2013 (4) TMI 663 - AT - Income Tax

Disallowance of warranty provision which are contingent and unascertained liability - CIT(A) deleted the disallowance - Held that - Assessee is engaged in the business of manufacturing and sale of air conditioners, compressors etc. and gives a free of cost repair and replacement warranty as per the agreed terms and conditions with the customers for a minimum period of one year at the time of sale. The provision for warranty has been recognized based on past warranty trends, warranty claims received during the year and the unspent provision for warranty for prior years. Thus, agree with the CIT(A) that the treatment of warranty provision is in consonance with accepted principles of commercial practice and accountancy followed year after year consistently. It is undisputed that the warranty clause is a part of the sales document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. As decided in Rotark Controls India P Ltd. vs. C.I.T. 2009 (5) TMI 16 - SUPREME COURT OF INDIA & C.I.T. vs. Majestic Auto Ltd. (2006 (7) TMI 568 - PUNJAB & HARYANA HIGH COURT) has affirmed that the provision for warranty claims and free services charges were allowable as deduction on the facts that quantification of warranty claim and liability of free services has been made on scientific basis. In favour of assessee.

Summary

Issues:
1. Disallowance of warranty provision as a contingent and unascertained liability.

Analysis:
The judgment by the Appellate Tribunal ITAT Delhi revolves around the disallowance of warranty provision by the Revenue for assessment years 1998-99 & 2001-02. The primary issue raised was the contention that the provision for warranty expenses is not an allowable deduction as it constitutes a contingent liability and not a liability in praesenti. The Assessing Officer argued that the provision for warranty was not an eligible expense as it was contingent and not ascertainable at the time of creation.

The Appellate Tribunal considered the facts presented by the appellant, who was engaged in manufacturing and sale of air conditioners, compressors, etc., and provided free repair and replacement warranty to customers for a minimum period of one year. The provision for warranty was based on past trends, claims received, and unspent provisions from prior years. The tribunal noted that the provision for warranty was in line with accepted commercial and accounting practices, following the accrual concept of accounting and the matching concept of preparing accounts under the mercantile system.

The tribunal referred to judicial precedents, including the decision of the Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT and the Jurisdictional High Court in CIT vs. Majestic Auto Ltd., which supported the allowability of warranty provisions made on a scientific basis and past experience. The tribunal upheld the order of the Commissioner of Income Tax (Appeals) in favor of the appellant, dismissing the Revenue's appeal.

Another ground raised by the Revenue in the appeal was related to the initiation of reassessment proceedings, which was challenged by the Commissioner of Income Tax (Appeals) on the basis of a mere change of opinion. However, the tribunal did not delve into this issue as the main contention regarding the provision for warranty had been adjudicated in favor of the appellant.

In conclusion, the Appellate Tribunal upheld the allowability of the provision for warranty expenses made by the appellant, emphasizing the scientific basis and past trends considered in determining the provision. The appeals filed by the Revenue were dismissed, affirming the decision of the Commissioner of Income Tax (Appeals) in favor of the appellant.