Income Tax Appellate Tribunal - Indore
M/S Cummins Technologies India Private ... vs The Acit Circle 1(1), Ujjain on 19 January, 2017
ITA Nos. 258 & 232/Ind/2016
Cummins Technoligies
आयकर अपील य अ धकरण, इ दौर यायपीठ, इ दौर
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
ी डी.ट .गरा सया, या यक सद य तथा
ी ओ.पी.मीना, लेखा सद य के सम%
BEFORE SHRI D.T. GARASIA, JUDICIAL MEMBER
AND SHRI O.P. MEENA, ACCOUNTANT MEMBER
आ.अ.सं./I.T.A. Nos.258/Ind/2015 : A.Y.2007-08
आ.अ.सं./I.T.A. Nos.232/Ind/2016 : A.Y.2010-11
M/s Cummins Technologies India Pvt.Ltd
Dewas
PAN - AABCT - 2018B :: अपीलाथ( /Appellant
Vs
ACIT 1(1)
Ujjain :: )*यथ( /Respondent
नधा+,रती क- ओर से/Assessee by Shri Girish Agrawal
राज व क- ओर से/Revenue by Shri K.G. Goyal
सन
ु वाई क- तार ख 10.1.2017
Date of hearing
उ3घोषणा क- तार ख 19.1.2017
Date of pronouncement
आदे श /O R D E R
PER SHRI D.T. GARASIA, JM
Both the appeals relate to the same assessee and common grounds are taken, therefore, these are being 1 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies disposed of by this consolidated order for the sake of convenience.
2. The first ground which is common in both the appeals reads as under :-
"That, on the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming addition on account of warranty provisions in the assessment year 200708 of Rs. 30,65,282/- and in the assessment year 2010-11 of Rs.16,98,831/- ."
In the assessment year 2010-11 the second ground reads as under :-
"That, on the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs.20,38,655/- on account of provision for bad and doubtful debts."
2. The short facts of the case are that the assessee company is engaged in manufacturing of turbochargers. Original assessment u/s 143 was passed on 24.11.2010. Thereafter, the Assessing Officer has disallowed provisions of warranty expenses of Rs.30,65,282/-. The Assessing 2 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies Officer was of the view that during the financial year 2003- 04 the assessee has practice of debiting warranty claim received during the year in profit and loss account. Subsequently, the company has started making provision for warranty and this amount was debited in profit and loss account. The quantification of provision made is not clear as to how the assessee has quantified and debited. The company has also not specified the reason regarding changing the policy. The assessee claimed that the quantification has been done under the advice from technical person and the average last quarter of the warranty cost vs. last vs. last quarter of sales were used for making the provision. The assessee has not given working. Therefore, the Assessing Officer was of the view that there is difference of expenses on account of provision made and actual expenses incurred by the assessee on the warranty. Therefore, both the warranty expenses are allowable 3 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies expenditure but the method in which the assessee was claiming, therefore, this was disallowed.
3. During the course of hearing, the learned counsel for the assessee has mainly argued on two counts, firstly that the assessee is following mercantile system of account and as per this system, there are revenue expenses which are accounted on accrual basis and the provisions by applying match concept. Here in this case, the assessee is claiming warranty expenses which are allowable expenditure as held by the Hon'ble Supreme Court in the case of Rotork Control India Private Limited; 314 ITR 62. As per the decision of the Hon'ble Supreme Court, the warranty expenses are allowable and in that case, the matter was restored to the Assessing Officer to verify whether the provision is made on structure policy of last 8 quarters of warranty cost and last quarter sales were used for quantifying the provisions. The assessee is following these provisions based on the policy 4 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies which was disclosed as mandated in the accounting standard. The assessee has made structure policy by taking the actual warranty cost and sales of last 8 quarters to make estimate of provisions for warranty claim. The accounting standard 29 issued by the Institute of Chartered Accountant mandates making such provision where reliable estimate can be made. Therefore, warranty expenses debited cannot be considered as contingent liability. During the course of hearing, the learned counsel for the assessee has drawn our attention to page 34 of the paper book wherein the assessee has made working of last 8 quarters which is the debit notes paid, FOC invoices, total claims, domestic sales and % of warranty claims to domestic sales percentage. In the last 8 quarters the percentage comes to 0.12%. The variation in the provisions made and actual warranty debited in the profit and loss account, therefore, based on such working which is 5 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies mentioned in page 29 of the paper book and in the audit account, the assessee has clearly mentioned and disclosed that provisions of warranty made and utilised and reversed during the year as per the accounting standard 29 issued by the institute of Chartered Accountants of India. Similar disclosure has been made in notes to accounts forming part of audited financials regarding warranty, therefore, considering the judgment of Hon'ble Supreme Court and comparing the facts of this case, warranty expenses are to be allowed.
