In a recent, case of Mahindra, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that Provision for Warranty Calculated on Scientific Basis is allowable as a deduction.
Mahindra & Mahindra Limited, the assessee company, is engaged in manufacturing and selling on-road automobiles, agricultural tractors and implements, engine parts and accessories of motor vehicles, rendering services, property development activity, financing and investment and transport solutions etc. The assessee filed its return of income on 30/09/2010 declaring a total income of Rs. 19,13,56,45,771/-and had revised its return of income on 29/03/2012 declaring a total income of Rs. 18,99,47,48,506/-.
It was observed that the assessee had entered into international transactions including the supply of medical and spares, rendering of services, provisions of loans and corporate guarantee on investment in equity shares with its use.
After this, the assessee’s case was transferred to the TPO who had adjusted to Rs. 31, 74, 04, 647/- and the AO had also proposed various other additions such as premium payable on FCCBs, provision for warranty, disallowance under section 14A, addition under section 40(a)(ia), weighted deduction under section 35 (2AB), dealer incentive and service coupon under section 40(a)(ia), disallowance under section 80IC and octroi incentive thereby proposing to assess the income at Rs. 25,07, 36,09,270/-.
The assessee challenged the disallowance of the provision for warranties by the DRP / ACIT by treating the same as a contingent liability and not an ascertained liability. It is observed that the assessee has claimed the provision in respect of warranty about certain products, the estimated cost of which accrued at the time of sale.
The assessee had contended before the Assessing Officer that the assessee company sells all the vehicles/tractors covered by a warranty clause entitled to be claimed with specific period/mileage provided the defects in vehicle/tractors are noticed by the buyer within the period of warranty.
It was observed that the assessee has made the said provision for warranty based on the actual expenses incurred on settlement of warranty claims incurred for earlier years on specific models of vehicles/tractors, which has facilitated in determining the average rate of warranty expenditure incurred on each of such models.
It was concluded that there was no dispute about the claim of deduction for warranty provision based on scientific working and analysis made by the assessee. The ITAT bench of Shri M. Balaganesh (accountant member) and Smt. Kavitha Rajagopal (judicial member) respectfully following the decision of the co-ordinate bench on identical facts, allowed the claim of the warranty provision.
Shri H.P. Mahajani and Ms Babita Singh appeared on behalf of the assessee and Ms Vatsala Jha appeared for the revenue.
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