The Income Tax Appellate Tribunal (ITAT) Delhi Bench has held that warranty expenses claimed under a provisional basis are not an unascertained liability and set-asides order disallowing provisional warranty expenses
The appellant, M/s Eberspeacher Suetrak Bus climate Control Systems Private Limited, had debited expenses in the Profit and Loss account, under the head “Provision for Warranty” amounting to Rs. 1,39,21,294/-. During assessment proceedings, Assessing Officer observed that the assessee, during the year under consideration, has incurred expenses amounting to Rs. 95,33,176/- only on account of meeting the warranty obligations. The balance amount of Rs. 43,88,118/- which was debited in the profit and loss account purely on a provisional basis has been treated as an unascertained liability and disallowed by the AO.
On appeal, the CIT(A) holds that the warranty expenses incurred during the year under consideration are allowable and the expenses which have not been actually incurred but have been debited purely on a provisional basis were disallowed. The aggrieved appellant filed an appeal before ITAT.
The Tribunal by relying on the decision of the Supreme Court in the case of Rotork Controls India P. Ltd. observed that the amount incurred may vary nominally in comparison to the amount of provision made. Based on the materiality concept, the amount of provision made, can’t be termed as unascertained liability, as the percentage for which provision is being made had been derived based on the technical study, the experience of the company, and the industrial standards. Also matching warranty costs as against the goods being sold is the most appropriate way of accounting because it fulfills the accrual concept as well as the matching concept.
The Coram of Mr. A. D. Jain, Vice President, and Dr. B. R. R. Kumar, Accountant Member has allowed the claim of the appellant on account of the provision of warranty.
Adv. Mr. Ved Jain and Mr. Ashish Goel, CA appeared for the appellant.
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