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2008 (1) TMI 417 - AT - Income TaxAddition on Provisions for Performance Warrantee - computation of the income - Minimum Alternate Tax (MAT) - Computation of the book profit u/s 115JB - new activity in the form of construction of terminals on behalf of the clients in the relevant previous year - provided 10 per cent of contract value as security deposit - HELD THAT:- On a perusal of its technical assessment for possible warranty liability, we find that such assessment was vetted by M/s Dalal Consultants & Engineers Ltd., an independent agency. The types of defects and performance failures that could arise under various components of the project have been succinctly summarized by the technical consultants in their report. Assessee had followed percentage completion method for accounting its income, which is a prudent one as evident from AS-7 of ICAI and no doubt vide s. 211(3) of the Companies Act, 1956, a company is bound to follow the Accounting Standards promulgated by ICAI. In the type of contract that assessee had with M/s IOC, no doubt recognition of revenue on percentage completion basis is itself an estimation, since such profits are so estimated even before a project is complete. Therefore, it is only prudent that all possible expenditures are also taken into account. Since accrual system has to be followed by a company, it is very much necessary that liabilities that are crystallised though difficult to be quantified are accounted for. It is true that there are inter-head variations between the technical estimates and actual spending, but that is well explained from the fact that one is an estimate and the other actual. Thus, assessee has been able to justify the provisioning and its quantum in a reasonable manner. The Madras High Court decision in CIT vs. Rotork Controls [2007 (2) TMI 200 - MADRAS HIGH COURT] what can be discerned is that warranty provisioning is allowable, if supported by sufficient data to justify such provisioning and is based on statistical or other relevant data. We have no hesitation in the facts of the case to hold that 5 per cent of the warranty provisioning done by the assessee was made against ascertained liability, very much reasonable and made on relevant data. Hence, we hereby set aside the CIT(A)'s order confirming non-allowance of deduction of performance warranty in computing the income of the assessee under the normal provision of the IT Act. AO is directed to allow the deduction of the provision for warranty as claimed by the assessee for computing its income under normal provisions of the Act. Computation of the book profit u/s 115JB - Addition amount was preliminary and deferred revenue expenditure written off by the assessee during the relevant previous year - HELD THAT:- Provision for warranty made by the assessee company is an ascertained liability, it follows that AO cannot make any addition thereof to the net profit of the assessee company for arriving at its book profits for the purpose of s. 115JB. Therefore, we set aside the orders of the CIT(A) and AO on this aspect and delete the addition made by the AO to the net profit for computing assessee's book profit under s. 115JB. Thus, Grounds 1 and 2 of the assessee are allowed. In the result, appeal of the assessee is partly allowed for statistical purpose. Addition for computing the net profit under s. 115JB - HELD THAT:- There is no case for the Revenue that assessee had adopted any different set of standards or policies vis-a-vis the accounts laid by it before the AGM. By writing off the balance remaining under its head 'Preliminary and deferred revenue expenditure' assessee was only doing what was prudent, in that, it was removing from the asset side of its balance sheet a non-productive item, and which in any case was not an asset at all. Therefore, it was not doing anything contrary to any ICAI guidelines. CIT(A) was very much right in following the law laid down by Hon'ble Supreme Court in Apollo Tyres [2002 (5) TMI 5 - SUPREME COURT], according to which, but for the limited power of making increase and reductions as provided in the Explanations to s. 115J, AO has to accept results as declared by the company if the accounts have been properly maintained in accordance with Companies Act and certified so by authorities under that Act. This principle is very much applicable for the book profit computation under s. 115JB also. Thus, we find no reason to interfere with the order of learned CIT(A) deleting the addition being the preliminary deferred revenue expenditure written off by the assessee, made by the AO in the relevant previous year for computing book profit I for the purpose of s. 115JB. Hence, Grounds 1 and 2 of the Revenue are dismissed. In the result, appeal of the Revenue is dismissed. To sum-up, assessee's appeal is partly allowed for statistical purposes and Revenue's appeal is dismissed.
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