TMI Blog2018 (9) TMI 1319X X X X Extracts X X X X X X X X Extracts X X X X ..... xposure to warranty risk has been done on a scientific basis. The assessee has been able to produce the details from the year 2001 onwards. Thus, the CIT(A) was perfectly correct in coming to the conclusion that the Assessee has explained the basis for working of the provision for warranty based on past experience and it is not on adhoc basis and moreover, it is based on the turnover of the last three years and based on provision for expenses on repairs during the warranty period as contemplated in the sale agreements. We are of the considered view that the Tribunal has erroneously reversed the order passed by the CIT(A) that too without assigning any reasons and without considering the materials, which are available on record. - Decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected for scrutiny under Sections 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). The assessment was completed under Section 143(3) of the Act vide order dated 30.01.2006 determining the total income of ₹ 1,73,66,446/-. While completing the assessment, the Assessing Officer disallowed, among others, the provision of warranty amounting to ₹ 18,01,443/-. (ii) The Assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short, the CIT(A) ]. The appellate authority vide order dated 02.02.2007 allowed the appeal and set aside the order of the Assessing Officer thereby allowing the provision for warranty. (iii) The Revenue preferred an appeal before the Income Tax App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia (P) Ltd. V. CIT, (2009) 314 ITR 0062 , and it is a good ground to set aside the impugned order of the Tribunal. 7. Nevertheless, the Court will consider as to whether there is any error in the order passed by the first appellate authority. In other words, whether the Assessing Officer committed an error in disallowing the warranty claim. 8. As mentioned earlier, the case of the Assessee was taken up for scrutiny, which culminated in the assessment order dated 30.01.2006. We find from the assessment order that the assessee was asked to justify the claim of provision for warranty, for which, it had given a detailed reply dated 25.11.2005 contending that the provision is an ascertained liability, as it was based on scientific method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure within the ambit and scope of Section 37 of the Act. The provision for warranty cannot be considered as an expenditure at all and the expenditure has to be an actually existing liability and the expenditure which is deductible for income tax purposes, but merely putting aside the money which may become expenditure on the happening of an event is not an expenditure. So far as the decisions relied on by the assessee, they support the case of the Assessee, but those decisions did not attain finality and accordingly, rejected the plea of the Assessee with regard to the provision for warranty. 10. The Assessee preferred an appeal contending that the Assessing Officer erred in not allowing the provision for warranty, in spite of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .... 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 conditions are not met, no provision can be recognized. 12. Nextly, the Hon'ble Supreme Court went on to examine as to what are the types of product warranties, a company would give and held that there were three options, namely, (a) account for warranty expense in the year in which it is incurred ; (b) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. .... 14. Further, the Hon'ble Supreme Court pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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