2009 (12) TMI 41 - HC - Income Tax

Supreme Court rules warranty provision deductible under Income Tax Act Section 37 for assessment year 2002-03

The Supreme Court allowed the appeal, rejecting the revenue's claims and ruling in favor of the assessee regarding the disallowance of provision for ... Provision of warranty – Disallowance - The assessee is engaged in the business of design, manufacture, sale, erection and commissioning of equipments and projects. In respect of the assessment year 2002-03 the assessee filed its return of income on 29.10.2002 admitting an income of Rs.36,60,370/-, after claiming relief under section 80HHC of the Act. The assessment was completed under section 143(3) of the Act on 10.03.2004. While making the above assessment, the assessing authority disallowed claims in respect of service tax and CST liability, purchase of software and provision for warranty. The assessee carried the matter on appeal before the Commissioner of Income Tax (Appeals), who confirmed the disallowance in respect of purchase of software and provision for warranty. The assessee appealed further to the Tribunal. The Tribunal remitted the issue relating to expense on computer software, however, rejected the claim in respect of warranty. – held that - the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. Warranty provision had to be recognised because the assessee 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. The value of the contingent liability like the warrant expense, if properly ascertained and discounted on accrual basis, can be an item of deduction under section 37 of the Act. - Controls India P. Ltd. v. CIT, [2009 -TMI - 33420 - SUPREME COURT OF INDIA] – Decided in favor of assessee Issues:Appeal against the order of the Income Tax Appellate Tribunal regarding the disallowance of provision for warranty for the assessment year 2002-03.Analysis:The appeal was filed challenging the Tribunal's decision to confirm the disallowance of the provision for warranty amounting to Rs.7,10,000. The Tribunal held that the warranty provision is not allowable as a deduction, and even if disallowed, the reversal of the provision in the current year should not be included as income. The assessee, engaged in the business of equipment design and sale, had filed its return for the assessment year 2002-03, which was completed under section 143(3) of the Income Tax Act. The assessing authority disallowed claims related to service tax, CST liability, purchase of software, and provision for warranty. The Commissioner of Income Tax (Appeals) upheld the disallowance of software purchase and warranty provision. The Tribunal remitted the issue of software expense but rejected the claim for warranty. The Supreme Court's judgment in Rotork Controls India P. Ltd. v. CIT established that warranty provision is an integral part of the sale price and can be deducted under section 37 of the Act if a reliable estimate of the liability can be made. The Court in CIT III v. M/s. FL Smedth Ltd. further supported this position, leading to a favorable decision for the assessee in this case. Given the similarity of facts with previous cases, the Court ruled in favor of the assessee, allowing the appeal and rejecting the revenue's claims.