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TMI Blog2021 (4) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... te that the Appellant had created the provision on the basis of past history and was based on a scientific and reliable method and as such, the disallowance sustained by the Ld. CIT(A) deserves to be deleted. The said provision made was towards accrued liability ought to have been held allowable as such. 2.1. That Ld. CIT(A) has erred on facts and in law in mis-interpreting the 'matching concept', and holding that provision for warranty of INR 7,37,150 made by the Appellant was excessive and unnecessary' by reason that opening balance of provision for warranty account was substantial. 2.2. That Ld. CIT(A) has erred on facts and in law in stating that the Appellant has been indulging on over-provisioning of warranty' expense, without appreciating that the Appellant has been consciously revising and reducing its estimates based on historical trends and technological improvements. 2.3. The Ld. CIT(A) has erred on facts in stating that the Appellant resorts to revisioning of basis of provisioning quite frequently, in disregard of the actual fact that the Appellant has followed the same basis for estimating warranty provision regularly. 3. Without prejudice to the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the respective assessment year. The particulars of provision made by the assessee and the actual expenses incurred during the assessment year are that of provision of warranty expenses debited to profit and loss account amounting to Rs. 7,37,150/- and actual warranty expenses incurred during the year and set off against opening balance for provision of warranty amount of Rs. 10,74,034/-. The Ld. AR submitted that provision for warranty was made by the assessee since the period of warranty provided in respect of sales made which was not expired and such a provision for warranty was created to meet those claims of warranty in respect of sales made during the year which has been duly offered to tax. The Ld. AR submitted that the assessee has accounted for the income of sale and the warranty cost are an integral part of the sale price then the assessee has to provide such warranty cost in its accounts for the relevant year otherwise matching concept will be violated. The Ld. AR relied upon the decision of the apex court in the case of Calcutta Co. Ltd. Vs. CIT (1959) 37 ITR 1 (SC). The ld. AR further submitted that the assessee company has provided for warranty expenses on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as in the case of the assessee actual warranty expenses have not been separately debited to the profit and loss account and have only been set off with the provision account only. The Ld. AR further submitted that the actual expenses incurred in the normal course of the conduct of business and are wholly and exclusively for the business of the assessee. Such expenses constitute an allowable expense under Section 37 of the Income Tax Act, 1961 (the Act). The provisions of Section 37(1) of the Act prescribes that any expenditure is allowable as a revenue expenditure if it is not a capital expenditure, not a personal expenditure and has been incurred wholly and exclusively for the purposes of its business. The Ld. AR relied upon the decision of Sassoon J. David Vs. CIT (1979) 118 ITR 261 as well as the decision of the Hon'ble Delhi High Court in the case of CIT Vs. EKL Appliances Ltd. 341 ITR 241 (Del). Thus, the Ld. AR submitted that the expenditure in respect of warranty was wholly and exclusively incurred by the assessee for the purpose of its business and was not in the nature of capital or personal nature and thus entitled to deduction under Section 37(1) of the Act. 8. As reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle itself is not followed by the assessee, hence the Ld. DR relied upon the assessment order and the order of the CIT (Appeals). 10. We have heard both the parties and perused all the relevant mat4erial available on record. It is pertinent to mention herein that as per the submissions of the Ld. AR, the assessee was maintaining the provisions for warranty and the same is reflected from the documents filed before us. The peculiar situation in the current assessment year is that, from assessment year 2012-13 onwards the assessee decided to maintain the closing balance for provision for warranty for the last three years sales including sale of the respective assessment year. The concept of provision of warranty expenses especially in consumer products or the manufacturing products is always a business necessity as to the effect that if the machinery of the product does not function within the warranty period, the same has to be substituted or has to be repaired without any remuneration / price taken from the customers / clients i.e. at the expenses of the manufacturer or merchant. But the treatment given by the assessee as to the price of provision of the warranty expenses d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983- 84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. 11. Now coming to the present case, the assessee from assessment year 2004-05 till 2009-10 has not shown any percentage for maintaining provision of warranty / liability account closing balance on sales / turnover of last three assessment years including current assessment year while giving us the chart. In assessment years 2008-09 and 2009-10 the assessee has made provision of warranty creation on sales / turnover which is at 0.75% and in assessment years 2010-11 and 2011-12 till 2015-16 which include the present assessment year, no provision of warranty creation of sale / turnover is reflected in that chart. The actual warranty expenses incurred during the present year over and above provision utilization is also not reflected in the present assessment year. Besides this, the provision reversed during the year is also not reflected and actual warranty expenses utilized during the year from the provision created for the year is also not reflected. The assessee at its sweet will is changing its provision for warranty and there is no scientific calculation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing balance on sales/turnover of last three assessment years (Including current A.Y Opening balance of provision of warranty A 3,84,941 24,26,639 10,94,022 12,13,718 35,98,902 Amount credited in provision for warranty account B 3,84,941 20,41,698 10,94,022 12,13,718 35,98,902 28,25,000 Provision utilized during the year from the opening position C 11,55,000 4,93,426 10,33,722 38,36,940 Provision utilized during the year from opening provision D 12,71,639 6,00,594 1,79,996 Provision transferred to other provision E Actual warranty expenses incurred during the year over and above provision utilization F 45,25,721 32,99,603 68,41,062 5,48,415 Actual; expense utilized during the year from the provision created for the year. G 2,38,038 Net amount claimed in profit & loss A/c corporate tax return H=(B+F+-D) 3,84,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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