Tribunal Upholds Assessee's Warranty Provision, Rejects CIT(A) Disallowance

The Tribunal allowed the appeal, ruling in favor of the assessee regarding the provision for warranty. The Tribunal held that the provision was justifiable, based on past experience and industry practices, and should not have been disallowed by the CIT(A). The Tribunal emphasized that the provision for warranty was not a contingent liability but an ascertained liability, crystallizing at the time of sale. Previous decisions in the assessee's own case and the Supreme Court decision were cited to support the claim, leading to the deletion of the disallowance and the overall success of the appeal.

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Issues involved: Allowability of provision for warranty.

Summary:
The appeal was initially dismissed for non-prosecution but later restored upon filing of a Misc. Petition by the assessee. The main issue raised was the allowability of provision for warranty amounting to a specific sum. The appellant contended that the disallowance made by the Deputy Commissioner of Income Tax was erroneous. The CIT(A) had erred in concluding that the average failure rate computed by the appellant for various products sold under warranty was unreasonably high and not based on past experience. The appellant argued that the provision for warranty was created based on estimation of expenditure likely to be incurred on past sales, following a consistent method. The appellant relied on previous decisions in their own case and the decision of the Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT to support their claim. The Tribunal, considering the facts and materials on record, held in favor of the assessee, stating that the provision for warranty was justified and should not have been disallowed by the CIT(A).

The Tribunal referred to previous orders in the assessee's own case where it was observed that the provision for warranty stood crystallized as soon as the sale was made, and it was at the cost of the assessee's goodwill. The Tribunal held that the provision was not a contingent liability but an ascertained liability based on past experience and industry trends. The Tribunal also highlighted the relevance of the decision of the Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. and the importance of basing warranty provisions on experience and historical trends. The Tribunal concluded that the disallowance of the provision for warranty was unjustified and ordered its deletion, thereby allowing the appeal of the assessee.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal and holding that the provision for warranty was justifiable based on past experience and industry practices.

Order pronounced in the open court on 16th March, 2012.

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