TMI Blog2018 (11) TMI 600X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 (5) TMI 16 - SUPREME COURT OF INDIA). The hon'ble Supreme Court in the aforesaid case, discussed in detail how the accounting entries for product warranty are to be made by the assessee. Both the appellate authorities below were justified in returning the proper findings of facts on the relevant material before them and have rightly found that the provisions of warranty made by the assessee company was on the basis of the scientific and consistent method and therefore, the present appeal of the Revenue does not give rise to any substantial question of law and the same deserves to be dismissed and is accordingly dismissed. - I. T. A. No. 431 of 2017. - - - Dated:- 25-6-2018 - DR. VINEET KOTHARI AND MRS. S. SUJATHA JJ. For the Appellants : K. V. Aravind, Advocate For the Respondent : Ankur Pai, Advocate JUDGMENT Dr. Vineet Kothari J.- 1. The Revenue has filed this appeal under section 260A of the Income-tax Act, 1961 ( Act for short) raising purported substantial questions of law arising from the order of the Income-tax Appellate Tribunal ( Tribunal for short) dated November 29, 2016 in I.T. (TP) A. No. 1561/Bang/2014 for the assessment year 2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y other Co-ordinate Benches of the Tribunal therefore requires no further deliberation. In the light of the above, we hold the view that the decision of the learned Com missioner of Income-tax (Appeals) requires no further interference on the issue. The Revenue's appeal stands dismissed. 10. Again in the order dated February 25, 2011 in ITA No. 784/ Bang/2010, it has been observed as under : 11.2 The assessee creates provision for warranty based on the estimation of expenditure likely to be incurred on the past sales made on yearly basis at the then prevailing market prices for spares and labour. For the relevant previous year, the assessee estimated the warranty liability at ₹ 12,76,77,530 and created a provision only for ₹ 12,16,75,204 in the books of account by charging a provision of ₹ 8,24,29,136 to the debit in the profit and loss account and claimed it as deduction. The assessee-company had created the provision based on the estimation of warranty liability, which is based on failure rates of the past year data/experience and industry trends and not on ad hoc basis. The assessee has not changed the method of computing the warranty provision a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) qua this issue. 3. The assessing authority in the present case disallowed the entire amount of such provision of warranty of ₹ 20,00,38,020 (rupees twenty crores thirty eight thousand and twenty only) by holding in para 5.4 of the impugned assessment order, annexure-A dated March 16, 2013 that the system of making of the provision for warranty by the assessee-company was not scientific and the reversal of the provision at the year end in view of the actual claims made by the customers was huge, varying from 23 per cent. to 100 per cent. and therefore, since the assessee has not followed the scientific system of making a provision in this regard, the entire amount of provision deserves to be disallowed and the same was added back to the declared income of the assessee. The relevant extract of the assessment order is also quoted below for ready reference : 5.4. It is seen that year-after-year the assessee is making warranty reversals of significant amounts. As held by the order (supra) if the warranty estimates are done in a robust way there will not be any huge reversals of the provisions. Even basing solely on this fact, one can conclude that the provisions are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd. such a claim should not be allowed. In other words, the provision of war ranty amounting to ₹ 20,00,38,020 should be disallowed. Accord ingly, an amount of ₹ 20,00,38,020 towards provision for warranty is disallowed and brought to tax. 4. The first appellate authority Commissioner of Income-tax (Appeals), however, granted the desired relief to the respondent-assessee in view of the decision of the hon'ble Supreme Court in Rotork Controls India (P.) Ltd. with the following observations : 3.8 Respectfully following the decisions of the hon'ble Income-tax Appellate Tribunal referred to above, since the appellant has been consistent in following the method for creating provision for warranty even for the assessment year 2009-10, I hold that the Assessing Officer was not justified in disallowing the appellant's claim for deduction of ₹ 20,00,38,020 and delete the disallowance accord ingly. 5. The second appeal filed by the Revenue before the Tribunal also failed. Hence, the present appeal before us by the Revenue. 6. The learned counsel for the Revenue Mr. K. V. Aravind submitted that the assessing authority had followed the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computers and hardware supplied to them, which in their ordinary course of business, the respondent-company gave such warrantees. The excess provision created by the company itself has been reversed by the respondent-company and only the provision to the extent of making an adequate provision for meeting such possible expenses for repairs and maintenance has been debited by the assessee- company in its books of account over the period of six years, the details of which are given by the assessing authority itself in the assessment order. 9. We are absolutely at a loss to understand how the assessing authority has found the said consistent practice of the assessee-company to be unscientific and untenable and then proceeded to disallow the entire claim of provision made by the assessee-company in this regard. Neither allowing the provision made for warrantees nor the actual expenses incurred by the company to be deducted from the profits of the company during the year is absolutely arbitrary and unscientific on the part of the assessing authority, to say the least. There was absolutely no basis for the assessing authority to make both the disallowances of provision for warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vent ; (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 provi sion can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obli gating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that are recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obli gations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by con sidering the said obligations as a whole. In this connection, it may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act as well as by the accounting standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already rec ognized (accrued). In other words, it is not based on the 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 the most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate his torical trend, it is important that the company has a proper account ing system for capturing the relationship between the nature of the sales, the warran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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