2018 (1) TMI 1719 - AT - Income Tax

Provision of warranty expenses - Lesser amount of warranty claims registered on the assessee - provision of warranty expenses have been made by the assessee @0.75% in earlier years, however, in Assessment Year 2010-11 and 2011-12 it was reduced to 0.5% - HELD THAT - In the present case as per annexure- A it seems that assessee has made ad hoc provision on the sales as a fixed percentage. The ld CIT (A) has also allowed the claim of Rs 3.5 lakhs without giving any cogent reason. Further looking at the chart titled as Annexure A by the Ld. CIT (A) which shows that the amount claimed by the assessee in the profit and loss account is a net result of opening balances of the provision for warranty added thereto amount credited in provision for warranty account during the year and reduced by the provision utilized during the year for meeting the expenditure out of the opening balances and actual warranty expenses incurred during the year over and above provision utilization. Assessee is entitled to the deduction of warranty expenses provided for, if it is made based on history and some scientific methodology but not on ad hoc basis. Therefore, we set aside the whole issue back to the file of the Ld. assessing officer with a direction to the assessee to provide the methodology of making provision of warranty expenditure which should be based on some scientific and historical basis and then grant deduction of the appropriate amount to the assessee in terms of the decision of Rotorok Controls India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT In the result ground No. 1 of the appeal of the assessee is allowed with above direction.

Summary

Issues involved:
- Appeal against disallowance of provision for warranty expenses for Assessment Years 2010-11 and 2011-12.

Analysis:
1. Assessment Year 2010-11:
- The assessee appealed against the disallowance of Rs. 1574953 out of Rs. 1924953 provision for warranty expenses. The Assessing Officer found the provision excessive and disallowed it.
- The assessee contended that the provision was based on past history and a reliable method. The CIT(A) confirmed the disallowance, allowing only Rs. 3.5 lacs as justified.
- The Authorized Representative argued that the provision was in line with accounting standards and not contingent. The Departmental Representative supported the lower authorities' orders.
- The Tribunal noted that the provision had reduced from 0.75% to 0.5% due to fewer warranty claims. It emphasized the need for scientific and historical basis for provisions, citing a Supreme Court decision.
- The Tribunal set aside the issue, directing the assessee to provide a methodology based on historical trends for the provision. The appeal was allowed for statistical purposes.

2. Assessment Year 2011-12:
- The assessee challenged the disallowance of Rs. 2325950 out of Rs. 2675450 warranty expenses claimed. The CIT(A) upheld the disallowance, ignoring actual expenses and historical basis.
- The Tribunal found the issue similar to the previous year and set it aside for the assessing officer to reevaluate based on historical and scientific grounds.
- The appeal was allowed for statistical purposes, emphasizing the need for a proper methodology for provision calculation.

In conclusion, the Tribunal emphasized the importance of basing provisions for warranty expenses on historical and scientific methods rather than ad hoc calculations. The appeals were allowed for statistical purposes, directing the assessing officer to reassess the deductions based on proper methodology.