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2015 (7) TMI 657 - HC - Income TaxWarranty amount inclusive of the sale amount - whether is an accrued liability or a contingent liability? - Tribunal following the decision of CIT v. Rotork Controls India Ltd. and others, (2007 (2) TMI 200 - MADRAS High Court) came to hold that since the warranty provision made as against the liability had not crystallized against the assessee, the plea of the assessee seeking deduction is unsustainable - Held that - The decision of this Court in Commissioner of Income Tax v. Rotork Controls India Ltd. supra on which heavy reliance was placed by the Tribunal, was reversed by the Supreme Court 2009 (5) TMI 16 - SUPREME COURT OF INDIA in the aforesaid decision wherein held that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. The order of the Tribunal stands set aside and the matter is remanded to the Assessing Officer to pass appropriate orders in the light of the decision of the Supreme Court cited supra. - Decided in favour of assessee for statistical purposes.
Issues:
1. Interpretation of warranty amount as accrued or contingent liability. 2. Application of judicial precedents in determining tax liability deduction. 3. Conflict between High Court and Supreme Court judgments on tax liability provisions. Issue 1: Interpretation of warranty amount The appellant, engaged in distributing diagnostic imaging equipment, claimed a deduction for unexpired warranties. The Assessing Officer disallowed the claim, stating the liability was unascertained under the mercantile accounting system. The Commissioner of Income Tax (Appeals) allowed the appeal, considering the warranty liability as ascertained. However, the Tribunal, following a High Court decision, held that since the warranty provision had not crystallized, the deduction sought by the appellant was unsustainable. The Supreme Court's decision in Rotork Controls India (P) Ltd. clarified that a provision is a liability measurable by estimation, recognized when certain conditions are met, including a present obligation from a past event. The Tribunal's decision was set aside, remanding the matter to the Assessing Officer for reconsideration in light of the Supreme Court's ruling. Issue 2: Application of judicial precedents The Tribunal relied on the High Court's judgment in Rotork Controls India Ltd. to deny the appellant's deduction claim. However, the Supreme Court's subsequent decision in Rotork Controls India (P) Ltd. reversed the High Court's ruling, emphasizing the conditions for recognizing a provision as a liability. The Supreme Court's decision highlighted the need for a substantial degree of estimation to measure a liability, based on present obligations from past events. Consequently, the Tribunal's decision was overruled, and the matter was remanded for fresh consideration by the Assessing Officer. Issue 3: Conflict between High Court and Supreme Court judgments The conflict arose between the High Court's decision in Rotork Controls India Ltd. and the subsequent Supreme Court judgment in Rotork Controls India (P) Ltd. The Supreme Court clarified the principles for recognizing provisions as liabilities, emphasizing the need for reliable estimates and present obligations from past events. The Supreme Court's ruling set aside the Tribunal's decision based on the High Court's judgment, remanding the matter for reassessment by the Assessing Officer in accordance with the Supreme Court's interpretation. As a result, the appeal was allowed by remand, with no costs imposed due to the remand order issued by the Court.
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