2023 (8) TMI 883 - AT - Income Tax

Revenue's appeal on warranty expense disallowance for 2016-17 dismissed. Provision upheld based on scientific working and historical trends.

Dy. Commissioner of Income Tax Circle–7 (1) (1), Mumbai Versus M/s. Mahindra Two Wheelers Ltd.

The appeal by the Revenue challenging the deletion of disallowance of provision for warranty expenses for the assessment year 2016-17 was dismissed. The ... Disallowance of provision of warranty - whether provision was contingent in nature and same was not based on actual basis? - assessee submitted that the provision was created after making extensive working on a scientific basis and the same is backed by historical trends essential to determine the warranty provisions to be made and the actual expenses incurred against such sales subsequently - HElD THAT:- As it is evident that the provision made by the assessee was ascertained based on the actual expenses incurred on settlement of warranty schemes in earlier years and was based on the scientific exercise of making provision for warranty clause for each and every vehicle sold on a regular basis year on year. We find that the issue is squarely covered in favour of the assessee by the decision of Rotork Controls India Pvt. Ltd. [2009 (5) TMI 16 - SUPREME COURT] Therefore, no infirmity in the impugned order allowing the claim of provision for warranty expenses. Accordingly, grounds raised by the Revenue are dismissed. Issues:The judgment deals with the appeal filed by the Revenue challenging the deletion of disallowance made on account of provision for warranty by the learned Commissioner of Income Tax (Appeals) for the assessment year 2016-17.Issue 1 - Disallowance of Provision for Warranty:The Revenue contested the deletion of the addition made on disallowance of Rs 3,45,17,000 being provision of warranty, arguing that the provision was contingent and not based on actual basis. The Assessing Officer disallowed the provision as unascertained and contingent liability, adding it to the total income of the assessee.Issue 2 - Scientific Basis of Provision:The assessee claimed that the provision for warranty was made on a scientific empirical basis, determined on the basis of actual sales and warranty expenses of the last 5 years. The provision was created after extensive working and analysis, backed by historical trends essential to determine the warranty provisions.Summary of Judgment:The Revenue raised grounds against the deletion of disallowance made on account of provision for warranty expenses. The assessee, engaged in manufacturing two-wheeler vehicles, filed its return showing a loss and claimed a provision for warranty. The Assessing Officer disallowed the provision, stating it was unascertained and contingent. The learned CIT(A) allowed the claim based on the scientific working done by the assessee, following a similar decision by the Tribunal in a related case. The Tribunal upheld the decision, noting that the provision was based on actual expenses incurred on settlement of warranty schemes in earlier years and was made on a scientific basis. The claim of provision for warranty expenses was allowed, and the appeal by the Revenue was dismissed.