TMI Blog2018 (6) TMI 1557X X X X Extracts X X X X X X X X Extracts X X X X ..... g Authority in t he present case has very casually disallowed the said claim in the hands of the Respondent-Assessee. Moreover, when the Higher Appellate Authorities have corrected the said approach of the Assessing Authority by the First Appellate Authority allowing the appeal of the Assessee and the Tribunal dismissing the appeal of the Revenue, we are all the more pained to see that the Revenue still felt dissatisfied and has brought up the matter before this Court under Section 260-A of the Act without actually any substantial question of law arising in the matter - Decided in favour of assessee - I.T.A. No.394/2009 - - - Dated:- 25-6-2018 - Dr. Vineet kothari And Mrs. S.Sujatha, JJ. SRI K.V.ARAVIND, ADV. For The Appellant. Sri T.Suryanarayana, ADV. For The Respondent. JUDGMENT Dr. VINEET KOTHARI, Mr. K.V.Aravind, Adv. for Appellants Revenue. Mr. T.Suryanarayana, Adv. for Respondent Assessee. The Revenue has filed this appeal u/s 260-A 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 30.01.2009 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 extra ct of the assessment order is also quoted below for ready reference: 3. During the year, the assessee had an 80IB Unit and non-80IB Unit. As seen from Schedule K of Operating and Other Expenses of the Profit Loss account of the 80IB Unit, a sum of ₹ 6,80,59,979/- has been debited as warranty charges . Further, a sum of ₹ 1,46,57,074/- has been debited as warranty charges towards the non-80IB Unit. Hence, a sum of ₹ 8,27,17,053/- has been debited towards warranty charges during the year. The assessee was asked to furnish details as to what amount was actually incurred towards warranty expenses. The assessee, during the course of its submissions, has stated that a sum of ₹ 6,10,83,025/- is the actual warranty expenses incurred in the 80IB unit and a sum of ₹ 1,31,54,550/- is the actual warranty expenses incurred for the non-80IB Unit. The assessee, in its submissions, has also given a break-up, from which it is seen that warranty is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee-Company to claim unnecessary deduction from the taxable profits of the Respondent-Company and since a consistent scientific method has been adopted by the Respondent-Assessee, the learned Assessing Authority could not have arrived at any s uch findings for alleged unscientific method adopted by the Assessee and therefore, disallowance of the entire claim of provision in this regard of ₹ 84,79,478/- [Rupees Eighty Four Lakhs Seventy Nine Thousand and Four Hundred and Seventy eight only] by the Assessing Authority is wholly unjustified. He even submitted before the Court that the Assessee-Company moved fo r rectification of the said order claiming the alternative relief of allowing the actual expenses incurred during the year, which were in excess of the provision to the extent of ₹ 84,79,478/- [Rupees Eighty Four Lakhs Seventy Nine Thousand and Four Hundred and Seventy eight only] but even that was not allowed to the Assessee -Company by the Assessing Authority and thus the assessee was put to a disadvantage in both ways, which was quite illegal. 8. Having heard the learned Counsels for the parties, we are of the clear opinion that no substantial ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act without actually any substantial question of law arising in the matter. This reflects the irresponsible manner in which the Revenue Department becomes a frivolous litigant in constitutional courts, by dragging such case, wasting public time and money. 11. As is well settled, the appeal under Section 260-A of the Act lies before this Court only on substantial questions of law. The final fact findings of the Tribunal under the Act are binding on this Court and cannot be disturbed unless they are found to be perverse on the basis of established material on re cord. We do not find any such case of Revenue in the present appeal. 12. Moreover, we are satisfied that the practice of making a provision for warranty in the present case has been found to be consistent, scientific and regular by the two Appellate Authorities below in consonance with the judgment of the Hon'ble Supreme Court in t he case of Rotork Controls India (P) Ltd. (supra). 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 Assessees. We quote below the relevant portion of the judgment for read y reference: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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