2006 (7) TMI 568 - HC - Income Tax

Provision for warranty claim and free service charges despite the fact that the claims made are merely provisions/contingent liabilities and hence not allowable as per the settled law? - HELD THAT - From the findings of facts recorded by the Tribunal in the present case it is evident that the quantification on account of warranty claim and for free service has been made by applying scientific basis. That being so we do not find any question of law arises in the present cases. Accordingly these petitions are dismissed.

Summary

Issues:
1. Whether the additions made by the Assessing Officer on account of provision for warranty claim and free service charges were correctly deleted by the Appellate Tribunal?
2. Whether the provisions made by the assessee for warranty claim and free service charges should be treated as contingent liabilities and added back to the income of the assessee?

Detailed Analysis:
Issue 1:
The case involved a petition under section 256(2) of the Income-tax Act, 1961, seeking direction to the Income-tax Appellate Tribunal for referring a question of law regarding the correctness of deleting additions made by the Assessing Officer. The assessee, engaged in manufacturing, had made provisions for warranty claim and free service charges which were disallowed by the Assessing Officer. The Commissioner of Income-tax (Appeals) upheld the disallowance, but the Tribunal accepted the appeal. The main contention was whether the Tribunal's decision to delete the additions was correct.

Issue 2:
The core argument was whether the provisions made by the assessee for warranty claim and free service charges should be considered contingent liabilities. The counsel for the revenue contended that such claims were contingent liabilities and not permissible deductions. However, the counsel for the assessee relied on various judgments, including one by the Hon'ble Supreme Court, to argue that the provisions made were not contingent liabilities. The judgments highlighted that liabilities, even if quantified and discharged in the future, should be treated as accrued liabilities and not contingent ones.

Judgment Analysis:
The judgment referred to the case of Bharat Earth Movers v. CIT where the Supreme Court held that liabilities to be quantified and discharged in the future should be treated as accrued liabilities, not contingent. The court emphasized that tax authorities could estimate such liabilities based on circumstances. Additionally, the judgment of Privy Council in IRC v. Mitsubishi Motors New Zealand Ltd. was cited to support the notion that even if liabilities were contingent on certain conditions, they could still be considered accrued obligations based on statistical information.

Furthermore, the Delhi High Court's decision in CIT v. Vinitec Corpn. (P.) Ltd. reiterated that liabilities arising from warranty clauses, though to be discharged in the future, should be deducted while calculating profits if accounts are maintained on the mercantile system. The court emphasized that liabilities capable of being quantified in definite terms, even if discharged later, should be considered proper deductions.

Ultimately, the Tribunal's findings in the present case showed that the quantification of provisions for warranty claim and free service charges was based on scientific grounds. Therefore, the court concluded that no question of law arose, and the petitions were dismissed.