TaxTMI 
TaxTMI 
2024 (9) TMI 281
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.... under CASS, leading to the issuance of notices under Sections 143(2) and 142(1) of the Act. The core issue in the scrutiny was the assessee's claim of Rs. 1,14,19,990/- as warranty provision expenses. The provision was made in relation to a contract with the Chhattisgarh government for the supply, installation, and commissioning of solar photovoltaic (SPV) irrigation pumps, which included a five-year (60 months) on-site warranty. 3. During the course of assessment proceedings, the assessee stated that the warranty provision, amounting to 0.74% of turnover, was based on the significant scale of the project and was allowable under Section 37 of the Act. The assessee supported this claim by referencing several judicial decisions, including Rotork Controls India P. Ltd. v. CIT (2009) 314 ITR 62 (SC), which established guidelines for recognizing a provision as a liability. The AO analysed the applicability of the Supreme Court's ruling in Rotork Controls India P. Ltd. (supra), which laid down conditions for recognising a provision as a liability. The AO concluded that the assessee did not meet these conditions because the provision was not based on historical trends or scientifi....
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....year of operation for the pumps supplied by the assessee", therefore, without any substance and is based on assumption and presumption. Such order cannot be sustained in the eyes of law. It may please be quashed. 4. That the Learned Commissioner of Income Tax (Appeals) failed to appreciate that, the sale as well as warranty are inextricably bound with each other and therefore, if the sale proceeds are taken note of in a year, the liability in respect of the warranty is also be taken note of in the same year. The liability is not contingent. It is a definite and certain liability. 5. That the Learned Commissioner of Income Tax (Appeals) failed to appreciate that, an assessee maintaining his account on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to be accepted principles of Commercial practice an accountancy. It is not as if such deduction is permissible only in case of amounts actually expanded or paid. 6. That the Learned Commissioner of Income Tax (Appeals) failed to appreciate that, liability to pay for warranty....
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....ovision of Rs. 1.15 crores for AY 2017-18. (Detailed working was submitted to the CIT(A)) 7. The AR also contended that it has been manufacturing electric motors since 1993 and has consistently made provisions for warranty expenses in its books of accounts for several years, including for FY 2016- 17. The turnover and provisions made in previous years were presented to establish the consistency and reasonableness of the provisions: * FY 2013-14 (AY 2014-15): Provision of Rs. 22,00,000/- on a turnover of Rs. 25,87,35,190/- * FY 2014-15 (AY 2015-16): Provision of Rs. 27,43,83,792/- on a turnover of Rs. 27,43,83,792/- * FY 2015-16 (AY 2016-17): Provision of Rs. 21,50,000/- on a turnover of Rs. 92,96,45,013/- * FY 2016-17 (AY 2017-18): Provision of Rs. 1,14,19,990/- on a turnover of Rs. 155,76,06,466/- 8. The AR further highlighted that for AY 2018-19 and AY 2021-22, identical questions regarding the provision for warranty expenses were raised during scrutiny, and after detailed submissions, the provisions were allowed. The amounts of provisions made and allowed were Rs. 3,98,90,990/- for AY 2018-19 and Rs. 4,68,83,555/- for AY 2021-22. 9. T....
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....t, further supports the legitimacy and accuracy of the assessee's approach. We find that the assessee's provision for warranty expenses complies with Accounting Standard 29 (AS-29). Specifically: * Present Obligation as a Result of Past Events: The provision was recognised as a liability because the assessee had a present obligation resulting from the sale of SPV pumps with a five-year warranty. This obligation was triggered by past events (the sale and delivery of the pumps as per the terms of contract) and created an unavoidable obligation to address potential warranty claims. * Probability of an Outflow of Resources: We agree with the assessee that an outflow of resources was probable, given the nature of the warranty obligations. The provision was made in anticipation of future warranty claims, which were likely given the historical data and the terms of the contract. * Reliable Estimate of the Obligation: The provision was calculated based on a reliable estimation process, using a scientifically justified discount rate and consistent with industry standards. The assessee's method, which factored in both the total inflow from the project and t....