TMI Blog2001 (5) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... s.96,37,000 on account of provision made on account of revenue recognition on percentage of completion method. The same is accordingly deleted. This ground accordingly succeeds. 3. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming the addition of Rs.31,51,000 on account of warranty provision made in the accounts. The facts and arguments of both sides are identical to those discussed by us in I.T.A No. 157/Pune/1995 for the earlier assessemnt year i.e. 1990-91. As such the decision given by us in the aforesaid order will apply mutatis mutandis to the facts of the present case. For the reasons discussed therein we hold that there is no justification for the impugned addition of Rs.31,51,000 on account of provision made in respect of warranty in the accounts. The same is accordingly deleted. This ground accordingly succeeds. 4. Ground No. 3 raised by the assessee reads as under: "The learned CIT(A) erred, while working out the disallowance under section 37(2A), in restricting the company's claim for deduction on account of participation of the company's officials in the business launches extended to the customers in the normal course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowed the claim on the ground that in the returns for the earlier years i.e. 1989-90 and 1990-91 neither investment allowance had been claimed nor allowed. The Assessing Officer further held that incurring of losses is no criteria for not claiming investment allowance. He further held that the investment allowance on computer is not allowable. He accordingly disallowed the claim of the assessee in toto. 8. On appeal, the CIT(A) confirmed the addition observing as under: " I have considered the submission of the appellant, and facts in issue. The deduction under section 32A is admissible in respect of machinery or plant acquired or installed or put to use in the previous year. In the instant case, the plant and machinery including computers had been put to use in the Assessment year 1989-90 and 1990-91 and as such cannot be considered for deduction in Assessment year 1991-92. The mere fact that the assessee could not claim deduction due to losses in the earlier years does not mean that it is eligible for such claim in later years. There is no material to show that computers or other plant and machinery for which disallowance is made had been installed or put to use in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32A itself and the deductions available under Chapter VIA. In other words, the amount of investment allowance is not allowed to convert income into a negative total income. At best it is allowed to enter into the computing mechanism so as to reduce the total income to NIL and no further. In this respect, he drew our attention to sub-section (3) of section 32A. The learned counsel further submitted that the deduction for investment allowance is further constrained by the conditions of creation of appropriate reserve with an option to create such reserve in the year the deduction is to be allowed under sub-section (3) of section 32A or in any earlier year not being earlier to the year in which the the machinery is installed or put to use. [Section 32A(4)(ii)]. The learned counsel further submitted that the assessee has no right of first/appeal under section 246 if the claim for investment allowance is rejected where such claim is outside the scope of total income assessed. There is no specific clause under section 246 conferring right of appeal in such a case unless the allowance affects the amount of income assessable [sec. 246(1)(a)]. Unlike section 157 providing for intimation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er for finding out whether or not the assessee fulfils the other conditions. 12. The learned D.R. further submitted that as per section 32A the assessee can claim investment allowance only in the assessment year relevant to the previous year in which the machinery was acquired or was installed or was first put to use immediately succeeding the assessment year. In the instant case, the machineries have been installed in earlier years as can be seen from the annexure. Therefore, the primary condition for the claim of the investment allowance has not been fulfilled by the assessee. The learned D.R. relied upon the judgment of the Calcutta High Court in the case of CIT v. J. Thomas Co. (P.) Ltd. [1977] 110 ITR 566 wherein it has been held that for claiming any concession the assessee must strictly comply with the requirements of the section. According to the learned D.R. the decision of the Patna High Court in the case of Arjun Prasad relied upon by the learned counsel for the assessee is distinguishable from the facts of the case. He submitted that in Arjun Prasad's case, the assessee had made the claim in the relevant assessment year. The assessee fulfilled all the conditions inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss account disclosed by the books of the assessee. Mere book entries will suffice for creating such a reserve fund. The debit entries and the entries relating to the reserve fund have to be made before the profit and loss account is finally drawn up. The Supreme Court has clearly held that this is a condition for securing the benefit of development rebate and if the condition is not satisfied, the deduction on account of development rebate cannot be claimed at all. In the case of the assessee, it is an admitted fact that in the earlier two assessment years 1988-89 and 1989-90 when the machinery was