Provision for Mobile Phone Warranty Cannot be disallowed for mere Technology Improvement

ITAT states that, as stated by the Assessing Officer in the assessment order, the table reveals that there was substantial increase and jump in sales year after year in the Assessment Years 2002-03, 2003-04, 2004-05 and 2005-06, from Rs.58.97 crores to Rs.830.51 crores to Rs.2408.01 crores, and then to Rs. 4729.14 crores, respectively. The provision for warranty would accordingly increase in numerical terms. Pertinently, the percentage of closing provision of warranty with reference to quantum of sales had decreased and came down. Variation in figure would indicate that no thumb rule was applied. Moreover in case of doubt and debate, Income Tax Authorities should have asked for the basis and the formula/criteria applied by the respondent/assessee to compute provision for warranty. On the other hand without disputing the computation, disallowance was made by holding that actual expenditure on warranty claims and not provision for warranty was allowable as expenditure. This proposition is wrong and incorrect. Improvement in technology would not justify disallowance of claim/expenditure on account of provision for warranty, though in a given case on basis of data it could be relevant factor in making the calculations. In the aforesaid factual matrix and in view of the decision of the Supreme Court in Rotork Controls India (P.) Ltd.’s case (supra), ITAT do not find any good ground or reason to accept the contention of the Revenue. Accordingly, the appeal of assessee is accepted.

FULL TEXT OF THE ITAT JUDGEMENT