The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that deduction allowable on warranty expenses of motor vehicles was ascertained based on the actual expenses incurred on settlement of warranty schemes in earlier years.
Assessee, Mahindra Two Wheelers Ltd is engaged in the business of manufacturing and selling motorized two-wheeler vehicles. After filing the return of income the assessee case was selected for scrutiny.
During the assessment proceedings, it was observed from the financials filed by the assessee that the assessee has shown long-term provisions of Rs.3,45,17,000, as provisions for warranty and free service coupons.
It was further observed that in the computation of income filed by the assessee, it has not added back that provision to its total income. Since the provision claimed by the assessee is contingent and unascertained liability which is not an allowable expense and should not be allowed as a deduction, the assessee was asked to show cause as to why the provision be not added to its total income.
After analysing the submission of assessee, the AO passed an assessment order and held that provision for warranty and provision for free service coupons remained unpaid before the due date for filing the return of income.
Aggrieved by the order, the assessee filed an appeal before the commissioner of Income Tax Appeals [CIT(A)], who allowed the appeal. Thereafter the revenue filed another appeal before the tribunal.
Before the bench Viral Shah, counsel for the assessee submitted that the provision for warranty is made on a scientific empirical basis and hence is allowable under the Income Tax Act.
Thus whenever any two-wheeler is sold, the said sale is covered by the warranty clause and the buyer is entitled to enforce this clause within the specified period/mileage provided that the defects in the vehicle noticed by the buyer are covered by the warranty. It is for such warranty expenses that the provision is created and claimed as a deduction.
Further, the assessee submitted that assessee has claimed allowance for provision for the warranty on a regular basis in the past, and the same was accepted by the Revenue as an allowable expenditure till the assessment year 2013-14.
The tribunal observed that provision made by the assessee was ascertained based on the actual expenses incurred on settlement of warranty schemes in earlier years and was based on the scientific exercise of making provision for warranty clauses for each and every vehicle sold on a regular basis year on year.
After considering the facts submitted by both parties, the two member bench of G.S. Pannu, (President) and Sandeep Singh Karhai (Judicial Member) upheld the deletion of disallowance made on account of provision for warranty.
Therefore, the bench dismissed the appeal filed by the revenue.
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