2009 (9) TMI 1033 - AT - Income Tax

Summary

Issues involved: Provision for warranty and disallowance of interest on borrowed capital.

Provision for warranty:
The Assessing Officer disallowed the provision for warranty made by the assessee, treating it as unascertained liability. However, the Commissioner of Income-tax (Appeals) allowed the provision as a deductible liability, considering it as a definite term liability arising during the accounting year. The ITAT confirmed the order of the Commissioner, citing the decision in the case of CIT vs. Sony India (Pvt.) Ltd. and the precedent set by the Hon'ble Apex Court in the case of Bharat Earth Movers vs. CIT. The provision for warranty, made on an actuarial basis, was held to be allowable as a deduction.

Disallowance of interest on borrowed capital:
The Assessing Officer disallowed the interest on borrowed capital, estimating it based on the ratio of amount due from parties to the amount borrowed by the assessee. However, the Commissioner of Income-tax (Appeals) allowed the deduction, noting that the expenses were incurred for commercial expediency and were subsequently recovered. The ITAT upheld the decision, stating that there was no evidence of diversion of borrowed funds for non-business purposes. The expenditure incurred by the assessee was considered to be for commercial expediency, justifying the deduction of interest on borrowed capital.

In conclusion, the appeal filed by the Revenue was dismissed, and the orders of the Commissioner of Income-tax (Appeals) regarding both the provision for warranty and the disallowance of interest on borrowed capital were upheld.