2018 (6) TMI 1557 - HC - Income Tax

Disallowance of provision of warranty - assessee company had not adopted the scientific basis for creating provision for warranty therefore, the provision in this regard was disallowed - Held that - We are absolutely at a loss to understand how the Assessing Authority has found the said consistent practice of the Assessee-Company to be unscientific and untenable and then proceeded to disallow the entire claim of provision made by the Assessee-Company in this regard. Neither allowing t he provision made for warrantees nor the actual expenses incurred by the company to be deducted from the profits of the company during the year is absolutely arbitrary and unscientific on the part of Assessing Authority, to say the least. There was absolutely n o basis for the Assessing Authority to make both the disallowances of provision for warranty as well as actual expenses at the same time in the hands of the Respondent-Assessee. We express our concern and dissatisfaction at the manner in which the Assessing Authority in t he present case has very casually disallowed the said claim in the hands of the Respondent-Assessee. Moreover, when the Higher Appellate Authorities have corrected the said approach of the Assessing Authority by the First Appellate Authority allowing the appeal of the Assessee and the Tribunal dismissing the appeal of the Revenue, we are all the more pained to see that the Revenue still felt dissatisfied and has brought up the matter before this Court under Section 260-A of the Act without actually any substantial question of law arising in the matter - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of provision for warranty.
2. Scientific basis for creating provision for warranty.
3. Consistency and regularity in the practice of making provision for warranty.
4. Substantial question of law under Section 260-A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Warranty:
The Revenue filed an appeal under Section 260-A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT) which allowed the provision of warranty made by the Assessee. The Assessing Authority had disallowed the entire amount of ?84,79,478/- by holding that the system of making the provision for warranty was not scientific and the reversal of the provision at the year-end was huge, varying from 23% to 100%. The First Appellate Authority (CIT [Appeals]) granted relief to the Assessee, and the Tribunal upheld this decision, leading to the present appeal by the Revenue.

2. Scientific Basis for Creating Provision for Warranty:
The Assessing Authority argued that the Assessee had not adopted a scientific basis for creating the provision for warranty, leading to the disallowance. However, the Tribunal found that the provision for warranty was based on past experience and consistent practice. The Tribunal referred to the Hon'ble Supreme Court's decision in IBM India Ltd. v. CIT, which supported the Assessee's method of creating provisions for warranty.

3. Consistency and Regularity in the Practice of Making Provision for Warranty:
The Court noted that the Assessee had consistently followed a similar practice for making provisions for warranty, which was found to be scientific and regular by the Appellate Authorities. The Assessee reversed the excess provision made each year and only debited the adequate provision for meeting possible expenses for repairs and maintenance. The Court found no abnormal fluctuation or excess provision made by the Assessee-Company.

4. Substantial Question of Law under Section 260-A of the Income Tax Act, 1961:
The Court held that no substantial question of law arose in the present appeal filed by the Revenue. The final fact findings of the Tribunal were binding and could not be disturbed unless found to be perverse. The Court expressed dissatisfaction with the manner in which the Assessing Authority disallowed the claim and criticized the Revenue for being a frivolous litigant, wasting public time and money.

Conclusion:
The Court dismissed the Revenue's appeal, affirming that the provision for warranty made by the Assessee was based on a scientific and consistent method. The practice was in line with the judgment of the Hon'ble Supreme Court in Rotork Controls India (P) Ltd., which detailed the accounting entries for product warranty. The Court emphasized that the appeal under Section 260-A lies only on substantial questions of law, which were not present in this case. The decision of the Appellate Authorities was upheld, and the appeal was dismissed with no costs.