Reasonable accounting estimates are acceptable under provisions relating to accounts under company law and tax law both. There should not be litigation by revenue.

[DEVKUMAR KOTHARI]

Reasonable estimates:

In accounts most of transactions are accounted for based on actual amounts supported by finalized documents. However, in some situations some estimates are required to be made. Such estimates are recognized under company law and tax law and even in general law, if situation so require.

Any liability that is ascertained  or estimated to have accrued or have to be considered with revenue recognized in accounts is allowable, subject to some exceptions under provisions like S.40 , 43B of Income tax Act. Such liability is allowable to ascertain real income.

One of such item of expenditure is towards guarantee and warrantee provided to customers on purchase of goods and services. This is required to satisfy customer and to maintain a healthy relationship with customers and retain customers loyalty.

Excess amount , if any will be income:

In case if any sum is found excess, and liability ceases to exist, then such sum is considered as income in the year when liability ceases or is no longer payable.

A businessman would make a reasonable estimate as per ground reality of his business. Reliable accounts is also important for the purpose of financing business. Healthy balance sheet is also important. Therefore, businessperson keep all aspects in mind. Whereas tax authorities unfortunately consider that excess expenditure is claimed to save tax.

Therefore, the tax authorities should not make arbitrary disallowances as per their views by ignoring business aspects and alleging that assessee is trying to avoid tax.

Case study about expenses for warranty and guarantee:

Recent order and judgments:

THE DEPUTY COMMISSIONER OF INCOME TAX & ANR. VERSUS APPLE INDIA PRIVATE LIMITED - 2024 (5) TMI 1181 - SC ORDER

Earlier SC judgment followed by HC and now by SC

M/S. ROTORK CONTROLS INDIA (P) LTD. VERSUS COMMISSIONER OF INCOME TAX, CHENNAI - 2009 (5) TMI 16 - SUPREME COURT

APPLE INDIA PRIVATE LIMITED VERSUS THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1 (1) (1) , BENGALURU, THE PRINCIPAL COMMISSIONER OF INCOME-TAX-I BENGALURU - 2023 (4) TMI 1053 - KARNATAKA HIGH COURT

And various judgments referred to in above judgments.

Earlier article:

Estimated liability to discharge obligations under product guarantee or warranty may be allowed as per recent judgment of the Supreme Court. An Article By: - C.A. DEV KUMAR KOTHARI May 22, 2009

From above we find that the tax department is indulging into un-necessary litigation  when principal of law are well settled and in law care is taken to tax if any excess liability which has been allowed is no longer payable or cease to exist etc.

In  the above referred cases, matter related to estimated expenses for providing guarantee.  Businessman knows his business and know implications of guarantee and warrantee provided. He also knows  about product and  chances  when a replacement or repair will be needed.  Technical aspects are also considered. From time to time, based on experience gained, method of estimation may be revised. If it is found that excess provision has been made , then in  future, lower estimate and provision  can be  made.

Reasonable estimates were made therefore the same were allowed.

In the  recent case of APPLE INDIA PRIVATE LIMITED

The Supreme Court held as follows:

   “ We also note that since identical matters have already been dismissed, we dismiss this special leave petition both on the ground of delay as well as on merits.”

Observations:

The law in this regard was settled in 2009 , therefore, revenue was no justified to initiate and contest litigation up to the Supreme Court. This caused loss to all concerned including loss of valuable time of appellate authorities and Courts.

Furthermore, the present appeal has also been dismissed on ground of merit also. Therefore. law in this regard has been reaffirmed.