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TMI Blog2007 (2) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... one and not a certainty, we fail to understand the reasoning of the Tribunal in accepting the case of the assessee on the strength of decisions, which certainly are based on definite data. Thus, the decision of the Tribunal deserves to be reversed. It may be noted that the assessee was providing warranty for the repair for a period of one year, when they were paying Rs. 150 per set to another company, by name, T. D. Electronics Service Company. That apart, there was another five years warranty and the expenditure on this account was estimated at Rs. 68 lakhs and this expenditure was to be incurred only when there arose a liability, to be borne. The facts herein are no different from that of the earlier cases. We do not find any justification to accept the plea of the assessee that the provision merited a deduction. Appeals preferred by the Revenue, on the question of warranty charges as a contingent liability, are allowed, holding that the same as not deductible. - P. D. Dinakaran And Mrs. Chitra Venkataraman JJ. For the Appellant : T. Ravikumar For the Respondents : R. Vijayaraghavan for M/S. Subbaraya Aiyar and Padmanabhan JUDGMENT 1. Mrs. Chitra Venk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the profit and loss account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor\qs interest. 7. Based on the said decision, learned standing counsel submits that when there was no obligation cast as on the date of sale except for an agreement and in the absence of any comparison to make a provision for an uncrystallised or uncertain liability, the assessee was not entitled to the benefit, as granted by the Tribunal. He also placed reliance on the decisions in Indian Smelting and Refining Co. Ltd. v. CIT [2001] 248 ITR 4 (SC) and CIT v. Dynavision Ltd. [2004] 265 ITR 289 (Mad) and makes a reference to page 297, to impress on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. Taking note of the nature of liability, the Supreme Court also made a reference to the decision in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53, and held that it was permissible for an assessee, if he so chooses, to provide in his profit and loss account for the estimated liability under a gratuity scheme, by ascertaining the present value on accrued basis and claiming it as an ascertained liability, to be deducted in the computation of profits and gains of the previous year. Referring to the provisions of section 40A(7) in that case, the Supreme Court held that the requirements for gratuity to be deductible under the Act must be fulfilled under section 40A(7). It may be noted that though it relates to a gratuity payment, the fact remains, that, to qualify for a deduction, there must be a liability and it is a certainty. Although the quantification, as such might be postponed to a future date, as long as the event is of certainty, the claim for deduction, as such, cannot be denied. However, where the liability itself is not held out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees of the company, subject to a ceiling on accumulation as applicable on relevant date. Consequently, the apex court held that the liability was not a contingent liability. 12. A perusal of the decision of the Supreme Court shows that what should be certain is the incurring of the liability. Even though the actual quantification may not be possible, it should also be capable of being estimated with reasonable certainty. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti, though it will be discharged at a future date. It makes no difference to the point of time when the liability shall have to be discharged. 13. The Supreme Court decision referred to above lays down the law on the question of deductibility of a provision on contingent liability and that the deduction to be allowable thereon must be that liability existing with certainty to be called an accrued liability. Hence, where there was no difficulty in ascertaining the existence of a liability, mere existence of difficulty in actual quantification does not convert the accrued liability to that of a conditional one, to look upon to the happening of an event. The se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Delhi High Court noted that the assessee had given figures for five years of warranty liability provided vis-a-vis the expenditure incurred, so also, in the decision reported in CIT v. Indian Transformers Ltd. [2004] 270 ITR 259 (Ker). 22. We do not think that the decisions of the Delhi High Court and the Kerala High Court lend support to the cause of action. In the absence of any such details, an ad hoc provision on a percentage of the turnover disentitles the assessee to the relief. 23. Learned counsel for the assessees reiterated the fact that under the terms of sale, warranty clause is a committed liability and, as such, the claim is reasonable as to the particular percentage in the total turnover. 24. We do not agree with the abovesaid submission of learned counsel that they could be granted some ad hoc percentage. Considering the fact that the liability, as such, being a contingent one and not a certainty, we fail to understand the reasoning of the Tribunal in accepting the case of the assessee on the strength of decisions, which certainly are based on definite data. Under the circumstances, the decision of the Tribunal deserves to be reversed. 25. As regards t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed extent. Learned counsel also submitted that considering the various aspects of the claim, the Tribunal had rightly concluded the issue in favour of the assessee. 29. A perusal of the order of the Tribunal shows that the Tribunal has mainly accepted the plea of the assessee that the expenditure was warranted by commercial exigencies and the assessee would have spent more if it were to maintain branches, instead of taking services of a holding company. 30. We feel, in the absence of any details in the order as to the services rendered, in order to result in a better business, the matter be remitted to the assessing authority for fresh consideration on issue of granting relief to enable the assessee to furnish the details as to the additional services rendered, to justify the payment over and above 2 per cent. service charges on the sales effected. Consequently, the first question in T. C. Nos. 94 and 95 of 2004, namely, whether the Income-tax Appellate Tribunal was right in holding that the disallowances made under section 40A(2)(b)(iv) of the Income-tax Act in respect of corporate service charges paid to a closely connected company were not justified, stands remanded to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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