2013 (10) TMI 155 - HC - Income Tax

Allowability of warranty expenses in excess of the provision of warranty - Assessee deals in manufacturing of machines and spares/components and the warranty requires replacement of spares, which is replaced by the assessee and debited to spare account, therefore, the assessee would not be required to bear warranty expenses separately Held that - Though, assessee had not produced any scientific method for arriving at the estimation of the warranty liability, in the present case, salient features are that the assessee had a gross sale of Rs.9722.32 lakhs during the year under consideration and the provision for warranty was calculated @ 0.5% thereof. Actual warrant expenditure during the same period was to the tune of Rs.177.17 lakhs. In the previous period also, consistently, the actual expenditure exceeded the provision made for warrant - Assessee had produced various details of the past working out provisions, which form the basis for the present year. In that view of the matter Decided against the Revenue.

Summary

Issues involved:
1. Whether the Tribunal was right in upholding the decision of CIT(A) in deleting the addition made on account of disallowance of warranty provision?
2. Whether the ITAT was justified in relying on a specific case without considering the unique circumstances of the present case?

Analysis:

Issue 1:
The respondent-assessee, engaged in manufacturing mining machines and spares, claimed a Warranty liability of Rs. 48.61 lakhs for the Assessment Year 2005-06. The Assessing Officer challenged this claim, arguing it was a contingent liability. The assessee relied on the Rotork Controls case, highlighting that the provision for warranty was a small percentage of total sales and actual expenses exceeded the provision. The Tribunal, following the Rotork Controls case, upheld the assessee's stand, leading to the Revenue's appeal. The Revenue contended that the assessee lacked a scientific method for estimating warranty liability, attempting to distinguish the Rotork Controls case with the Micro Land Ltd. case. However, the Tribunal's decision was supported by the Supreme Court's Rotork Controls case, and no error was found in upholding the deduction for warranty provision. The Tribunal's decision was based on the assessee's historical data and the proportionality of the provision to total sales, justifying the dismissal of the appeal.

Issue 2:
The Revenue argued that the assessee failed to provide a scientific method for estimating warranty liability, unlike in the Micro Land Ltd. case. However, the respondent-assessee defended the Tribunal's decision, citing alignment with the Rotork Controls case. The High Court acknowledged the absence of a scientific method for estimating warranty liability but emphasized the proportionality of the provision to total sales and historical data showing actual expenses exceeding provisions. The Court found no reason to interfere, as the assessee's past working out provisions formed the basis for the present year. Consequently, no question of law arose, leading to the dismissal of the Tax Appeals.

This detailed analysis of the judgment highlights the key issues, arguments presented by both parties, relevant case laws, and the High Court's reasoning in reaching its decision.