2015 (2) TMI 253 - HC - Income Tax

Provisions made on account of warranty - contingent liability - ITAT deleted addition - Held that - The warranty stood attached to the sale price of the product. It was held that warranty provisions had to be recognized because the assessee therein had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee therein had incurred a liability during the assessment year which was entitled to deduction u/s.37 of the Income-tax Act, 1961. See M/s. Rotork Controls India (P) Ltd. Versus CIT, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA - Decided in favour of the Assessee.

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal was right in law and on facts in deleting addition made under the head provisions made on account of warranty which is a contingent liability?

Analysis:
The High Court considered the issue of deletion of additions made under the head of provisions for warranties, which were in the nature of contingent liabilities. The matter originated from an appeal before the A.O. who disallowed an amount made for warranties. The C.I.T. (Appeals) allowed the relief in favor of the Assessee, which was further confirmed by the Tribunal. The Court noted that similar issues had been addressed in previous judgments. In Tax Appeal No.235 of 2007, the Court reiterated the view that warranty provisions had to be recognized as the assessee had a present obligation due to past events, resulting in an outflow of resources. The Court relied on the decision in Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, where it was held that warranty provisions were deductible under section 37 of the Income-tax Act, 1961.

The Court also referred to a judgment in Tax Appeal No. 966 of 2007, where a similar question of law was decided in favor of the assessee. The Revenue's counsel did not dispute the legal proposition established in these cases. Therefore, the Court upheld the Tribunal's decision to delete the addition made on account of warranty provisions. The Court emphasized that since the issue was already settled by previous judgments, there was no need for elaborate reasoning. The Court answered the substantial question of law in favor of the assessee and against the Revenue, confirming the Tribunal's decision to delete the addition.

The Court dismissed the appeal and confirmed the impugned order passed by the Tribunal. The Revenue's counsel failed to present any distinguishing circumstances that would warrant reconsideration of the established legal position. Consequently, the Court answered the question in favor of the Assessee and disposed of the appeal accordingly.