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TMI Blog1997 (12) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... ard, U.P. State Electricity Board, Delhi Electric Supply Undertaking, etc. The assessee was supplying the distribution transformers to different Electricity Boards of different States, against their orders as per their terms and conditions like, price, payments, delivery, time warranty, period, etc. In the assessment year 1987-88, the Assessing Officer while completing assessment order noted that the assessee-firm debited an amount of Rs. 2,74,119 to Profits Loss Account under the narration 'Inbuilt Liability', which was to be born by the assessee-firm. The assessee was called upon to show the provision as to how that amount was claimed as deduction. The assessee contended that they were dealing in the business of manufacturing and distribution of transformers and against goods supplied to different State Electricity Boards, the assessee-firm was giving warranty for 12 to 18 months and in some cases even up to 60 months against manufacturing defects and the amount of Rs. 2,74,119 was claimed as provision for carrying out the necessary manufacturing defects or replacement, etc. Relying upon the decision of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, the assessee submitted that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was 12 to 18 months or 60 months and secondly on the basis of actual replacement carried out as the assessee itself has admitted that no separate account of warranty and current repair were being maintained. The learned CIT(Appeals), further noted that by adopting this method of accountancy the net effect was postponement of payment of tax on the provisions claimed for the period of warranty. Further, he noted that provisions can be made only in respect of determined liability and liability, which was contingent cannot be treated as determined liability. The case of the present assessee, in the opinion of the learned CIT(Appeals), was that expenses of warranty were contingent on the break-down of a transformer during the period of warranty and such provision cannot be made and particularly no such provision can be made at the time of sale. He further concluded that the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. and that of Delhi High Court decision in the case of Nav Bharat Nirman (P.) Ltd. were distinguishable and rather the decision of the Hon'ble Supreme Court in the case of Shree Saijan Mills Ltd. v. CIT[1985] 156 ITR 585/23 Taxman 37 was appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5 per cent for repairs/replacement of damaged part of transformers being supplied to 12/18 months and 60 months warranty period respectively. The assessee noted from the experience of repairs carried out on damaged transformers during the accounting years 198384 to 1985-86 that the above amount was quite less and average so worked out on the basis of repairs costs for these three accounting years, which came to 1.90 per cent and 6.3 per cent for warranty period of 12/18 months and 60 months respectively. The assessee's learned counsel has pointed out to the copy of the note of provision of liability for repairs of transformers damaged during the warranty period submitted to the authorities below and appearing at pages 9 to 10 of the paper book and contended that on the basis of this estimate of 2 per cent of the total cost of sale of transformers with warranty period of 12/18 months and 6 per cent of total cost of transformers sold with 60 months warranty period was worked out and provision was made in each year accordingly. The counsel further adds that the Department has never questioned or doubted the quantum of estimate, of repairs amount to be borne by the assessee for the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot going to get any benefit in payment of taxes as noted by the CIT(Appeals). 9. So far as the legal position is concerned, the contention of the assessee's learned representative is the same as taken before the authorities below and reliance was placed or the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. and that of Delhi High Court decision in the case of Nav Bharat Nirman (P.) Ltd. and contended that the amount of provisions claimed by the assessee cannot be called contingent liability as the amount of provision was based on estimate and even that estimate was based on the assessee's experience in earlier years. The contention was that the assessee was following the consistent method of accounting and liability was being definite one and there was no occasion to treat that as contingent one and the Department should have allowed the claim of the assessee for deduction. 10. As against this, the learned D.R. placed reliance on the order of the CIT(Appeals) and submitted that the order is reasonable one and the learned CIT(Appeals) rightly treated the provisions of liability as contingent liability and the amount of provision meant for expenditure on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable or not. 13. At the very beginning, it may be relevant to point out that assessee has given out the basis for arriving at the amount of provisions to be made to carry out the inbuilt liability in the warranty period and note of provision of liability for repairs of transformers damaged during warranty period was submitted to the authorities below on the basis of expenses incurred by the assessee for the accounting years 1983-84 to 1985-86, the assessee has arrived the estimated cost of repairs of 2 per cent of sale value for those transformers, which were sold with warranty of 12/18 months and 6 per cent of the total cost of these transformers, which were sold with warranty clause of 60 months. The method of estimating cost of repairs had not been challenged by the Revenue as neither the Assessing Officer nor the CIT(Appeals) have found any defect in working out-such estimate. Once the assessee is coming with estimated cost of repairs of warranty clause then assessee's such claim is to be allowed as in the case of Calcutta Co. Ltd. , the Hon'ble High Court has laid down that if there is estimate of accrued liability, which is to be discharged at a later date, then such an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the warranty period was contingent then such liabilities were specifically certain and capable of being valued as assessee have arrived at the estimate of such liability to be incurred on the basis of past experience and the Department has not doubted the same then such estimated liabilities are to be treated as trading expenses and must be allowed. On the basis of above, legal position which emerges out is that even contingent liabilities which are capable of being valued specifically are allowable and the liability of the assessee even if treated contingent is allowable in view of the decision of the Supreme Court in the case of Calcutta Co. Ltd. . 14. So far as the observations of the learned CIT(Appeals) that the claim on account of warranty is being claimed by the assessee twice, it is pointed out that the assessee had worked out the estimate of what is the expenses in carrying out the necessary repairs/replacement of defective/damaged transformers in warranty period and in case that estimate was somewhat erroneous, the Assessing Officer should have made necessary efforts to highlight this aspect of the matter. No doubt attempt was made to find out as to what were the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at guarantee was in the shape of warranty. On the basis of past experience, the Co. started following the method of accounting of providing some provision to meet the expenditure consequent to the warranty. The provision was of Rs. 1,89,787 while the actual amount of expenditure incurred was Rs. 1,33,562 and the Assessing Officer disallowed the excess provision of Rs. 56,225. The CIT(Appeals) deleted the addition and the Tribunal confirmed that view on the basis that assessee has given out an estimate of such expenses for which provision was made and such estimate was based on assessee's experience in the earlier year. The accounting method followed by the assessee was contingent one and the Tribunal concluded that in such type of cases the Department should not disallow the provisions so made by the assessee on being too technical rather should adopt a pragmatic approach. Even if the Assessing Officer would have arrived at the conclusion after making necessary investigations that estimate. was arrived at by the assessee was in any way excess in any particular year then such expenses were to be allowed on the reasoning of above case but certainly it is not a case before us as the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject to statutory conditions and limitations and that cannot be withdrawn in cash. The plea of the assessee was that the amount cannot be added to the total income of the assessee. On the basis of the above the CIT(Appeals) find force in the plea of the assessee and deleted the addition. The Revenue is in appeal before us. 17. The learned D.R. has placed reliance on the order of the Assessing Officer and the learned counsel for the assessee placed reliance on the order of the CIT(Appeals). 18. At the very beginning, it may be pointed out that the learned D.R. failed to argue as to how the amount of unutilised credit in the modvat account of the assessee can be treated as the income of the assessee because that amount cannot be encashed by the assessee and utilisation thereof was subject to statutory limitations. In the absence of reply to the query, we conclude that this amount of modvat credit cannot be treated as total income of the assessee and the CIT(Appeals) rightly deleted the same after following the answer to query published in Excise Law Times, November, 1987. 9. The result is that all the appeals of the assessee are allowed and that of Revenue is dismissed. - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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