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2018 (10) TMI 1347 - AT - Income TaxDisallowance of warranty claim - allowability of provision made by assessee for warranty expenses within warranty period - allowable deduction - Held that - The payments which were due to assessee, were being withheld by IAF against warranty claims. Undoubtedly, it is the liability of assessee as per contract to provide warranty within stipulated period to the customer i.e. IAF. Thus where there was engine failure within warranty period, then as per terms of agreement and since the enquiry had been completed in 2006, the assessee which was following mercantile system of accounting, had accounted for the said claim of warranty under the head Provision for Warranty . Such claim made by the assessee under the provisions of the Act was duly allowable as deduction in the hands of assessee, applying the ratio laid down in Bharat Earth Movers Vs. CIT 2000 (8) TMI 4 - SUPREME COURT . It may also be reiterated that other claim of warranty provision of about ₹ 48 lakhs had been allowed by Assessing Officer. - Decided in favour of assessee
Issues Involved:
1. Disallowance of warranty claim amounting to ?2,76,87,623/-. Issue-wise Detailed Analysis: 1. Disallowance of Warranty Claim: Facts of the Case: The assessee, engaged in trading aircraft parts and engines, filed a return declaring total income of ?4.97 crores for the assessment year 2006-07. The initial assessment under section 143(3) of the Income-tax Act, 1961, resulted in a total income of ?8.41 crores after various disallowances. The CIT(A) partly allowed the appeal, leading to further appeals by both the assessee and the Revenue. The Tribunal remanded the issues related to Provision for Gratuity, Vacation leave, and Warranty expenses to the Assessing Officer (AO) for re-examination. Provision for Warranty Expenses: The assessee claimed a provision for warranty expenses of ?3.25 crores, which included ?2.76 crores for engine R-29-300 and ?48,12,377/- for other claims. The AO disallowed ?2.76 crores, deeming the warranty expenses contingent and not incurred. The AO noted that the assessee acted as a dealer, not a manufacturer, and thus the warranty expenses were not attributable to the assessee. The AO allowed only ?48,12,377/- and disallowed the remaining ?2.76 crores. CIT(A) Decision: The CIT(A) upheld the AO's decision, stating that the assessee had not owned the warranty claim, which was to be settled by M/s. UMPO UFA. The CIT(A) dismissed the assessee's claim and upheld the addition of ?2.76 crores. Assessee's Argument: The assessee argued that the warranty provision was based on a Tripartite Agreement with IAF and M/s. UMPO UFA. The engine failure within the warranty period led to an accident, and the claim was lodged by IAF in 2006. The assessee contended that it was responsible for the warranty, supported by the fact that IAF withheld payments due to the assessee. Revenue's Argument: The Revenue questioned the assessee's liability, noting that the assessee had claimed it was not responsible in its correspondence with the counterpart. The Revenue relied on the CIT(A)'s order. Tribunal's Analysis: The Tribunal examined the Tripartite Agreement, which stipulated that the assessee was responsible for warranty claims during the specified period. The agreement allowed the customer to deduct the warranty amount from any outstanding invoice if the defect was not addressed within the stipulated period. The Tribunal noted that the assessee had to bear the warranty expenses, even though it was not the manufacturer. Legal Precedent: The Tribunal referred to the Supreme Court's decision in Bharat Earth Movers Vs. CIT (2000) 245 ITR 428 (SC), which stated that if a business liability has definitely arisen in the accounting year, it should be allowed as a deduction, even if it is to be discharged in the future. The liability should be certain and reasonably estimable. Conclusion: The Tribunal concluded that the provision for warranty expenses was allowable, as the liability had arisen within the warranty period and was recognized in the year the enquiry was finalized. The Tribunal found that the authorities below erred in disallowing the claim merely because the liability was not discharged and was being pursued for reimbursement. The Tribunal allowed the appeal, reversing the orders of the authorities below and granting the deduction for the warranty provision. Final Judgment: The appeal of the assessee was allowed, and the disallowance of ?2,76,87,623/- was reversed. Order Pronouncement: The order was pronounced on the 17th day of October, 2018.
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