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TMI Blog2017 (10) TMI 1246X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting to Rs. 66,66,881/-. 2. Ground No. 2: Provision for Maintenance and Free Service / Warranty - Rs. 4,54,08,269/- (Rs.1,29,59,645+ Rs. 3,24,48,624) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in upholding the disallowance made by the AO in respect of provision for Maintenance and Free Service/Warranty of Rs. 4,54,08,269/-. 3. Ground No. 3: Disallowance of expenditure under section 40(a)(ia) - Rs. 5,44,27,004/-. On the facts and in the circumstances of the case and in law, The Ld. CIT(A) erred in upholding the addition made by the AO in respect of disallowance of Rs. 5,44,27,004/- under section 40(a)(ia) of the Act. Assessment Year 2010-11 1. Ground No. 1: Disallowance of Provision towards recovery of cost of repairs - Rs. 51,73,107/- On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance made by the AO in respect of provision towards recovery of cost of repairs amounting to Rs. 51,73,107/-. 3. The appellant Otis Elevator Company (India) Ltd. is engaged in the business of manufacturing, erection, installation and maintenance of lifts, escalators, elevators and travel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have used the strong words like 'habitual tax evader' against the assessee which in our humble and respectful submissions are not correct observations of the authorities below and we direct that all such words used by the authorities below stand expunged from the orders of the authorities below. The citizens and the tax-payers of this country are participant in the nation/building and also contributor to the exchequer and to use such harsh words against them are not warranted except in exceptional proven cases." 3.3 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). He further states that the said provisions are purely contingent in nature depending upon the happening or non-happening of any event. These cannot be considered to have crystallized during the year under consideration and therefore, cannot be allowed as expenditure for the year. 3.4 We have heard the rival submissions and perused the relevant material on record. We find from the annual report that as per the accounting policy of the assessee-company, the revenue for repair contracts is recognized only on completion of repairs. Thus, on completion of repair contracts, advance received from cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount was not claimed in the original return of income. The AO on verification found that this amount was not reflected in the profit and loss account. Therefore, the AO rejected the above claim of the assessee in the revised computation of income and made an addition of Rs. 3,24,48,624/-. 4.1 In appeal, the Ld. CIT(A) held that (i) there is no convincing basis of estimation of provision on page no. 159 because there is no corroborative basis of various estimation, (ii) the terms and conditions of warranty are such that the appellant has to perform routine inspection and maintenance after commencement of use of elevator or lift machine; this condition refers to future responsibility and not of immediate and current liability, (iii) there is no propriety to claim expenditure by way of making provision of future happening. Therefore, the Ld. CIT(A) sustained the disallowance of expenditure of Rs. 4,54,08,269/- made by the AO. 4.2 Before us, the Ld. Counsel of the assessee submits that the company gives one-year warranty in respect of elevators sold by it. The period of one year starts from the date of completion of installation of the elevator. During the period of warranty, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red for inspection. Maintenance will consist of regular examinations and any necessary adjustment lubrication of the equipment by competent employees under our direction and supervision. The required supplies and parts will be furnished except such parts as may be needed because of negligence, misuse or accident not caused by us." 4.4.1 We find that as the expenses relating to warranty are the expenses for the year in which the elevator is sold, in accordance with the concept of matching revenue with cost, the assessee-company is making provision for the cost of warranty in the year in which the elevator are sold. 4.4.2. At this juncture we refer to the disclosure at page 36 of the Financial Statements and locate that the following was the position with regard to warranty provisions made and utilized/reversed during the year: Particulars Amount (Rs.) Opening balance 3,24,48,624 New warranty provision made during the year (i.e. in respect of elevators sold and installed during the year) 8,97,94,010 Utilization/Reversal of warranty provision during the year (7,68,34,365) Closing balance 4,54,08,269 We further find that out of new warranty provision of Rs. 8,97,94,010/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse without giving any reason and details of disallowances mentioned in the tax audit report. Therefore, the AO made a disallowance of Rs. 5,44,27,004/-. In appeal, the above disallowance was confirmed by the Ld. CIT(A) on the same reason as given by the AO. 5.1 Before us, the Ld. Counsel of the assessee relies on the certificate issued by the tax auditor. On the other hand, the Ld. DR relies on the order of the Ld. CIT(A). 5.2 We have heard the rival submissions and perused the relevant materials on record. We find that as per Annexure 7 filed before the AO, the tax auditors have issued the following clarification "While making the Tax Audit Report for the P.Y. 2008-09 (AY 2009-10) under the lead of disallowance under section 40(a)(ia) of the I.T. Act, 1961, sub-contractor charges amounting to Rs. 5,44,27,004/- were disallowed on account of payment made to sub-contractor (under the head unallocated cost in progress). Based on subsequent review of records and as per information and explanation given to us by the management, such expenses were not incurred towards sub-contractor but they were towards payment made to employees of Otis Elevator Company (India) Ltd." 5.2.1 Defin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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