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| The Tax Publishers2019 TaxPub(DT) 7579 (Del-Trib) INCOME TAX ACT, 1961
Section 37(1)
Where AO as well as CIT (A) proceeded to make disallowance of provision for warranty purely by resorting to the arithmetic calculations by completely ignoring the fact that assessee was required to outsource the service to set off to settled its warranty obligation, which could only be measured by using substantial degree of estimation, the matter was restored to the AO to recompute the income received by the assessee on account of commission and service including warranty obligation.
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Business expenditure - Allowability - Provision for warranty -
Assessee-company was a sale representative of its AE situated outside India. Its activity involved sale of equipments and at the same time, attends to the warranty services for free warranty for the warranty period and it was receiving commission for the same. AO found that the assessee created a provision for warranty, which was reduced from the commission income. Further, as the assessee did not furnish any justification or any scientific basis to support the provision of warranty by reducing the same from the commission income, the AO made disallowance on account of provision for warranty. Further, CIT (A) also held the said disallowance. Held:AO as well as CIT (A) proceeded to make disallowance of provision for warranty purely by resorting to the arithmetic calculations by completely ignoring the fact that the assessee was required to outsource the service to set off to settled its warranty obligation, which could only be measured by using substantial degree of estimation. More particularly the reliable estimation of the amount of obligation had to be made on the basis of scientific method and not on the basis of arithmetic calculation as done by the AO and affirmed by the CIT (A). Further, the assessee was to provide services including warranty for next two years after sales and thus, the income accrued at the time of receiving commission would be accounted for in the year of accrual and not in the year of receipt. Hence, the matter was restored to the AO to recompute the income received by the assessee on account of commission and service including warranty obligation.
REFERRED : M/s. Rotork Controls India (P) Ltd. v. CIT (2009) 314 ITR 62 (SC): 2009 TaxPub(DT) 1730 (SC) CIT v. Smt. Paramjeet Luthra (2014) 51 Taxmann.com 571 (Del): 2015 TaxPub(DT) 0563 (Del-HC) Rohde and Schwarz India (P) Ltd. v. Dy. CIT [ITA No. 3692/Del/2016 AY: 2010-11, dt. 5-4-2019]
FAVOUR : In assessee's favour by way of remand
A.Y. : 2011-12 to 2012-13
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