2017 (4) TMI 235 - AT - Income Tax

Disallowance of claim of Provision for warranty expenses - AO took the view that the amount provided by the assessee for warranty claims is excessive and disproportionate to the actual present obligation as a result of past events - CIT-A allowed claim - Held that - FAA has examined the claim of the assessee by following the principles laid down in the case of Rotork Controls (India) Ltd (2009 (5) TMI 16 - SUPREME COURT OF INDIA ) and has further noticed that the assessee has spent a sum of 85, 28, 300/- in the succeeding years out of the warranty amount provided for during the instant year. The machinery sold by the assessee are imported second hand machines and hence they may require frequent attendance/repairs. Since the assessee has been declaring profits at a higher level year after year the Ld CIT(A) has also observed that the creation of provision and reversal of the same are revenue neutral. In any case a business man would provide for such warranty claims on estimated basis for possible claims only and it is not necessary that the provision so made should be fully spent. The actual expenditure would depend upon the warranty claims actually lodged by the customers which may vary year after year. In the instant case it is not the case of the AO that the assessee has provided for amount at an excessive figure in order to suppress the profits. Hence in our considered view the Ld CIT(A) has taken judicious view of the matter and the same does not call for any interference. - Decided against the revenue.

Summary

Issues:
- Disallowance of claim of Provision for warranty expenses.

Analysis:
1. Facts of the Issue: The assessee, a partnership firm engaged in selling refurbished imported second-hand medical devices, made a provision for warranties amounting to ?1,15,35,985 during the assessment year 2011-12. The AO disallowed the claim, citing that the provision was excessive and disproportionate to the actual obligation as per past events.

2. AO's Disallowance: The AO contended that the provision made by the assessee, about 10% of sales value, was not supported by past data, as the assessee reversed a significant portion of provisions made in earlier years. The AO argued that the provision did not comply with Accounting Standard-29, disallowing the entire claim.

3. Appellate Proceedings: In the appellate proceedings, the Ld CIT(A) allowed the claim, considering the historical trends, past history, and service engineers' reports supporting the provision for warranty expenses. The Ld CIT(A) observed that the provision was made on a scientific basis to meet expected expenses, and the unutilized amount was offered for tax after the warranty period.

4. Contentions of the Parties: The Department argued that while the warranty clause and potential outflow of funds were present, the provision failed on the quantification aspect. In contrast, the assessee's representative highlighted the nature of the business, frequent repairs needed for second-hand machinery, and the scientific basis for the provision.

5. Judicial Analysis: The Ld CIT(A) analyzed the claim in detail, considering the nature of the business, historical trends, and the necessity of providing for warranty claims on an estimated basis. The Ld CIT(A) found the provision to be justified, following principles laid down by the Supreme Court in relevant case laws. The Ld CIT(A) also noted that the provision and its reversal were revenue neutral, and the actual expenditure would vary based on customer claims.

6. Conclusion: The Tribunal upheld the Ld CIT(A)'s decision, emphasizing that the provision for warranty expenses was made in accordance with business practices, historical trends, and scientific estimation. The Tribunal found no grounds to interfere with the Ld CIT(A)'s order, dismissing the revenue's appeal.

In summary, the judgment revolved around the disallowance of the claim of Provision for warranty expenses, with the Tribunal ultimately upholding the decision of the Ld CIT(A) in favor of the assessee based on detailed analysis and legal principles.