2012 (12) TMI 671 - HC - Income Tax

Disallowance u/s 43-B - amounts deposited in the Excise Personal Ledger Account (PLA) - Held that - In the present case, the assessee had no option, but to keep the account, in respect of each excisable product (evident from the mandate in Rule 173G that it shall keep an account current ). The latter part of the main rule makes it clear beyond any doubt that the assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit. As decided in CIT And Another Versus C. L. Gupta And Sons. 2002 (11) TMI 82 - ALLAHABAD HIGH COURT section 43B in clear terms provides that the deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account - in favour of assessee. Disallowance of provision for warranties - Held that - As decided in M/s. Rotork Controls India (P) Ltd. Versus CIT, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA a provision is recognized when an enterprise has a present obligation as a result of a past event & it is probable that an outflow of resources will be required to settle the obligation with a reliable estimate can be made of the amount of the obligation - The principle is that if the historical trend indicates that a large number of sophisticated good were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 - in favour of assessee.

Issues Involved:
1. Whether the amounts deposited by the assessee in the Excise Personal Ledger Account (PLA) could be disallowed under Section 43-B of the Income Tax Act.
2. Whether the provision for warranties made by the assessee for the assessment year 1996-97 should be disallowed.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 43-B of the Income Tax Act:
The core issue revolves around whether the amounts deposited by the assessee in the Excise Personal Ledger Account (PLA) could be disallowed under Section 43-B of the Income Tax Act. The revenue contended that since the amount paid into the account was not in respect of manufactured goods, it could not be deducted. Section 43B permits deductions only on actual payment of the corresponding amounts, and the deduction is available only if the sums are "otherwise allowable under this Act." The argument was that the deduction of the prescribed sums would be available to an assessee only on the basis of payment, either in the relevant assessment year or in the subsequent assessment year, but no deduction would be available where the corresponding liability was not incurred by the assessee.

The assessee argued that the amounts paid into the PLA were towards excise liability incurred as a result of the manufacture of goods. The structure of Rule 173G and the scheme of excise duty collection mandated that manufacturers keep certain amounts in the PLA as a precondition for the removal and further sale of goods. The amounts deposited were towards the obligation to pay excise duty, and nothing else.

The court referred to Section 43-B, which states that a deduction otherwise allowable under the Act in respect of any sum payable by way of tax, duty, cess, or fee shall be allowed only in the year in which such sum is actually paid by the assessee. The court also considered Rule 173G, which mandates that every assessee shall keep an account current with the Collector for the duties payable on excisable goods and periodically credit such account by cash payment into the treasury to cover the duty due on the goods intended to be removed.

The court concluded that the amounts deposited in the PLA were towards the excise duty liability and fell within the description under Section 43-B. The amounts were related to the assessee's duty liability, and the arrangement prescribed by the rule was both a collection mechanism and mandatory. The court also referred to previous rulings, including the decision of the Allahabad High Court in C.L. Gupta & Sons and the Supreme Court's decision in CIT v. Shri Ram Honda Power Equipment Corporation, which supported the assessee's position. Consequently, the court answered the first question in favor of the assessee and against the revenue.

2. Disallowance of Provision for Warranties:
The second issue concerned whether the provision for warranties made by the assessee for the assessment year 1996-97 should be disallowed. The court referred to the ruling of the Supreme Court in Rotork Controls India Ltd. v. CIT, which upheld the provisions of warranty. The Supreme Court stated that a provision is a liability that can be measured only by using a substantial degree of estimation and is recognized when:
(a) An enterprise has a present obligation as a result of a past event.
(b) It is probable that an outflow of resources will be required to settle the obligation.
(c) A reliable estimate can be made of the amount of the obligation.

The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and defects existed in some of the items manufactured and sold, then the provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37.

Based on this reasoning, the court answered the second question in favor of the assessee and against the revenue.

Conclusion:
In view of the above discussion, both questions were answered in favor of the assessee, and the appeals were dismissed with no costs.

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