4. On the other hand, the learned DR relied upon the orders of the authorities below. Moreover, the learned DR submitted that the assessee was formerly following the warranty expenses on actual basis and the assessee thereafter has changed the policy to make the provision for warranty expenses. Therefore, as per the rule of consistency, this expenditure cannot be allowed. 6 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies
5. We have considered the submissions of both the sides. Looking to the facts and circumstances of the case, we find that the assessee company is engaged in manufacturing of turbochargers and offers warranty for technical default in the product. During the financial year 2003-04 the company has practice of debiting the actual warranty claims received during the year in the profit and loss account. With the implementation of Accounting Standard 29 issued by the Institute of Chartered Accountants of India effective from financial year 2004-05 which mandates making the provision on matching concept principle, the company started making the provision for warranty and this amount was debited to profit and loss account. The provisions were made and advice received from technical and engineering team. This policy of making the provision based on technical advice continued even for the next financial year. During the year the company accrued 7 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies warranty cost on domestic sales. In Schedule 14 of audited financials the assessee has made disclosure on provisions of warranty made and utilised and reversed during the year as per the accounting standard 29 issued by the Institute of Chartered Accountants of India. The amount was disclosed as under :-
Financial year Opening Additions Utilisation/ Closing balance Reversal balance F.Y.2006-07 16,20,000 3,471,507 2,177,465 2,914,042 F.Y.2005-06 1,200,000 1,620,000 1,200,000 1,620,000 Details of above figures are as under :-
S.No. Particulars Amount F.Y.2006-07
1 Opening balance of warranty provision 16,20,000
2 Add:Provision made during the year 34,71,507
3 Less : Payment of warranty charges 17,71,240
during the year
4 Less : Reversal of credit amount lying in 4,06,225
the warranty provision at the year end
in the profit and loss account
5 Warranty provision debited in the profit 30,65,282
and loss account
We find that exercise of warranty claim during the year is from the provision account which does not affect profit and loss account. Under new policy percentage of last 8 quarters of warranty cost vs. last 8 quarterly sales were 8 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies used for making the warranty expenses provision.
Comparative table disclosing the impact of Accounting Standard 29 for the Financial Year on Profit of the company is as under :-
S.No. Particulars Amount
F.Y. 2006-07
1 Warranty provision debited in the 30,65,282
profit and loss account
2 Payment of warranty charges 17,71,240
during the year
3 Difference being extra charge on 12,94,042
P&L of the company on account of
following Accounting Standard 29
of ICAI
We find that the assessee is manufacturing a product which requires warranty and the assessee has adopted reversing excess provision. The assessee is making provision of warranty applying the percentage of cost to the turnover based on past record making the process more scientific bringing into higher degree of accuracy. The assessee is following mercantile system of accounting.
Therefore, we are of the view that the issue in controversy is squarely covered by the decision of the Hon'ble Supreme 9 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies Court in the case of Rotork Controls India (P) Ltd. vs. CIT;
314 ITR 62 wherein it is held as under :-
"Business expenditure - Allowability - Provision for warranty claims -A provision is recognized when (a) an enterprise has a present obligation as a result of a past event (b) it is probable that an outflow of resources will be required to settle the obligation, and
(c) a reliable estimate can be made of the amount of the obligation - If the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction -
Assessee is manufacturing value actuators in large numbers and statistical data indicates that some of them turn out to be defective every year - Being a sophisticated item no customer is prepared to buy value actuator without warranty and, therefore, warranty became an integral part of the sale price - Assessee made a provision for warranty at the rate of 1.5 per cent of the turnover - Such provision needs to be recognised as the assessee has a present obligation as a result of past events which would result in outflow of resources and a reliable estimate can be made of the amount of the obligation - Warranty cost being an integral part of the sale price, assessee must provide for such warranty costs in its accounts for the relevant year, otherwise the matching concept fails - It is appropriate to provide for warranty as a percentage of turnover based on past experience as it satisfies the 10 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies accrual concept as well as the matching concept - Therefore, assessee incurred liability during the relevant assessment years on the facts and circumstances of the case, and the provision made by it is allowable as deduction under s. 37." We respectfully following the same, allow the claim of the assessee in both the years.
6. In respect of second ground for assessment year 2010- 11 the Assessing Officer held that the assessee has created and calculated the provision of doubtful debt on the basis of age of the debtor. In the cases where the age of debtor was more than 720 days, 100% outstanding bill was written off in cases where outstanding bills are between 541 to 720 days, 75% of the amount has been provided and in cases where bills are outstanding between 361 to 540 days, 50% of the amount has been provided. The distinction between good and bad debtors have not been kept in mind and by making provision of bad debts on the basis of age of outstanding bills, good debtors have also 11 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies been provided which is not the intention of section 36(1)(vii) of the Act. The Assessing Officer, therefore, was of the view that under section 36(1)(vii) of the Act the bad debt cannot be allowed.
