2019 (3) TMI 2047 - AT - Income Tax

Provision made and expenses not actually accrued - warranty expenses booked by the assessee under the head provisions for warranty expenses disallowed - as per AO liability had not been ascertained or incurred - AO has held that these expenses were not ascertained and were adhoc in nature which could not be claimed as expenses for the year under consideration - HELD THAT - The expenses had been claimed under the head warranty expenses and the assessee had been claiming this consistently on the same basis as a contractual liability. We note that the provision was made as per Note 27(D) to the balance sheet. The assessee company had written back sum under the head Excess Provision Written back and shown as Other income for the impugned assessment year. Coming to the judgment in the case of Bharat Earthmovers 2000 (8) TMI 4 - SUPREME COURT allowability of a liability has to be judged as 1. a business liability has to definitely arise in the accounting year. 2. there should be certainly about the incurring of the liability. 3. it should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. 4. the liability has to be allowed although the liability may have to be quantified and discharged at a future date. It would have to be seen whether the facts of the case of the assessee meets with the criteria settled by the Hon ble Supreme Court. On perusal of the facts of the case it is seen that the liability had definitely arisen in the accounting year and there was certainty about this. The appellant company had made a reasonable estimate of claiming at 0.5% of sales based on past expenses and technical estimates. The appellant company also stated that on the expiration of the warranty period the balance amount is offered for tax as income. Decided against revenue.

Summary

Issues:
- Disallowance of warranty expenses claimed by the assessee
- Interpretation of business liability under Income Tax Act, 1961

Issue 1: Disallowance of Warranty Expenses
The case involved appeals by the assessee and the revenue against separate orders passed by the Commissioner of Income-tax (Appeals) regarding the disallowance of warranty expenses under the head "provisions for warranty expenses." The revenue contended that the provision for warranty expenses was not actually incurred but was a mere provision in the books of accounts, thus should not be claimed as an expenditure. The assessee, a Government of India undertaking, argued that incurring the liability for warranty expenses was certain based on past experience and technical estimates. They consistently provided for warranty obligations on an accrual basis in their Profit and Loss account. The assessee relied on various judgments to support their claim that the liability was certain and estimated with reasonable certainty. The Assessing Officer disallowed the expenses, citing the Supreme Court judgment in Bharat Earth Mover case. However, the Tribunal noted that the liability had arisen in the accounting year, was estimated scientifically, and was offered for taxation upon expiration. The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal for the relevant assessment years.

Issue 2: Interpretation of Business Liability
The Tribunal analyzed the principles laid down by the Supreme Court regarding the allowability of a liability under the Income Tax Act. The liability must definitely arise in the accounting year, be certain incurring, capable of reasonable estimation, and quantified at a future date. The Tribunal found that the assessee's provision for warranty expenses met these criteria as the liability was certain, estimated based on past expenses, and offered for taxation upon expiration. Relying on the Supreme Court's guidance, the Tribunal dismissed the revenue's appeal and allowed the assessee's appeal for the assessment years in question.

In conclusion, the Tribunal upheld the assessee's claim for warranty expenses, emphasizing the certainty and estimation of the liability as per the principles established by the Supreme Court. The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, highlighting the importance of accurately assessing business liabilities under the Income Tax Act.