2013 (10) TMI 223 - HC - Income Tax

Court sets aside Tribunal decision on warranty claims provision, remands for reassessment

The court allowed the appeal, setting aside the Tribunal's decision and remanding the case to the Assessing Officer for redetermination of the provision ... Deduction of a provision made towards warranty – Provision for warranties is not made on any scientific basis and past experience and made merely on estimate basis – Held that:- Relying upon the judgment in the case of Rotork Controls India (P.) Ltd [2009 (5) TMI 16 - SUPREME COURT OF INDIA], disallowed this amount of provision for warranties - The matter is sent to the Assessing Officer for redetermination of the quantum that can be allowed as a provision towards warranty claims in the light of the Judgment of the Supreme Court in Rotork Controls' case – Decided in favor of Revenue. Issues:1. Entitlement for deduction of provision made towards warranty without scientific basis.2. Error in not considering the actual expenditure on warranty charges.Issue 1: Entitlement for deduction of provision made towards warranty without scientific basisThe case involved an appeal by the Revenue under section 260-A of the Income Tax Act, 1961, regarding the entitlement of the assessee for deduction of a provision made towards warranty claims. The assessee, a company for the assessment year 2004-05, had made a provision of &8377; 1,60,62,016/- towards warranty claims based on estimating it at 1.5% of the sales turnover. The Assessing Officer disallowed a portion of this amount, &8377; 74,56,682/-, as it was made without any actual claim or expenditure. The Appellate Commissioner upheld this disallowance, but the Tribunal reversed this decision, considering the provision as a revenue expenditure. The Revenue argued that the Tribunal's decision was not in line with the Supreme Court judgment in Rotork Controls India (P.) Ltd v. Commissioner of Income Tax, stating that the matter should be sent back to the Assessing Officer for redetermination applying the Supreme Court's guidelines.Issue 2: Error in not considering the actual expenditure on warranty chargesThe second issue raised was regarding the error in not considering the actual expenditure on warranty charges, which was &8377; 39,788/-, as opposed to the provision made at &8377; 1,60,62,016/-. The respondent pointed out that the correct figure for consideration should be &8377; 74,56,682/-, not the higher amount. The Revenue, however, argued that the provision made was indeed &8377; 1,60,62,016/-, even though a portion of it was reversed and included in the total income. The court allowed the appeal to the extent of setting aside the Tribunal's order and remanded the matter to the Assessing Officer for redetermination of the quantum of provision towards warranty claims in accordance with the Supreme Court's judgment in Rotork Controls India (P.) Ltd case. The court emphasized that the quantification and other aspects could be presented by the assessee before the Assessing Officer for further examination.In conclusion, the judgment highlighted the importance of making provisions based on sound principles and past experience, emphasizing the need for actual expenditure to support such provisions. The court's decision to remand the matter for redetermination by the Assessing Officer ensures adherence to the legal principles established by the Supreme Court, providing both parties with an opportunity to present their positions for a fair assessment.