2015 (5) TMI 869 - HC - Income Tax

Disallowance of warranty provision - whether ITAT was right in law in treating provision for warranty in the present case as an ascertained liability, despite failure on part of the assessee to establish historical or scientific basis of arriving at the said provision? - Held that - The question is answered in favour of the respondent by the judgment of Commissioner of Income Tax v. Majestic Auto Ltd. (7) TMI 568 - PUNJAB & HARYANA HIGH COURT which was also relied upon by the Tribunal. So is the view taken in Calcutta Co. Ltd. v. CIT 1959 (5) TMI 3 - SUPREME Court wherein held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Also see Rotork Controls India P. Ltd. v. Commissioner of Income Tax 2009 (5) TMI 16 - SUPREME COURT OF INDIA 314 ITR 62 (SC)- Decided in favour of assesse.

Summary

Issues:
1. Disallowance of warranty provision by Income Tax Appellate Tribunal.
2. Treatment of provision for warranty as an ascertained liability.
3. Contention of warranty expenses being contingent or in praesenti.
4. Application of mercantile system of accounting for warranty expenses.
5. Justification of warranty provision based on past experience.
6. Whether warranty provision was made on a scientific basis.
7. Interpretation of judgments in Commissioner of Income Tax v. Majestic Auto Ltd. and Rotork Controls India P. Ltd.

Issue 1: Disallowance of warranty provision by Income Tax Appellate Tribunal

The High Court addressed Income Tax Appeal Nos. 434 and 439 of 2014, both challenging the Income Tax Appellate Tribunal's decision to dismiss the appellant's appeal against the Commissioner of Income Tax (Appeals) order. The Commissioner had deleted the disallowance of warranty provision for the assessment years 1998-99 and 2001-02.

Issue 2: Treatment of provision for warranty as an ascertained liability

The appellant raised substantial questions of law regarding the treatment of provision for warranty as an ascertained liability, questioning the ITAT's decision. However, the High Court ruled in favor of the respondent-assessee, citing a Division Bench of the Court and a Supreme Court judgment.

Issue 3: Contention of warranty expenses being contingent or in praesenti

The Assessing Officer initiated proceedings under sections 147 and 148 of the Income Tax Act, questioning the warranty expenses' deductibility. The AO considered the warranty expenses as contingent liabilities, leading to an addition to the respondent's income and penalty proceedings under section 271(1)(c) of the Act.

Issue 4: Application of mercantile system of accounting for warranty expenses

The respondent followed the mercantile system of accounting, including warranty expenses in the Profit & Loss account. The High Court disagreed with the AO's view that warranty expenses should be added to the respondent's income due to being contingent liabilities.

Issue 5: Justification of warranty provision based on past experience

The respondent justified the warranty provision based on past experience, stating that the provision was calculated from actual expenses incurred in the past. The High Court found the respondent's practice of making a provision for warranty in its books of accounts consistent and reliable.

Issue 6: Whether warranty provision was made on a scientific basis

The High Court dismissed the contention that the warranty provision was not made on a scientific basis, emphasizing that the provision was based on the respondent's past experience, which was deemed sufficient.

Issue 7: Interpretation of judgments in Commissioner of Income Tax v. Majestic Auto Ltd. and Rotork Controls India P. Ltd.

The High Court relied on judgments in Commissioner of Income Tax v. Majestic Auto Ltd. and Rotork Controls India P. Ltd. to support the respondent's position. These judgments emphasized that liabilities quantified and discharged at a future date should be treated as accrued liabilities, not contingent ones, supporting the respondent's claim regarding warranty provisions.

In conclusion, the High Court dismissed both appeals, upholding the respondent's position regarding the treatment of warranty provisions and emphasizing the importance of past experience and legal precedents in such cases.