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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 ..... rt the deduction of provisions for future liabilities when they are based on reasonable estimates and comply with recognized accounting standards. We also consider other judicial precedents cited by the assessee, which consistently uphold the admissibility of such provisions when made on a scientifically sound and consistent basis. Provisions based on scientific methods, consistent business practices, and compliance with AS-29 should be recognized as allowable deductions. The consistent application of these principles is essential to ensuring that business liabilities are accurately reflected in the financial statements and tax assessments. Disallowance is directed to be deleted, and the provision for warranty expenses is allowed as a deduction under Section 37 of the Act. Assessee appeal allowed. - Shri T.R. Senthil Kumar, Judicial Member And Shri Makarand V. Mahadeokar, Accountant Member For the Appellant : Shri Shailesh J. Shah, C.A. For the Respondent : Smt. Trupti Patel, Sr. DR ORDER PER MAKARAND V. MAHADEOKAR, AM: This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals) National Faceless Appeal Centre, Delhi [hereinafter referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esult, 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 claim of 'Provision of Warranty' of Rs. 1,14,19,990/- without appreciating that, expenses on provision for future warranty would be allowable deduction u/s. 37(1) as it was not a contingent liability and that, the appellant has adduced various evidence, non-of which have been belied or disproved by the assessing officer. The said addition made by the Assessing Officer, and sustained by the Commissioner of Income Tax (Appeals) may therefore be deleted. 3. On the facts and in the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleted and such other and further reliefs, as may be favourable to the appellant, may be granted, as may be thought fit to meet the end of justice. 9. The appellant craves leave to add, amend and / or alter the Grounds or Grounds of Appeal either before or at the time of hearing of the Appeal. On the grounds 6. The Authorised Representative (AR) of the assessee pointed out that there was a specific condition of warranty in the Bid Document of the Odisha Renewable Energy Development Agency which required assessee to repair and replace defective goods or part thereof, without cost to the purchaser. He further stated that this warranty was valid for 60 months after the goods or any portion thereof have been delivered and commissioned at the final destination indicated in contract. The AR submitted that the provision made 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 warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as income for AY 2022-23, consistent with the terms and conditions of the tender. The AR submitted copies of ledger account extracts to support the reversal of the provision. 11. The Departmental Representative (DR) relied on the order of lower authorities and did not object to the additional evidence submitted by the assessee during the course of hearing. 12. We have heard both the parties and perused the material available on records. After thoroughly reviewing the submissions made by the assessee, the compliance with relevant accounting standards, and the judicial precedents cited, we acknowledge that the provision for warranty expenses made by the assessee was grounded in a scientifically sound and consistent method. The provision was calculated using the discounted cash flow (DCF) method, which considered the inflow from the solar project, the five-year warranty period, and a discount rate of 14%. This approach provided a reliable estimate of future warranty costs, aligning with the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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