Provision for warranty disallowed where assessee fails to provide proper reasons of calculating the same: ITAT

The assessee company is engaged in the business of manufacturing and trading of diagnostic reagent strips and kits. The Assessing Officer vide order dated 23.02.2015 made addition in respect of provision for warranty and made total addition of Rs.1,14,00,430/-.

Being aggrieved by the assessment order dated 23.02.2015 the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

Before tribunal, the ld. A.R. submitted that the CIT(A) erred in disallowing warranty provision of Rs.25,00,000/- by observing that it is a contingent liability and, therefore, not an allowable deduction. The warranty provision covers the expenses related to the repairing and maintenance of equipments sold as well as equipment placed with the customers which contractually bind the company to provide free supplies/replacements of spares and hence the liability in respect of warranty for instruments sold/placed should be provided in the year in which the instruments are sold/placed. It had made provisions on the basis of method consistently followed by it in this regard. The Ld. AR submitted that in the subsequent years the provisions for the warranty was allowed by the Revenue. On the other hand, the Ld. D.R. submitted that it is a contingent liability related to provisions of warranty but the method which was taken into account by the assessee was not a scientific method. In fact, the assessee has not correlated the provisions of warranty with the claims made by the customers for defective goods in proportionate manner in this particular year. ITAT observed that that the provision for warranty has not been properly followed by the assessee as per any scientific method and the assessee could not correlate the provisions of warranty to the sale/claims from customers for defective products of the earlier year or the subsequent years and on what basis the assessee has allocated provision for warranty in respect of this particular head. The calculations given by the assesse before the Assessing Officer, CIT(A) as well as before the tribunal are also not proving to be proper. Some figures are shown in the chart of provisions for warranty and the chart table for overall provisions including the warranty in the paper book, but the calculation of the provisions for warranty specifically is not showing about how many claims were finalized during the year from the earlier funds of the provisions for warranty. Merely giving overall amount will not prove the case of the assessee that it is properly arrived at the particular amount for provisions for warranty in the present assessment year without giving any details of the method used by the assessee. Besides this, the contention of the Ld. AR that in subsequent year the same is allowed can also not be taken as sole criteria for allowing or disallowing any claim as per the Income Tax Statute. In A.Y. 2005-06, despite giving opportunity to the assessee by the Tribunal, the assesse failed to establish the nexus in respect of arriving the particular amount of provisions for warranty in the present assessment year than in earlier or its subsequent years. Thus, the CIT(A) as well as the Assessing Officer rightly disallowed this claim.

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