TaxTMI 
TaxTMI 
2025 (8) TMI 123
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....iture, stating it to be a provision? The Ld. CIT(A) did not appreciate that warranty costs is an obligation/expense of the appellant and therefore qualifies as an allowable business expenditure u/s. 37(1). 3. Whether the Learned CIT(A) erred in not taking into consideration the binding decision of the Hon'ble Supreme Court in the case of Rotork Controls India Private Limited v. CIT (314 ITR 62), by incorrectly distinguishing it on facts. 4. Whether the Learned CIT(A) erred in stating that the appellant has not offered the excess of provision either in the current year or in the succeeding year. The Learned CIT(A) ought to have noted that if the amount claimed as expenses in a year exceeds the actual expenditure, the difference is reversed in the succeeding year and only net expenses is claimed in the return of that succeeding year. 5. Without prejudice to the above grounds, if for any reason the above claim made by the appellant towards warranty is not allowed in AY 2021-22, the said claim may be allowed as expenses in the AY 2022-23 in which the amount is utilized, to avoid double disallowance of legitimate business expenditure. 3. Ground no.1 is ....
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....ed as expenses in a year on the above basis exceeds the actual expenditure, the difference is reversed in the succeeding year and only net amount is claimed in the return of that succeeding year. In other words, in the subsequent year, additional amount of warranty claimed is debited to Profit and Loss is made is net of the excess amount relating to immediate previous year. This method has been followed consistently by the company. Hence, the warranty cost is an obligation/expense of the company in respect of the sales made and income offered to tax. The treatment is also in line with the Accounting Standards followed by it as required by the Companies Act 2013. 5.1 It is further submitted that the ld.AO/CIT(A) did not appreciate that the said amount has already been reversed in the succeeding year and offered to tax. They failed to appreciate the fact that provision for warranty for various goods sold by the assessee company has been made in a very systematic manner and is not in the nature of ad hoc provisions which are without basis. The said basis of provisioning is consistently applied by the assessee. It may be further noted that the company also reassesses these estimates....
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....,871 Closing Balance(retained as ascertained by the Company on systematic basis) 4,90,000 54,00,000 63,00,000 1,10,96,871 5.3 Further, in the audited financial statements, it is clearly mentioned that the provision will be utilized within a period of one year. Relevant pages of Annual report for AY 2021-22 have been submitted in the paper book. 5.4 It is argued that the impugned sum is eligible for deduction u/s 37 of the Act as warranty expense is not capital expenditure as the warranty arises out of sale of equipment which is the operating income of company and it is not a personal expense. The expense is wholly for the purpose of business and hence, all the conditions of section 37 is complied with and can be claimed as an expense. 5.5 The assessee has also place reliance on certain judicial decisions in this regard i.e. Rotork Controls India Private Limited Vs Commissioner of Income Tax Chennai (supra),Principal Commissioner of Income Tax, Bangalore Vs Lenovo India (P) Ltd (433 ITR 177, Karnataka HC, 2021),Principal Commissioner of Income Tax Vs Nokia India (P) Ltd (98 taxmann.com 415, Delhi HC, 2018),Champ Energy Ventures (P) Ltd Vs Income Tax Officer W....
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....anty at certain percentage of turnover of the company based on past experience (historical trend). Among these three options, it was held that 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. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized. 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. The third option is the most appropriate because it fulfils accrual concept as well as the matching concept. Further, the Hon'ble Supreme Court pointed out the four important aspects of provisioning namely, provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly, it involves reliable estimation of obligation. Through this judgment, the Honourable Supreme Court se....
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....ision was not based on the said historical/empirical data or not. The hon'ble Court has recognised the right to deduction of warranty provision holding that the provision is not against a contingent liability, if the present value is ascertained properly and discounted on accrual basis. It is deductible under section 37 of the Act. The provision will depend upon the nature of business, nature of sales, nature of product manufactured and sold and the scientific method of accounting adopted by the assessee, besides the historical trend in the quantum of articles produced and sold. The Court also held that the fact that it would involve a substantial degree of estimation should make no difference to the character of the provision. 7.3 In view of the above discussion, we are of the considered view that the impugned warranty provision cannot not be considered as contingent in nature. Provision for meeting warranty liability, estimated on the basis of relevant data and found to be reasonable with reference to such materials, cannot be disallowed. Accordingly, we hold that the ld.CIT(A) has erred in affirming the disallowance of provision for warranty which is held to be allowable unde....