2018 (9) TMI 426 - HC - Income Tax

Disallowing the provisions made towards liability for warranty for goods supplied by the appellant on the ground that it is a contingent liability - Held that - Assessee requested that the matter may be remanded to the Assessing Officer for fresh consideration so that the Assessee will be able to produce material to substantiate the case. We find that such a plea wholly inadmissible at this juncture especially when we are called upon to decide the substantial question of law which has been framed for consideration. Assessee has failed to fulfill the three conditions pointed out by the Hon ble Supreme Court in Rotork Controls India Private Limited (2009 (5) TMI 16 - SUPREME COURT OF INDIA) and there has been no material placed before the Assessing Officer to establish that the provision in the accounts for the warranty charges was based on any scientific basis or based on the past experience. Thus the stand taken by the Assessee was wholly non-substantiated and consequently the Tribunal rightly allowed the appeal filed by the Revenue and restored the findings of the Assessing Officer.

Summary

Issues:
1. Disallowance of provision for warranty by the Assessing Officer.
2. Appeal before Commissioner of Income Tax (Appeals) and subsequent appeal before the Income Tax Appellate Tribunal.
3. Interpretation of legal position on warranty provisions based on previous court decisions.
4. Failure of the Assessee to provide material to substantiate the provision for warranty.
5. Decision of the High Court on the substantial question of law framed.

Issue 1: Disallowance of provision for warranty by the Assessing Officer:
The Assessee, engaged in software development, filed a return of income for the assessment year 2000-2001, which was accepted under Section 143(1) of the Income Tax Act, 1961. However, during scrutiny under Section 143(3), the Assessing Officer disallowed the provision made by the Assessee for warranty, considering it as a contingent liability.

Issue 2: Appeal before Commissioner of Income Tax (Appeals) and subsequent appeal before the Income Tax Appellate Tribunal:
The Assessee appealed before the Commissioner of Income Tax (Appeals) who allowed the appeal, but the Revenue challenged this decision before the Income Tax Appellate Tribunal. The Tribunal reversed the CIT-A's decision, restoring the Assessing Officer's order disallowing the provision for warranty.

Issue 3: Interpretation of legal position on warranty provisions based on previous court decisions:
The Assessee argued that the Tribunal's decision was influenced by a previous court case and sought restoration of the CIT-A's order based on historical trend and experience. The Revenue, however, cited legal precedents to support the disallowance of the provision unless specific conditions were met.

Issue 4: Failure of the Assessee to provide material to substantiate the provision for warranty:
The Assessing Officer found that the Assessee failed to provide evidence that the provision for warranty was based on previous experience. The Assessee's claim was considered provisional as it was not crystalized or ascertained at the end of the previous year.

Issue 5: Decision of the High Court on the substantial question of law framed:
The High Court noted that the Assessee did not fulfill the three conditions recognized by the Supreme Court for allowing warranty provisions. The lack of material to substantiate the provision led to the dismissal of the appeal, with the substantial question of law answered in favor of the Revenue.

This detailed analysis of the judgment highlights the issues involved, the arguments presented by both parties, and the reasoning behind the High Court's decision to dismiss the appeal and uphold the disallowance of the provision for warranty.