Provision for Warranty is allowable as Deduction when the assessee has not made provision on a Scientific basis: Karnataka HC [Read Judgment]

The Karnataka High Court held that the provision for warranty is allowable as deduction when the assessee has not made provision on a scientific basis.The assessee filed the return of income for the Assessment year 2008-09 declaring income of Rs.2,17,18,047/-. The return was processed under Section 143(1) of the Act and was selected for scrutiny. Thereafter, a notice under Section 143(2) of the Act was issued.

The assessee for the Assessment year 2008-09 had claimed provision for warranty for a sum of Rs.3,98,18,294/-. The Assessing Officer by an order held that provision for warranty made for Assessment year 2008-09 to the profit and loss account has been made for an amount of Rs.9,80,90,650/-.

The assessee has incurred actual expenditure to the extent of Rs.5,82,72,356/-. Thus, a sum of Rs.3,98,18,294/- debited to profit and loss account is still outstanding in the nature of provision. It was also held that there is no provision under the Act to allow any expenditure, which is in the nature of provision and is contingent. Accordingly, a sum of Rs.3,98,18,294/- was disallowed and was added to the total income.

The Commissioner of Income Tax (Appeals) by an order dismissed the appeal and affirmed the order passed by the Assessing Officer. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal. The Tribunal by an order held that the provision for warranty was made every year in accordance with accounting standards 29 prescribed by Institute of Chartered Accountants.

It was further held that in the instant case, the assessee had made provision on the basis of sale and also the actual trend of the last few years and the provision was worked out scientifically every year.

It was further held that the CIT(A) grossly erred in not allowing provision for warranty for the concerned Assessment year on the ground that the ratio between the actual and provision is less than 70:100.

The Tribunal held that the warranty provision made by the assessee for the concerned Assessment year is justified and no addition is called for. In the result, the appeal preferred by the assessee was allowed.

The division bench of Justice Alok Aradhe and Justice H. T. Nagendra Prasad held that the principles laid down by the Supreme Court in Rotork Controls India (P) Ltd. Supra had been taken into account by the Commissioner of Income Tax (Appeals) and the estimation of provision for the Assessment year 2008-09 has been found to be unscientific and unreasonable.

“It was also held that provision of warranty was made every year in accordance with accounting standards 29 and the provision is worked out scientifically every year merely because the provision has come down to 59:100, the same cannot be disallowed,” the court, while setting aside the order of CIT(A) said.