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TMI Blog2009 (1) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case, the learned CIT(Appeals) was justified in deleting the above addition without appreciating the fact that they are based on sales which are totally unpredictable and not ascertainable." 3. The facts giving rise to the issue has been discussed by the CIT(Appeals) as under:- "Ground No. 4: During the year under consideration it was noticed by the Assessing Officer that the assessee had reduced a sum of Rs. 10.13 crores from its income on account of 'Provision of Service Warranty'. However, same were not reflected in its Profit & Loss Account. When the assessee was confronted on these facts it was brought to the notice of the Assessing Officer that company was providing one year warranty on sale of its products based upon scientific and realistic method up till 31-3-2001, provisions were made and expenses of Rs. 10,13,518 were disallowed in the statement of taxable income computed for income-tax purpose. During the assessment year 2002-03 such provisions were written back in books of account and as such, total actual expenses, charged to Profit & Loss Account were reduced by Rs. 10,13,58,000. As such, expenses were already offered for tax in earlier years. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice warranty expenses are provided in the books of account based upon well established scientific and realistic methods. In this connection your attention is invited towards of the judgment of the Hon'ble Supreme Court in the case of Bharat Earthmovers Ltd. v. CIT [2000] 245 ITR 428 wherein it was held by the Apex Court that- If a business liability has definitely arisen in the accounting-year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present; though it will be discharged at a later date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. Recently, honourable Madras Court has had the opportunity to deal with the specific matter in the case of CIT v. Beema Mfrs. (P.) Ltd. [2003] 130 Taxman 400. The Court relied on its own judgment in TC No. 85 of 1997 dated 9-9-2002 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous years. The statistical data and calculation of provision of service warranty based on such data is attached herewith. The principle and importance of statistical date/scientific method has been affirmed by various courts as mentioned in preceding paragraph. Further in the case of CIT v. Indian Transformer Ltd. [2004] 270 ITR 259 the Hon'ble Kerala High Court has held that provision of service warranty is not a contingent liability and rather it is an ascertained liability capable of being estimated with reasonable certainty though the actual quantification may not be possible. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. The Assessing Officer while passing the order under section 143(3) has completely over looked the judgment of above case and therefore, has wrongly made addition of Rs. 11,24,04,000 which is not sustainable." 3.2 After considering the assessee's submission and as well as the Assessing Officer's observation of the CIT(Appeals), allowed the assessee's claim after following the decision of jurisdictional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including provisions. The difference in the expenses including provisions and actual expenses was considered for providing the additional provisions. This method was followed by the assessee-company uniformly right from the first year of the commencement of the production. Although the claim of the provisions as a revenue expense was made first time in the year under consideration based on the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. v. CIT [2000] 245 ITR 428 and many other courts' citations submitted by the appellant-company in its submission in the course of assessment proceedings and also in the course of appellate proceedings but I find that its first time claim in the year under consideration is allowable as per the ratio laid down by the jurisdictional Delhi High Court in the case or CIT v. Vinitek Corpn. (P.) Ltd. [2005] 278 ITR 337 . The observation made by the Assessing Officer that since these provisions have not been incurred wholly and exclusively for the purpose of business, they stand disallowed under section 37(1) or the Income-tax Act, 1961 and also they are based on the sales which are totally unpredictable to be determined have bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make payments under those warranties and, even though it might not be required to do so until the following year, it was definitely committed in the year of sale to that expenditure; and that, accordingly, in computing the profits or gains derived by the taxpayer from its business in the year in which the vehicles were sold, the taxpayer was entitled under section 104 to deduct from its total income the provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of vehicles sold in that year." Regarding the warranty liability, the Privy Council further observed as follows: "The evidence of accounting practice adduced before Doogue, J. left no doubt about the proper treatment of the outstanding warranty liabilities. They were part of the cost of the vehicle sales and therefore so far as capable of reasonable estimation, should be matched against the corresponding revenue. The evidence satisfied the judge that a reasonable estimate could be placed upon the anticipated liabilities. All vehicles which leave the taxpayer's assembly plant at Porirua have been tested and examined for defects. So far as the taxpayer is aware, there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a condition cannot be allowed as a deduction unless the dependent condition is fulfilled during the previous year. In the case of warranty liability, it is found that the assessee when it sold the goods manufactured by it, conferred on the purchasers the benefit of a warranty, and thereby the assessee undertakes to provide free maintenance or replacement of its parts within a particular period on sale of the goods. The contention of the Revenue that the liability was contingent upon a defect appearing and being notified within the warranty period and till such time there was no liability in law and, therefore, the claim for deduction on account of estimated liability could not be allowed has not been accepted by the courts by holding and observing that once the liability arising on account of warranty claims is in-built in the sale mechanism itself, it cannot be viewed that it is contingent in nature. It was further held by the court, that a contingent liability is to be understood as one, which is not only dependent on the happening of a future event but is also incapable of ascertainment or even estimation with a fair degree of precision. In contrast, a liability whose happening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to be a permissible outgoing or allowance or deduction in the year of account, it is further clear that the putting aside of money, which may become expenditure on the happening of an event, is not admissible expenditure. The expenditure which is deductible for income-tax purpose is one which is towards a definite and certain liability actually existing at the relevant time. Therefore, a pure contingent liability distinguished from a definite and actual liability arising in praesenti, do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. The other condition to be satisfied is that the definite liability in praesenti should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these conditions are satisfied, it does not make any difference if the liability may have to be discharged at a future date, and the future date, on which the liability shall have to be discharged, is not certain. It is also clear that a condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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