M/S Falcon Tyres Ltd.,, Bangalore vs Department Of Income Tax

Deputy Commissioner of Income-tax,LTU Bangalore. ... Appellant

Vs.

M/s.Falcon Tyres Ltd., K R S Road, Metagalli, Mysore-570016. ... Respondent PAN:AAACF 7258 E

Appellant by: Dr.K.Shankar Prasad, JCIT(DR). Respondent by: None.

Date of hearing : 25/02/2015. Date of pronouncement: 04/03/2015.

Per Smt. P.MADHAVI DEVI, JM:

This is an appeal filed by the Revenue against the order of

the CIT(A) LTU, Bangalore, dated 26/12/2013 for the

assessment year 2010-11. The revenue is aggrieved by the

order of the CIT(A) in deleting the addition made on account of

warranty provision u/s 41(4) of the Income-tax Act, 1961

[hereinafter referred to as 'the Act' for short]. ITA No.319/Bang/2014

M/s.Falcon Tyres Ltd.

Page 2

2. Brief facts of the case are that the assessee-company

which is in the business of manufacture and sale of tyres and

tubes, filed its return of income for the assessment year 2010-11

on 14/10/2010 declaring income of Rs.34,41,00,580/-

Subsequently, on 5/12/2010 the assessee filed a revised return

declaring income of Rs.30,93,06,639/-. During the assessment

proceedings u/s 143(3) of the Act, the Assessing Officer (AO)

noticed that the assessee has debited a sum of Rs.4,30,56,543/-

as provision for warranty to the profit and loss account. The

assessee was asked to furnish the details with regard to the

claim of warranty. The assessee, vide letter dated 18/1/2013

furnished the required details. From these details the AO

observed that they do not contain the entire required

information and that the assessee has stated that they are in the

process of compiling details location-wise and month-wise and

the same will be submitted during the personal appearance.

However, the assessee could not furnish necessary required

details. After perusing the details furnished by the assessee, the

AO came to the conclusion that the assessee is not following any

scientific methodology or consistent past experience for creating

the warranty provision. In view of the same, following the

decision of the Hon'ble Supreme Court in the case of Rotork

Controls India Pvt. Ltd. vs. CIT (314 ITR 62), the AO disallowed

the same and added back to the income. Thereafter, the AO

observed that Rs.97 lakhs which is shown as closing balance for ITA No.319/Bang/2014 M/s.Falcon Tyres Ltd.

Page 3 the assessment year 2007-08 also has to be added back to

income as cessation of liability because the assessee is not able

to identify the parties for whom such warranty was created

during the previous year and also as the assessee is not in the

possession of scientific database as assessee could not match

the sale corresponding to the warranty created. He, therefore,

treated the sum of Rs.97 lakhs as the income of the assessee as

cessation of liability u/s 41(4) of the Act.

3. Aggrieved, the assessee preferred an appeal before the

CIT(A) explaining the methodology followed for estimating the

provision for warranty as claimed in the profit and loss account.

After perusing the submissions of the assessee, the CIT(A) came

to the conclusion that from the analysis of warranty provision

created and utilized in the past year, it is clear that the

provisions are completely utilized and there is no scope for any

extra provision which was required to be written back and

offered for taxation in terms of the direction prescribed by the

Hon'ble Apex Court in the case of Rotork Controls India Pvt. Ltd.

(cited supra). He also observed that the assessee's business of

manufacture and sale of products is covered by the warranty and

therefore it creates a present obligation on it as a result of past

events and the probability that an outflow of resources will be

required to settle the obligation by way of warranty replacement

definitely arises. He held that the provision is completely utilized

in the following year and the fact there has never arisen any ITA No.319/Bang/2014 M/s.Falcon Tyres Ltd.

Page 4 requirement for reversal of excess provision clearly shows that

the past experience has been a good guide for the company in

creating the provision and in avoiding over provisioning.

Therefore, he deleted the disallowance made by the AO. He also

deleted the addition of Rs.97 lakhs made u/s 41(4) of the Act on

the ground that the actual figure of closing balance for the

assessment year 2007-08 was Rs.42 lakhs and not Rs.97 lakhs

and further that the said provision was fully utilized during the

following financial year 2007-08 and therefore there was no

cessation of liability. Aggrieved by the relief given by the CIT(A)

on both the counts, the revenue is in appeal before us.

3. The appeal was initially fixed for hearing on 5/11/2014

and thereafter on 24/12/2014 on which date the bench did not

function. However, the notices of hearing were duly served on

the assessee for both the dates of hearing and the

acknowledgments of receipt are on record. The appeal was

thereafter fixed for hearing i.e. on 25/2/2015 and this notice was

also served on the assessee. In spite of the same, none

appeared for the assessee before the Tribunal on this date.

Therefore, the Tribunal has proceeded to hear the learned

Departmental Representative exparte qua the assessee and

proceeded to dispose of the appeal as under.

4. As regards the first issue of making of provision for

warranty, the Hon'ble Supreme Court in the case of Rotork

Controls India Pvt. Ltd. (cited supra) has held that provision can ITA No.319/Bang/2014 M/s.Falcon Tyres Ltd.

Page 5 be made provided the assessee has followed a scientific method

for creating such a provision. The assessee has not provided

any details before the AO to substantiate its claim of using its

past experience and scientific method for making a provision.

From the data filed by the assessee which is reproduced at page

3 of the assessment order, we notice that for the assessment

year 2008-09, provision for warranty was created at Rs.200.65

lakhs whereas the warranty utilized during the year was only

Rs.150.65 lakhs and the closing balance of the warranty

provision for the relevant year was Rs.92 lakhs and for the

assessment year 2009-10 the provision created was Rs.208.22

lakhs, whereas the warranty utilized was Rs.203.22 lakhs. For

the assessment year 2010-11 i.e. the relevant assessment year

before us, the warranty created was Rs.430.57 lakhs whereas

the warranty utilized is only Rs.268.57 lakhs with a closing

balance of warranty provision being Rs.259 lakhs. Thus it is

clear that the CIT(A)'s observation that the provision created

was fully utilized during the relevant assessment year is not

entirely correct. Further, we do not find any material brought on

record by the CIT(A) to hold that the assessee has followed a

scientific methodology and also the past experience to make

such a provision. In view of the same, we are not inclined to

accept the findings of the CIT(A) in deleting the addition made

by the AO. Further, as regards the cessation of liability u/s

41(4) of the Act also, the CIT(A) has accepted that the closing ITA No.319/Bang/2014 M/s.Falcon Tyres Ltd.

Page 6 balance of the assessment year 2007-08 was actually Rs.42

lakhs and not Rs.97 lakhs and that Rs.42 lakhs as on 31/3/2007

was fully utilized during the financial year 2007-08 when he

actual warranty cost was Rs.150.65 lakhs. The relevant

assessment year before us is 2010-11 whereas the CIT(A) has

considered the facts and figures relating to assessment year

2007-08 and 2008-09 which have no relevance to the

assessment year before us. Therefore, we are not inclined to

accept the finding of the CIT(A) on this issue also. In view of

the same, we set aside the order of the CIT(A) and remand both

the issues to the file of the AO for reconsideration of the issue

provided the assessee files all the relevant details before the AO

and does not seek adjournment without a reasonable cause. In

view of the same, the revenue's appeal is treated as allowed for

statistical purposes.

Pronounced in the open court on 04th March, 2015.

sd/- sd/- (AbrahamP George) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore