2018 (11) TMI 600 - HC - Income Tax

Provision of warranty - accounting policy - Held that - Neither allowing the provision made for warrantees nor the actual expenses incurred by the company to be deducted from the profits of the company during the year is absolutely arbitrary and unscientific on the part of the assessing authority, to say the least. There was absolutely no basis for the assessing authority to make both the disallowances of provision for warranty as well as actual expenses at the same time in the hands of the assessee. In view of the comparison of actual expenses and provisions made for warranty, the details of which are given in the assessment order itself, we do not find any abnormal fluctuation or excess provision made by the assessee-company on this account. We are satisfied that the practice of making a provision for warranty in the present case has been found to be consistent, scientific and regular by the two appellate authorities below in consonance with the judgment of the hon ble Supreme Court in the case of Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA). The hon ble Supreme Court in the aforesaid case, discussed in detail how the accounting entries for product warranty are to be made by the assessee. Both the appellate authorities below were justified in returning the proper findings of facts on the relevant material before them and have rightly found that the provisions of warranty made by the assessee company was on the basis of the scientific and consistent method and therefore, the present appeal of the Revenue does not give rise to any substantial question of law and the same deserves to be dismissed and is accordingly dismissed.

Summary

Issues Involved:
1. Whether the provision for warranty made by the assessee was scientific and consistent.
2. Whether the assessing authority was justified in disallowing the entire provision for warranty.
3. Whether any substantial question of law arises in the present appeal under section 260A of the Income-tax Act, 1961.

Issue-wise Analysis:

1. Provision for Warranty:
The Tribunal allowed the provision for warranty made by the assessee for probable costs of repairs and maintenance of computers and hardware supplied, following its order for the preceding assessment year. The Tribunal relied on the decision of the Supreme Court in Rotork Controls India P. Ltd. v. CIT, which held that a provision based on past experience and historical trends is scientific and appropriate. The Tribunal found that the assessee's provision for warranty was consistent with past data and industry trends, and thus, justified.

2. Disallowance by Assessing Authority:
The assessing authority disallowed the entire provision of ?20,00,38,020, arguing that the method was not scientific as the reversal of the provision varied significantly from 23% to 100%. The authority concluded that the provisions were not created scientifically and thus disallowed them. However, the first appellate authority and the Tribunal found that the assessee had consistently followed a reasonable method, reversing excess provisions each year and making adequate provisions for probable expenses. The appellate authorities held that the disallowance by the assessing authority was unjustified and allowed the provision for warranty.

3. Substantial Question of Law:
The High Court found no substantial question of law in the Revenue's appeal. The Court noted that the assessee consistently followed a scientific method for making provisions for warranty, which was in line with the Supreme Court's decision in Rotork Controls India P. Ltd. The Court criticized the assessing authority for disallowing both the provision for warranty and the actual expenses, calling it arbitrary and unscientific. The Court expressed dissatisfaction with the Revenue's approach and dismissed the appeal, stating that the final fact findings of the Tribunal are binding unless found perverse, which was not the case here.

Conclusion:
The High Court upheld the decisions of the appellate authorities, finding that the provision for warranty made by the assessee was scientific and consistent. The disallowance by the assessing authority was deemed arbitrary and unjustified. The appeal by the Revenue was dismissed as it did not raise any substantial question of law.