Provision for Warranty Not Contingent when Based on Scientific Method: ITAT Directs AO to allow Correct Deduction [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) ruled that a provision for warranty is not a contingent liability and should be allowed as a deduction when made on a scientific basis and directed the Assessing Officer (AO) to compute and grant the correct deduction based on the actual warranty provisions made during the year.

Scania Commercial Vehicles India Private Limited (assessee) engaged in the business of dealing in heavy-duty trucks, buses, and coaches, filed a return showing a total loss. During the assessment, the AO discovered that the assessee had debited a provision for warranty utilized during the year amounting to ₹4,51,07,257.

The AO, supported by the Dispute Resolution Panel (DRP), held that this provision was a contingent liability and was therefore disallowable. The AO added the amount to the total income.

The assessee explained that for the financial year 2015-16, a provision of ₹9,18,70,138 was created, of which ₹4,67,62,881 was utilized for actual warranty expenditure, leaving a closing balance of ₹4,51,07,257. For the assessment year 2017-18, the assessee made a further contribution of ₹26,53,18,804 to the warranty provision.

The counsel for the assessee argued that warranty expenditure was not contingent in nature when calculated on a scientific basis. The counsel relied on a decision of the Supreme Court to assert that such provisions should be allowed as a deduction.

The counsel for the revenue argued that supported the orders of the AO and the DRP, maintaining that the liability was contingent.

The two member bench comprising Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member) reviewed the accounting notes and the computation of income.

The tribunal observed that the AO's addition of ₹4,51,07,257 was incorrect. For the assessment year 2017-18, the correct deduction allowable to the assessee was actually the new provision made during the year, amounting to ₹26,53,18,804.

The bench stated it was duty-bound to direct the AO to compute the correct income when the necessary facts such as audited financial notes were already available in the records.

The tribunal restored the issue to the file of the Assessing Officer with a direction to grant the correct deduction. The tribunal held that the findings of the lower authorities were not sustainable.

The tribunal held that the correct deduction allowable to the assessee was ₹26,53,18,804 and directed the AO to compute the correct deduction allowable being the amount of warranty provision made during the year.

The tribunal allowed this ground of appeal for statistical purposes by remanding it for fresh computation.

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