2013 (9) TMI 887 - HC - Income Tax

Whether the provision of warranty as claimed is based upon scientific and rational basis or not Held that - Provision for warranty on the basis of principle for matching can be allowed but the amount claimed should have some rational and scientific basis and it cannot be on mere ipsi dixit Reliance has been placed upon the judgment in the case of Woodward Governor India Limited 2010 (1) TMI 33 - DELHI HIGH COURT , wherein it has been held that provision for warranty has to be on actuarial valuation. Matter requires in-depth and proper factual examination For, the purpose, the matter remitted to the Assessing Officer, who will examine the provision for warranty as claimed, including the actual warranty expenses incurred during the year and then determine and decide the quantum of the claim.

Summary

Issues:
1. Disallowance of actual warranty expenses by the Income Tax Appellate Tribunal.

Analysis:
The main issue in this case revolved around the disallowance of actual warranty expenses by the Income Tax Appellate Tribunal. The court framed a substantial question of law regarding whether the Tribunal was justified in disallowing the warranty expenses. The legal position regarding the provision for warranty as an expenditure under Section 37(1) of the Income Tax Act, 1961 was discussed, citing precedents such as the Woodward Governor India Limited case. It was established that the quantum of the provision for warranty should be based on rational and scientific grounds, and actuarial valuation was emphasized for determining the provision amount.

The court referred to the Woodward Governor India Limited case and the Whirlpool of India Limited case to support the allowance of provision for warranty as an expenditure under Section 37(1) based on actuarial valuation and the principle of matching. The provision amount should be determined with reference to past history and scientific study, ensuring a rational basis for the claim. The court analyzed the provision for warranty and warranty expenses debited to the profit and loss account for the relevant assessment year, highlighting the importance of a scientific and rational basis for the claimed amount.

The court observed a discrepancy in the computation aspect of the provision for warranty made by the appellant, leading to confusion in the tribunal's order. It was noted that the provision should be based on actuarial valuation and not mere assertion. Consequently, the court decided to remand the matter to the Assessing Officer for a detailed examination of the provision for warranty, including actual expenses incurred, to determine the quantum of the claim independently. The Assessing Officer was directed to conduct a thorough scrutiny of the accounts and figures without being influenced by the tribunal's observations.

In conclusion, the court partially favored the appellant-assessee by remanding the matter to the Assessing Officer for a comprehensive examination of the provision for warranty to ensure a scientific and rational basis for the claim. The order of remand was made to facilitate an independent assessment of the provision amount, disregarding the tribunal's observations, and applying a meticulous approach to determine the quantum of the claim.