2016 (1) TMI 782 - AT - Income Tax

Disallowance of provision of warranty expenses - CIT(A) allowed the claim - Held that - The provision for such warranty is being made on the basis of past experience and has been computed in a systematic and scientific manner, as in the present case, surely we have to appreciate that these warranty expenses are towards expenses which have been incurred or are likely to be incurred within the period for which warranty has been assured to the customers against the sale of products and as such, such expenses are deductible as business expenditure. Such expenditure having been incurred wholly for the purpose of business is fully allowable as business expenditure. Accordingly, we uphold the order of CIT(A). See Retork Controls India P. Ltd. Vs. CIT (2009 (5) TMI 16 - SUPREME COURT OF INDIA ) - Decided against revenue

Summary

Issues Involved:
1. Allowability of provision for warranty expenses as deductible business expenditure.

Issue-wise Detailed Analysis:

1. Allowability of Provision for Warranty Expenses:
The primary issue in these appeals is the allowability of the provision for warranty expenses amounting to Rs. 1,50,43,597/- for AY 2006-07 and Rs. 1,60,88,554/- for AY 2007-08. The revenue contends that only the portion of the provision that has crystallized during the relevant previous year should be allowed as an expense, and the remaining provision should be added back to the total income.

Facts:
The assessee company, engaged in manufacturing and marketing control gears and related products, claimed warranty expenses of Rs. 1,56,85,757/- for AY 2006-07. These expenses were divided into two portions: actual expenses incurred for warranty replacements and a provision for future warranty expenses. The Assessing Officer (AO) disallowed the provision for warranty expenses, arguing that actual expenses incurred were only about 5% of the amount debited in the books.

CIT(A) Decision:
The CIT(A) allowed the assessee's claim, noting that the provision was made based on past experience and computed systematically. The CIT(A) referenced the Supreme Court decision in Rotork Control India Pvt. Ltd. v. CIT, which held that estimated provisions for warranty expenses are allowable if they are based on a reliable estimate of the obligation.

Tribunal's Analysis:
The Tribunal reviewed the detailed working of the warranty provision provided by the assessee, which included statistical data from previous years. The Tribunal noted that the provision was made systematically and scientifically, based on past experience and future expectations. The Tribunal also considered the Supreme Court's judgment in Rotork Control India Pvt. Ltd., which emphasized that a liability arising from past events, if reliably estimated, is allowable as a deduction under Section 37 of the Income-tax Act.

Conclusion:
The Tribunal upheld the CIT(A)'s order, agreeing that the provision for warranty expenses was made on a systematic and scientific basis and was allowable as a business expenditure. The Tribunal dismissed the revenue's appeals, affirming that such expenses, incurred or likely to be incurred within the warranty period, are deductible as business expenditure.

Final Judgment:
Both appeals of the revenue were dismissed, and the order was pronounced in the open court on 18.12.2015.