Indian Oiltanking Ltd. v. ITO
A.Y. : 2001-02. Dated : 23-1-2008
Fact I :
Allowabilty of provision for warranties u/s.37 —
Provisioning done by the assessee was made against ascertained liability, very
much reasonable and made on relevant data.
Fact II :
Book profits u/s.115JB — Provision for performance
warranties and preliminary and deferred revenue expenses added by the AO — As
regards preliminary and deferred revenue expenses there was change in the
accounting policy of the assessee — So the amount was written off — Nothing
against ICAI policy — So allowed as deduction for book profits u/s.115JB.
Fact I :
The assessee-company was engaged in providing oil terminal
services. During the relevant previous year, it started a new activity of
construction and operation of petroleum terminals also. Its first contract was
with the IOC wherein it was required to design and construct storage
facilities and also to provide services relating to handling, storage and
dispatch of petroleum products.
The assessee-company filed return of income declaring a
loss of Rs.14,73,34,669 as per normal provisions of the Income-tax Act, 1961
(‘the Act’). In the course of assessment proceedings the AO added Rs.
4,83,72,135 being provision for performance warranties while computing
income/loss under normal provisions of the Act.
The Tribunal discussed the following case laws dealing
basically with allowance of provision for warranties :
(i) Bharat Earth Movers v. CIT, (245 ITR 428) (SC)
(ii) CIT v. Vinitec Corpn. (P.) Ltd., (278 ITR
337) (Del. HC)
(iii) Mitsubishi Motors New Zealand Ltd. (222 ITR 697)
(Privy C.)
(iv) CIT v. Indian Transformers Ltd., (270 ITR
259) (Ker. HC)
It observed that the common vein running through all the
above cases was that there was sufficient past data with the assessee to
justify the reasonableness of the warranty provisioning done.
In the given case the assessee had for the first time
executed the work and hence no past data was available. Since there was no
past data, the assessee made technical assessment and had it vetted by an
independent agency.
The Tribunal observed that just because the assessee has no
past data, it cannot by itself make him ineligible from making the claim,
especially when he has just started this line of activity.
The assessee has a technical assessment which is vetted by
an independent agency. The assessee has also filed industrial experience which
gives instances of failure/development of defects in oil industry. Further the
assessee had also submitted details of expenses incurred for rectification of
various damages during defect liability period after 31-3-2001 which came to
Rs.3,06,79,133 as against warrant provisioning of Rs.4,83,72,135.
The Tribunal held that provisioning done by the assessee
was made against ascertained liability, very much reasonable and made on
relevant data.
Fact II :
For computing book profits u/s.115JB, the AO made two
additions which were provision for performance warranties (as discussed in
Fact-I) and preliminary and deferred revenue expenses.
Held :
Provision for warranty is already held as an ascertained
liability and so the AO cannot make any addition to the net profit for the
purposes of S. 115JB.
As regards preliminary and deferred revenue expenditure,
there was a change in the accounting policy of the assessee and so the amount
was written off.
By writing off the balance remaining under its head
‘Preliminary and deferred revenue expenditure’ the assessee was only doing
what was prudent, in that, it was removing from the asset side of its balance
sheet a non-productive item and which in any case was not an asset at all.
Therefore, it was not doing anything contrary to any ICAI guideline. The CIT(A)
was very much right in following the law laid down by Hon’ble Supreme Court in
Apollo Tyres Ltd.
