In T.A. No. 25 of 2019 -JHAR HC- Jharkhand High Court rules in favour of Heavy Engineering Corporation Limited, allows 'Provision of Warranty Expenses' as expenditure for business income
Justice Rongon Mukhopadhyay & Justice Deepak Roshan [12-06-2023]

Read Order: Principal Commissioner of Income Tax v. Heavy Engineering Corporation Limited

Chahat Varma

New Delhi, June 26, 2023: The Jharkhand High Court has ruled in favour of Heavy Engineering Corporation Limited (respondent assessee), stating that the amount allocated for ‘Provision of Warranty Expenses’ can be considered as an expenditure for the business income of the company.

Brief facts of the case were that the respondent assessee, a government of India undertaking engaged in the business of manufacturing, project works, reconditioning, execution and commissioning of machineries, equipment for steel plants, mining sector, railways, defense etc., filed its return declaring a total income of ‘NIL’.  However, the assessment order disallowed the claimed business expenses under the head of ‘Provision for Warranty Expenses’. The respondent assessee filed an appeal before the Commissioner of Income Tax (Appeals), where all the additions made by the Assessing Officer were deleted. The Revenue department then appealed to the Income Tax Appellate Tribunal (ITAT) and ITAT dismissed the Revenue's appeal, upholding the decision of the Commissioner of Income Tax (Appeals).

The division bench of Justice Rongon Mukhopadhyay and Justice Deepak Roshan noted that the ITAT had held that the company, upon the expiration of the warranty period, offered the balance amount as income for taxation. This indicated that there was no intention of tax evasion.

The bench further referred to the case of M/s. Rotork Controla India (P) Ltd v. Commnr. of Income Tax, Chennai p LQ/SC/2009/1248], where it was observed by the Supreme Court that if there was a historical trend of manufacturing a large number of sophisticated goods and if defects were found in some of the items in the past, then the provision made for warranty in relation to such goods would be eligible for deduction from the gross receipts under section 37 of the Income Tax Act.

Consequently, the issue of provision of warranty in the facts and circumstances of the case was decided in favor of the assessee and against the Revenue.