2022 (10) TMI 1059 - HC - Income Tax

Disallowance of provision at the rate of 1% of the sale value of kitchen appliances, other than pressure cooker and cookware towards warranty - HELD THAT - The warranty claims if any, will be received either in that year or subsequent years. CIT(A) has recorded the factual aspect that assessee had incurred warranty expenses of Rs.2.86 Crores for the claims during the financial years 2011- 12 and 2012-13. The warranty claims said to have been discharged for the subsequent years namely A.Y. 2013-14 to 2015-16 are also much higher and to be precise, Rs.4.96 Crores, Rs.7.89 Crores and Rs.3.85 Crores respectively. In para 27 of Rotork Controls, extracted hereinabove, it is held that when warranty costs are integral part of the sale price, then assessee has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. CIT(A) has passed a detailed order by recording the factual aspect of the case and considering the authorities on the point, where as, the ITAT has considered expenses incurred in incorrect A.Ys. Further, in our view, the ITAT has misconstrued the law laid down in Rotork. In view of undisputed facts that the exported products were pressure cookers and the kitchen ware and the claims received for the A.Y. in question, is in excess of the provision made, in our view, the provision has been made based on the past experience of the assessee in its business. These appeals merit consideration.

Summary

Issues:
1. Appeal against the reversal of the Commissioner of Income Tax (Appeals) order by the Income Tax Appellate Tribunal without proper consideration.
2. Disallowance of provision for warranty expenses for different assessment years based on past data and new product introductions.

Analysis:

Issue 1:
The appellant challenged the Income Tax Appellate Tribunal's decision to reverse the Commissioner of Income Tax (Appeals) order without adequately addressing the reasons given. The appellant argued that the Tribunal's decision was erroneous as it did not consider the correct application of the law. The appellant contended that the provision for warranty expenses was based on the introduction of new products and the lack of past data for these products, justifying the provision made. The appellant relied on the Rotork Controls case to support their argument. The Revenue, on the other hand, opposed the appeal, stating that the provision made was not based on past warranty claims, as required by the Rotork Controls case. The High Court carefully considered the arguments presented by both parties and examined the relevant legal principles.

Issue 2:
The dispute centered around the disallowance of provision for warranty expenses for different assessment years. The appellant, a Public Limited Company engaged in the sale of pressure cookers and cookware, also marketed kitchen home appliances with warranties. The appellant introduced new products annually, leading to higher anticipated warranty claims. The Commissioner of Income Tax (Appeals) had allowed the provision, considering the appellant's past warranty expenses and the introduction of new products. However, the Income Tax Appellate Tribunal set aside the Commissioner's order, leading to the appeal. The High Court analyzed the facts, noting the appellant's past warranty expenses and the provision made, which was found to be based on the appellant's business experience. The Court emphasized the importance of matching the warranty costs with the relevant revenue, as highlighted in the Rotork Controls case. Ultimately, the High Court allowed the appeals, ruling in favor of the appellant and against the Revenue, with no costs imposed.

This detailed analysis of the judgment highlights the key issues raised in the case and the legal arguments presented by the parties, leading to the High Court's decision in favor of the appellant.