TaxTMI 
TaxTMI 
2026 (6) TMI 988
X X X X Extracts X X X X
X X X X Extracts X X X X
....73,65,88,600/-. The return of the income filed by the petitioner was taken for reassessment and reopening by the revenue and accordingly, the notice under Section 148A(b) of the Act was issued on 06.03.2024 by alleging that the assessee had claimed deduction of Rs. 3,80,21,349/- on account of provision for warranties from its profit and loss account for Financial Year (for short, "FY") 2016-17. However, the actual expenditure incurred by the petitioner with regard to warranties was Rs. 3,21,80,595/- and hence, the only expenditure which has been actually incurred by the petitioner in an allowable expenditure as per the provisions of the Act and the provision for warranty created on scientific basis by the petitioner is not an allowable expenditure as it is in the nature of unascertained liability. 2.2. The petitioner - assessee received an order dated 26.03.2024 under Section 148A(d) of the Act for the AY 2017-18 of the Act objecting to the reassessment made by the Assessing Officer by suggesting that the income chargeable to tax has escaped assessment within the meaning of Section 147 of the Act. Accordingly, the Revenue proposed to reassess the difference between the warranty ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duct is sold or services are provided and the amount of provision is based on historical experience of cost to be incurred for warranty claims and the estimate of such warranty cost is revised annually. It is submitted that the provisions for warranty is made on scientific basis based on the requirement of applicable accounting standard matter which the respondent - Assessing Officer has failed to appreciate. 3.2. It is submitted that this issue is squarely covered by the decision of the Supreme Court in the case of Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai, [2009] 180 Taxman 422 (SC). While referring to the said decision, he has also simultaneously invited our attention to the provisions of Income Computation and Disclosure Standard (relating to provisions, contingent liabilities and contingent assets), (for short, "ICDS") and the definitions supplied under Provision 4(1) of ICDS which under clause(a), (b), (c) and (d) defines "Provision", "liability", "obligating event", "contingent liability" respectively. It is submitted that these standards are mandatory to be complied with as required under the provision of Sub-Section (2) of Section 145....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to consider that the C-Form amount which was forfeited during the assessment year had been deposited with Sales Tax Authorities towards the payment of sales tax and the money forfeited had been used to pay the sales tax in relation to the customers who had not supplied the C-Form and thus, it is a Revenue neutral exercise which the respondent has failed to appreciate. It is submitted that the petitioner through details of customers, Central Sales Tax ledger along with challans have produced showing that the payment of sales tax but the respondent has failed to appreciate such evidence and as the reopening on this account is nothing but a change of opinion and hence, is required to be quashed. SUBMISSIONS ON BEHALF OF REVENUE 4. Responding to the aforesaid submissions, the learned Senior Standing Counsel Mr. Aaditya Bhatt has urged that at this stage, the reopening of the assessment may be sustained as all these aspects can be pointed out by the petitioners during the assessment proceedings. While referring to the contents of the affidavit-in-reply, it is submitted that as per the provisions of Section 37 of the Act, which mentions about the declaration of any expenditure, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... had forfeited security deposits taken against C-Form amounting to Rs. 65,45,962/- during FY 2016-17 which has not been offered for taxation. 5.2. It is not in dispute and is established from the record that the petitioner in his detailed reply had pointed out that the deductions of the provision for warranty has been claimed by adopting a scientific method based under Section 37 of the Act. 5.3. At this stage, we may refer to the observations of Supreme Court in the case of Rotork Controls India Pvt. Ltd. (supra) wherein, the Supreme Court on the identical issue after analyzing the provisions of Section 37 of the Act and the nature of the provision relating to warranty has observed thus: "10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise 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. If these condition....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (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 insisti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - 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. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case." 5.4. The aforenoted observations of Supreme Court exposit that a provision is a liability which can be measured only by using the substantial degree of estimation and it is recognized when an enterprise has a present obliga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the product. This was the specific contention which was raised by the petitioner in his reply, however, the Assessing Officer has ignored the same and the reopening is premised on the basis of an unascertained liability. The Assessing Officer has not examined that in some cases, the actual expenses incurred towards warranty claim may be greater than the warranty provision, whereas in other cases, the actual expenses may be lesser than the warranty claims. It is not disputed by the Assessing Officer that the petitioner has offered to tax the excess provision of warranty by reversing in subsequent years after completion of warranty period, and if the actual amount exceeds amount of provision of warranty, such amount is directly charged to statement of Profit or Loss. 5.5. We may mention that the Supreme Court in this regard has observed that the warranty provision for the products should be based on the estimate at year end of future warranty expenses and such estimates need reassessment every year and as one reaches close to 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 estim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able expenditure as it is in the nature of unascertained liability, is required to be quashed in view of the ICDS and also the law enunciated by the Supreme Court. The Assessing Officer has failed to consider the definitions of liability, obligating event and contingent liability as mentioned in ICDS more particularly in Provision 4 clause-(b) to (d) which categorically mentions that the obligating event is an event that creates an obligation that results in a person having no realistic alternative towards settling that obligation and the liability on such obligation is a present obligation of a person arising from past event. Thus, on this count, since the reopening is premised on the ignorance of the law enunciated by the Supreme Court and the provisions of ICDS and also non-consideration of the material which was already available with the Assessing Officer at the time of filing the return, the reopening of the assessment calls for interference. 6.2. As far as the second aspect of reopening of the assessment is concerned regarding forfeited security deposits taken against C-Forms, it is noticed by us that the impugned order dated 26.03.2024 passed under provision of Section 1....