IMPORTANT POINT
Warranty provision made on historical data is admissible for deduction u/s 37, IT Act, 1961.

Judgment :-

S.H. KAPADIA, J.

1.1. Delay condoned.

2.2. Leave granted.

FACTS IN THE LEAD MATTER

Civil Appeal Nos. of 2009 - Arising out of S.L.P.(C) Nos.14178-14182 of 2007 -M/s. Rotork Controls India (P) Ltd. v. Commissioner of Income Tax, Chennai.

1.3. In these civil appeals filed by the assessee we are concerned with the assessment years 1991-92, 1992-93, 1993-94 and 1994-95. For the sake of convenience we hereby refer to the facts concerning assessment year 1991-92.

2.4. Appellant-company sells Valve Actuators. Bulk of the sales is to BHEL. At the time of sale appellant (assessee) provides a Standard Warranty whereby in the event of any Beacon Rotork Actuator or part thereof becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch whichever is earlier, the company undertakes to rectify or replace the defective part free of charge. This warranty is given under certain conditions stipulated in the warranty clause. For the

assessment year 1991-92, the assessee made a provision for warranty at Rs.10,18,800/- at the rate of 1.5% of the turnover. This provision was made by the assessee on account of warranty claims likely to arise on the sales effected by the appellant and to cover up that expenditure. It may be noted that since the provision made was for Rs.10,18,800/- which exceeded the actual expenditure, the appellant reversed Rs.5,00,246 as Reversal of Excess Provision. Consequently, the assessee claimed deduction in respect of the net provision of Rs.5,18,554/-which was disallowed by the A.O. on the ground that the liability was merely a contingent liability not allowable as a deduction under Section 37 of the Income-tax Act, 1961 ("the 1961 Act", for short). This decision was upheld by CIT (A). The matter was carried in appeal to the Tribunal by the appellant. It was held by the Tribunal that right from the assessment year 198384 the CIT (A) as well as the Tribunal had allowed the warranty claim(s) on the ground that Valve Actuators are sophisticated equipments; that in the course of manufacture and sale of Valve Actuators a reasonable warranty was given to the purchasers; that every item of sale was covered by the warranty scheme; that no purchaser was ready and willing to buy Valve Actuators without warranty and consequently every item sold had a corresponding obligation under the warranty clause(s) attached to such sales. This has been the view of the Department and the Tribunal right from assessment year 1983-84. In fact the Department allowed deduction on the above facts constituting normal trading practice. For example, during the assessment year 1983-84 the total sales during the year was Rs.1,45,36,599/-and in that year the appellant had earmarked 1% of the total sales towards the warranty claims which it would have to meet. This amount provided for was held to be reasonable having regard to the anticipated liability which was discharged in the subsequent year. From that year onwards it has been consistently held that looking to the nature of the business and the nature of the product manufactured and sold it was necessary for warranty clause to be attached to the sales effected by the appellant and that the warranty obligations constituted an integral part of the sales effected during the year. All throughout this period between assessment year 1983-84 and assessment year 1991-92, the Tribunal took the view that the provision made by the appellant was realistic. Applying the Rule of Consistency, the Tribunal held that the assessee on the facts and circumstances of the case was entitled to deduction under Section 37 of the 1961 Act in respect of provision for warranty amounting to Rs.5,18,554. At this stage one point needs to be emphasized. During the assessment year 1983-84 to assessment year 1991-92 there was one instance when the Tribunal disallowed the warranty claim that was in the assessment year 1985-86. The reason was in that year the assessee had not adjusted