2020 (8) TMI 768 - HC - Income Tax

Provision for warranty - whether allowable as deduction when the assessee has not made provision on a scientific basis? - whether the assessee is entitled for deduction when excess provision towards warranty made in the previous years is not offered to tax by reversing the entries? - whether the principles laid down by the Supreme Court in Rotork Controls India (P) Ltd. 2009 (5) TMI 16 - SUPREME COURT have been taken note of while deciding the issue of estimation of provision for the Assessment year 2008-09? - Tribunal allowed deduction - HELD THAT - Principles laid down by the Supreme Court in Rotork Controls India (P) Ltd. Supra had been taken into account by the Commissioner of Income Tax (Appeals) and the estimation of provision for the AY 2008-09 has been found to be unscientific and unreasonable. Tribunal has noted that admittedly, the CIT (Appeals) has considered the same working method of provision in previous two years and allowed the provision. CIT (Appeals) did not allow the provision for warranty for the Assessment year on the ground that the ration between the actual and the provision is less than 70 100 - ratio adopted by the CIT (Appeals) is imaginary and arbitrary and is without any basis. It was also held that provision of warranty was made every year in accordance with accounting standards 29 and the provision is worked out scientifically every year merely because, the provision has come down to 59 100, the same cannot be disallowed. Accordingly, the finding recorded by CIT (Appeals) that estimation of provision is unscientific and is unreasonable has been set aside. Thus, it is evident that the conditions laid down by the Supreme Court to assess a provision have been met in the instant case - submission made by learned counsel for the revenue that neither Commissioner of Income Tax (Appeals) nor Tribunal has examined the ratio laid down in Rotork Controls India (P) Ltd. Supra does not deserve acceptance. In view of preceding analysis, the substantial questions of law framed are answered against the revenue.

Summary

Issues:
1. Whether provision for warranty is allowable as deduction when not made on a scientific basis?
2. Whether excess provision towards warranty made in previous years affects entitlement for deduction?

Analysis:
Issue 1: The appeal under Section 260A of the Income Tax Act, 1961 involved the question of whether the provision for warranty amounting to ?3,98,18,294 was allowable as a deduction when not made on a scientific basis as per the decision in Rotork Controls India Pvt. Ltd. vs. CIT, 314 ITR 62. The Assessing Officer disallowed the provision, adding it to the total income, stating that there is no provision under the Act to allow contingent expenditures. However, the Tribunal held that the provision was made in accordance with accounting standards and based on sales trends, thus justifying its allowance. The Tribunal found the Commissioner of Income Tax (Appeals) erred in disallowing the provision based on a specific ratio, deeming it imaginary and arbitrary. The Tribunal's decision was upheld, stating that the conditions for recognizing a provision were met, and the estimation was scientific and reasonable.

Issue 2: The second issue pertained to whether the excess provision towards warranty made in previous years affected the entitlement for deduction. The Tribunal noted that the Commissioner of Income Tax (Appeals) had allowed the provision in previous years and considered the working method of provision. The Tribunal found the Commissioner's disallowance based on a specific ratio to be without basis and arbitrary. It was held that the provision was made in accordance with accounting standards and was worked out scientifically each year. The Tribunal set aside the Commissioner's decision, emphasizing that the conditions for recognizing a provision were met in this case, despite the ratio decreasing to 59:100. The judgment favored the assessee, dismissing the appeal by the revenue.

In conclusion, the High Court of Karnataka dismissed the appeal, upholding the Tribunal's decision to allow the provision for warranty as a deduction, as it was made in accordance with accounting standards and based on scientific estimation, meeting the conditions set by the Supreme Court. The judgment emphasized the importance of following legal principles in recognizing provisions and rejected the revenue's argument against the allowance of the provision.