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TMI Blog2024 (9) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... in the CIT(A) upheld the disallowance of Rs. 1,14,19,990/- on account of warranty provision expenses made by the Assessing Officer (AO) as per his order passed u/s 143(3) of the Act. Facts of the case 2. The assessee, who is engaged in the manufacturing of engineering goods, filed its e-return for AY 2017-18, declaring a total income of Rs. 41,41,54,010/-. The case was selected for complete scrutiny under CASS, leading to the issuance of notices under Sections 143(2) and 142(1) of the Act. The core issue in the scrutiny was the assessee's claim of Rs. 1,14,19,990/- as warranty provision expenses. The provision was made in relation to a contract with the Chhattisgarh government for the supply, installation, and commissioning of solar photo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a to be recognized as an allowable expense. As a result, the CIT(A) upheld the AO's decision to disallow the warranty provision expense of Rs. 1,14,19,990/- and add it back to the total income of the assessee. 5. Aggrieved by the order of CIT(A), the assessee is in appeal before us with following grounds of appeal: "1. On the facts and in the circumstances of the case and in the law the Learned Assessing officer ACIT, Anand Circle, Anand has passed the e-Assessment order in violation of principal of natural justice. 2. On the facts and in the circumstances of the case and in the law the Learned Commissioner of Income Tax Appeals) has erred in sustaining the addition made by the ACIT, Anand Circle, Anand treating the genuine bona fide c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility is not contingent. It is a definite and certain liability. 5. That the Learned Commissioner of Income Tax (Appeals) failed to appreciate that, an assessee maintaining his account on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to be accepted principles of Commercial practice an accountancy. It is not as if such deduction is permissible only in case of amounts actually expanded or paid. 6. That the Learned Commissioner of Income Tax (Appeals) failed to appreciate that, liability to pay for warranty claims arose no sooner the sales were affected. Appellant on the basis of scientific approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade for warranty expenses complied with Accounting Standard 29 (AS-29), as per which - - A present obligation existed as a result of a past event (the sale of solar pumps with a five-year warranty), creating an unavoidable obligation to settle through an outflow of resources. - The provision was necessary due to the certainty of incurring future expenses related to warranty claims, which is consistent with the class of obligations as a whole. Therefore, the outflow of resources was expected. - The assessee made a reliable estimate of the provision using the discounted cash flow (DCF) method. The provision was calculated at 0.74% of the turnover based on the inflow from the solar project of Rs. 136.83 crores, discounted at 14%, resulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the provision for warranty expenses based on reasonable estimation. * Rotork Controls India Ltd. v. CIT [2009] 314 ITR 62 (SC): Hon'ble Supreme Court allowed a provision for warranty expenses where it was based on past data and made using a reliable estimation method. * Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC): Hon'ble Supreme Court held that a business liability, if based on a reasonable estimate and historical data, should be allowed as a deduction even if the exact outflow occurs in a future period. 10. The AR emphasised that the warranty provision of Rs. 1,14,19,990/- made for AY 2017-18 was reversed in AY 2021-22 to the extent of Rs. 2,01,09,848/-, as the warranty period ended on 31/03/2022. The reversal was offered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y: * Present Obligation as a Result of Past Events: The provision was recognised as a liability because the assessee had a present obligation resulting from the sale of SPV pumps with a five-year warranty. This obligation was triggered by past events (the sale and delivery of the pumps as per the terms of contract) and created an unavoidable obligation to address potential warranty claims. * Probability of an Outflow of Resources: We agree with the assessee that an outflow of resources was probable, given the nature of the warranty obligations. The provision was made in anticipation of future warranty claims, which were likely given the historical data and the terms of the contract. * Reliable Estimate of the Obligation: The provision ..... X X X X Extracts X X X X X X X X Extracts X X X X
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