2016 (8) TMI 1593 - AT - Income Tax

Provision of warranty - deduction u/s 37 denied - assessee had failed to maintain systematic data in support of its claim for provision of warranty - Assessee s contention that such warranty was necessary and was part of contract of sale - CIT(A) deleted the addition - HELD THAT - As per accounting system regularly followed by assessee such provision was made @ 2% of sales and would written back if in excess at the expiry of warranty period. CIT(A) observed that assessee s case is squarely covered by the decision of M/s. Rotork control India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT wherein observed that the valve actuators manufactured by the assessee were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuators being a sophisticated items no customer was prepared to buy a valve actuator without a warranty. Therefore the warranty became an integral part of the sale price; in words the warranty was attached to the sale price of the product. In this case the warranty provision had to be recognized because the assessee had a present obligation as a result of past event resulting in outflow of resources and reliable estimate could be made of the amount of obligation. As assessee had incurred a liability during the assessment year which was entitled to deduction u/s 37 - Facts being similar so following same reasoning CIT(A) was justified in granting relief to assessee. This reasoned factual finding of CIT(A) needs no interference from our side - Decided against revenue.

Summary

Issues:
1. Disallowance related to provision of warranty
2. Application of precedent in a similar case
3. Maintenance of systematic data for warranty claim

Analysis:

Issue 1: Disallowance related to provision of warranty
The appeal was filed by the Revenue against the order of the Commissioner of Income-Tax (Appeals) concerning the disallowance related to a provision of warranty. The Assessing Officer observed that the assessee had debited a significant amount in the Profit & Loss account as provisions for warranty. However, it was noted that the warranty expenses were contingent liabilities as they were only incurred if customers claimed warranty and met specific conditions. The Assessing Officer made an addition to the extent of Rs. 1,24,46,994 based on this analysis.

Issue 2: Application of precedent in a similar case
The First Appellate Authority granted relief to the assessee regarding the disallowance related to the provision of warranty. The Revenue opposed this decision, arguing that the Assessing Officer's order should be restored. However, the Authorized Representative supported the order of the Commissioner of Income-Tax (Appeals). The Appellate Tribunal found that the provision for warranty was a necessary part of the assessee's business of trading and servicing specialized medical equipment. The Tribunal upheld the decision of the Commissioner of Income-Tax (Appeals) by applying the precedent set in the case of M/s. Rotork Control India Pvt. Ltd. vs. CIT [2009] 314 ITR 62 (SC). The Tribunal agreed that the warranty provision was an integral part of the sale price, and the assessee had incurred a liability during the assessment year, justifying the deduction under section 37 of the IT Act.

Issue 3: Maintenance of systematic data for warranty claim
The Revenue contended that the assessee had failed to maintain systematic data to support its claim for the provision of warranty. However, the Tribunal found that the warranty provision was part of the regular accounting system of the assessee, made at 2% of sales and adjusted if in excess at the end of the warranty period. The Tribunal agreed with the Commissioner of Income-Tax (Appeals) that the provision was justified based on the nature of the business and upheld the decision to grant relief to the assessee.

In conclusion, the appeal filed by the Revenue was dismissed, and the decision of the Commissioner of Income-Tax (Appeals) was upheld by the Appellate Tribunal.