2018 (6) TMI 1732 - HC - Income Tax

Disallowance of provision of warranty - system of making of the provision for warranty by the Assessee-Company was not scientific and the reversal of the provision at the year end in view of the actual claims made by the customers was huge, varying from 23% to 100% and therefore, since the Assessee has not followed the scientific system of making a provision in this regard, the entire amount of provision deserves to be disallowed - HELD THAT - As is well settled, the appeal u/s 260-A of the Act lies before this Court only on substantial questions of law. The final fact findings of the Tribunal under the Act are binding on this Court and cannot be disturbed unless they are found to be perverse on the basis of established material on record. We do not find any such case of Revenue in the present appeal. We are satisfied that the practice of making a provision for warranty in the present case has been found to be consistent, scientific and regular by the two Appellate Authorities below in consonance with the judgment in the case of Rotork Controls India (P) Ltd. 2009 (5) TMI 16 - SUPREME COURT - The Hon'ble Supreme Court in the aforesaid case, discussed in detail how the accounting entries for product warranty are to be made by the Assessees. We are, therefore, satisfied that both the Appellate Authorities below were justified in returning the proper findings of facts on the relevant material before them and have rightly found that the provisions of warranty made by the Respondent-Assessee Company was on the basis of the scientific and consistent method and therefore, the present appeal of the Revenue does not give rise to any substantial question of law and the same deserves to be dismissed and is accordingly dismissed.

Summary

Issues Involved:
1. Disallowance of provision for warranty expenses by the Assessing Authority.
2. Consistency and scientific basis of the provision for warranty as claimed by the Assessee.
3. Applicability of the Supreme Court's decision in Rotork Controls India (P) Ltd. to the case.
4. Justification of the First Appellate Authority and Tribunal's decisions in favor of the Assessee.

Detailed Analysis:

1. Disallowance of Provision for Warranty Expenses by the Assessing Authority:
The Assessing Authority disallowed the entire amount of provision for warranty expenses amounting to ?10,16,76,422/- on the grounds that the Assessee's method for making the provision was not scientific. The authority noted that the reversal of the provision at the year-end varied significantly, from 23% to 100%, indicating a lack of a scientific basis. Consequently, the entire provision was added back to the declared income of the Assessee.

2. Consistency and Scientific Basis of the Provision for Warranty as Claimed by the Assessee:
The Tribunal, following its previous orders and the decision of the Supreme Court in Rotork Controls India (P) Ltd., found that the Assessee's method of creating a provision for warranty was based on past experience and industry trends, which constituted a scientific method. The Tribunal noted that the provision was consistently made based on historical data and failure rates, and the method had not been changed over the years. The Tribunal concluded that the provision was not a contingent liability but an ascertained liability, as it was based on a reliable estimate of future expenses.

3. Applicability of the Supreme Court's Decision in Rotork Controls India (P) Ltd. to the Case:
The Tribunal and the First Appellate Authority relied on the Supreme Court's decision in Rotork Controls India (P) Ltd., which held that a provision for warranty made on past experience is scientific and appropriate. The Supreme Court outlined that a provision is recognized when there is a present obligation from a past event, probable outflow of resources, and a reliable estimate of the obligation. The Assessee's method fulfilled these conditions, as it was based on historical trends and provided for warranty costs in line with the accrual and matching concepts.

4. Justification of the First Appellate Authority and Tribunal's Decisions in Favor of the Assessee:
The First Appellate Authority granted relief to the Assessee, observing that the provision for warranty was based on scientific methods and consistent practices, aligned with the Supreme Court's judgment in Rotork Controls India (P) Ltd. The Tribunal upheld this view, finding no reason to interfere with the CIT(A)'s decision. The Tribunal noted that the Assessee consistently reversed excess provisions and made adequate provisions for future expenses, showing no abnormal fluctuations.

Conclusion:
The High Court dismissed the Revenue's appeal, stating that no substantial question of law arose from the case. The Court affirmed that the Assessee's practice of making a provision for warranty was consistent, scientific, and regular, as validated by the two Appellate Authorities and in line with the Supreme Court's decision in Rotork Controls India (P) Ltd. The Court criticized the Assessing Authority for arbitrarily disallowing the provision and actual expenses and expressed concern over the Revenue's frivolous litigation, wasting public resources. The appeal was dismissed with no costs, emphasizing that the final fact findings of the Tribunal are binding and cannot be disturbed unless found perverse.