1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 25TH DAY OF AUGUST 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.400 OF 2012 BETWEEN: 1. COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD BANGALORE. 2. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-12(4), C.R. BUILDING QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: M/S. AMCO BATTERIES LTD., 3RD FLOOR, TOWER BLOCK UNITY BUILDINGS, J.C. ROAD N.R. SQUARE, BENGALURU-02. ... RESPONDENT (BY SRI. S. PARTHASARATHI, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 03.07.2012 PASSED IN ITA NO.1166/BANG/2011, FOR ASSESSMENT YEAR 2008-09, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. 2 (I) ALLOW APPEAL AND SET ASIDE ORDERS DATED 03.07.2012 PASSED BY ITAT, BANGALORE, IN ITA NO.1166/BANG/2011 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY DEPUTY COMMISSIONER OF INCOME TAX OFFICER, CIRCLE- 11(1), BANGALORE. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by revenue. subject matter of appeal pertains to Assessment year 2008-09. appeal was admitted by bench of this Court vide order dated 12.01.2013 on following substantial question of law: (i) Whether Tribunal was correct in holding that provision for warranty of Rs.3,98,18,294/- is allowable as deduction when assessee has not made provision on scientific basis as enunciated by Apex Court in Rotork Controls India Pvt. Ltd., vs. CIT, 314 ITR 62? (ii) Whether Tribunal was correct in 3 holding that assessee is entitled for deduction when excess provision towards warranty made in previous years is not offered to tax by reversing entries as laid down by Apex Court in Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62? 2. Facts leading to filing of this appeal briefly stated are that assessee filed return of income for Assessment year 2008-09 declaring income of Rs.2,17,18,047/-. return was processed under Section 143(1) of Act and was selected for scrutiny. Thereafter, notice under Section 143(2) of Act was issued. assessee for Assessment year 2008-09 had claimed provision for warranty for sum of Rs.3,98,18,294/-. Assessing Officer by order dated 29.11.2010 inter alia held that provision for warranty made for Assessment year 2008-09 to profit and loss account has been made for amount of Rs.9,80,90,650/-. assessee has incurred actual 4 expenditure to extent of Rs.5,82,72,356/-. Thus, sum of Rs.3,98,18,294/- debited to profit and loss account is still outstanding in nature of provision. It was also held that there is no provision under Act to allow any expenditure, which is in nature of provision and is contingent. Accordingly, sum of Rs.3,98,18,294/- was disallowed and was added to total income. 3. Being aggrieved, assessee filed appeal. Commissioner of Income Tax (Appeals) by order dated 29.11.2010 dismissed appeal and affirmed order passed by Assessing Officer. assessee thereupon filed appeal before Income Tax Appellate Tribunal (hereinafter referred to as Tribunal , for short). Tribunal by order dated 03.07.2012 inter alia held that provision for warranty was made every year in accordance with accounting standards 29 prescribed by Institute of Chartered Accountants. It was further held that In 5 instant case, assessee had made provision on basis of sale and also actual trend of last few years and provision was worked out scientifically every year. It was further held that Commissioner of Income Tax (Appeals) grossly erred in not allowing provision for warranty for concerned Assessment year on ground that ratio between actual and provision is less than 70 : 100. Tribunal held that warranty provision made by assessee for concerned Assessment year is justified and no addition is called for. In result, appeal preferred by assessee was allowed. Being aggrieved, revenue is in appeal before us. 4. Learned counsel for revenue while referring to decision of Supreme Court in ROTORK CONTROLS INDIA (P.) LTD. VS. COMMISSIONER OF INCOME-TAX, CHENNAI , (2009) 180 TAXMAN 422 (SC) submitted that provision is recognized only when enterprise has 6 present obligation as result of past event, it is probable that outflow of resources will be required to settle obligation and reliable estimate can be made of amount of obligation. It is further submitted that until and unless aforesaid conditions are satisfied, no provision can be recognized. It is urged that Tribunal has failed to take into account law laid down by Supreme Court in aforesaid decision and has made reference to accounting standard 29. Therefore, order passed by Tribunal has passed in violation of law laid down by Supreme Court and deserves to be quashed. On other hand, learned counsel for assessee submitted that provision for warranty was allowed in previous years and in para 7 of order passed by Commissioner of Income Tax (Appeals), law laid down by Supreme Court in case of Rotork Controls India (P) Ltd. supra has been taken note of and it has been held that estimation of provision for Assessment year 2008-09 is not 7 scientific and reasonable. aforesaid finding has been set aside by Tribunal and order passed by Tribunal does not call for any interference. 