Kunkel Wanger (India) P.Ltd, Mumbai vs Assessee

M/s. Kumkel Vagner (India) P. Ltd. DCIT (OSD) 9(1) DI/34, 3rd Floor, Khira Nagar Room No. 316, 3rd Floor Vs. Swami Vivekanand Road Àayakar Bhavan, M.K. Road Santacruz (W), Mumbai 400054 Mumbai 400020 PAN - AAACK9554C Appellant Respondent

Appellant by: Shri Ambrish M. Mehta Respondent by: Shri Asghar Zain

Date of Hearing: 24.03.2015 Date of Pronouncement: 28.04.2015

ORDER

Per D. Manmohan, V.P.

This appeal by the assessee is directed against the order passed by the CIT(A)-19, Mumbai and it pertains to A.Y. 2009-10.

2. The following grounds were urged before us: -

"a. The learned Commissioner of Income Tax (Appeals) [CIT (A)] erred in confirming the action of the Assessing Officer [AO] in disallowing the provision for warranty claim of Rs.20,33,485/- ignoring the submissions made by the appellant during the course of assessment and appellate proceedings.

b. The learned CIT(A) ought to have followed the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (Pvt.) Ltd. v. CIT (2009) 314 ITR 62 and allowed the deduction on account of provision of warranty claim of Rs.20,33,485/-. c. Without prejudice to the main contention raised above the learned CIT(A) ought to have allowed the actual expenditure incurred of Rs.11,10,628/- against the provision for warranty claim and debited to provision for warranty claim account, eventhough, full details of which were filed before AO & CIT(A).

2 ITA No. 5301/Mum/2012 M/s. Kumkel Vagner (India) P. Ltd.

3. The issue in short revolves around disallowance of provision for warranty claim of `20,33,485/-. The facts in brief are that the assessee-company declared total income of `90,55,749/-. During the course of scrutiny proceedings the AO noticed that the assessee debited `20,33,485/- towards "provision for warranty claim", which implies that the expenditure has not been crystallised. Eventhough the assessee is following mercantile system of accounting, no liability of this type of expenditure can be said to have accrued to the assessee. The AO also observed that the parties to whom the liability is payable are also not identified. He accordingly disallowed the claim of deduction.

4. Aggrieved, assessee contended before the CIT(A) that it is engaged in the business of manufacturing, conveying and handling equipments which are required in manufacturing of foundry moulding machines, sand preparation plants and allied equipments. The main plants are manufactured in Germany. The equipments manufactured and sold by the assessee are under warranty for a period ranging from 12 to 24 months. Earlier the expenses incurred were debited to various heads of expenses such as purchase of raw materials and components, labour charges, travelling expenses, etc. Since the operations of the company increased, it thought it prudent to make a provision of warranty claim @2%. It further submitted that the expenditure incurred against the provision during the warranty period is debited to 'provision for warranty A/c' and not debited to Profit & Loss Account and thus the provision for warranty claim is allowable as revenue expenditure. In the alternative it was submitted that the actual expenditure incurred against the provision for warranty should be allowed as deduction though the said expenditure has not been debited to Profit & Loss Account.

5. The learned CIT(A) preferred to follow the view taken in assessee's own case for A.Y. 2007-08, by his predecessor, and thus dismissed the appeal filed by the assessee. Further aggrieved, assessee is in appeal before the Tribunal.

6. At the time of hearing the learned counsel for the assessee placed before us a copy of the order of the ITAT "A" Bench, Mumbai in assessee's 3 ITA No. 5301/Mum/2012 M/s. Kumkel Vagner (India) P. Ltd.

own case for A.Y. 2007-08 (ITA No. 6933/Mum/2010 dated 13.06.2012) wherein the Bench considered the issue in detail to hold that the assessee has consistently followed the system of making a provision for warranty claim on reasonable basis and hence there is no reason to interfere with the system followed by the assessee. The operative portion of the order is extracted for immediate reference: -

"4.1 In our view, the decision of the authorities below to disallow the claim cannot be upheld. The assessee had filed copy of contracts with the buyers in which there was specific clause regarding warranty. Therefore, as soon as the sale is made, the assessee incurs the liability on account of warranty claim even though the expenditure may be actually incurred in subsequent years. Therefore, the claim of deduction on account of provision for warranty claim is allowable as deduction in mercantile system of accounting and this view is also supported by the judgment of Hon'ble Supreme Court in case of Rotork Controls India (P) Ltd. (supra). The assessee had given full details/ particulars of the provisions of warranty claim and assessee had also given copies of the contracts with the parties in which there was specific provision for warranty. As regards quantum of claim the assessee had been consistently making claim @ 2% of sales and, in case, in the subsequent year, the provision made is found to be excessive, balance amount is offered for income and, in case, expenditure actually incurred is found to be more, further deduction is claimed in subsequent year. Even in the case of Rotork Controls India (P) Ltd. (supra), warranty provision @ 1.5% of sales have not found allowable. Warranty percentage will depend upon facts and circumstances of each case. The assessee has consistently followed the system and adjustments have been made in future. The ld. AR has filed copy of profit and loss account for assessment year 2010-

11 to demonstrate that excess provision has been offered as income. We, therefore, see no reason to interfere with the system being consistently followed by the assessee. In our view, the order of CIT(A) confirming the disallowance cannot be upheld . We accordingly set aside the order of CIT(A) and allow the claim of the assessee."

7. The learned D.R. admitted that the issue stands covered by the decision of the ITAT (supra).

8. We have heard the rival submissions and carefully perused the record. In our opinion the view taken by the ITAT is based on cogent reasons and by adopting the same reasoning we hold that the claim of the assessee deserves to be allowed.

4 ITA No. 5301/Mum/2012 M/s. Kumkel Vagner (India) P. Ltd.

9. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 28th April, 2015.

Sd/- Sd/- (Sanjay Arora) (D. Manmohan) Accountant Member Vice President

Mumbai, Dated: 28th April, 2015

Copy to:

1. The Appellant 2. The Respondent 3. The CIT(A) - 19, Mumbai 4. The CIT- V, Mumbai City 5. The DR, "A" Bench, ITAT, Mumbai

By Order

//True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai n.p.