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TMI Blog2009 (1) TMI 359X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on perusal of the records formed an opinion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue because the Assessing Officer has allowed the provision for warranty amounting to Rs. 2.83 crores. According to the learned Commissioner of Income-tax, the deduction was not an allowable expenditure. The liability was contingent in nature. Hence a show-cause notice was issued to the assessee to file objection for the proposed action of not allowing the provision for warranty. The assessee submitted a reply vide letter dated February 26, 2008. It was stated that the provision for warranty is created on accrual basis on last day of each quarter. The quantum of provision is arrived at on the basis of earlier experience with the customer. The actual warranty related expenses incurred are adjusted against the provision. The provision is generally kept for one year and thereafter, the balance, if any, is written back. The provision for warranty is an accrued expenditure. The Bangalore Bench has allowed the provision for warranty in the case of Wipro GE Medical Systems Ltd. v. Deputy CIT [2003] 81 TTJ 455. Attention was also drawn towards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax in his order has impliedly approved that the provision for warranty is allowable in case the provision and the warranty expenditure do not differ considerably. However, while giving the final conclusion, the learned Commissioner of Income-tax directed that the provision for warranty should be disallowed. The hon'ble jurisdictional High Court had an occasion to consider the allowability of the provision for warranty. In that case the provision for warranty was based on management estimate. The relevant questions of law considered by the hon'ble jurisdictional High Court in respect of warranty in the case of CIT v. Wipro GE Medical Systems in I.T.A. Nos. 342, 343 and 345 of 2003 is as under: "16. Whether the Tribunal was correct in holding that the provision of Rs. 24,51,968 made by the assessee towards 'provision of warranty' based on management estimate was allowable deduction as it had accrued on the date of sale?" The hon'ble jurisdictional High Court vide order dated June 9, 2008, disposed of the above ground after observing as under: "It is rightly submitted by learned counsel for the assessee that the substantial question No. 16 framed in I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that interest from Gurgaon unit does not fall within the purview of income from export business, therefore, the same is not an allowable deduction under section 10B. The learned Commissioner of Income-tax (Appeals) observed that the interest from the software division is also of the same nature as the one from the staff loan because there is no direct nexus between the activity of the industrial undertaking eligible for deduction under section 10B and the said interest income of Rs. 1,36,34,010. Therefore, the learned Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer. While taking this view, the learned Commissioner of Income-tax (Appeals) has observed that he has taken a view which is consistent with the view of his predecessor for the assessment year 2001-02. During the course of proceedings before us, the learned authorised representative submitted that the deduction under section 10B is to be allowed by considering the profit of the business of the undertaking, which is eligible for deduction under section 10B. Interest income so earned relates to the undertaking, which is engaged in export. Once the Assessing Officer has assessed the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest paid to head Cr. 13,634,009 Dr. 13,634,009" office ------------------------------------------------------------- In the immediately preceding year, such entry amounted to Rs. 34,72,948. Before us, no material has been placed to establish that the sum of Rs. 34,72,948 was held eligible for deduction under section 10B. The learned authorised representative was specifically required to file the balance-sheet of both the undertakings. It was submitted by the learned authorised representative that no separate balance-sheet for both the undertakings have been maintained. It was submitted that the company maintains a common account of bank for both the divisions and that is known as Sweep Account. The amounts received in respect of export oriented unit and non-export oriented unit has been identified with reference to invoices and necessary entries are passed in the accounts maintained in SAP. When the funds are used from the common pool, respective funds outflow is identified with reference to the divisions. Based on the fund utilisation, the deployment of funds by one division to the other division are identified and monthly gross charge interest at a suitable r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of surplus funds: "Turning to the submissions in the present cases, as regards the first of the categories, viz., the parking of surplus funds, there should be no difficulty at all. In view of the large number of the decisions of the hon'ble Supreme Court in the context of section 56 and section 57 and those of the Kerala High Court in the context of section 80HHC itself, we are unable to accept the contention of the asses sees based on Snam Progetti S.P.A. v. Asst. CIT [1981] 132 ITR 70 (Delhi) that interest earned on parked surplus funds should qualify as business income. Clearly, Snam Progetti S.P.A. v. Asst. CIT [1981] 132 ITR 70 (Delhi) was not rendered in the context of section 80HHC and cannot but be confined to the facts of that case. Circular No. 564 dated July 5, 1990, can also not help in interpreting section 80HHC which is a 'stand alone' provision. We are, therefore, of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes enti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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