5. We have considered submissions made by learned counsel on both sides and have perused record. only issue, which arises for consideration in this appeal is whether principles laid down by Supreme Court in Rotork Controls India (P) Ltd. Supra have been taken note of while deciding issue of estimation of provision for Assessment year 2008-09. At this stage, it is relevant to extract para 8 of order passed by Commissioner of Income Tax (Appeals), which reads as under: I have considered rival submission. I find A.O. is not justified in holding that in all cases provision is to be disallowed as expenditure. This has become strict law of past after pronouncement of Supreme Court in several cases that provision can also become allowable 8 deduction if it is computed with certain degree of certainty. locus classicus on subject M/s Rotrok Controls India Pvt. Ltd., vs. CIT (2009) 314 ITR 62 (SC) legal principles enunciated in that Rotork case has been analyzed by me in case of M/s Apple India (P) Ltd., ITA No.77/DC-11(1)/A- I/10-11, dated 22.09.2011. relevant portions are extracted below:- Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Thus I have concluded that if ratio between actual expenditure and provisions is 70:100 then provision be considered ascertainable and therefore deductible. On this premises I have allowed deletion of additions in appellants own case in Assessment years 2005-06 and 2007-08. But each case is different on facts. assessee also admits that sales of company has grown by leaps and bounds. This year ratio between actual expenditure and warranty provision is 59:100 and therefore do not meet parameter fixed by me i.e., 9 70:100 on basis of which additions of Assessment years 2005-06 and 2007-08 had been deleted. In view of above I do not consider estimation of provision in this year is scientific and reasonable. However, allowance of actual expenditure reduced by A.O. and disallowance of balance is found justified. addition is upheld. related grounds of appeal are dismissed. 6. Thus, from close scrutiny of paragraph 9, it is evident that principles laid down by Supreme Court in Rotork Controls India (P) Ltd. Supra had been taken into account by Commissioner of Income Tax (Appeals) and estimation of provision for Assessment year 2008-09 has been found to be unscientific and unreasonable. Tribunal has noted that admittedly, Commissioner of Income Tax (Appeals) has considered same working method of provision in previous two years and allowed provision. It was further held that Commissioner of Income Tax (Appeals) did not allow provision for 10 warranty for Assessment year on ground that ration between actual and provision is less than 70:100. It was further held that ratio adopted by Commissioner of Income Tax (Appeals) is imaginary and arbitrary and is without any basis. It was also held that provision of warranty was made every year in accordance with accounting standards 29 and provision is worked out scientifically every year merely because, provision has come down to 59:100, same cannot be disallowed. Accordingly, finding recorded by Commissioner of Income Tax (Appeals) that estimation of provision is unscientific and is unreasonable has been set aside. Thus, it is evident that conditions laid down by Supreme Court to assess provision have been met in instant case. Therefore, submission made by learned counsel for revenue that neither Commissioner of Income Tax (Appeals) nor Tribunal has examined ratio laid down in Rotork Controls India (P) Ltd. Supra does not deserve 11 acceptance. In view of preceding analysis, substantial questions of law framed are answered against revenue and in favour of assessee. In result, appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Commissioner of Income-tax, Bangalore / Deputy Commissioner of Income-tax Circle-12(4), Bangalore v. Amco Batteries Ltd