Debatable Warranty Provision Disallowance u/s 37(1) Falls Outside Section 154 Scope: ITAT [Read Order]
Relying on precedents including ITO vs. Volkart Brothers (1971) 82 ITR 50 (SC) and other recent rulings, the ITAT set aside the CIT(A)’s order and directed the AO to delete the addition relating to warranty provisions.
The Kolkata Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that the disallowance of warranty provisions under section 37(1) of Income Tax Act,1961, was a debatable issue and could not be made through a rectification order under section 154, which applies only to clear and obvious mistakes.
QLAR India Private Limited,appellant-assessee, conducted business in manufacturing and selling plant sequencing, continuous weighing, feeding, proportioning, and on-line data handling batching systems for industrial applications. It filed a belated income tax return on 25.03.2015, reporting total income of ₹11,91,44,400 under the normal provisions.
The case was selected for scrutiny, and the Assessing Officer (AO) completed the assessment under section 143(3) on 29.12.2016. During the assessment, the AO reviewed the warranty provisions but did not make any disallowance. Later, the AO issued a rectification order under section 154 on 17.09.2019, disallowing the warranty expenses under section 37(1).
The assessee appealed to the Commissioner ofIncome Tax (Appeals)[CIT(A)], who upheld the rectification but sent the matter back to the AO to examine whether the warranty provisions were made on a scientific basis.
The two member bench comprising Pradip Kumar Choubey (Judicial Member) and Rajesh Kumar (Accountant Member) after considering the submissions and reviewing the record, concluded that the allowability of warranty provisions was a debatable issue and fell outside the scope of section 154 of the Act. It noted that section 154 applies only to clear and obvious mistakes, not issues where two opinions are possible or which require detailed reasoning.
Read More: Advance Income from AMC Contracts not Taxable Entirely on Invoicing: ITAT grants Relief to HP India Confirming Consistent Accounting Method, allows Proportionate TDS Credit
The appellate tribunal relied on precedents, including ITO vs. Volkart Brothers (1971), MC Mowjee & Co. Pvt. Ltd. vs. ITO , Lanshree Products & Services Ltd. vs. DCIT , and PCIT vs. Lanshree Products & Services Ltd. (2023), which held that debatable issues cannot be addressed under section 154.
Following these rulings, the tribunal set aside the CIT(A)’s order and directed the AO to delete the addition related to warranty provisions.
Accordingly the appeal was allowed.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
