2021 (6) TMI 250 - AT - Income Tax

Allowability of provision of warranty expenditure - AO had clearly disallowed the provision for warranty expenditure holding it to be contingent - HELD THAT - CIT (A) had rightly taken note of the legal position governing the allowability of provision for warranty expenditure as laid down in the case of CIT Vs Rotork Controls India Ltd. 2009 (5) TMI 16 - SUPREME COURT . CIT (A) while applying the parameters laid down by the Hon'ble Supreme Court in the said decision, had not considered the most relevant data and information i.e., terms and conditions laid down in the warranty policy for the company, what is the percentage of actual claims made for warranty claims in terms of the sales etc. We are of the considered opinion that the matter should be remitted back to the file of ld. CIT (A) for denovo consideration with a direction to decide the issue on hand keeping in view with the terms and conditions of the warranty policy as well as historical data as laid down by the Hon'ble Supreme Court's decision in the case of Rotork Controls India Ltd. (supra). Accordingly, the matter is remanded back to the file of ld. CIT (A). Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of provision for warranty claim by the Assessing Officer
2. Appeal against the order of the Commissioner of Income Tax (Appeals)-8, Mumbai
3. Allowability of provision for warranty expenditure

Analysis:
1. The appellant, a company engaged in manufacturing cranes, filed a return of income for the assessment year 2010-11 showing a loss. The Assessing Officer disallowed expenses on internet web and IT costs, along with provisions for warranty claims. The Commissioner of Income Tax (Appeals)-8, Mumbai deleted the addition for internet and IT costs but confirmed the addition for provisions for warranty claims.

2. The appellant appealed against the decision of the Commissioner of Income Tax (Appeals)-8, Mumbai. During the hearing, the appellant did not appear, and the Senior Departmental Representative relied on the lower authorities' order. The only issue in the appeal was the allowability of the provision for warranty expenditure.

3. The Assessing Officer had disallowed the provision for warranty expenditure as contingent. The Commissioner of Income Tax (Appeals) considered the legal position based on a Supreme Court decision but did not fully analyze the warranty policy's terms, historical data, and actual claims percentage. The Tribunal remanded the matter back to the Commissioner of Income Tax (Appeals) for a fresh decision, emphasizing the importance of considering the warranty policy's terms and historical data as per the Supreme Court's decision in a relevant case.

In conclusion, the Tribunal allowed the appeal for statistical purposes, directing a reconsideration of the provision for warranty expenditure by the Commissioner of Income Tax (Appeals) based on the warranty policy's terms and historical data.