2013 (4) TMI 176 - AT - Income Tax

Provision for warranty disallowed - Held that - The facts are not in dispute that the assessee has made provision for warranty expenditure in the year of sale on the basis of past experience using scientific method. It was disallowed by the A.O. on the ground that the said provision for warranty is a contingent liability. Tribunal in assessee s own case for A.Y. 2005-06 while relying on the decision of Rotork Controls India (P) Ltd. vs. CIT (2009 (5) TMI 16 - SUPREME COURT OF INDIA) decided the similar issue in favour of the assessee stating that warranty was an integral part of sale price as the warranty stood attached to the sale price of the product. It was also observed that warranty provisions have to be recognized because an assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore the assessee had incurred the liability which was an allowable deduction under section 37 - assessee s appeal stands allowed.

Summary

Issues:
Disallowance of provision for warranty
Allowability of warranty claims

Analysis:
The appeal pertains to the disallowance of a provision for warranty made by the assessee company engaged in the manufacture of automotive components for the assessment year 2007-08. The Assessing Officer (A.O.) disallowed the provision for warranty amounting to Rs. 21,94,000 as a contingent liability, as warranty claims are contingent upon future events. The ld. CIT(A) upheld the A.O.'s decision, following the appellate orders for the assessment years 2005-06 & 2006-07. The assessee challenged this decision before the Appellate Tribunal.

Upon hearing the arguments, the Tribunal noted that the provision for warranty expenditure was made by the assessee based on past experience using a scientific method. The Tribunal referred to a previous decision of the Hon'ble Supreme Court in Rotork Controls India (P) Ltd. vs. CIT, where it was held that warranty provisions should be recognized as an allowable deduction under section 37 of the Income Tax Act. The Supreme Court had observed that warranty was an integral part of the sale price, and the assessee had a present obligation due to past events, allowing for a reliable estimate of the liability amount. The Tribunal, relying on this decision, set aside the order of the ld. CIT(A) and allowed the claim of the assessee.

The Tribunal further highlighted that this decision had been consistently followed in the assessee's own case for the assessment years 2005-06 and 2006-07. In the absence of any distinguishing feature presented by the ld. D.R., the Tribunal allowed the assessee's appeal, setting aside the order of the ld. CIT(A) and allowing the claim for the provision of warranty. The alternative ground raised by the assessee was not pressed and thus rejected. Consequently, the assessee's appeal was allowed in its entirety.