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TMI Blog2023 (9) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... course of appellate proceedings and has proceeded to uphold the disallowance merely by relying on the assessing officer's observations in the fresh assessment order. 3. That Ld. CIT(A) has erred both on facts and in law in confirming a disallowance of INR 35,98,902 in respect of provision for warranty made by the Appellant: 3.1. That Ld. CIT(A) has erred in facts and in law in disregarding the method of computing provision for warranty based on past history of claims, and in stating that the Appellant has claimed warranty expenses at its own will without following any scientific or reasonable method to calculate the expenses 3.2. The Ld. CIT(A) has erred in facts and in law in stating that the provision for warranty expenses does not have any co-relation with sales of respective years. 4. That on facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act, as not adjudicated upon by the Ld. CIT(A). The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary at any time either before or during the hearing." 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ./fuel and production of goods is not possible due to the inherent nature of products manufactured, process/time involved in manufacturing, process of raising invoices by electricity authorities and various other factors beyond the control of the Appellant. -The power consumption for different kinds of products is different. Some products manufactured by the Appellant consume more units of power than other products manufactured by the Appellant. Therefore, consumption of power and fuel expenses in a period largely depends on the quantities in which each good is manufactured. -The electricity expenses are paid to Dakshin Haryana Bijii Vitran Nigam Ltd. (DHBVN). DHBVN is a division of Haryana State Electricity Board (HSEB) and a wholly state owned corporation. -All the payments have been made by the Appellant vide account payee cheques. All the power expenditure has been duly vouched for and recorded in the books of accounts. -Other power and fuel expenses comprise of diesel expenses for generators used in the factory of the Appellant. The Appellant has installed high power generators in its factory to run its production activities in case of power cuts and power failures. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for warranty of INR 1,02,59,968, INR 66,61,066/- was the amount claimed to be actually incurred during the year and remaining amount of INR 35,98,902/- represents the provisions for warranty which was recognized at 0.75% of the current year's sales to cover the warranty claims pertaining to the year when the sales were made and its revenue is recognized. For the year under consideration, the total sales (net of excise duty) for the period amounted to INR 48,27,77,110/- and the provision made for warranty at the rate of 0.75% amounts to INR 35,98,902/-. 10. The warranty expenses has been disallowed by the A.O. on account of being mere provision and the provisions of expenses are not allowable as expenditure, while computing the taxable income the provisions for warranty must be ignored while computing the taxable income and the warranty expenses is claimed only when the same is actually incurred. The said disallowance of the warranty expenses has been upheld by the CIT(A) in following manners:- "6.2 I have considered the facts of issue, basis of disallowance made by AO and submissions of the appellant. As can be seen from the assessment order as well as earlier appellate ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en claimed which included actual warranty expenses of Rs. 68,41,062/- & provision of Rs. 35,98,902/- against the sales of Rs. 48,27,77,110/-. Thus, the sales has decreased in comparison to preceding year but the total warranty expenses have increased more than 250 per cent and provision for warranty expenses around 300 per cent. Similarly, in the A.Y. 2005-06, warranty expenses were incurred at Rs. 20,41,698/- against the sales of Rs. 35,78,28,116/- but in the subsequent year I.e. A.Y 2006-07, though the sales remained almost static but the warranty expenses increased more than 200 per cent. Further, in earlier two assessment years, no warranty expenses were claimed by the appellant at all. Thus, the warranty expenses have been claimed by the appellant at its will without following any scientific or reasonable method to calculate these expenses. These expenses have no co-relation with the sales of respective years which the appellant is trying to establish. Similar is the position in the subsequent years also wherein Hon'ble ITAT vide their order dated 02.01.2018, as mentioned above, vide Para 7, has observed as under:- "7. We have carefully considered the rival contentions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year over and above provision utilization. In fact, assessee is entitled to the deduction of warranty expenses provided for, if it is made based on history and some scientific methodology but not on ad hoc basis. Therefore, we set aside the whole issue back to the file of the Ld. assessing officer with a direction to the assessee to provide the methodology of making provision of warranty expenditure which should be based on some scientific and historical basis and then grant deduction of the appropriate amount to the assessee in terms of the decision of the Hon'ble Supreme Court. In the result, Ground No. 1 of the Appeal of the assessee is allowed with above direction." 6.4 In view of the above, it can be seen that the claim of appellant by taking average at the rate of 0.75 per cent is most general and unscientific method without taking into consideration the historical trend of its own figures of sales and warranty expenses. There is no consistent method of claiming the warranty expenses in the earlier or subsequent years. The appellant has claimed these expenses at its will and as per requirement by reducing or Increasing the taxable income. The principles laid by Hon' ..... 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