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Deputy Commissioner of Income-Tax, Circle-7, Kolkata Versus M/s B.C.H. Electric Ltd.

2016 (1) TMI 782 - ITAT KOLKATA

Disallowance of provision of warranty expenses - CIT(A) allowed the claim - Held that:- The provision for such warranty is being made on the basis of past experience and has been computed in a systematic and scientific manner, as in the present case, surely we have to appreciate that these warranty expenses are towards expenses which have been incurred or are likely to be incurred within the period for which warranty has been assured to the customers against the sale of products and as such, suc .....

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R N Bajoria, Sr. Adv ORDER Per Shri Mahavir Singh, JM Both these appeals by revenue are arising out of separate orders of CIT(A)-VIII, Kolkata vide Appeal Nos. 527/CIT(A)-VIII/Kol/08-09 and 462/CIT(A)-VIII/Kol/09-10 dated 04.08.2011 and 05.08.2011 respectively. Assessments was framed by ACIT, Circle-7, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2006-07 and 2007-08 vide his separate orders dated 23.12.2008 and 31.12.2009 re .....

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under: "1. That under the facts and circumstances of the case the Ld. CIT(A) has erred in law as well as in facts in holding that the entire provision of warranty expenses amounting to ₹ 1,50,43,597/- as an allowable expenses and deleting the entire addition. Whereas, only the part of such provision which got crystallized during the relevant previous year i.e. the amount of actual payment made during the year under the said head only should be allowed and the closing provision as on .....

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e assessee explained before the AO that these expenses consist of two portions, firstly, the expenses actually incurred for meeting the warranty liability known as warranty replacement expenses and the second portion being in the nature of provision. The assessee contended that these expenses are in the normal course of business and likely to be incurred over a period of warranty. The assessee filed the working of three years of expenses, which reads as under: Financial Year 2002-03 Financial Ye .....

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ses at ₹ 1,50,43,597/- out of total expenses debited by the assessee at ₹ 1,56,85,757/-. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) allowed the claim of assessee by observing as under: "5.2 Ground No.2 - This ground of appeal is directed against the disallowance of ₹ 15043597/- claimed towards the warranty expenditure. It is seen that the A. O. has disallowed such expenses on the ground that the actual expenses incurred are hardly 5% of what has been de .....

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l course of business and likely to be incurred over the period of warranty. In support of its contention the appellant produced the quantum of expenses actually incurred in last three years with detailed working of warranty, replacement expenditure then warranty expenses and total pertaining to F.Y. 2002-03, 2003-04 & 2004-05. At the appellate stage the appellant submitted that it is true that in F.Y.2002-03 & 2003-04 there was no warranty replacement expenses but the same was incurred o .....

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current year i.e. the relevant year 2006-2007, provisions of such warranty expenses is being made on the basis of past experience and had been computed in a systematic and scientific manner and hence the same is allowable expenses. In support of its contention that such expenses are clearly allowable expenditure; the appellant relied upon a numbers of decisions of the various High Courts and Supreme Court. My attention was drawn to the decision of the Hon'ble Supreme Court in the case of Rot .....

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obligation. If it is so made it is a liability allowable as deduction U/s.37 of the IT Act. It is seen that the Hon'ble Apex Court has also laid down that the estimate of liability has to be on the basis of statistical data available in the past. In the present case the appellant had filed the necessary data on the basis of which the provision of warranty expenses had been made but the same was not considered by the A.O. Since the appellant has made the provisions on the basis of a principl .....

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f hearing, Ld. Counsel for the assessee drew our attention to assessee's paper book consists of pages 1 to 198 wherein complete details of working of warranty provision is given at pages 196 and 197 for the relevant AY 2006-07 and 2007-08 respectively. The relevant details from page 196 for AY 2006-07 reads as under: "Warranty expenses: Warranty Expenses Booked as per warranty claimed processed during the year 10,956,851 Provision made for the year ended 31.03.2006 4,086,746 Add: Warran .....

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. Ld. Counsel for the assessee drew our attention to the chart reproduced by AO and even by us in para 3 above. He narrated that by applying the percentage on the sale for AY 2005-06 relevant to FY 2004-05 the warranty expenses works out and he filed the details as under: Year Sales Actual year of pay out Amount of pay out 2003-04 Rs.81,84,78,271/- 2004-05 ₹ 80,28,072/- 2002-03 Rs.68,87,60,046/- 2003-04 Rs.66,90,068/- Aggregate Rs.150,72,38,317/- Rs.1,47,18,140/- Average - 1,47,18,140/150, .....

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nty expenses is only for ₹ 18,67,185/-. Ld. Counsel for the assessee stated that the contention of the AO that only 5% of the amount has been paid is totally incorrect. According to him, indeed this method is being following since earlier years and on the basis of past experience such provision is being made in the books of account and similar provision is made in the current assessment year i.e. 2006-07 as well as the provision has been made as under: Year Sales Actual payout (Year) Amoun .....

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ision E 1,867,185.00 Provision required F 2,219,561.18 D-E Detail of Warranty Expenses Current year expenses 10,956,851 Provision made 4,086,746 Total 15,043,597 Add: Warranty Replacement Exp. 642,160 15,685,757" Ld. Counsel for the assessee explained that such warranty expenses are towards expenses which have been incurred or are likely to the incurred within the period of which warranty has been assured to the customer against products sold and as such, such expenses are deductible busine .....

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) wherein Hon'ble Supreme court held that such estimated provision for warranty as an allowable expenses. Hon'ble Supreme court finally held as under:- "18. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. [1959] 37 ITR 66 .....

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er two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to a number of years. In such a case it was held by this court that the provision made by the assessee-company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounti .....

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e employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticate .....

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