Case Law Details
Calcutta High Court held In the case of The CIT vs. M/s Carrier Air-Conditioning and Refrigeration that provision for warranty based on personal experience and past trends is an allowable expenditure. The division bench judgment in the case of Commissioner of Income Tax v. Majestic Auto Ltd. [2006] 156 Taxman 460 (P&H) and supreme court judgment in the case of Rotork Controls India P. Ltd. v. Commissioner of Income Tax [2009] 314 ITR 62 (SC), squarely covers the current case.
Facts of the Case
The assessee had debited an amount of Rs. 2,66,33,000/- on account of warranty expenses in the Profit and Loss account. He stated that the warranty costs were determined on the basis of the past experience and are provided for in the year of sale. This provision was increased from the previous year by an amount of Rs. 60,25,000/-.The assessee stated that it had calculated the provision for warranty expenses based on actual expenses incurred in the past; that it consistently followed the practice of making a provision for warranty in its books of accounts and the basis of making the warranty provision was also disclosed in the financial statements. While, the Assessing Officer held that the warranty expenses are not an allowable deduction and that the liability was contingent. Observing that it was a liability that may or may not have to be discharged, the Assessing Officer added the amount of 60,25,000/- back to the assessee’s net income and initiated penalty proceedings under section 271(1)(c) of the Act.
Contention of the Assessee
The learned counsel for the assessee submitted that it had calculated the provision for warranty expenses based on actual expenses incurred in the past; that it consistently followed the practice of making a provision for warranty in its books of accounts; that the entire sale consideration in respect of which the provision was made had been recorded in the books as revenue; that the corresponding warranty expenses had to be necessarily deducted in order to arrive at the respondent’s taxable income and the basis of making the warranty provision was also disclosed in the financial statements.
Held by CIT (A)
CIT (A) deleted the disallowance of warranty provision.
Held by ITAT
ITAT held that provision for warranty is an ascertained liability and accordingly allowed the provision for warranty.
Held by High Court
It is not disputed that the entry of warranty provision is reversed and the amount is added to the Profit & Loss account if the expenses towards meeting the warranty are not actually incurred for any reason upon the expiry of the warranty period. The Assessing Officer’s view that the warranty expenses are liable to be added to the respondent’s income on account of the warranty being a contingent liability is not well founded. The respondent is engaged in the business of manufacture and sale of air conditioners. As noted by the C.I.T. (A), under the agreements entered into by it with its customers, the respondent gives free of cost repair and replacement warranty for a minimum period of one year from the date of sale.
The assessee has been in this same line of business for several years. It is not suggested that the records, including the books of account are not reliable or that the expenses towards meeting the obligations for fulfilling the warranties were not incurred. There is in any event no loss to the revenue. If the respondent does not incur any expenses towards meeting its obligation under the warranty clause on account of the claims there under not matching the provision for any reason including on account of the expiry of the warranty period without the warranty being invoked, the unspent/unutilized provision is debited to the warranty provision account.
The judgment of a Division Bench of this Court in the case of Commissioner of Income Tax v. Majestic Auto Ltd. [2006] 156 Taxman 460 (P&H) which was also relied upon by the Tribunal is squarely applicable in this case in which it was held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one.
Also in the judgment of the Supreme Court in Rotork Controls India P. Ltd. v. Commissioner of Income Tax [2009] 314 ITR 62 (SC), apex court rejected the contention that provision of warranty is contingent and deduction is not allowed. Further it was held that if the warranty provisions are based on experience and historical trends and if the working is robust, then the question of reversal in the subsequent two years in the example furnished therein may not arise in a significant way.
Accordingly, appeal of the revenue dismissed.