first installed and put to use, neither any reserve was created nor claim for deduction of development rebate was made before the Assessing Officer on the ground that in these years, the assessee-company had suffered losses. The assessee did not make any book entries for creating a reserve fund. The finding of the Hon'ble Supreme Court on the issue is very clear and is reproduced as follows: "That (creation of reserve) is a condition for securing the benefit of development rebate and if that condition is not satisfied, we fail to see how the deduction on account of develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is a public limited company and is engaged in the business of designing, engineering, fabrication, procurement and assembly, erection, installation and commissioning of Ground Boilers with the help of sophisticated technology for Petrochemical, Fertiliser, Sugar and other process industries. The first grievance of the assessee relates to addition of Rs.60,30,000 on account of provisioning made on account of revenue recognition on percentage of completion method. The year under consideration is the first year of assessee's business and for arriving at the portion of the profit of the long-term contracts, whose execution is spread over more than one accounting period, the company maintained accounts on the percentage of completion method, now formally recognised as Accounting Standard 7 (AS-7) of the Institute of Chartered Accountants of India. In other words, in respect of long-term contracts the profit was shown by adopting the following method: --------------------------------------------------------------------- (Value of invoices raised) (Estimated profit from ---------------------------- X the contract as a (Contractor value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer holding that provisioning in the accounting was made for an unknown liability and such a provision cannot be considered as a charge on profit. According to the learned CIT (Appeals), the assessee-company had created the provision of Rs.60.36 lakhs for job cost on estimated material cost and percentage of completion basis and thus, provision was made basically in respect of the likely material cost and not for the actual material cost. In the view of the learned CIT (Appeals) provisioning the amount per se cannot be allowed unless it was created for an ascertained and accrued liability and that assessee cannot create a notional liability by way of equalization charge and claim deduction for the same. 3. Aggrieved by the orders of authority below, the assessee is in appeal before us. 4. Shri B.K. Khare, the learned counsel submitted that the learned CIT (Appeals) erred in disallowing without ascertaining the raison d'etre of provisioning, a sum of Rs.60,36,000 in the company's accounts maintained regularly on the percentage of completion method now formally recognized as Accounting Standard 7 (AS-7) of the Institute of Chartered Accountants of India for arriving at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Department that such provisioning is not for the actual expenditure or any liability incurred but it is made for the purpose of finding out the profit on the basis of percentage of completion method as the provisioning is by way of distribution of profit for the contract to various previous years for which the contract was in progress. In other words according to the learned counsel, it is in the nature of profit rationaliser, divider, allocater, etc., in order to determine profit of each year during which contract was in progress. In the year of completion of contract ultimately true profits emerged and such profits are not interfered with. In other words, ultimate profit in the year of completion of the contract also includes stage by stage profit as worked out by the assessee-company and in that sense profit from the contract as per the books of account is fully accepted. The learned counsel submitted that the assessee has worked out the profits on the long-term contract as per well accepted norms of accountancy. In this connection, he drew our attention to the extracts from Standard Books of Accountancy placed at pages 134 to 171 of the paperbook. In the Book Keeping and A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p Sampatramn v. CIT [1953] 24 ITR 481, 486 (SC). 11. Badridas Daga v. CIT[1958] 34 ITR 10 (SC). 7. Shri Naresh Kumar, the learned D.R. strongly supported the orders of authorities below. He submitted that for computing the profit for any assessment year, the following points have to be considered: (i) Whether the income has accrued to the assessee? (ii) How the assessee treats the profits? (iii) Whether profits have accrued? (iv) Whether the accountancy principle would overrule the provisions of income-tax and whether shifting of the profit as has been done by the assessee is permitted? Coming to the first point, the learned D.R. submitted that it is clear that the receipts which have been received by the assessee have accrued to it. All the payments have been received in pursuance of the contract. Therefore, it cannot be said that the income had not accrued to the assessee. In this connection, he relied upon the decision of Supreme Court in the case of ED. Sassoon Co. Ltd. v. CIT [1954] 26 ITR 27. 