2009 (9) TMI 958 - AT - Income Tax

Provision for warranty deductible as per rational basis; Revenue appeal dismissed.

The addition of Rs. 241.33 lakh made on account of provisions for warranty for the assessment year 2002-03 was deleted. The Commissioner of Income-tax ... - Issues involved: The judgment involves the deletion of an addition made on account of provisions for warranty for assessment year 2002-03.Summary:1. The only issue for consideration was the deletion of an addition of Rs. 241.33 lakh made on account of provisions for warranty. The Assessing Officer disallowed the amount as the provision was made only on the last year's figures, without any basis for additional provision. The Tribunal directed the Assessing Officer to ascertain the basis for the disallowed amount. 2. The assessee claimed that the provision for warranty was made at 0.73% on sales for the assessment year 2002-03 based on actual warranty claims in the previous three years. The Assessing Officer rejected this, stating it was for an unascertained liability. The Commissioner of Income-tax (Appeals) held that the provision was made on a rational basis and deleted the addition based on past claims and consistent methodology.3. The Commissioner observed that the Assessing Officer did not challenge the consistent methodology followed by the assessee for providing the provision for warranty. Relying on legal precedents, the Commissioner held that the provision made by the assessee on the basis of past claims could not be treated as a provision for unascertained liability, thus deleting the addition.4. The Tribunal found that the provision for warranty was estimated based on past history and scientific methods, in line with legal principles. Citing relevant legal decisions, the Tribunal upheld the deletion of the addition, stating that the provision for warranty was allowable as a deduction.5. The appeal of the Revenue was dismissed, and the order in favor of the assessee was pronounced in open court on 18.09.2009.