INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Erroneous and prejudicial order - Disallowance of provision for warranty - Provision made on scientific and reasonable basis

CIT disallowed provision for warranty invoking jurisdiction under section 263. However, Tribunal found that the provision made for warranty given by assessee, who was manufacturing and selling auto components to its customers, was based on percentage of turnover and, therefore, the same was computed, based on a scientific method adopted by the assessee consistently from year to year. Accordingly, the Tribunal set aside the revisional order passed by the CIT by allowing provision for warranty. Aggrieved, Revenue was in appeal.Held: Assessee had been consistently following the practice of making a provision for warranty for about 1.59 percentage of the total turnover of the auto parts supplied to the customers. Thus, the provision made on the basis of turnover on same or similar percentage year after year follows a rationale and scientific method of making a provision for such warranty. Further, the actual claims made by the customers against such warranty provision could not be the sole criteria, to be labeled as the scientific method, as contended by the Revenue. It was the consistency and the commercial prudence of the assessee, in which the assessee chose to make a provision for warranty based on his total turnover figure, which could not be said to be unscientific. Such decisions, taken in normal commercial prudence, could not be interfered with or superseded by the tax authorities. Therefore, the Tribunal was justified in holding that the revisional proceedings under section 263 in such circumstances were not at all justified.