in holding that provision was based on estimation and not backed by scientific method. Assessee's estimate is absolutely reliable as there is not much variation in the actual expenses as compared to provision for warranty and also the actual expenses are in the range of 1.79-2.37% of sales i.e. very much near to the percentage of provision. Assessee creates "Provision for warranty" and debits the same to P&L a/c. In the next year, such provision is reversed by crediting P&L a/c after deducting amount utilized and thereafter, various expenses incurred for warranty services like travelling and salary of CSD are debited. AO has completely overlooked the fact that excess provision is reversed by crediting P&L and therefore, even if other two expenses are separately debited, the same has nullifying effect in light of reversal of provision by crediting the P&L a/c. Thus, all the objections raised by AO are on account of not considering "travelling expenses" and "salary cost of CSD" as part of "actual warranty expenses". Had AO taken pains to consider details furnished by the assessee, he would not have reached the above conclusion. "Provision for warranty" created by assessee satisfies all the criteria laid in the case of Rotork Controls [2009 (5) TMI 16 - SUPREME COURT OF INDIA] as well as AS-29. Hence, the same is allowable as deduction u/s 37 of the Act. - Decided in favour of assessee. Disallowance of unutilized MODVAT/CENVAT credit - AO upon finding that assessee follows "Exclusive method" of accounting, made addition u/s 145A in respect of "unutilized CENVAT credit" on the count that it must be added to "closing stock" of raw material - Held that:- AO failed to appreciate that the assessee has been consistently following "Exclusive method" of accounting for years. If any adjustment w.r.t. CENVAT is made in the amount of "closing stock", then corresponding adjustments need to be made in the amounts of "opening balance", "purchases" and "sales" as well. Once all such adjustments are made, there would be no impact on profit and loss of the year by inclusion of excise duty or other credits to the value of closing stock. It is mandatory for an assessee to follow "Exclusive method" of accounting for valuation of inventories in light of AS-2 on "Valuation of Inventories" issued by ICAI. However, as per S.145A, an assessee is to follow "Inclusive method" of accounting. In any case, there is no impact on profitability whether an assessee follows "Exclusive method" or "Inclusive method". Accordingly, no addition is called for u/s 145A. Amount lying with the excise authorities could not have been claimed as refund by the assessee and hence, it cannot be treated as an income in the hands of the assessee - addition has been rightly deleted by CIT(A) - Decided in favour of assessee.
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