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TaxTMI 
TaxTMI 
TaxTMI 
2022 (6) TMI 1242
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....s of the warrantee charges, the additions, utilization/reversal over the period of eight years are as under:- Assessment Years 2001-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Opening Balance of provision of (A) 6,311,000.00 5,482,508.0 0 12,418,817.00 16,806,935.00 13,342,559.00 16,172,962.00 23,630,497.00 42,454,550.00 Additions (B) 11,970,790.00 18,078,0866.00 13,921,294.00 4,148,813.00 8,944,861.00 14,504,795.00 31,002,349.00 28,534,137.00 Utilization/Reversal (C) 12,799,282.00 11,141,777. 00 9,533,176.00 7,613,189.00 6,114,458.00 7,047,260.00 12,178,296.00 28,258,751.00 Closing balance (A+B+C) 5,482,508.00 12,418,817. 00 16,806,935.00 13,342,559.00 16,172,962.00 23,630,497.00 42,454,550.00 42,729,936.00 3. Brief facts involved in the case of appellant are that the appellant had debited expenses in the P&L A/c, under the head "Provision for Warranty" amounting to Rs. 1,39,21,294/-. During the course of assessment proceedings, AO observed that assessee, during the year under consideration, has actually incurred expenses amounting to Rs. 95,33,176/- only on account of meeting....
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....ise has a present obligation as a result of a past event (b) It is probable that an outflow of resources will be required to settle the obligation; and (c) A reliable estimate can be made of the amount of the obligation." 7. Ld.CIT(A) held that identical issue was involved in the case of appellant in A.Y. 2011-12and the same has been decided by the ld. CIT(A) in which he has given a finding that the warranty expenses are to be allowed on the basis of their actual incurring during the year and not on provisional basis, Accordingly, the ld. CIT(A) held in the instant case that, out of total warranty expenses debited to the P&L A/c, the warranty expenses actually incurred during the year under consideration are allowable and the expenses which have not been actually incurred but have been debited purely on provisional basis were disallowed. While deciding the appeal the Ld. CIT(A) also referred to the order passed by Ld.DRP-1, Delhi in the case of appellant in AY 201213, where Ld.DRP-1 has discussed identical issue involving the allowability of warranty expenses on provisional basis, as claimed by the appellant. While passing the order, Ld.DRP-1, Delhi has also referred the decis....
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.... and reliable estimate of the amount of the provision and its obligation in future. The three conditions laid down in case of M/s Rotork Controls India (p) Ltd. are certainly not satisfied in the case of appellant and thus the AOs finding that the provision of warranty expenses debited/claimed in the P&L account cannot be allowed as the same is not an ascertained liability, is correct However, the AO has disallowed the entire claim debited to P & L Account; amounting to Rs. 1,19,70,790/-. This view of AO is not correct since the entire amount of Rs.1,19,70,790/- does not represent provision, while a part of it has actually been spent during the year under consideration. The actual expenses incurred during the year, amounts to Rs.1,27,99,232/- which includes the expenses incurred towards opening balance of provision for warranty expenses amounting to Rs. 63,11,000/-, Therefore, a sum of Rs. 64,88,282/- (Rs.1,27,99,282/- minus Rs. 63,11,000/) can be said to have been actually incurred towards the overall provision for warranty expenses created during the year amounting to Rs. 1,19,70,790/-. Accordingly, out of total disallowances amounting to Rs. 1,19,70,790/- made by the AO, the s....
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....y by using a substantial degree of estimation. A provision should be recognized when (repeated) (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation If these conditions are not met, no provision should be recognized. * In the present case, the assessee had claimed warranty charges of Rs.1,39,21,294 on account of provision for warranty. The provision for warranty represents the ascertained liability which was computed on a scientific basis, based on quantum of sales made during the year. It can be verified that the amount of warranty provision made during the year represents the present/current ascertained liability of warranty obligation to be met in subsequent year, as period of warranty has not expired on such sales. Also the assessee company has an obligation to render the requisite warranty services on account of sales made at the relevant point of time. Thus it can be said that the assessee company has a present obligation of rendering warranty services as a ....
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....ntial increase and jump in sales year after year in the Assessment Years 2002-03, 2003-04, 2004-05 and 2005-06, from Rs.58.97 crores to Rs.830.51 crores to Rs.2408.01 crores, and then to Rs.4729.14 crores, respectively. The provision for warranty would accordingly increase in numerical terms. Pertinently, the percentage of closing provision of warranty with reference to quantum of sales had decreased and came down as is reflected in the figure in the column (h) of the table above. In the present case, we are only concerned with the Assessment Year 2003-04 in which the percentage of closing provision to sales was only 0.81%. Variation in figure would indicate that no thumb rule was applied. Moreover in case of doubt and debate, Income Tax Authorities should have asked for the basis and the formula/criteria applied by the respondent/assessee to compute provision for warranty. On the other hand without disputing the computation, disallowance was made by holding that actual expenditure on warranty claims and not provision for warranty was allowable as expenditure. This proposition is wrong and incorrect. Improvement in technology would not justify disallowance of claim/expenditure on a....
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....r warranty as per the terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 & AY 2013-14 has allowed provision for warranty, the provision made during the instant year is on same basis as in all the years is hereby allowed. * CPS CASH PROCESSING SOLUTIONS PRIVATE LTD. [FORMERLY KNOWN AS-DE LA RUE CASH PROCESSING SOLUTIONS INDIA PVT. LTD. VERSUS DCIT CIRCLE-1 (1) , GURGAON- 2018 (7) TMI 224 - ITAT DELHI- Dated.- July 3, 2018 "10. We have heard both the parties and perused all the records. Ground No. 1 and 1.1 is relating to disallowance of Rs.1,76,90,14/- on account of warranty provisions which was estimated at 10% of sales. It is settled position that provisions for warranty is a business necessity and such provision is an allowable expenses. The CIT(A) in 2006-07 held that the warranty provision provided at 10% of sales was actually utilized only to the extent of 1.16% by the Company and the rest was reversed. Thus, the CIT(A) held that it is considered fair and reasonable that warranty provision to the extent of 1.50% of the sales would justifiable and remaining provision needs to be added back. The contention of the Ld. AR that warranty obligatio....