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TMI Blog2022 (10) TMI 1059X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO (Assessing Officer) completed the assessment under Section 143(3) of the Income Tax Act, 1961 ('1961 Act' for short) and vide Assessment order dated 25.03.2014 disallowed the provision at the rate of 1% of the sale value of kitchen appliances, other than pressure cooker and cookware towards warranty. On appeal filed by the assessee, the CIT(A) (Commissioner of Income Tax (Appeals)) vide order dated 27.09.2016, allowed the provision. 4. For A.Y. 2012-13 (ITA No.737/2018), the assessee filed its return of Income declaring an income of Rs.142,02,31,210/-. The AO completed the assessment under Section 143(3) of the Income Tax Act, 1961 ('1961 Act' for short) and vide Assessment order dated 13.03.2015 disallowed the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher warranty claims. Hence, a provision for warranty at the rate of 1% turnover with respect to turnover in UK market and sales of all electrical appliances was made. 8. Dr. Krishna urged that the law on the point is settled and the CIT(A) applying the correct position of law granted relief to the assessee. The ITAT, without proper application of mind has disallowed the provision on the ground that the past event should be the basis for making provision; that assessee is in the business for a long time and ought to have demonstrated that the provision of 1% for anticipated liability on account of warranty claims is based on its own past experience. 9. Dr. Krishna contended that in respect of new kitchen appliances, there will be n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords. 13. In Rotork Controls, it is held that a provision is a liability, which can be measured only by using a substantial degree of estimation and it is recognized when: (a) an enterprise has a present obligation as result of past event; (b) it is probable and an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of obligation. 14. Further, illustration of a Company dealing with Computers has been given in para 27. Three options have been examined with regard to the provision for warranty and it is held as follows: 27. In the present case we are concerned with product warranties. To give an example of product warranties, a company dealing in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because it fulfils accrual concept as well as the matching concept. .. 15. Assessee's case is, it has been in the business of manufacture and sale of pressure cooker and cookware. It also trades in kitchen home appliances which carry warranty for repair and replacements. Most markets for pressure cookers had already matured. Customer designed pressure cookers were exported to UK market for the first time and therefore assessee expected high warranty claims. Assessee claims to have introduced 26 new kitchen wares in 2009-10, 39 new products in 2010- 11 and 53 products in 2011-12. 16. The Commissioner(Appeals) has recorded a finding that the assessee had incurred warranty expenses towards warranty claims during financial ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly incorrect. We may also record that the relevant Assessment Years under consideration is, 2011-12 to 2013-14. The warranty claims if any, will be received either in that year or subsequent years. The 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. 19. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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