Marelli Um Electronic Systems Private Limited Vs DCIT (ITAT Delhi)
Warranty Provision Is Allowable Business Expenditure: ITAT Deletes Disallowance Despite Large Opening Balance
Delhi ITAT allowed the Assessee’s appeal and deleted the disallowance of ₹32.75 lakh made towards provision for warranty. The Tribunal held that warranty provision, when created on the basis of consistent accounting policy, past experience and historical trend, constitutes an ascertained liability deductible u/s 37, even if a substantial opening balance already exists.
Relying heavily on the Supreme Court ruling in Rotork Controls India (P) Ltd. and noting that warranty is an integral part of the Assessee’s sales contract, the ITAT rejected the Revenue’s stand that only actual utilisation during the year is allowable. The Bench observed that the mere fact that opening provision appeared sufficient could not be a ground to deny deduction, as provisioning is based on estimated future obligations arising from past sales. The Tribunal also took note that similar warranty provisions were consistently allowed in earlier years and in the case of the Assessee’s group company. Consequently, the disallowance sustained by the AO/DRP was held unsustainable and the full provision for warranty was directed to be allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
