2019 (1) TMI 1644 - AT - Income Tax

Disallowance of provision for warranty - HELD THAT -The appellant has relied on the decision of the Hon ble Delhi High Court in case of CIT vs. Ericssion Communication P. Ltd. 2009 (9) TMI 710 - DELHI HIGH COURT . As observed that it could be that in particular year actual warranty claim may exceed the provisions which is made. Assessee was therefore entitle deduction in respect of provisions for warranty claims. The appellant has relied on Kirloskar Borthers Ltd. 2014 (9) TMI 1065 - ITAT PUNE wherein provision for warranty were fully allowed. The crux of these judicial pronouncements are that provisions for warranty are full allowable. The only thing is that the estimation of the provisions for warranty should be on scientific basis. The appellant has calculated provisions of warranty on the basis of warranty period actual expenditure on warranty. The obligation of warranty starts at the point of sale itself. Provisions for warranty is allowable and disallowable made by the AO cannot be upheld - Decided in favour of assessee.

Summary

Issues Involved:
- Disallowance of provision for warranty of Rs. 75,00,000 made by the Assessing Officer.

Analysis:
1. The appeal was filed by the Revenue against the order of CIT(A)-7, Pune for the Assessment Year 2010-11. The assessee, engaged in the business of wind turbine generators, declared a loss of Rs. 17,24,43,810. The Assessing Officer disallowed a warranty provision of Rs. 75,00,000 as the assessee failed to provide supporting documents. The AO relied on the Supreme Court judgment in Rotork Control India Pvt. Ltd. vs. CIT (2009) 314 ITR 62 (SC).

2. During the first appellate proceedings, the assessee submitted evidence showing the warranty provision was only 1.43% of sales. The assessee detailed the warranty provision year-wise and its appropriation towards claims. The CIT(A) analyzed the data and allowed the appeal, considering the warranty provision's actual expenditure basis. The CIT(A) referred to various judicial decisions, including those of the Supreme Court and High Courts, to support the assessee's calculation method.

3. The Revenue appealed to the Tribunal, challenging the CIT(A)'s decision. The Tribunal reviewed the data related to the warranty provision for financial years 2009-10 to 2012-13. It noted the close correlation between the provision created and utilized in the relevant years. The Tribunal found the CIT(A)'s reasoning fair and reasonable, dismissing the Revenue's appeal.

4. The Tribunal upheld the CIT(A)'s decision, emphasizing the scientific estimation basis for warranty provisions. The Tribunal concluded that the grounds raised by the Revenue did not warrant interference, ultimately dismissing the Revenue's appeal.

In conclusion, the Tribunal affirmed the CIT(A)'s decision to allow the warranty provision of Rs. 75,00,000 based on the assessee's calculation method and actual expenditure, dismissing the Revenue's appeal.