2015 (4) TMI 326 - HC - Income Tax

Court upholds Tribunal ruling on warranty provision deduction under Income-tax Act, 1961

The High Court upheld the Tribunal's decision to delete the addition of Rs. 42,21,368 under the warranty provision, ruling in favor of the assessee ... Addition made under the head provision made on account of warranty which is in the nature of contingent liability - ITAT deleted the addition - Held that:- The issue involved in this appeal is already concluded by a judgment in the case of Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, [2009 (5) TMI 16 - SUPREME COURT OF INDIA] wherein the assessee was engaged in the business of manufacture of valve actuators, which were sophisticated goods. The statistical data indicated that every year some of these were found defective. The valve actuator, being a sophisticated item, no customer was prepared to buy it without a warranty. Therefore, the warranty became an integral part of the sale price. In other words, the warranty stood attached to the sale price of the product. It was held that warranty provisions had to be recognized because the assessee therein had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee therein had incurred a liability during the assessment year which was entitled to deduction u/s.37 of the Income-tax Act, 1961. - Decided against revenue. Issues:1. Whether the addition of Rs. 42,21,368 made under the head provision for warranty, treated as a contingent liability, was rightly deleted by the Income Tax Appellate TribunalRs.Analysis:1. The appellant, dissatisfied with the Tribunal's order regarding the addition of Rs. 42,21,368 under warranty provision for the Assessment Year 1997-98, filed the present Tax Appeal. The substantial question of law considered was whether the ITAT was correct in deleting this addition.2. The assessee had made a provision for warranty and reduced it from total sales. The Assessing Officer disallowed this provision, stating that only actual and existing liabilities are deductible under the mercantile system of accounting. The CIT(A) and Tribunal, however, ruled in favor of the assessee, leading to the revenue's appeal.3. The High Court referred to the Apex Court's judgment in Rotork Controls India Pvt. Ltd. case, where warranty provisions were recognized as the assessee had a present obligation due to past events, justifying a deduction under Section 37 of the Income-tax Act, 1961. Another judgment in a similar matter favored the assessee, aligning with the Rotork Controls case.4. The counsel for the Revenue did not contest the established legal position. The Court, relying on precedent, upheld the Tribunal's decision to delete the addition under warranty provision, concluding in favor of the assessee against the Revenue.5. Consequently, the High Court confirmed the Tribunal's order, dismissing the appeal.