2015 (6) TMI 937 - HC - Income Tax

Addition on account of warranty in the nature of contingent liability - ITAT deleted the addition - Held that - The issue involved in these appeals is already concluded in the case of Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, 2009 (5) TMI 16 - SUPREME COURT OF INDIA wherein held that the assessee was engaged in the business of manufacture of valve actuators, which were sophisticated goods. The statistical data indicated that every year some of these were found defective. The valve actuator, being a sophisticated item, no customer was prepared to buy it without a warranty. Therefore, the warranty became an integral part of the sale price. In other words, the warranty stood attached to the sale price of the product. It was held that warranty provisions had to be recognized because the assessee therein had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee therein had incurred a liability during the assessment year which was entitled to deduction u/s.37 of the Income-tax Act, 1961. Learned counsel appearing for the Revenue was not in a position to dispute the above proposition of law.- decided in favour of the assessee.

Summary

Issues:
Tax Appeals involving common questions on law and facts.

Analysis:
The case involved Tax Appeals with common questions on law and facts, consolidated and decided through a common judgment. The lead matter was Tax Appeal No.966/2007. The appellant, an assessee firm engaged in manufacturing Tower Packing, filed an income tax return for the Assessment Year 1993-94. The Assessing Officer determined the total income after disallowances, including disallowance of interest payment under section 36(1)(iii) of the Income-tax Act, 1961. The CIT(A) later reduced the total income after an appeal by the assessee.

Subsequently, an amount towards provision for warranties was disallowed during assessment reopening, leading to further appeals. The CIT(A) partly allowed the appeals, concluding that income had escaped assessment for two years. The Revenue appealed to the Income Tax Appellate Tribunal, which dismissed the appeal. The central question in the appeals was whether the addition made under the provision for warranties, treated as a contingent liability, should be deleted.

The judgment referred to a precedent set by the Apex Court in Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, [2009] 314 ITR 62 (SC). In that case, warranty provisions were recognized as the warranty was an integral part of the sale price, representing a present obligation from past events. The court held that the liability was deductible under section 37 of the Income-tax Act, 1961. The Revenue did not contest this legal position.

Given the precedent and lack of dispute on the legal proposition, the High Court ruled in favor of the assessee and against the Revenue. The appeals were disposed of accordingly.