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TMI Blog2018 (6) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be recognized because the assessee had a present obligation as a result of the past events resulting in an outflow of resources and reliable estimate can be made of the amount of the obligation. Present value of the contingent liability if properly ascertained and discounted on accrual basis can be an item of deduction u/s 37. In the present case there is no allegation on the assessee that the warranty provision made by the assessee is not a reliable estimate. - Decided in favour of assessee. - ITA No. 4233/Del/2015 - - - Dated:- 20-6-2018 - SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Revenue : Ms. Ashmia Neb, Sr. DR For The Assessee : Mr. Parth, Adv ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity in present and is not a contingent liability. Further, the assessee contended that the allowability of this deduction is covered by the decision of the Hon'ble Supreme Court in case of Rotork Controls India Pvt. Ltd Vs. CIT 314 ITR 62. The ld AO rejected the explanation and held that provision of warranty is not allowable deduction as it is a contingent liability. He therefore, disallowed ₹ 21406000/-. The order u/s 143(3) read with section 148 of the Act was passed on 30.12.2011 making the above disallowances. 3. The assessee contested the above disallowance before the ld CIT(A) who allowed the claim of the assessee. Therefore, the revenue is in appeal before us. 4. The ld Sr. DR vehemently contested that the liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sulting in an outflow of resources and reliable estimate can be made of the amount of the obligation. The Hon ble Court has stated that present value of the contingent liability if properly ascertained and discounted on accrual basis can be an item of deduction u/s 37. In the present case there is no allegation on the assessee that the warranty provision made by the assessee is not a reliable estimate. The ld CIT(A) has decided the issue vide para 4.2 to 4.5 as under:- 4.2 I have considered the facts of the case and gone through the submissions of the appellant. The appellant is engaged in the business of manufacturing and sale of Air-conditioners and compressors etc. and gives a free of cost repair and replacement warranty as per ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for provisions in the year of sale based on historical trend is in consonance with the accrual system of accounting. The issue of allowability of provision for warranty made on scientific basis and past experience has been clinched by the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT (314 ITR 62) and the Hon'ble P H High Court in the case of CIT vs. Majestic Auto Ltd. (156 taxman 460). The relevant extracts of these orders have already been reproduced in the submissions of the appellant. Thus, based on the aforesaid judgments and in light of the facts of the case, it is amply clear that the warranty clause which is a part of a sale document imposes a liability on the appellant to discharge its obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on past warranty trends, warranty claims received during the year and the unspent provision for warranty for prior years. Thus, we agree with the Ld. Commissioner of Income Tax (A) that the treatment of warranty provision is in consonance with accepted principles of commercial practice and accountancy followed year after year consistently. It is undisputed that the warranty clause is a part of the sales document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. In this regard, we find that Hon'ble Apex Court in the case of Rotark Controls India P Ltd. vs. C.I.T. [2009] 314 ITR 62 (SC) (supra) has held as under:- A provision is a liability which can be measured o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for warranty is not to be treated as contingent liability and therefore, should be allowed as deduction in the accounting year itself. 4.5 Hence after a careful consideration of the facts of the case, particularly the judgment of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT (Supra),the judgment of Hon'ble Jurisdictional High Court in the case of CIT vs. Majestic Auto Ltd. (Supra) and the decision of Hon'ble ITAT in the appellant's case for A.Ys 1998-99 and 2001- 02, I hold that the A.O erred in making the addition of ₹ 2,14,06,000/- on account of Provision for Warranty'. Accordingly, Grounds No. 3 of the appeal is allowed. 7. He has also allowed the claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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