2019 (10) TMI 387 - AT - Income Tax

Disallowance of provision for warranty - HELD THAT - CIT(Appeals) on the issue has provided relief to the assessee since on the identical issue in assessee s own case for assessment year 2010-11 was decided in favour of the assessee.

Summary

Issues:
1. Allowance of provision for warranty
2. Interpretation of judicial pronouncements on provisions for warranty
3. Application of scientific basis for estimating provisions for warranty

Analysis:

Issue 1: Allowance of provision for warranty
The appeal by the Revenue challenges the order of the Ld. CIT(Appeals) regarding the provisions for warranty. The Ld. CIT(Appeals) allowed the provision for warranty of &8377; 2,25,49,347/- made by the Assessing Officer. The Ld. CIT(Appeals) based this decision on the fact that in the assessee's own case for the assessment year 2010-11, a similar issue was decided in favor of the assessee. The Tribunal also upheld the issue in favor of the assessee for the assessment year 2010-11. The Tribunal analyzed the case records and considered judicial pronouncements before concluding that the relief provided by the Ld. CIT(Appeals) was justified. The Tribunal found that the provision created and utilized for warranty claims were very close, and the estimation of provisions for warranty should be on a scientific basis.

Issue 2: Interpretation of judicial pronouncements on provisions for warranty
The Tribunal referred to judicial pronouncements, including the decision of the Hon'ble Delhi High Court and other cases, to support the allowance of provisions for warranty claims. The Tribunal emphasized that provisions for warranty are fully allowable, provided they are estimated on a scientific basis. The Tribunal highlighted that the obligation of warranty starts at the point of sale itself. By relying on these judicial pronouncements, the Tribunal concluded that the provisions for warranty of &8377; 75,00,000/- were allowable, and the disallowance made by the Assessing Officer could not be upheld.

Issue 3: Application of scientific basis for estimating provisions for warranty
The Tribunal considered the data relating to warranty provisions for different financial years and observed the closeness between the provision created and utilized for warranty claims. The Tribunal found the reasoning given by the CIT(A) fair and reasonable, as the estimation of provisions for warranty was based on scientific calculations. Consequently, the Tribunal dismissed the appeal of the Revenue, sustaining the relief granted to the assessee by the Ld. CIT(Appeals) based on the identical facts and circumstances as the previous year.

In conclusion, the Tribunal upheld the decision of the Ld. CIT(Appeals) to allow the provision for warranty, emphasizing the importance of estimating such provisions on a scientific basis as supported by judicial pronouncements.