TMI Blog2011 (9) TMI 994X X X X Extracts X X X X X X X X Extracts X X X X ..... ant may please be permitted to amend or alter any of the foregoing grounds or to adduce any additional ground at or before the time of hearing. The grounds of appeal taken by revenue in ITA No.2882/Del/2011 read as under : 1. On the facts and circumstances of the case and in law, the CIT (A) has erred in restricting the addition to ₹ 5,00,000/- out of total addition of ₹ 45,80,999/- made on account of disallowance u/s 14A of the I.T. Act. 2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing. 2. The assessee is engaged in the manufacture of commercial vehicles, tractors, two wheelers and gears. The assessment u/s 143(3) was completed on 12.12.2007. 3. In ground No.1 of assessee s appeal, the issue involved is against the confirmation of the disallowance of provision for warranty of ₹ 91.70 lacs. The learned AR submitted that the assessee is engaged in the business of manufacture and sale of commercial vehicles, tractors, two wheelers and gears. These products are sold with warranty period and during the warranty period, if any component becomes defective due to any manufacturing defect, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained liability, hence it should have been made allowable as deduction. The learned AR also relied on the decision of Hon'ble Delhi High Court in ITA No.1154 of 2009 in the case of CIT vs. Whirlpool of India Limited wherein the Hon'ble High Court has decided as under :- 19. We may also point out at this stage itself that the Supreme Court distinguished the judgments in Sajjan Mills (supra) as well as Indian Molasses Co. (supra). We would also like to refer to the judgment of the Supreme Court in CIT Vs. Woodward Governor India P. Ltd. 312 ITR 254 wherein it was held that the accounting method followed by the assessee continuously for a given period of time has to be presumed to be correct till the AD comes to the conclusion for the reasons to be given that the estimate does not reflect to be true and correct profits. 20. The legal principle delineated in the aforesaid judgment would clearly demonstrate that whenever there is a warranty clause in the bulk product sold by the company/assessee to its customers, warranty provision can be made and it would not be treated as contingent liability. There is no quarrel to this proposition and in fact in this very case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty. The assessee s claim that additional provision was made for increasing trend in the claim is not based on any scientific study and actuarial basis. Past history in this regard also had no role for this claim. The provision for warranty has been already calculated @ 0.43% which is based on past history of case, therefore, allowing the provision for additional warranty on LCV (Engine and trans) for earlier years shall amount to be the double claim. He pleaded to sustain the order of CIT (A) on this issue. 5. We have heard both the sides and also considered the facts of the case. The relevant part of CIT (A) order is as under:- 3.13 I have considered the facts of the case, assessment order of the assessing officer and submissions made by the assessee. The Supreme Court in the case of Rotork Controls (supra), after considering the various earlier decisions rendered in the context of accrual of liability and allowability thereof under section 37 of the Act held that provision for warranty made in respect of sales occurred during the year, which may need to be discharged on a future date, is allowable deduction in the year of sale itself provided a reliable estimate of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75.80 723.28 Warranty claims on export sales 68.72 39.69 36.67 145.08 Total warranty 868.08 Warranty claims as a percentage of sales 0.43% 3.15 The provision made for additional warranty provided on special components of light commercial vehicles has also been provided on the basis of average percentage of actual warranty claims settled on these two parts in the earlier years, which has been applied to sales of the LCVs vehicle sold during the year. Similarly, the additional one year warranty on HCVs has been computed on the basis of actual average claim of warranty made in the earlier years, which has been applied to the percentage of heavy commercial vehicles sold during the relevant year. The aforesaid method of computing warranty has been upheld by the Tribunal in the assessment year 2002-03 and by my predecessor in the assessment year 2003-04. 3.16 From the chart extracted above, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty provided to the customers. There is nothing wrong in calculating the provision for warranty on the aforesaid basis. The Supreme Court in the case of Rotork Controls (supra) has also observed that provision for warranty on the basis of actual historical data of such claims in earlier year is a reasonable basis for making provision. The aforesaid method of creating provision for warranties including additional provisions for extended period of warranties or warranty provided for replacing of certain specific parts, is in line with the provision for warranty created in the earlier year 2002-03, which has been upheld by my predecessor as well as Hon'ble ITAT. In view of the aforesaid discussion, I hold that the total amount of provision for warranty amounting to ₹ 1332.42 are allowable deduction. 3.18 However as discussed above, I am unable to accept the stand of the appellant for the additional warranty to the extent of ₹ 91.70 supposedly for eng and transmission for LCV. When no evidence could be produced of actual incidences and claims from various customers and dealership, it has changed its stand and argued that the additional provision was on account of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on scientific study and actuarial basis. In view of these facts, we see no reason to deviate from the decision taken by the CIT (A) on this issue. This ground of assessee s appeal is dismissed. 6. In the ground no.2 of assessee s appeal and in ground no.1 of revenue s appeal, the issue involved is allocation of expenses out of interest expenses and administrative expenses pertaining to dividend exempted income by involving the provisions of section14A of the Income-tax Act, 1961. 7. The AO disallowed ₹ 45,80,999/- u/s 14A. The CIT (A) restricted the disallowance to ₹ 5 lacs. The CIT (A) granted part relief by holding that the assessee is not maintaining separate books of account in respect of the funds utilized for earning the exempted income. General funds of company on which interest paid are utilized for investment from which exempted income is earned. The decision of investment is taken at highest level. The sustenance of part of disallowance was based on an estimate. Learned AR submitted that the mutual funds were purchased and sold during the year and the loan amount has been reduced in comparison to the past year. The investment and the mutual funds is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s method not satisfactory. Rule 8D is not retrospective and applies from AY 2008-09. For earlier years, disallowance has to be worked out on reasonable basis u/s 14A (1) In AY 2002-03, the assessee claimed that no disallowance u/s 14A in respect of the tax-free dividend earned by it could be made as it had not incurred any expenditure to earn the dividend. The AO rejected the claim and made a disallowance u/s 14A. This was deleted by the CIT (A). On appeal by the department, the Tribunal followed the judgement of the Special Bench in Daga Capital 117 ITD 169 (Mum) (where it had been held that s. 14A(2) (3) Rule 8D are procedural in nature and have retrospective effect) and remanded the matter to the AO for re-computing the disallowance. The assessee challenged the decision of the Tribunal. HELD : (1) The argument that dividend on shares / units is not taxfree in view of the dividend-distribution tax paid by the payer u/s 115-O is not acceptable because such tax is not paid on behalf of the shareholder but is paid in respect of the payer s own liability; (2) S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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