1997 (12) TMI 136 - AT - Income Tax

Summary

Issues Involved:
1. Liability of provision for expenses on repair of transformers during the warranty periods.
2. Addition of unutilized modvat credit to the total income.

Summary:

Issue 1: Liability of Provision for Expenses on Repair of Transformers During the Warranty Periods
The primary issue in the assessee's appeals for assessment years 1987-88 to 1989-90 was the disallowance of provisions for expenses on repair of transformers during warranty periods. The assessee, engaged in manufacturing and distributing transformers, provided warranties ranging from 12 to 60 months to various State Electricity Boards. The assessee claimed provisions based on past experiences, estimating repair costs at 2% for 12-18 months warranties and 6% for 60 months warranties. The Assessing Officer disallowed these provisions, treating them as contingent liabilities, not allowable as deductions. The CIT(A) upheld this view, citing that contingent liabilities do not constitute expenditure and cannot be deducted even under the mercantile system of accounting, referencing the Supreme Court decision in Shree Saijan Mills Ltd. v. CIT.

The ITAT, however, found that the assessee's method of estimating repair costs was reasonable and based on past experience. It held that even contingent liabilities, if sufficiently certain and capable of being valued, could be treated as trading expenses. The Tribunal referenced the Supreme Court's decision in Calcutta Co. Ltd. v. CIT, which allowed deductions for estimated accrued liabilities to be discharged at a future date. The ITAT concluded that the assessee's provisions for warranty repairs were allowable deductions, reversing the lower authorities' decisions.

Issue 2: Addition of Unutilized Modvat Credit to the Total Income
In the Department's cross appeal for the assessment year 1988-89, the issue was the addition of Rs. 1,52,229 as unutilized modvat credit to the total income. The Assessing Officer added this amount, but the CIT(A) deleted the addition, noting that unutilized modvat credit could not be treated as income since it was subject to statutory conditions and could not be withdrawn in cash. The ITAT upheld the CIT(A)'s decision, agreeing that unutilized modvat credit did not constitute income.

Conclusion
The ITAT allowed all the assessee's appeals, recognizing the provisions for warranty repairs as allowable deductions, and dismissed the Department's appeal, confirming that unutilized modvat credit could not be added to the total income.