2024 (7) TMI 639 - AT - Income Tax

Disallowance of provision for warranty expenses - provision for unexpired period is not allowed in the relevant AY - HELD THAT - The law is well settled that the provision for warranty expenses would be allowable in the event of assessee proves that same has been computed on the basis of past experience and on scientific basis. In the present case, no past history is available, but the claim is based purely on estimation basis. The assessee has applied a formula and claimed this formula has been applied in subsequent years as well. The claim of the assessee based upon such formula has been allowed in subsequent years. Alternate prayer of the assessee is that the expenses may be allowed in the year of payment without prejudice to the other contentions - It is not the case of Assessing Authority that the expenses, even if actually incurred, would not be allowable. It is also admitted fact that the assessee is maintaining its books of account on accrual basis. The assessee has claimed that the payments of expenses were actually made in subsequent year. As per the assessee, this fact goes to prove that provision so made is justified and ought to have been allowed, at first instance, in the year under appeal. Otherwise same may be allowed in the year when such expenses are incurred. Allowablility of the expenses in the year of payment, same cannot be allowed in view of the fact that the accounts are maintained on the basis of mercantile system of accounting. The nature of expenses being business cannot be lost sight. The factum of actual incurrence of expenses goes to prove that the provision so computed on the basis of formula devised and applied by the assessee is correct. The Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd. 2009 (5) TMI 16 - SUPREME COURT has held that if the facts establish/show that the defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction under section 37 of the Act. In the present case, the assessee has demonstrated that defects were occurred and rectified during the warranty period. Thus, in our considered view, the learned CIT(A) erred in holding that the ratio of decision of Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra), is not applicable. We, therefore, direct the AO to allow claim of the assessee after verifying the claim of the assessee that it actually incurred the impugned expenses during the unexpired warranty period. Ground is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of provision for warranty expenses
2. Initiation of penalty proceedings under section 271(1)(c) Income-tax Act 1961

Issue 1: Disallowance of provision for warranty expenses

The case involved an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals) regarding the disallowance of provision for warranty expenses for the assessment year 2016-17. The Assessing Officer disallowed a provision amounting to Rs. 23,51,396 for unexpired warranty period, leading to an adjusted loss figure. The assessee contended that the provision was based on reliable estimates and was necessary due to the obligation to provide warranty cover on sophisticated products. The dispute centered around whether the provision for unexpired warranty period should be allowed as an expense in the current financial year or the succeeding year. The Tribunal found that the provision was created for the next financial year and, therefore, could not be considered an expense of the current financial year. However, the Tribunal directed the Assessing Officer to verify if the actual expenses were incurred during the unexpired warranty period and allowed the claim based on the actual incurrence of expenses. The Tribunal disagreed with the Commissioner's decision and allowed the appeal for statistical purposes.

Issue 2: Initiation of penalty proceedings under section 271(1)(c) Income-tax Act 1961

The Tribunal noted that Ground no. 4, which related to the initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, was premature and did not require adjudication at that stage. Therefore, the Tribunal did not delve into this issue further in the judgment.

In summary, the Appellate Tribunal ITAT DELHI ruled in favor of the assessee regarding the disallowance of provision for warranty expenses for the assessment year 2016-17. The Tribunal directed the Assessing Officer to allow the claim based on actual expenses incurred during the unexpired warranty period, contrary to the Commissioner's decision. The judgment did not address the issue of penalty proceedings under section 271(1)(c) of the Income-tax Act, as it was deemed premature at the time of the appeal.