2012 (12) TMI 714 - AT - Income Tax

Provision for Warranty disallowance as assessee not following any scientific way of debiting the expenditure - Held that - As decided in CIT Versus Vinitec Corporation Pvt. Ltd. (2005 (5) TMI 54 - DELHI HIGH COURT) warranty liability is not a contingent liability. If the assessee is maintaining the accounts on mercantile system on liability accrued, though to be discharged at a future date, would be a proper deduction while working out the profit and accounts of the business. As decided in CIT v Sony India (P) Ltd. 2006 (4) TMI 457 - DELHI HIGH COURT liability arising out of a warranty is an allowable deduction even when amount payable by assessee is quantified and discharged in future - Thus looking to the quantum of sales effected during the year, the net provision of Rs.24,20,522/- debited in profit and loss account is not excessive. The assessee has submitted that it is in the business of selling the equipment since 1995 and the provision is being made on the basis of the past experience. Hence, CIT(A) was justified in deleting the addition - in favour of assessee.

Summary

Issues:
- Disallowance of provision for warranty debited to profit and loss account
- Liability to be charged to interest u/s 234 B of the Act

Analysis:
1. Disallowance of Provision for Warranty:
- The appellant contested the addition of Rs.15,38,000 for provision for warranty debited to the profit and loss account.
- The AO disallowed the expenditure, stating the appellant lacked a scientific way of debiting the warranty expense.
- The appellant argued the provision was based on scientific and rationale basis, citing past experience and Supreme Court precedent.
- The CIT(A) upheld the AO's decision, noting the appellant neither provided nor reversed the warranty expenses for the year.
- The appellant referenced a previous case where a similar issue was decided in their favor, presenting the ITAT's order in their own case.
- The Tribunal reviewed past decisions and found that warranty liabilities are inbuilt in sale prices, not contingent, and should be allowed based on scientific estimation.
- Citing various court decisions, the Tribunal concluded that warranty provisions are not contingent liabilities and are allowable deductions in a mercantile system of accounting.
- Considering the appellant's past experience and the scientific approach used, the Tribunal deleted the impugned addition, following precedent and allowing the appeal.

2. Liability to be Charged to Interest u/s 234 B of the Act:
- The appellant denied liability to be charged interest under section 234 B of the Act.
- The Tribunal did not address this issue specifically in the judgment, as it focused on the disallowance of the provision for warranty.
- Since the Tribunal allowed the appeal regarding the warranty provision, it can be inferred that the liability to be charged to interest u/s 234 B of the Act was also resolved in favor of the appellant.

In summary, the ITAT, Bangalore, in the cited judgment, addressed the disallowance of the provision for warranty debited to the profit and loss account. The Tribunal ruled in favor of the appellant, deleting the addition based on scientific estimation and past experience, following precedent and allowing the appeal. The issue of liability to be charged to interest u/s 234 B of the Act was not explicitly discussed in the judgment but can be inferred to have been resolved in favor of the appellant along with the main issue.