2022 (11) TMI 79 - HC - Income Tax

Reopening of assessment us 147 - As argued reopening was on the basis of mere change of opinion - disallowance of liability on account of the warrantee - HELD THAT - When we refer to Explanation (1) to Section 147 of the Act, as it existed at the relevant point of time as per which production before the Assessing Officer the account books or other evidence from which material evidence with due diligence could have been discovered by the Assessing Officer would not necessarily amount to disclosure within meaning of Section 147 of the Act. That being the position we answer the first question against the appellant and in favour of the revenue. Provision for warranty which incidentally was the reason for re-opening of assessment - As has been held by the Supreme Court in Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT the law is settled that if a business liability has arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability would be in - praesenti though it may have to be discharged at a future date. In the present case, no liability had arisen in the assessment year under consideration. All that the assessee had done was to make a provision for warranty that might accrue in future. There was no certainty of incurring the expenditure. No reason to answer the second question in favour of the appellant. Consequently this question is also answered against the appellant and in favour of the revenue.

Summary

Issues:
1. Validity of reassessment under Section 148 of the Income Tax Act based on a mere change of opinion.
2. Disallowance of provision for warranty as a deduction by the Assessing Officer.

Analysis:

Issue 1: Validity of reassessment under Section 148:
The appellant challenged the reassessment under Section 148, claiming it was based on a mere change of opinion. The Assessing Officer had reopened the assessment due to a provision for warranty debited by the appellant. The first appellate authority and Tribunal rejected the appellant's argument, stating that the Assessing Officer had the right to reassess under Section 147 of the Act. The Tribunal emphasized that the Assessing Officer's failure to issue a notice under Section 143(2) did not prevent reassessment. The Tribunal's decision was based on the amended provisions of Section 147, deeming under-assessed income as escaped assessment. The Court concurred with the Tribunal's view, emphasizing the importance of Explanation (1) to Section 147.

Issue 2: Disallowance of provision for warranty:
The Assessing Officer disallowed the provision for warranty as a deduction, stating it was a contingent liability and not an actual expenditure incurred by the appellant. The CIT(A) and Tribunal upheld this decision, considering the provision uncertain and contingent. The Tribunal outlined principles for determining liability as contingent or uncertain, emphasizing the need for estimation based on past experience and prudence. The Tribunal found that the appellant's provision for warranty lacked scientific analysis and was not based on past experience. The Court referenced the Supreme Court's decision in Bharat Earth Movers, stating that for a deduction to be allowed, the liability must have arisen in the accounting year and be capable of reasonable estimation. As the provision for warranty was not a certain liability, the Court upheld the disallowance.

In conclusion, the Court dismissed the appeal, upholding the reassessment under Section 148 and the disallowance of the provision for warranty as a deduction.