COMMISSIONER OF INCOME TAX vs. WOODWARD GOVERNOR INDIA LTD.

Whether reporters of local papers may be allowed to see the judgment?

To be referred to the Reporter or not?

Whether the judgment should be reported in the Digest?

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/-

In the course of the assessment proceedings, the Assessing Officer noticed that the assessee had claimed warranty expenses as under:-

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’).

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 2010:DHC:289-DB

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.

The Commissioner of Income Tax (Appeals) confirmed the finding of the Assessing Officer.

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 2010:DHC:289-DB

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 2010:DHC:289-DB

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.