IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 19th January, 2010
+ ITA 82/2010
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Ms P.L. Bansal
versus
WOODWARD GOVERNOR INDIA LTD. ..... Respondent
Through: Mr Prakash Kumar
CORAM:
HON’BLE MR JUSTICE BADAR DURREZ AHMED
HON’BLE MR JUSTICE SIDDHARTH MRIDUL
1. Whether reporters of local papers may be allowed to
see the judgment?
2. To be referred to the Reporter or not?
3. Whether the judgment should be reported in the Digest?
BADAR DURREZ AHMED, J (ORAL)
CM 628/2010 (Exemption)
Allowed subject to all just exceptions.
The application stands disposed of.
ITA 82/2010
1. The Revenue has filed this appeal in respect of the assessment year
2004-05 against the order dated 26th March, 2009 passed by the Income Tax
Appellate Tribunal (hereinafter referred to as ‘the Tribunal’) in ITA No.
1973/Del/2008.
ITA 82/2010 page 1 of 5
2. The issue raised before the Tribunal was with regard to the
disallowance of the provision made for warranty expenses amounting to
Rs 31,35,150/-
3. In the course of the assessment proceedings, the Assessing Officer
noticed that the assessee had claimed warranty expenses as under:-
(i) Warranty on actual expense basis Rs 35,69,999/-
(ii) Provision for warranty expenses Rs 31,35,150/-
Rs 67,05,149/-
4. The Assessing Officer asked the assessee to explain as to why the
provision for warranty expenses amounting to Rs 31,35,150/- should not be
disallowed, inasmuch as the claim of provision for warranty expenses was
contingent in nature. The Assessing Officer pointed out that in earlier years,
the claim of warranty expenses were on payment basis i.e., on actual basis,
but in the current year the assessee was claiming warranty expenses on both
actual payment basis as well as on accrual basis by making provision for
warranty expenses and the assessee was, therefore, following a mixed
accounting system, which was not permissible under Section 145 of the
Income Tax Act, 1961 (hereinafter referred to as ‘the said Act’).
5. Regarding the provision for warranty expenses, the assessee explained
that the same was made by quantifying the amount on the basis of sales of
18 months beginning from October, 2002 to 31st March, 2004, by taking the
average rate at which the warranty expenses had been incurred on payment
ITA 82/2010 page 2 of 5
basis in the past. The assessee indicated that it had taken into account the
sales of six months of the immediate previous year i.e. of October, 2002 to
March, 2003, since the claim of warranty in respect of the same were to be
settled in the current year itself.
6. The Assessing Officer considered the submissions made by the
assessee and took the view that the assessee was not entitled to claim
warranty expenses on provision basis in respect of the prior period sales i.e.,
period from October, 2002 to March, 2003 and as such an amount of
Rs 10,41,476/-, being the provision for warranty relating to that period, was
disallowed under Section 37(1) of the said Act. It was further observed that
warranty claims are contingent i.e., dependent upon the happening of an
event in future, such as, a fault occurring in the goods and resultant claims
made by the customers. As a result, the Assessing Officer disallowed the
assessee’s total claim for provision made for warranty amounting to
Rs 31,35,150/- by treating the same to be of a contingent nature.
7. The Commissioner of Income Tax (Appeals) confirmed the finding of
the Assessing Officer.
8. Being aggrieved, the assessee preferred an appeal before the Tribunal.
Since the assessee had been allowed the claim of actual warranty expenses
amounting to Rs 35,69,999/-, the dispute before the Tribunal was only with
regard to the provision for warranty expenses amounting to
Rs 31,35,150/- made during the year by changing the accounting system
ITA 82/2010 page 3 of 5
from actual payment basis to accrual basis. The assessee had calculated the
provision amounting to Rs 31,35,150/- by applying an average rate of 1.1%
to the total sales made from October, 2002 to March, 2004. The Tribunal
held that the working of the average rate of warranty expenses was rational
and scientific and thus acceptable, however, the rate had to be applied to the
sales made during the current year only. The sales made during the period
from October 2002 to March, 2003 had been recognized in the previous year
ended on 31st March, 2003 and the assessee had incurred actual warranty
expenses in the current year with regard to the same. Moreover, the actual
warranty expenses amounting to Rs 35,69,999/- had already been allowed by
the Assessing Officer and thus there was no reason to make a provision for
warranty expenses for the sales of the previous year. Consequently, the
Tribunal reduced the provision of Rs 31,35,150/- by the sum of
Rs 10,41,476/- pertaining to sales for the period from October, 2002 to 31 st
March, 2003. As such, the provision for warranty expenses during the year
were to be reduced to Rs 20,93,674/- (Rs 31,35,150 – Rs 10,41,476/-). The
figure of Rs 25,28,523/- mentioned in the impugned order is incorrect.
However, the principle adopted by the Tribunal is correct, inasmuch as the
sum of Rs 10,41,476/- is to be reduced from the provision for warranty
expenses as claimed by the assessee.
9. The Tribunal also held that in view of the decision of this Court in the
case of Commissioner of Income Tax v. Vinitec Corporation Pvt. Ltd.: 278
ITR 337 (Del), the provision made by the assessee for the current year, on
ITA 82/2010 page 4 of 5
the basis of past year figures, towards warranty liability to be discharged in
the future, was an accrued liability and not contingent in nature and,
therefore, was allowable as deduction in computing profit and gains of the
business. We may also point out that the said decision of this Court has been
confirmed by the Supreme Court as reported in 309 ITR (Statute) 54.
10. In view of the foregoing, we see no error in the impugned order, apart
from the calculation error mentioned above. No substantial question of law
arises for our consideration. The appeal stands disposed of.
BADAR DURREZ AHMED, J
SIDDHARTH MRIDUL, J
JANUARY 19, 2010
mk
ITA 82/2010 page 5 of 5