8. Coming to the second point, the learned D.R. argued that it is immaterial how the assessee treats the receipts in its books of account. The same principle was canvas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent years not in order to fulfil the contractual agreement. According to the learned D.R., under the peculiar circumstances, the Supreme Court allowed that deduction on account of liability to be incurred in subsequent year. However, in the instant case, the receipts had been received by the assessee during the assessment year and that these receipts have been earned by the assessee by performing the job as envisaged in the contract. For earning the receipts, whatever expenses have to be incurred as for the contract, have already been incurred as per the terms of payment; payments are to be made only after production of the certificate that the relevant work has been done. In other words, raising of bills tantamounts to the completion of relevant portion of work. Therefore, he learned D.R. submitted that, so far as these receipts are concerned, the assessee has not incurred any further expenses. Therefore, he submitted that ratio of decision of the Supreme Court in Calcutta Co. Ltd.'s case is not applicable to the facts of the present case. On the other hand, the judgment of the Hon'ble Supreme Court in the case of CITv. British Paints Ltd. [1991] 188 ITR 44 was applicable becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract as per its books of account covering the entire period of contract and the net income so ascertained was apportionable over the four years in question on the basis of yearly turnover - again highlighting the principles of measurement of yearly profit in the case of percentage of completion method used in the case of long-term contracts. In the case of M.N. Dastur Co., the Calcutta Bench of ITAT, following the judgment of the Hon'ble Supreme Court in the case in Guttoffnungashutto Sterkrado held that the basis of Accounting Standard issued by the Institute of Chartered Accountants of India i.e., AS-7 is a well recognised method and the assessee was right in following the same. 14. In the case of CITv. UP. State Industrial Development Corpn. the Hon'ble Supreme Court held as under: "In order to determine the question of taxability, well-settled legal principles as well as principles of accountancy have to be taken into account. It is a well accepted proposition that for the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the method of accounting adopted by the assessee, we do not find any violation of the provisions of the charging section. As regards the reliance plated by the ld. D.R on the judgment of the Hon'ble Madras High Court referred to, the Hon'ble Madras High Court was considering the case of a nonresident assessee. The method of accounting applied was such that in the opinion of the High Court, the income earned in India could not be brought to be charged at all under section 5(2). In the case of the assessee, the position is different; the charge is not at all defeated; it is only rationalised. 17. Coming to the judgment of the Hon'ble Supreme Court in the case of British Paints Ltd. relied upon by the ld. D.R, we hold that the ratio does not apply to the facts of the present case because in that case, the system of accounting adopted was such which excluded, for valuation of stocks in trade, all costs other than the cost of raw-material, for the goods in process, furnished products and same was likely to result in a distorted picture of the true state of business for the purpose of computing the chargeable income. In the present case, the assessee as pointed above has adopted o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justification for the impugned addition of Rs.60,30,000 on account of provisioning made on account of revenue recognition of percentage of completion method. The same is accordingly deleted. This ground accordingly succeeds. 20. The next grievance of the assessee is that the ld. CIT(Appeals) is not justified in confirming an addition of Rs.11,64,000 on account of warranty provision made in the accounts. During the course of assessment proceedings, the Assessing Officer noted that the assessee-company had debited a sum of Rs.11,64,000 as provision for warranty. This amount had remained unpaid/unadjusted and therefore, had been shown as liability as on 31-3-1990. The Assessing Officer called upon the assessee to explain the nature of this provision. The assessee submitted that contracts with customers imposed warranty obligation. The company had to replace defective components during the warranty period. The assessee had made provision on account of services/replacements required to be made in terms of the warranty obligation. The Assessing Officer holding that the amount claimed was in the nature of a provision and the provisioning had been made on estimated basis, disallowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.10.78 lakhs. For accounting year 1990-91, i.e., for assessment year 1991-92, against the warranty provision of Rs.31.51 lakhs (43.15 lakhs minus reversal of last year's provision of Rs.11.64 lakhs) the actual cost incurred for the said provision amounted to Rs.32.31 lakhs. Currently, the measure of estimating the warranty cost is materially changed, where it is made on the basis of job classified as hereunder: ------------------------------------------------------------------------ (a) High pressure of FOAX or new technology jobs 2% (approx) (b) No FOAK: 0.5% (approx) (c) Exactly repetitive jobs viz. sugar boilers, FM 0.25% (approx) ------------------------------------------------------------------------ Even though the warranty period starts after handing over the Boiler, the provision for liability on account of warranty is to be made in respective years of the progressive execution of the contract as per the Accounting Standard 7 where it is stated that the costs attributable to the contract include expected warranty costs. Warranty costs are provided for when such costs can be reasonably estimated. