TaxTMI 
TaxTMI 
2010 (7) TMI 82
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....tances of the case, the Income Tax Appellate Tribunal was right in holding that the provision for warranty was an allowable deduction, even though the provision had not been made on any scientific basis ensuring a fair degree of accuracy, thereby resulting in huge deferment of revenue and tax liability thereon? 2. For Assessment Year 2003-04 and 2004-05: Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the provision made by the assessee should be allowed as a deduction for the purpose of 115JB on the I.T. Act, even though such provision has not been made on any scientific basis and huge excess provision had been made resulting in deferment of revenue? 2. The ques....
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....s Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognised (accrued). In other words, it is not based on the matching concept. Under the matching concept, if revenue is recognised the cost incurred to earn that revenue including warranty costs has to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account ....
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....f warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for re....
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.... in the subsequent two years, in the said case, may not arise significantly. The four important aspects of provisioning have also been highlighted by the Hon'ble Supreme Court and keeping those aspects in mind, when a case is analysed and the facts involved therein satisfied those principles, no interference should be made. 5. Keeping the above legal principles in mind, when we examine the order of the Tribunal impugned in these appeals and the questions of law raised before us, we find that the Tribunal has in effect applied the principles and has held that the assessee herein made a scientific approach while making a provision for warranty account for the relevant years and therefore, there was no scope to disallow the claim made by th....
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....o reason to interfere with the conclusions reached by the CIT(A). His orders for AYs 1999-2000 to 2002-03 are, accordingly confirmed." 6. We also perused the statements, which have been extracted by the Tribunal in its order in paragraphs 7 and 8. In fact, on behalf of the assessee, a categoric stand was made that the assessee was making a reasonable estimate of the provision for warranty claims and that it was consistently adopting a method of taking the average of actual settlements of the immediately preceding three years while working out the provision based on the percentage of current year's sales. 7. Having regard to the figures furnished and the claim that a scientific approach was made while making a provision for warranty cl....