Delhi High Court
Woodward Governor India Ltd. vs Commissioner Of Income Tax on 21 August, 2013
Author: Sanjiv Khanna
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*IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NOS.110/2012 & 111/2012
(Assessment Year: 2005-06)
Date of decision: 21st August, 2013
WOODWARD GOVERNOR INDIA LTD.
..... Appellant
Through Dr. Rakesh Gupta, Ms. Rani Kiyala
& Mr. Rishabh Kapoor, Advocates.
versus
COMMISSIONER OF INCOME TAX
..... Respondent
Through Mr. Amol Sinha, Sr. Standing
Counsel & Mr. Rahul Kochar, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J. (ORAL):
Having heard counsel for the parties, the following substantial
question of law is framed:-
"Whether the Income Tax Appellate Tribunal
was justified in disallowing Rs.39,59,118/- on
account of provision for warranty?"
2. Learned counsel for the parties have addressed arguments as a
short issue is involved and is covered by an earlier decision of this
Court in Commissioner of Income Tax versus Woodward Governor
ITA Nos. 110/2012 & 111/2012 Page 1 of 5
India Limited, 2010 (321) ITR 147 (Del).
3. The aforesaid decision in Woodward Governor India Limited
(supra), which pertains to Assessment Year 2004-05, accepts the legal
position that provision for warranty can be allowed as an expenditure
under Section 37(1) of the Income Tax Act, 1961 (Act, for short). The
other question, i.e., how much or the quantum of expenditure, which
should be allowed, it has been held, depends upon facts and
circumstances of each case. The working of the figure or quantum of
the provision for warranty has to be rational and scientific.
4. Similar view has been taken by Delhi High Court in
Commissioner of Income Tax versus Whirlpool of India Limited,
2011 (242) CTR (Del) 245 wherein it has been observed that provision
for warranty should be based on actuarial valuation with reference to
the products sold during the year. This amount can be treated as
expenditure under Section 37(1) on the principle of matching. Further,
depending upon the past history, the quantum of provision for warranty
can be increased or decreased. However, the provision, which is
allowed towards warranty claim, should be based upon scientific study
and actuarial basis.
5. In the present year the provision for warranty and the warranty
expenses debited to the profit and loss account were as under:-
ITA Nos. 110/2012 & 111/2012 Page 2 of 5
Particulars Amount in Rs.
Opening balance as on 1.4.2005 52,58,505/-
Add; Provision created during the 39,59,118/-
year
Less: Expenses charged off out of 33,35,506/-
provision
Closing balance as on 31.3.2006 58,82,118/-
Warranty Expenses debited to P&L A/c
Actual warranty expenses 21,07,644/-
Warranty provided during the year 39,59,118/-
Amount debited to P&L A/c 60,66,762/-
6. It is clear from the aforesaid chart that the assessee had incurred
total expense of Rs.54,43,150/- (Rs.33,35,506/- + Rs.21,07,644/-).
However, provision for warranty expenses was made for
Rs.39,59,118/-. In other words, the assessee in the profit and loss
account had debited an amount of Rs.60,66,762/- (Rs.39,59,118/- +
Rs.21,07,644/-). The tribunal in paragraph 26 of the impugned order
has noticed that the appellant had made provision for warranty on sales
for a period of eighteen months for the Assessment Year 2004-05 and
they had applied rate of 1.10% towards provision for warranty claims.
There appears to be confusion in the order of the tribunal in paragraphs
26 to 28 on the computation aspect/claim. Tribunal has remanded the
question to the Assessing Officer after making some observations.
ITA Nos. 110/2012 & 111/2012 Page 3 of 5
7. The appellant has filed before us chart showing details of
provision for warranty as claimed by them for Assessment Year 2005-
06 onwards and also a step chart to justify the provision for warranty
expenses.
8. As we perceive, the real question and issue is whether the
provision of warranty as claimed is based upon scientific and rational
basis or not. Provision for warranty on the basis of principle for
matching can be allowed but the amount claimed should have some
rational and scientific basis and it cannot be on mere ipsi dixit. This is
clear from the two decisions in Woodward Governor India Limited
(supra) and Whirlpool of India Limited (supra). In the last decision it
has been held that provision for warranty has to be on actuarial
valuation.
9. In view of the aforesaid position, we feel that the matter requires
in-depth and proper factual examination by the adjudicating authorities
and were inclined to remand the matter to the tribunal to examine the
said issue keeping in view the figures, charts etc. and after ascertaining
the basis, period etc. However, learned counsel for the appellant
submitted that the matter may be remanded to the Assessing Officer, as a
detailed scrutiny of accounts and figures would be required. Learned
counsel for the Revenue states that he has no objection. Tribunal has also
ITA Nos. 110/2012 & 111/2012 Page 4 of 5
remitted the question of computation to the Assessing Officer.
10. In view of the aforesaid position, we answer the question of law
mentioned above partly in favour of the appellant-assessee but with an
order of remand to the Assessing Officer, who will examine the
provision for warranty as claimed, including the actual warranty
expenses incurred during the year and then determine and decide the
quantum of the claim. The Assessing Officer while making the said
computation will not be influenced by the observations made by the
tribunal in the impugned order and will independently apply his mind.
The appeal is disposed of. No costs.
SANJIV KHANNA, J.
SANJEEV SACHDEVA, J.
AUGUST 21, 2013
VKR
