Income Tax, Issue Update

Warranty provision created on random basis or scientific basis: Deductibility of such provision

Case: Demag Delval Indl Turbomachinery Pvt. Ltd ( By Successors Siemens Ltd) vs. Addl. CIT, Mumbai ITAT

Outcome: Remand

Facts

  • The Assessee had made provision for warranty of Rs. 2.76 crore which was claimed as expenditure. The same was denied by the Assessing Officer on the ground that it was an unascertained liability and a contingent liability.

Key points

  • Reliance was placed on the decision of the Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., wherein it was concluded that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there was manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation.
  • Hence, it was inferred that the provision for warranty was to be allowed as deduction under section 37 of the Income Tax Act.

Share your thoughts using the comment section below

%d bloggers like this: