2014 (3) TMI 582 - HC - Income Tax

Nature of Expenses - Provision for warranty liability - Whether the Tribunal was correct in holding that the sum being a provision made for warranty liability in respect of products sold is not a contingent liability but should be allowed as a revenue expense Held that - The decision in ROTORK CONTROLS INDIA (P) LIMITED v/s COMMISSIONER OF INCOME-TAX, CHENNAI 2009 (5) TMI 16 - SUPREME COURT OF INDIA and COMMISSIONER OF INCOME-TAX AND ANOTHER v/s M/s. IBM INDIA LIMITED 2013 (10) TMI 1225 - KARNATAKA HIGH COURT followed - A provision is a liability which can be measured only by using a substantial degree of estimation the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it - On this basis a sensible estimate should be made - The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Provision for warranty is rightly made by the assessee because it has incurred a present obligation as a result of past events - There is also an outflow of resources - A reliable estimate of the obligation was also possible - the appellant has incurred a liability during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act - all the three conditions for recognizing a liability for the purposes of provisioning stand satisfied thus, no substantial question of law is involved in the appeal and the appeal for consideration Decided against Revenue.

Summary

Issues:
1. Whether a provision made for warranty liability in respect of products sold should be allowed as a revenue expense despite not being incurred during the assessment year?

Analysis:
The High Court of Karnataka heard an Income Tax Appeal against the order of the Income Tax Appellate Tribunal, Bangalore Bench 'B', which had dismissed the Revenue's appeal for the assessment year 2003-04. The primary issue raised was whether a sum of Rs.4,96,60,442/-, recognized as a provision for warranty liability in the Profit and Loss Account, should be treated as a revenue expense even though it had not been incurred during the assessment year.

The Senior Counsel for the assessee referred to the Supreme Court judgment in ROTORK CONTROLS INDIA (P) LIMITED and a Karnataka High Court judgment in COMMISSIONER OF INCOME-TAX AND ANOTHER v/s M/s. IBM INDIA LIMITED, asserting that the issue was settled in favor of the assessee in those cases. The Supreme Court in ROTORK CONTROLS INDIA (P) LIMITED defined a provision as a liability that can be estimated with a substantial degree of certainty, based on certain conditions. The Court emphasized that a provision should be recognized when there is a present obligation from a past event, a probable outflow of resources, and a reliable estimate of the obligation amount.

The Revenue argued that the matter should be remanded to the Tribunal for further assessment based on the Supreme Court's observations in ROTORK CONTROLS INDIA (P) LIMITED. However, the Court noted that the assessee had already spent a significant amount towards warranty and accrued expenses, and the remaining provision was correctly added back to the income. The Court highlighted that similar deductions had been allowed for the assessee in previous and subsequent assessment years, as confirmed by previous judgments.

Ultimately, the Court concluded that the issue was settled by previous judgments, including the Supreme Court decision in ROTORK CONTROLS INDIA (P) LIMITED and the Karnataka High Court judgment in M/s. IBM INDIA LIMITED. Therefore, the Court found no substantial question of law in the present appeal and dismissed it accordingly.