2018 (9) TMI 112

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....r warranty expenses. Both these appellate authorities have decided the issue in favour of the assessee. The assessee is engaged in the business of manufacture and marketing of control gears, motor controls centres, control panels and enclosures etc. For the two assessment years, 2006-07 and 2007-08, it had made provisions for warranty expenses of Rs. 1, 50, 43, 597/- and Rs. 1, 60, 88, 554/-. It appears that this provision was made for anticipated expenditure of the assessee for subsequent years on discharging their warranty in respect of materials supplied to its customers. The assessing officer had disallowed claim for deduction of this expenditure mainly on the ground that no actual expense was incurred for the two financial years, th....

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....2% of turnover of the company based on past experience ( historical trend). 28. 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. 29. 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 matching concept. Under the matching concept, if revenue is recognised the cost ....

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....the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If 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. 33. In our view, on the facts and circumstances of the present case, provisions for warranty is rightly made by the appellant enterprise because it has incurred a present obligation as a result of past event. There is also an outflow of r....