Sree Rayalaseema Green Energy v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 0046 (Hyd-Trib) : (2012) 139 ITD 0139 INCOME TAX ACT, 1961 --Business expenditureAllowability Provision for warranty--The assessee was carrying on the business of generation of power and manufacture of transformers. It is claiming deduction under section 80-IA for its business of generation of power. During the assessment proceedings, the assessee filed two separate balance sheets and P&L account, along with schedules in respect of the two divisions, viz. 'Power Division' and 'Transformer Division'. Before the assessing officer, the assessee had explained that the above provision had been made for the transformers manufactured and sold to government and the warranty was as per the terms of sale. It was also submitted that the assessee is in the business of manufacture of transformers from assessment year 2004-05 and had made the provision towards warranty expenses at 10% of the total sales turnover after analyzing the expenditure incurred on warranty in the preceding year. It was also claimed that making provisions for warranty is a common practice in all manufacturing and trading concerns and is an allowable expenditure. *Held:* The actual expenditure incurred on warranty during the warranty period of 5 years may be verified at the end of the assessing officer. Therefore, the contention is accepted that the liability for provision for warranty is not contingent and thereafter quantification thereto is to be examined by the assessing officer on the basis of actual expenditure incurred. Accordingly, the assessing officer is directed to examine the same and allow to the extent the expenditure incurred by the assessee for the relevant warranty period relating to this assessment year. The liability for provision for warranty cannot be construed as a contingent in nature. It is a definite and certain liability. Only the quantification of liability is based on estimate, which is, in turn, based on experience and data. The department has the objection that the liability in respect of warranty is contingent in nature. This Tribunal is unable to accept this contention of the Department. Sales as well as warranty are inextricably bound with each other and, therefore, if the sale proceeds are taken note of in a year, the liability in respect of warranty is also to be taken note of in the same year. The liability for provision for warranty cannot be construed as a contingent in nature. It is a definite and certain liability. Only the quantification of liability is based on estimate, which is in turn based on experience and data. It is also by the Authorized Representative that in subsequent assessment years 2005-06 to 2008-09 the assessee had spent towards warranty more than that was provided in the books of account. According to him, the assessee had spent Rs. 2,57,17,536 against the provision of Rs. 2,54,96,766. The transformers sold by the assessee are given unique identification number which facilitates exact quantification of actual expenditure incurred on after-sale service and maintenance of the transformers sold during a particular year. [Para 25] A site report is prepared immediately after attending to the compliant received from customers and copy would be forwarded to the official of the respective region of the customer corporation. Details of expenditure incurred during the period 2005-06 (accounting year) to 2008-09 (accounting year), copies of material issue register are maintained for such period. Being so, the actual expenditure incurred on warranty during the warranty period of 5 years may be verified at the end of the assessing officer. Therefore, the contention is accepted that the liability is not contingent and thereafter quantification thereto is to be examined by the assessing officer on the basis of actual expenditure incurred. Accordingly, the assessing officer is directed to examine the same and allow to the extent the expenditure incurred by the assessee for the relevant warranty period relating to this assessment year. [Para 26] There is no dispute that when the sales are done warranty clause is part of the sale transaction and, therefore the assessee is encumbered with committed liability for the period of years commencing from the initial stage of sale. But for the prescription of such a warranty clause the customer may not have bought the product of the assessee. The assessing officer could have examined the actual expenditure incurred by the assessee in subsequent assessment years towards warranty given in the assessment year and could have come to reasonable conclusion instead of rejecting the same as there is no warranty provision required. The warranty expended by the assessee exhibits that the assessee had incurred expenditure resulting from the warranty clause in subsequent assessment years. There was direct nexus between the claim of the assessee and its obligation arising from the warranty clause. [Para 28] It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessed to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. Once an assessee is maintaining his accounts on the mercantile system, a liability is accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. [Para 30] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0046 (Hyd-Trib) : (2012) 139 ITD 0139

INCOME TAX ACT, 1961

--Business expenditureAllowability Provision for warranty--The assessee was carrying on the business of generation of power and manufacture of transformers. It is claiming deduction under section 80-IA for its business of generation of power. During the assessment proceedings, the assessee filed two separate balance sheets and P&L account, along with schedules in respect of the two divisions, viz. 'Power Division' and 'Transformer Division'. Before the assessing officer, the assessee had explained that the above provision had been made for the transformers manufactured and sold to government and the warranty was as per the terms of sale. It was also submitted that the assessee is in the business of manufacture of transformers from assessment year 2004-05 and had made the provision towards warranty expenses at 10% of the total sales turnover after analyzing the expenditure incurred on warranty in the preceding year. It was also claimed that making provisions for warranty is a common practice in all manufacturing and trading concerns and is an allowable expenditure. Held: The actual expenditure incurred on warranty during the warranty period of 5 years may be verified at the end of the assessing officer. Therefore, the contention is accepted that the liability for provision for warranty is not contingent and thereafter quantification thereto is to be examined by the assessing officer on the basis of actual expenditure incurred. Accordingly, the assessing officer is directed to examine the same and allow to the extent the expenditure incurred by the assessee for the relevant warranty period relating to this assessment year. The liability for provision for warranty cannot be construed as a contingent in nature. It is a definite and certain liability. Only the quantification of liability is based on estimate, which is, in turn, based on experience and data.

The department has the objection that the liability in respect of warranty is contingent in nature. This Tribunal is unable to accept this contention of the Department. Sales as well as warranty are inextricably bound with each other and, therefore, if the sale proceeds are taken note of in a year, the liability in respect of warranty is also to be taken note of in the same year. The liability for provision for warranty cannot be construed as a contingent in nature. It is a definite and certain liability. Only the quantification of liability is based on estimate, which is in turn based on experience and data. It is also by the Authorized Representative that in subsequent assessment years 2005-06 to 2008-09 the assessee had spent towards warranty more than that was provided in the books of account. According to him, the assessee had spent Rs. 2,57,17,536 against the provision of Rs. 2,54,96,766. The transformers sold by the assessee are given unique identification number which facilitates exact quantification of actual expenditure incurred on after-sale service and maintenance of the transformers sold during a particular year. [Para 25] A site report is prepared immediately after attending to the compliant received from customers and copy would be forwarded to the official of the respective region of the customer corporation. Details of expenditure incurred during the period 2005-06 (accounting year) to 2008-09 (accounting year), copies of material issue register are maintained for such period. Being so, the actual expenditure incurred on warranty during the warranty period of 5 years may be verified at the end of the assessing officer. Therefore, the contention is accepted that the liability is not contingent and thereafter quantification thereto is to be examined by the assessing officer on the basis of actual expenditure incurred. Accordingly, the assessing officer is directed to examine the same and allow to the extent the expenditure incurred by the assessee for the relevant warranty period relating to this assessment year. [Para 26] There is no dispute that when the sales are done warranty clause is part of the sale transaction and, therefore the assessee is encumbered with committed liability for the period of years commencing from the initial stage of sale. But for the prescription of such a warranty clause the customer may not have bought the product of the assessee. The assessing officer could have examined the actual expenditure incurred by the assessee in subsequent assessment years towards warranty given in the assessment year and could have come to reasonable conclusion instead of rejecting the same as there is no warranty provision required. The warranty expended by the assessee exhibits that the assessee had incurred expenditure resulting from the warranty clause in subsequent assessment years. There was direct nexus between the claim of the assessee and its obligation arising from the warranty clause. [Para 28] It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessed to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. Once an assessee is maintaining his accounts on the mercantile system, a liability is accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. [Para 30]