2003 (9) TMI 11 - HC - Income Tax

Expenditure accrued in the discharge of a liability - contingent liability vis-a-vis definite and ascertained liability - In the assessment for the years 1991-92, 1992-93 and 1993-94, the assessee claimed deduction of Rs. 3,50,000, Rs. 4,01,000 and Rs. 4,78,000, respectively, representing provision for after sales services based on the warranty issued at the time of sale of the transformers - For the assessment year, the assessee had made a provision of Rs. 3,50,000 but the actual expenses incurred for that year was Rs. 7,98,958. These circumstances clearly show that the provision is made on a reasonable basis. - Major portion of the transformers sold were defective and therefore a reasonable provision has to be made - Tribunal has rightly held that the provision made for the three years is based on an ascertained liability and that it cannot be treated as a contingent liability.

Issues Involved:
1. Entitlement to claim deduction of provisions made towards repairs of transformers.
2. Validity of the provision in the absence of an ascertained liability.
3. Tribunal's affirmation of the provision as an ascertained liability.

Issue-wise Detailed Analysis:

1. Entitlement to Claim Deduction of Provisions Made Towards Repairs of Transformers:
The court examined whether the assessee is entitled to claim deduction under section 37 of the Income-tax Act, 1961, for provisions made towards after-sales services based on warranties issued at the time of sale of transformers. The Assessing Officer had disallowed the claims, considering them contingent liabilities. However, the first appellate authority and the Tribunal allowed the claims, treating them as definite and ascertained liabilities. The court upheld the Tribunal's decision, affirming that the provision created was towards a definite liability accrued at the time of the sale of the machinery, thus making it a permissible deduction under section 37(1).

2. Validity of the Provision in the Absence of an Ascertained Liability:
The court analyzed whether the provision for after-sales services was valid in the absence of an ascertained liability. The Assessing Officer argued that the provision was contingent and based on estimates without any concrete basis. Conversely, the appellate authorities found that the provision was based on specific instances of defects notified during the warranty period. The Tribunal noted that the actual expenditure incurred was significantly higher than the provision made, indicating that the provision was based on a reasonable estimate of the liability. The court agreed with the Tribunal, concluding that the provision was for an ascertained liability and not a contingent one.

3. Tribunal's Affirmation of the Provision as an Ascertained Liability:
The court considered whether the Tribunal was right in affirming the finding of the Commissioner of Income-tax (Appeals) that the provision was towards an ascertained liability. The Tribunal had found that the provision was created based on definite information regarding defects and the estimated expenditure required for repairs and replacements. The court upheld this finding, noting that the provision was made on a reasonable basis and supported by statistical data and past experience. The court referenced the Supreme Court's decision in Bharat Earth Movers v. CIT, which held that a liability that has definitely arisen in the accounting year should be allowed as a deduction, even if it is to be quantified and discharged at a future date.

Conclusion:
The court dismissed the appeals filed by the Department, affirming that the provision made by the assessee for after-sales services was based on an ascertained liability and was a permissible deduction under section 37(1) of the Income-tax Act, 1961. The court's decision was supported by precedents, including the Supreme Court's rulings in Bharat Earth Movers v. CIT and the Privy Council's decision in Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd.

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