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2016 (12) TMI 1355 - AT - Income TaxClaim of deduction on account of provision made for warranty - Held that - Following the ratio laid down in Rotork Controls India P. Ltd. Vs. CIT (2009 (5) TMI 16 - SUPREME COURT OF INDIA) , we hold that the value of Contingent Liability by way of recognizing the warranty liabilities, by making a provision and also following systematic method of its write back and / or utilization is an accepted accounting method adopted by the assessee and the provision made by the assessee is to be allowed as deduction in the hands of assessee. It may be clarified herein that the CIT(A) had rejected the claim of assessee in assessment year 2008-09 observing that the assessee had made provision to the extent of ₹ 32.74 crores, whereas none of the provisions made in the earlier years were much utilized. The learned Authorized Representative for the assessee in this regard has clarified that inadvertently, the same was created at ₹ 32.74 crores but ₹ 31.07 crores was written back and the deduction by way of provision of warranty was claimed only at ₹ 1.67 crores. AO had also disallowed sum of ₹ 1.67 crores only. In view thereof, we find no merit in the observations of CIT(A) in denying the claim of assessee. Applying the ratio laid down by the Hon ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra) , the assessee having fulfilled the conditions laid down by the Apex Court, we find merit in the claim of assessee and accordingly, we direct the Assessing Officer to allow the deduction on account of provision for warranty made at ₹ 1.67 crore - Decided in favour of assessee.
Issues:
- Disallowance of incremental provision for warranty - Whether provision for warranty is contingent liability - Compliance with Accounting Standard 4 - Deduction on account of provision made for warranty Issue 1: Disallowance of Incremental Provision for Warranty (AY 2008-09) - The assessee, engaged in manufacturing liquid food packaging material, made a net provision for warranty of &8377; 1,67,12,826 in the current year. - The Assessing Officer disallowed the incremental provision for warranty, which was confirmed by the Disputes Resolution Panel. - The CIT(A) held that the provision for warranty was only a contingent liability, not historically or scientifically measurable, and thus disallowed it under section 37(1) of the Income-tax Act, 1961. Issue 2: Compliance with Accounting Standard 4 - The assessee argued that the provision for warranty was properly ascertained and measured based on past experience, complying with Accounting Standard 4. - The CIT(A) observed that the claim of the assessee was not tenable as there was no business exigency for creating a huge provision of &8377; 32.74 crores for the year under consideration. - The CIT(A) held that the provision for warranty was only a contingent liability and not allowable under section 37(1) of the Act. Issue 3: Deduction on Account of Provision Made for Warranty - The assessee followed a systematic method of making provisions for warranty based on sales value, duration, and utilization. - The Tribunal found that the provision made for warranty was an accepted accounting method, fulfilling the conditions laid down by the Supreme Court in Rotork Controls India P. Ltd. Vs. CIT. - The Tribunal directed the Assessing Officer to allow the deduction on account of the provision for warranty made by the assessee. Conclusion: - The Tribunal allowed both appeals of the assessee, holding that the provision made for warranty was a legitimate deduction and complied with accepted accounting practices as per the Supreme Court's decision in Rotork Controls India P. Ltd. Vs. CIT. This detailed analysis covers the issues of disallowance of the incremental provision for warranty, compliance with Accounting Standard 4, and the deduction on account of the provision made for warranty, providing a comprehensive understanding of the judgment delivered by the Appellate Tribunal ITAT Pune.
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