2018 (9) TMI 1319 - HC - Income Tax

Claim of expenditure as provision for warranty - whether provision was made on a scientific basis on the basis of actual warranty cost incurred in the year and the outstanding warranty risk and not an adhoc estimate? - Held that - Assessee filed a paper book containing the movement in provision for warranty and note on allowability of provision for warranty with annexures, which were placed before the Assessing Officer, CIT(A) as well as the Tribunal. The relevant details, which are contained in the movement in provision for warranty were culled out in the form of a separate sheet from which, we find that the exposure to warranty risk has been done on a scientific basis. The assessee has been able to produce the details from the year 2001 onwards. Thus, the CIT(A) was perfectly correct in coming to the conclusion that the Assessee has explained the basis for working of the provision for warranty based on past experience and it is not on adhoc basis and moreover, it is based on the turnover of the last three years and based on provision for expenses on repairs during the warranty period as contemplated in the sale agreements. We are of the considered view that the Tribunal has erroneously reversed the order passed by the CIT(A) that too without assigning any reasons and without considering the materials, which are available on record. - Decided in favour of assessee.

Summary

Issues:
1. Entitlement to deduction for provision of warranty.
2. Failure to appreciate provision made on a scientific basis.

Issue 1: Entitlement to deduction for provision of warranty
The case involved the appeal against an Income Tax Appellate Tribunal order disallowing the provision for warranty in the assessment year 2003-2004. The Assessee, engaged in manufacturing pumps, claimed the provision for warranty as a deduction. The Assessing Officer disallowed the provision, considering it a contingent liability. The Assessee argued the provision was based on scientific method and past experience, not adhoc. The Tribunal upheld the Revenue's case, citing a Division Bench decision. However, the High Court noted the Division Bench decision had been reversed by the Supreme Court. The Court examined the Assessing Officer's disallowance and found it erroneous, as the provision was based on a scientific basis and past experience, meeting the criteria for recognition as a liability. The Court referenced the Supreme Court's explanation of what constitutes a provision and the appropriate method for accounting for warranty expenses.

Issue 2: Failure to appreciate provision made on a scientific basis
The Court observed that the Tribunal's order lacked particulars, showing a non-application of mind and absence of reasons, making it a non-speaking order. Despite this, the Court refrained from remanding the matter due to the significant time elapsed since the Tribunal's decision. The Assessee contended that the provision for warranty was made on a scientific basis, supported by past data and turnover analysis. The CIT(A) accepted the Assessee's explanation, highlighting the scientific basis and past experience behind the provision. The Court found that the Tribunal erred in reversing the CIT(A) order without proper consideration of the available materials and without providing reasons for the decision. Consequently, the Court allowed the appeal, setting aside the Tribunal's order and restoring the CIT(A) decision in favor of the Assessee.

This detailed analysis of the judgment highlights the issues of entitlement to deduction for provision of warranty and the failure to appreciate the provision made on a scientific basis. The Court's thorough examination of the facts, legal principles, and precedents led to the decision in favor of the Assessee, emphasizing the importance of a scientific basis for provisions and the proper application of accounting principles in determining deductible expenses.