2018 (6) TMI 1119 - AT - Income Tax

Disallowance on account of warranty expenses - allowable busniss expenses - Held that - The warranty provision has been created by the assessee following the accounting standard 29 of provision, contingent liability and contingent assets which is mandatory for the companies. The Hon ble Supreme Court in Rotork Controls India Pvt. Ltd Vs. CIT (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has held that provision of warranty expense is allowable as deduction u/s 37 of the Act. Warranty is an integral part of the sale price which is attached to the sale price of the product. It was further held that warranty provision had to be recognized because the assessee had a present obligation as a result of the past events resulting in an outflow of resources and reliable estimate can be made of the amount of the obligation. Present value of the contingent liability if properly ascertained and discounted on accrual basis can be an item of deduction u/s 37. In the present case there is no allegation on the assessee that the warranty provision made by the assessee is not a reliable estimate. - Decided in favour of assessee.

Summary

Issues Involved:
Challenge to disallowance of warranty expenses by the Assessing Officer and its deletion by the Commissioner of Income Tax (Appeals) for Assessment Year 2004-05.

Detailed Analysis:

1. Disallowance of Warranty Expenses:
The case involved a company that incurred warranty expenses and claimed a deduction for the same. The Assessing Officer (AO) disallowed a specific amount of &8377; 21406000/- as warranty expenses, considering it a contingent liability. The company contended that warranty expenses were incurred as part of its manufacturing process and were recognized as a liability following accounting standard 29. The company relied on the decision of the Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd Vs. CIT 314 ITR 62, which allowed warranty expenses as a deduction under section 37 of the Income Tax Act. The Commissioner of Income Tax (Appeals) allowed the company's claim, emphasizing that the provision for warranty was made based on past claims received and unspent provisions for warranty from previous years. The Commissioner held that the provision for warranty was in accordance with accounting standards and commercial practices, thus allowing the deduction. The Tribunal upheld the Commissioner's decision, citing previous judgments and the company's consistent practice of recognizing warranty provisions.

2. Arguments by Revenue and Assessee:
The Revenue argued that warranty liability should only be allowed if determined scientifically and that unutilized provisions from previous years were not credited to the profit and loss account. The Revenue contended that the company's claim was not based on past claims received during the year. On the other hand, the Assessee relied on the Commissioner's order, highlighting that the provision for warranty was recognized based on historical trends and past experiences, following accepted commercial practices and accounting principles.

3. Tribunal's Decision:
The Tribunal carefully considered the contentions of both parties and the lower authorities' orders. It noted that the provision for warranty was made following accounting standard 29 and the decision in Rotork Controls India Pvt. Ltd case, where warranty expenses were allowed as a deduction. The Tribunal agreed with the Commissioner's findings that the provision for warranty was made on a scientific basis, in line with commercial practices and accounting principles. It also referenced a previous decision by the Delhi ITAT upholding the deletion of similar additions for the Assessee in earlier years. Consequently, the Tribunal dismissed the Revenue's appeal, upholding the deletion of the disallowance on account of warranty expenses.

In conclusion, the Tribunal's decision affirmed the allowance of the deduction for warranty expenses, emphasizing compliance with accounting standards, commercial practices, and past judicial precedents.