Provision made based on historical trend would be entitled to deduction from the gross receipts under section 37 of the Income-tax Act,1961 (“l.T. Act”)
 
1. During the AY 2007-08, total provisions Of Rs. 21,88,24,077/- have been created for expenses comprising of employee related payables, Central Sales Tax / VAT expenses, Annual Awards Function, etc. Out of Rs. 21,88,24,077/- Rs.18,76,66,388/- was paid on or before the due date of filing of income tax return and therefore the same was allowed as expenses. From the balance provisions of Rs. 3,11,57,689/- excess provision for Central Sales Tax/ VAT expenses, provident fund contribution and bonus amounting to Rs. 1,51,22,225 have been disallowed in the computation statement.
 

2. Balance Provision of Rs. 1,60,35,464/- pertains to defective items which the assessee disallowed yearly at the constant rate of 7-8% every year based on past trend. The Ld. DRP (Dispute Resolution Panel) during the proceedings assessment disallowed the excess provision of Rs.1,60,35,464/- on the ground that year end estimates of expenses are excess provision.

3. Being aggrieved by the Order of DRP assessee preferred an appeal before the Hon’ble Tribunal of Mumbai Bench. During the proceedings it was submitted that the Assessing Officer has failed to appreciate the fact that adjustments made in relation to one year are tax neutral since disallowance/ allowance for year 1 is allowed / disallowed in year 2. In support of this contention the Ld. AR replied on the following judgements:

3.1. Rotork Controls India (P) Limited (314 ITR 62) (SC)
3.2. JCIT vs ITC LTD (112 ITD 57) (KOL SB)
3.3. Bharat Earth Movers vs CIT (245 ITR 428) (SC)
3.4. Excel Industries Limited (358 ITR 295) (Supreme Court)
3.5. Nagri Mills Ltd (33 ITR 681) (Bombay High Court); and
3.6. Vishnu Industrial Gases P. Ltd. (Delhi High Court) (ITR No 229/1988)

 
4. The Hon’ble Tribunal relied on the judgement Of Rotork Controls India (P) Limited (supra) upholding the principle that if the historical trend indicates that a large number of goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made in respect of such goods would be entitled to deduction u/s. 37 of the l.T.Act.