Income Tax Deduction Allowable On Expenditure Incurred On Warranty Claim: ITAT

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the income tax deduction is allowable on expenditures incurred on warranty claims.

The bench of Kul Bharat (Judicial Member) and M. Balaganesh (Accountant Member) has relied on the decision of the Supreme Court in the case of Rotork Controls India (P) Ltd., in which it was held that if the facts establish or show that defects existed in some of the items manufactured and sold, then the provision made for warranty in respect of the army of sophisticated goods would be entitled to deduction under Section 37 of the Income Tax Act.

The bench noted that the assessee has demonstrated that defects occurred and were rectified during the warranty period. Thus, the CIT(A) erred in holding that the ratio of the decision of the Supreme Court in the case of Rotork Controls India (P) Ltd. is not applicable.

The appellant/assessee is in the business of sales, trading, marketing, production, and assembly of products and parts for warehousing automation, where the products are highly sophisticated. It is incumbent upon the assessee to provide warranty cover on such products for a certain period of time, ordinarily one year. The assessee would be under obligation to repair or replace the products if they were found defective during the warranty period. The obligation generates a liability at the time when the product is sold. The liability would start when the risk and rewards of the products are transferred to the buyer as per the terms and conditions agreed upon. As per the mercantile system of accounting, the profit is to be arrived at after taking into account all the accrued receipts and expenses.

The assessee filed its return of income in electronic mode, declaring a loss. The case was selected for scrutiny and assessment. In response to statutory notices issued by the assessing authority, the assessee attended the proceedings. The AO made an addition by disallowing provision for warranty expenses.

The assessee brought the matter in appeal before the CIT (Appeals), who sustained the addition made on account of disallowance of expenses claimed for provision made for warranty expenses.

The assessee contended that the CIT(A) failed to appreciate the fact that provision recognized in the relevant assessment year was actually utilized in the unexpired period, which goes to demonstrate that it was calculated on a reasonable and reliable basis. The warranty clause is an integral part of the sales agreement and/or purchase order and imposes an obligation in the relevant assessment year in which the sale is effected, and the assessee was under obligation to discharge the claim during the unexpired warranty period. Where the provision for an unexpired period is not allowed in the relevant assessment year, the actual expenditure incurred on warranty claims in the succeeding assessment year should be allowed.

The tribunal noted that it is well settled law that the provision for warranty expenses would be allowable in the event that the assessee proves that it has been computed on the basis of past experience and on a scientific basis. No past history is available, but the claim is based purely on an estimation basis. The assessee has applied a formula and claimed the formula has been applied in subsequent years as well. The claim of the assessee based on a formula has been allowed in subsequent years.

The tribunal directed the AO to allow the claim of the assessee after verifying the claim of the assessee that it actually incurred the expenses during the unexpired warranty period.

Counsel For Appellant: Vishal Kalra

Counsel For Respondent: Vivek Kumar Upadhyay

Case Title: Grey Orange India Pvt. Ltd. Versus ACIT

Case No.: ITA No. 7607/DEL/2019

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