2012 (7) TMI 662 - HC - Income Tax

Provision for ascertained liability or contingent liability - Treatment of the provision for installation and service charges - Tribunal treated it as an ascertained liability and hence an allowable deduction - Held that - The provision for the service charges payable by the assessee by way of warranty provision is not made on any scientific data. Admittedly, the provision made was only on ad hoc basis, a fact which is recorded by the Tribunal. - The said fact is further strengthened by the fact that even though the warranty period is for one year and the assessee has to make payment to the service provider as and when a demand is made, normally such payment claim has to come during the period of warranty or within a reasonable time. Even though the agreement that the assessee had with the service provider is not placed before this Court, nor was it placed before the authorities below, nevertheless, a reading of the Commissioner s order relating to the assessment year 1992-93 makes the facts clear by reason of the fact that more than 60% of the provision remained unpaid even after more than two years since the date of sale. Provision was made for the service charges based on past obligation - Held that - If really the provision made was otherwise based on past experience, certainly, the figures would not have stayed as having a correlation to the sales, or for that matter, as the Commissioner of Income Tax (Appeals) observed, more than 60% of the provision would not have remained unpaid even after more than two years from the date of sale - setting aside the order of the Tribunal thereby restoring the order of the AO as Tribunal committed a serious error in law in holding that such ad hoc provision would nevertheless qualify for deduction - in favour of Revenue.

Issues Involved:
1. Whether the Tribunal was right in treating the provision for installation and service charges as a provision for an ascertained liability and hence an allowable deduction.
2. Whether provisions made year after year far in excess of claims likely to be made can be treated as accrued expenditure.

Detailed Analysis:

Issue 1: Provision for Installation and Service Charges as Ascertained Liability
The assessee, engaged in trading office equipment, offered a one-year warranty with free service. The provision for service charges was made in the accounts for the service dealers, calculated at Rs.82 per machine sold. The Assessing Authority deemed these provisions contingent liabilities, not deductable, since service dealers became eligible for service charges only upon making a claim. The Commissioner of Income Tax (Appeals) upheld this view, noting that more than 60% of the provisions remained unpaid even after two years, indicating the provision was not based on actual liabilities but rather on future probabilities.

The Tribunal, however, held that the liabilities crystallized upon the sale of the machines, referencing the decisions in Calcutta Co. Ltd. Vs. CIT and CIT Vs. Beema Manufacturers (P) Ltd. The Tribunal concluded that the provision was for unascertained liabilities and set aside the lower authorities' orders. The Revenue appealed, arguing the provision was ad hoc and not based on historical data, thus should be treated as contingent liabilities.

The High Court rejected the assessee's claim, referencing the Supreme Court's criteria in Rotork Controls India P. Ltd. Vs. CIT, which requires a present obligation from past events, probable outflow of resources, and a reliable estimate of the obligation. The Court found the assessee's provision did not meet these criteria, as it was made on an ad hoc basis without scientific or historical analysis. Consequently, the Tribunal's decision was set aside, restoring the Assessing Officer's order.

Issue 2: Provisions Made in Excess of Likely Claims as Accrued Expenditure
The assessee's provision for service charges was based on sales rather than actual claims made by service dealers. The Commissioner of Income Tax (Appeals) observed that the provision was excessive, with a significant portion remaining unpaid beyond two years, indicating it was not based on a realistic assessment of likely claims. The Tribunal's acceptance of the provision as an accrued expenditure was challenged by the Revenue, which argued that the provision was not based on historical analysis or actual obligations.

The High Court agreed with the Revenue, noting that the provision was made on an ad hoc basis and not supported by scientific data or historical trends. The Court emphasized that provisions should be based on reliable estimates and past obligations, as outlined by the Supreme Court in Rotork Controls India P. Ltd. Vs. CIT. The Court found that the assessee's provision did not meet these requirements, and thus, the provision could not be treated as accrued expenditure.

Conclusion
The High Court concluded that the provision for installation and service charges made by the assessee was not based on ascertained liabilities or a reliable historical trend. The provision was deemed ad hoc and excessive, not meeting the criteria for deductibility as outlined by the Supreme Court. Therefore, the Tribunal's decision was set aside, and the order of the Assessing Officer was restored. The Tax Case Appeals were allowed, with no costs awarded.

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