Case Law Details
Recently, the Delhi High Court (High Court) in the case of CIT Vs. Whirlpool of India Ltd. (ITA No. 1154 of 2009) (Judgement date: 24 January 2011 Assessment Year 1996- 97) held that additional provision for warranty made was not contingent liability and was allowable as revenue expenditure. Further, the High Court held that such increased provision can be treated as expenditure under Section 37 of the Income-tax Act, 1961 (the Act) since it fulfills the accrual concept as well the matching concept.
Facts of the case
• The taxpayer is manufacturer of refrigerators and deep freezers and offers optional service contract (OSC) for a period of seven years on the machines sold. The amounts received by the taxpayer on account of OSC are included in its income in the year of sale.
• The taxpayer has been consistently making provision for warranty on the basis of actuarial valuation in respect of machines sold during the year. The actual expenditure incurred for warranty claims are deducted against the provision made. Accordingly, the warranty provisions made were shown in the books of accounts and income was calculated after the deduction of the said provision.
• For Assessment Year (AY) 1996-97, the taxpayer experienced shortages in warranty liability account. Accordingly, on the basis of the report undertaken by the independent agency, additional provision of INR 31 million was made in AY 1996-97.
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