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2022 (6) TMI 1242 - AT - Income TaxAllowability of Provision for Warranty - HELD THAT - As merely because the assessee had returned back the provisions in subsequent year cannot be a basis for disallowing the assessee s claim in the current year particularly when the assessee had given specific basis for making warranty provisions. The Hon ble Apex Court in case of Rotork Controls India (P) Ltd. ( 2009 (5) TMI 16 - SUPREME COURT has given the criteria which are fulfilled by the assessee herein. Thus issue is squarely covered in favour of the assessee.
ISSUES PRESENTED and CONSIDERED
The core legal issue considered in this judgment was the allowability of the provision for warranty charges claimed by the assessee under the Income Tax Act for the Assessment Year 2013-14. The specific question was whether the provision made for warranty expenses, which was not fully utilized during the year, could be considered an ascertained liability and thus allowable as a deduction. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework revolves around the principles established by the Supreme Court in the case of Rotork Controls India P. Ltd. The Court outlined conditions under which a provision can be recognized as a liability: (a) a present obligation due to a past event, (b) a probable outflow of resources to settle the obligation, and (c) a reliable estimate of the obligation amount. These conditions are also reflected in Accounting Standard 29 (AS 29), which defines provisions and contingent liabilities. Court's Interpretation and Reasoning The Tribunal examined whether the assessee's provision for warranty charges met the criteria set by the Supreme Court in Rotork Controls India P. Ltd. The Court noted that the provision should be based on a sensible estimate derived from historical trends and past experiences. The Tribunal emphasized that the provision must not be arbitrary and should be supported by a scientific basis or historical data. Key Evidence and Findings The Tribunal reviewed the assessee's records, which included transaction-wise details of sales, warranty charges incurred, and the scientific basis for the provision. The assessee argued that the provision was made based on past experience and industry standards, and the unutilized portion was regularly reversed. The Tribunal found that the assessee had consistently followed this methodology in subsequent years, where similar provisions were allowed in scrutiny assessments. Application of Law to Facts The Tribunal applied the principles from Rotork Controls India P. Ltd. and AS 29 to the facts of the case. It concluded that the assessee's provision for warranty charges was based on a scientific estimate, considering the nature of the business and historical data. The Tribunal noted that the provision was not arbitrary and was made in line with the company's accounting policy, which had been accepted in subsequent years by the tax authorities. Treatment of Competing Arguments The revenue argued that the provision was unascertained and should not be allowed as it was not fully utilized during the year. However, the Tribunal found that both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] did not dispute the methodology or the policy behind the provision. The Tribunal rejected the revenue's argument, emphasizing that the provision was made on a scientific basis and was consistent with industry practices. Conclusions The Tribunal concluded that the provision for warranty charges met the conditions for recognition as a liability under AS 29 and the principles established by the Supreme Court. Thus, the provision was allowable as a deduction for the Assessment Year 2013-14. SIGNIFICANT HOLDINGS The Tribunal reiterated the principles from Rotork Controls India P. Ltd., emphasizing the importance of a scientific basis for provisions. It held that the provision for warranty charges was allowable as it was based on a reliable estimate, considering historical trends and the nature of the business. Core Principles Established The judgment reinforced the principle that a provision for warranty charges is allowable if it is based on a scientific estimate and meets the criteria of AS 29. The Tribunal highlighted the importance of consistency in accounting policies and the role of historical data in determining the reliability of provisions. Final Determinations on Each Issue The Tribunal allowed the assessee's appeal, holding that the provision for warranty charges was an ascertained liability and thus deductible. The Tribunal emphasized that the provision was made on a scientific basis, consistent with the company's accounting policy and industry standards.
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