2018 (10) TMI 1817 - HC - Income Tax

Disallowance of expenses for provision of five year warranty - estimate was based on number of compressors on such machines which failed every year in last five years - Tribunal deleted the addition on the short ground of consistency - HELD THAT - No where in the past the Revenue had objected to such claim. Quite apart from the Tribunal s observations on the issue of consistency which seem to be commencing independently also we do not think that the disallowance was justified on merits. The assessee who was engaged in the business of manufacturing and selling air conditioned units would provide five year warranty to the customer. The expenditure was estimated on the basis of data of past five years of failure of the compressors which obviously in all air conditioned units would be the main concern. The principle of allowing expenditure on the basis of estimation which is derived through some scientific exercise which in statistical terms used as actuary is well established. - Decided against revenue.

Summary

Issues:
Disallowance of expenses claimed for provision of five-year warranty.

Analysis:
The main issue in this case was the disallowance of expenses claimed by the assessee for providing a five-year warranty to customers. The Revenue appealed against the decision of the Income Tax Appellate Tribunal regarding the addition of &8377; 28.29 lakhs made by the Assessing Officer. The Tribunal had deleted this addition, which was initially confirmed by the Commissioner of Income Tax (Appeals).

The assessee, engaged in the business of manufacturing and selling air conditioners, had estimated the expenditure for the warranty based on the failure rate of compressors in the past five years. The Assessing Officer and the Commissioner of Income Tax (Appeals) did not accept this explanation, stating that the data provided was for a different assessment year and that the objection raised was not raised in the past.

However, the Tribunal, in its judgment, emphasized the importance of consistency. It noted that the assessee had consistently followed the same pattern in estimating warranty expenses over the years, and the Revenue had not objected to it previously. Additionally, the Tribunal found that the disallowance was not justified on merits. The estimation of expenditure based on past failure data was considered reasonable and scientifically derived, following established principles of actuarial science.

Ultimately, the High Court upheld the Tribunal's decision and dismissed the Tax Appeal, concluding that the disallowance of the expenses claimed for the provision of a five-year warranty was not justified.