TaxTMI 
TaxTMI 
2012 (12) TMI 210
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....ading of medical consumable devices and diagnostic equipment for use by the health care professionals, medical research institutions, industry and general public etc. had claimed provision for warranty service. It had contended that this provision was based on adoption of scientific analysis. The assessee provided for 4% of the total sale value of its products as "provision for warranty". The assessee supplied details of the warranty provision made and claimed by it as deduction from its computation of the 'book profit'. The warranty provision was created in the year of sale and the claim was based on scientific and reasonable basis. The assessing officer, for all the years under consideration uniformly disallowed the claim and added back the amount. The assessee succeeded in some cases, before the appellate Commissioner. The revenue carried the matter in appeal to the ITAT contending that the amount had to be added back by virtue of Explanation 1(i) to Section 115JB. The Tribunal after discussing the rival contentions and also analyzing the order of the CIT(Appeals) held as follows : "8. We have heard both sides and gone through the record and relevant provis....
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.... for the revenue reiterates the submission made before the ITAT as well as grounds urged on its behalf in the appeal. We have considered the submissions. In Rotork Controls India P. ltd. Vs. CIT (2009) 314 ITR 62 , the Supreme Court had occasion to consider the deductibility of a liability such as provision for warranty. The context of course was deductibility claimed under Section 37(1) of the Act. In that connection the Court pertinently observed as follows : "Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to se....
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....nd (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies 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 recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized 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 for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it ....
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....l is not justified. The assessee had sought to justify this provision contending that it amounted to foolproof identified products which are slow moving or non-productive and had disclosed all details. In addition it is contended that the assessee is dealing with sophisticated medical consumables which are used by the large public and if an inventory is not moving for sufficiently long period, it is considered to be non-productive or non-useable. The assessee had identified through SAP computer programme which took into consideration each and every item of slow moving finished goods lying at the end of each year and contained information in that regard. 8. The Tribunal's reasoning as far as this item i.e. provision for slow moving goods are concerned are as follows : "5. We have gone through the records including the details of slow moving stock as on 31.3.2001 and similar stocks in the other years and do not find any infirmity in the order of the CIT(A). The assessee has been consistently following the method of accounting over a period of time. The assessee is in the business of pharmaceutical products where strict supervision of the quality has to be ens....