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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 ..... vision of warranty liability having regard to the past factor of actual expenses incurred by the assessee towards warranty liability. The assessee has worked out the amount of liability by applying a multiplying factor on the total sale made during the year on the basis of past result. This method has been followed by the assessee in uniformly right from the first year of the commencement of the production as so noted by the CIT(Appeals) in his order. We are, therefore, in the full agreement with the view taken by the CIT(Appeals) in allowing the assessee s claim of deduction towards warranty liability, a provision thereof was made in the books of account on actuarial basis. The order of CIT(Appeals) is thus upheld. In the result, the appeal filed by the revenue is dismissed. - C.L. SETHI, J.M. AND A.K. GARODIA, A.M. For the Appellant : Smt. Kavita Bhatnagar For the Respondent : S.K. Aggarwal ORDER C.L. SETHI, J.M. The present appeal has been filed by the revenue against the order dated 29-12-2006 passed by the learned CIT(Appeals) in the matter of an assessment made under section 143(3) of the Income-tax Act, 1961 (the Act) by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its claim. However, Assessing Officer was of the view that the definition of the provision in itself defines that it is not possible to predict any certainty as to when and to what extent a liability would materialize resulting in a business expenditure. Assessing Officer was of the view that in the instant case assessee himself had been adding back the amount of provisional created during such year and had also paid due taxes. In the year under consideration assessee had failed to put-forth any evidence/arguments as to why the provisions created in the year has any difference from the provisions created in the earlier year. Since the liability to Rs. 11,24,04,000 had not arisen till the end of the year, the question of allowability for such expenses does not arise as per section 37(1) of the Income-tax Act, 1961. The Assessing Officer had again stated in his assessment order that in the cases relied upon by the assessee the liability had arisen on account of salary, wages and retirement benefits etc. whereas in the case of the assessee, the liability is towards the Customer Service Expenses which are highly unpractical and therefore, any provision would only be estimated rathe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation which showed that as a matter of existing fact not further contingency 63 per cent. or all vehicles sold by the taxpayer contained defects likely to be manifested within the warranty period and require work under warranty only, that since theoretical contingencies could legal obligation to make payments under those warranties and, even though it might not be required to do so until the following year, it was definitively 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. More recently the Hon ble Delhi Bench of ITAT had the opportunity to deliver a judgment on this issue in the case of Maruti Udyog Ltd. v. DCIT [2005] 92 ITD 119 . It was held that if the claim of the assessee was based on this scientific method then, the claim of the assessee could not be rejected on the ground that it was contingent. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the assessee to discharge its obligation under that clause for the period of warranty. It was a liability which was capable of being construed in definite terms, which had arisen in the accounting year, although its actual quantification and discharge might be deferred to a future date. Once the assessee is maintaining his accounts on the mercantile system, a liability accrued, though to be discharge at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. To substantiate its claim for the relevant assessment year the assessee had given the figures of last five years of warranty liability provided vis- -vis the expenditure incurred. These figures clearly exhibited that the assessee had incurred expenditure resulting from the warranty clause to the extent of more than 2 per cent of its total sales in the previous year. There was nothing on record which could suggest that the change in the accountancy was motivated or was improper or that the provision made in the accounting year and deduction claimed as business expenditure was unduly excessive and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the provision for after sales services of transformers on the facts of that case was a reasonable one in view of the actual expenses, which materialized in a latter year, so that it was also allowable, following the decision of the Hon ble Supreme Court in the case of Bharat Earth Movers (supra) which, however, related to a case of leave encashment but the rational of the Hon ble Supreme Court decision in the case of Bharat Earth Movers (supra) should have an application for warranty cases as well. As regards the warranty claims, the Kerala High Court followed not only the decision of the Hon ble Supreme Court in the case of Bharat Earth Movers (supra), on leave encashment but also a decision of the Hon ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 in support of the principle that certain liability in future is not a contingent liability. The Privy Council in the case of IRC v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 specifically on the subject of warranty has also taken a similar view by observing thus (headnote): The taxpayer s liability under the warranty for each vehicle sold was contingent on a defect appearing and being noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of remedial work for all the vehicles sold in a given year. Normal commercial practice therefore requires that this amount should be brought into account as a deduction from income in estimating the profits or gains of the business in the year in which the vehicles were sold. The aforesaid decision of the Privy Council in the case of Mitsubishi Motors New Zealand Ltd. (supra) was followed by the Hon ble Delhi High Court in the case of Vinitec Corpn. (P.) Ltd. (supra) where it was observed that when it was not disputed that warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligation under that clause for the period of warranty, it is a liability which is capable of being construed in definite terms, which had arisen in the accounting year, may be its actual quantification and discharge is deferred to a future date. Once the assessee is maintaining its accounts on the mercantile system, the liability accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the year in which the goods were sold, the assessee was entitled to deduct from its profit the provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of the goods sold in that year, the quantification thereof being based on statistical information. It was further held that occurrence of the warranty claim has to be viewed from an overall perspective so as to match the costs vis- -vis the sales revenue of a given period. In this sense and the issue being considered in this background the court held that the warranty liability of the assessee cannot be construed to be a contingent liability in nature. On analysis of the judgments referred to above, the position of law emerging therefrom is that once the assessee is maintaining its accounts on the mercantile system, the liability already accrued in a year, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid. The expression t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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