2018 (9) TMI 112 - HC - Income Tax

Allowability of provisions for warranty expenses - Held that - We cannot accept the Revenue s submission that such expenditure goes outside purview of Section 37 of the Act. Next question, which was urged, was that the sum claimed was made on the basis of the arbitrary estimate. But we find both the Commissioner and Tribunal found the estimation to be reliable. It is finding of the Tribunal that the assessee had filed the data on the basis of which the provisions of warranty expenses was made but the same was not considered by the assessing officer. Hence, we do not want to interfere with their findings on facts. In our opinion, issue raised by the Revenue is covered by the decision of the Hon ble Supreme Court of India in the case of Rotork Controls India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT OF INDIA and no substantial question of law arises in this appeal.

Summary

Issues:
Allowability of provisions for warranty expenses under Section 37 of the Income Tax Act.

Analysis:
The appeal concerned the allowability of provisions for warranty expenses made by an assessee engaged in the business of manufacturing and marketing control gears, motor control centers, and enclosures. The assessing officer disallowed the deduction of warranty expenses for the financial years 2006-07 and 2007-08, arguing that no actual expenses were incurred in the previous years. However, both the Commissioner and the Tribunal found the accounting norms adopted by the assessee to be proper, as the provisions were made based on past experience in a systematic and scientific manner. The appellate authorities applied the decision of the Supreme Court in Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, Chennai, which emphasized the importance of accrual and matching concepts in determining the allowability of warranty expenses.

The Supreme Court held that accounting for warranty expenses on a cash basis was prohibited, and provisions should be made based on past experience to fulfill both the accrual and matching concepts. The Court emphasized the importance of a proper accounting system to estimate future warranty expenses and recommended reassessment of estimates annually. It was concluded that the assessee had incurred a present obligation as a result of past events, leading to a reliable estimate of the liability, satisfying the conditions for recognizing a liability for provisioning purposes.

The Revenue argued that warranty expenses were not deductible due to being unascertained liabilities, but the Court rejected this argument, citing the decision in Rotork Controls India Pvt. Ltd. The Revenue also contended that the estimation of warranty expenses was arbitrary, but both the Commissioner and the Tribunal found the estimation reliable based on the data provided by the assessee. Consequently, the Court dismissed the appeal, stating that the issue raised by the Revenue was covered by the Supreme Court's decision, and no substantial question of law arose in the case. The appeal was therefore dismissed, along with the stay petition.