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Issues Involved:
1. Whether anticipated liabilities under warranties can be deducted in computing "profits or gains" for income tax purposes. 2. Interpretation of "profits or gains" u/s 65(2)(a) of the Income Tax Act 1976. 3. Applicability of sections 101 and 104 of the Income Tax Act 1976. 4. Construction of the warranty terms and whether the liabilities were "incurred" within the year of sale. 5. Alternative methods of accounting for warranty costs and income. Summary: 1. Anticipated Liabilities Under Warranties: The primary issue was whether Mitsubishi Motors New Zealand Ltd. ("the taxpayer") could deduct anticipated liabilities under warranties when computing its "profits or gains" for income tax purposes. The taxpayer argued that these liabilities should be matched against the corresponding revenue as part of the cost of vehicle sales. 2. Interpretation of "Profits or Gains" u/s 65(2)(a): Income tax is levied on "assessable income," which includes "all profits or gains derived from any business." The term "profits or gains" is not defined in the statute and should be understood in its ordinary meaning as per business or accounting practices. The evidence presented showed that the anticipated warranty liabilities were part of the cost of vehicle sales and should be deducted from income. 3. Applicability of Sections 101 and 104: Sections 101 and 104 of the Income Tax Act 1976 govern the deductions allowed in calculating assessable income. Section 101 prohibits deductions except as expressly provided, while section 104 allows deductions for expenditures "incurred" in gaining or producing assessable income. The New Zealand courts have interpreted "incurred" to mean that the taxpayer must have either paid or become "definitively committed" to the expenditure. 4. Construction of Warranty Terms: The warranty terms indicated that liability was contingent upon a defect appearing and being notified within the warranty period. The Court of Appeal held that no liability was incurred until these conditions were met. However, the Privy Council noted that 63% of vehicles sold had defects that would manifest within the warranty period, making the taxpayer "definitively committed" to the expenditure. Thus, the warranty costs were deductible under section 104. 5. Alternative Methods of Accounting: The Court of Appeal suggested an alternative method where the taxpayer could retrospectively apportion the vehicle price between the hardware and the warranty, treating the warranty income as earned over the warranty period. The Privy Council disagreed, stating that normal accounting principles should govern the recognition of income and that manipulating these principles to compensate for statutory anomalies was inappropriate. Conclusion: The Privy Council agreed with Doogue J. that the warranty costs were deductible under section 104 and dismissed the appeal. The commissioner was ordered to pay the taxpayer's costs. The alternative argument based on sections 64B to 64M was not addressed due to the conclusion reached on the primary issue.
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