7 During the course of hearing, the learned counsel for the assessee has argued that as per the provision of section 36(1)(vii) of the Act, the provision used the words "the amount of any bad debt or part thereof" which clearly implies that it is not necessary that whole of the debt must become bad and doubtful to claim a deduction. Even a part of such bad and doubtful debt is entitled for claim of deduction under the provision. In order to claim deduction under section 36(1)(vii) of the Act, one of the conditions that it required to be satisfied is laid down under section 36(1)(vii) of the Act. The condition stipulated in first limb of clause (i) of sub-section 36 is that no deduction on account of bad debt or part thereof shall be allowed unless such 12 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or an earlier previous year. The second limb of clause (i) of sub-section (2) of section 36 says that the said condition is not applicable where such debt represents money lent in the ordinary business of banking or money lending which is carried on by the assessee. Therefore, second limb of clause (i) of sub-section (2) of section 36 is not relevant. Section 36(1)(vii) of the Act is for computing the total income of the assessee and bad debt or part thereof has to be taken into account. It is well settled by the decision of the Hon'ble Supreme Court in the case of T.R.F. Limited vs. CIT; 190 Taxman 391(SC) which specifies that the proposition of law is well settled after 1.4.1989. It is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt 13 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies is written off as irrecoverable in the accounts of the assessee. Therefore, in the instant case, the decision of the Hon'ble Supreme Court in the case of Vijaya Bank; 323 ITR 166 (SC) is completely applicable and, therefore, relying upon the decision of the Hon'ble Supreme Court and following the decision of the Hon'ble Bombay High Court in the case of Tainwala Chemicals & Plastics India Ltd. (2013) 34 taxmann.comn. 159 (Bom), it must be allowed.
8. On the other hand, the learned DR submitted that as per the decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. (supra) after 1.4.1989 if the bad debt is written off as irrecoverable in the accounts of the assessee, it is allowable as bad debt. The learned DR submitted that the assessee has relied upon the decision in the case of Vijaya Bank (supra) which is completely misplaced because the assessee company is not doing the business of banking or money lending. Therefore, the judgment of Vijaya Bank 14 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies (supra) is not applicable to the facts of the case of the assessee.
9. We have heard both the sides. Looking to the facts and circumstances of the case, we find that as per the decision of the Hon'ble Supreme Court in the case of T.R.F. Limited, wherein the Hon'ble Supreme Court has categorically held as under :-
" This position in law is well-settled. After 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off."
Following the above decision of the Hon'ble Supreme Court, we are of the view that the assessee's claim of bad debt 15 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies and doubtful debt is covered by the decision of the Hon'ble Supreme Court and as per the decision of the Hon'ble Supreme Court wherein the Hon'ble Supreme Court has categorically restored this matter to the file of the Assessing Officer to examine whether the bad debt or part thereof has been written off in the accounts of the assessee, the matter has to be examined by the Assessing Officer de novo and considering all the above aspect, the matter may be decided. We, therefore, restore this issue to the file of the Assessing Officer to do the needful after providing the assessee reasonable opportunity of being heard.
10. In respect of the assessee's contention that the facts of this case are identical with the facts of the case of Vijaya Bank (supra), we find that in the decision of the Hon'ble Supreme Court, the case related to Vijaya Bank and the bank is in the business of money lending and in that case the Hon'ble Supreme Court has held that after 1.4.1989 16 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies the assessee is required not only to debit the profit and loss account but also simultaneously reduce the loans and advances or debtors from the asset side of the balance sheet to extend the corresponding amount, so at the end of the year the amount of loans of advances/debtors is shown as net provision for impugned bad debt. We are of the view that the assessee is not in money lending business, therefore, this decision is not applicable to the facts of this case. During the course of hearing, the learned counsel for the assessee was specifically asked by the Bench as to whether the assessee wants to pursue this decision and still he wants to argue the matter or he wants the matter to be restored to the file of the Assessing Officer as per the decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. (supra), the learned counsel for the assessee specifically submitted that it is the wisdom of the Tribunal. Thereafter, again the same question was put to the learned 17 ITA Nos. 258 & 232/Ind/2016 Cummins Technoligies counsel for the assessee and the learned counsel for the assessee has finally conceded that the matter may be restored to the file of the Assessing Officer as per the decision of the Hon'ble Supreme Court. Therefore, we have restored this matter to the file of the Assessing Officer to decide the same as per the decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. (supra).
11. In the result, ITA No. 258/Ind/2015 is allowed and ITA No.232/Ind/2016 is partly allowed for statistical purposes.
The order has been pronounced in open Court on 19th January, 2017.
Sd/- Sd/-
(ओ.पी.मीना) (डी.ट .गरा सया)
लेखा सद य या यक सद य
(O.P.Meena) (D.T.Garasia)
Accountant Member Judicial Member
दनांक /Dated : 19th January, 2017.
Dn/
18