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TMI Blog2024 (7) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. That on facts and in circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 271(1)(c) Income-tax Act 1961. 2. Ground no. 1 being general in nature, needs no adjudication . Ground no. 4, against initiation of penalty proceedings u/s 271(1)(c) of the Income-tax, 1961 (the Act ), being premature, requires no adjudication at this stage. 3. The only effective ground that remains for adjudication is against sustaining the addition of Rs. 23,51,396/-, made in respect of disallowance of provision for warranty expenses, 4. Facts giving rise to the present appeal are that in this case the assessee company filed its return of income, through electronic mode, on 17.07,2017, declaring loss of Rs. 10,49,61,711/-. The case was selected for scrutiny assessment. In response to statutory notices issued by the Assessing Authority u/s 143(2) of the Act, the learned authorized representative of the assessee attended the proceedings. The AO after considering the submissions made addition amounting to Rs. 23,51,396/- by disallowing provision for warranty expenses and a sum of Rs. 87,59,575/- in respect of disallowance of lease equalization reserve amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis could be done is not available. The judgment of the Hon ble Supreme Court rendered in the case of Rotork Controls India (P) Ltd. v. CIT (2009) 314 ITR 62 is not applicable. 5.2 Learned counsel further submitted that the warranty expenses, made on the same basis, have been allowed in the subsequent years. 5.3 Learned counsel submitted that the assessee is engaged in the business of sales, trading, marketing, production and assembly of products and parts for warehousing automation where the products are highly sophisticated and it is incumbent upon the assessee to provide warranty cover on such products for a certain period of time, ordinarily one year. He contended that the assessee would be under obligation to repair or replace the products if it is found defective during the warranty period. This obligation generates a liability at the time when the product is sold. The liability would start when the risk and rewards in the products are transferred to the buyer as per the terms and conditions agreed upon. He submitted that assessee has to provide for such warranty costs in its accounts for the relevant year, otherwise the matching concept would be violated. He contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant itself conceded to the fact that the provision which is computed pertains to that unexpired period of warranty which falls beyond the period of the captioned financial year and thus relates to immediate next financial year. 5.7 Thus, the expense which pertains to the next financial year, cannot be considered to be an expense of this financial year, even if a provision is created. Provision could have been an allowable expense only if such provision pertains to the captioned financial year, though the outflow may happen in next year. As per the explanation and methodology adopted by the appellant, the provision created for warranty expense pertains to that period of warranty which falls outside the ambit of the year under consideration. 5.8 Thus, the formulae used by the assessee itself is devoid of merits and cannot be considered to be a scientific basis of computing the provision for warranty charges. 5.9 Furthermore, it is also important to note that the company is in its second year of operation and in such a scenario, having a scientific basis to study and compute the warranty charges would not be reliable as the sample period for which analysis could be done is not avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. Otherwise same may be allowed in the year when such expenses are incurred. So far question of 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. (supra), 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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