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Income-tax Act of New Zealand and there being material difference between the provisions of Income-tax in New Zealand and Income-tax in India, the said decision has no relevance. The ld. D.R. accordingly, concluded that the action of the authorities below deserves to be upheld. 24. We have considered the rival submissions and perused the facts on record. In the case of manufactured capital goods, invariably, a provision is made in the contract that should any deficiencies and infirmities be found in its working, then, for certain period, the suppliers will undertake, free of cost, to remove such deficiencies or infirmities which prevent the promised working by the capital asset. This is very important as offending unit could put into dis-array the whole working of the enterprise. In the case of the assessee-company, as explained above, the guarantee is given in respect of supply of every project Boiler which enjoins the company to make the Boiler operational as per the specification, after removing the deficiencies found during the warranty period. This warranty period lasts from 12 to 18 months from handing over the project Boiler or from the date the Project has beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer did not allow such excess provision on the ground that it was only an estimate amounting to contingent liability and the same basis given by the Assessing Officer in the case of present assessee before us. On appeal, the Tribunal held that no doubt, the provision made was contingent at the time when it was made, but such estimate was based on the assessee's experience in the earlier years. The assessee knew for certain that some expenditure had to be incurred and as a prudent businessman, had to make a provision which approximated to the amount of expenditure. The method followed was consistent and therefore, there was justification for allowing the assessee's claim. The case of the assessee is on all fours and accordingly, we hold that above case clearly comes to the assistance of the assessee. The distinguishing factor pointed out by the ld. D.R. that the provision for warranty has been created by the assessee even before the produce has come into existence is of no relevance because it is the principle of accounting which is of vital importance. We further find that the case of the assessee stands supported by the decision of the ITAT in the case of Voltas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,86,702 ----------------------------------------------------------------------- In the computation of total income, it had claimed 50% business lunch expenses incurred by employees accompanying the guests and had shown Rs.1,12,941 as disallowed. The Assessing Officer held that the entire expenses of Rs.1,47,523 incurred on business lunches were in the nature of entertainment and accordingly, he applied the provisions of section 37(2A). 28. On appeal, the CIT(Appeals) gave partial relief inasmuch as he directed the Assessing Officer to treat 20% of the expenditure to be attributable to employees out of the total lunch expenses of Rs.1,47,523. 29. Shri B.K Khare, ld. counsel for the assessee stated that the claim of the assessee at 50% was in accordance with the judgment of Karnataka High Court in the case of CITv. Mysore Minerals Ltd. [1986] 162 ITR 562. The ld. D.R. Shri Naresh Kumar relied upon the orders of the authorities below. 30. We have considered the rival submissions and perused the facts on record. It is noted that out of the total entertainment expenses of Rs.1,86,702, the assessee had incurred a sum of Rs.1,47,523 on business lunches. The business lunches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te dated 11-1-2000, requested me to reconsider the issue of guarantee, in view of the ratio laid down by the Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd v. CIT[1985] 156 ITR 585 at 598-99. After going through the judgment of the Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd. I find that the ratio laid down by the Hon'ble Supreme Court in the said case is not applicable to the facts of the case of the assessee. 37. In the matter of claim made by an assessee for deduction of provision made towards warranty obligations, a question often arises as to whether admission of such a claim will run counter to the fundamental postulate that an expenditure which is not actually incurred by the assessee and which is only of a contingent nature cannot be allowed under section 37(1) of the Income-tax Act. Among others, the Supreme Court in the case of Shree Sajjan Mills Ltd and in the case of Madras Industrial Investment Corpn. Ltd has observed that an expenditure which is of a contingent nature cannot be admitted into the limited confines of section 37(1) which allows deduction for an expenditure which is incurred by an assessee. 38. In fact, this proposition is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts, should not come in the way of the assessee's claim. The Apex Court declined to bless this contention which, though was the result of the working of a clever mind but could be said to be guilty of making mockery of a clearly intended provision of a statute. In the course of the judgment, the Apex Court dealt with the provisions of section 37 and reiterated the principles laid down in the case of Indian Molasses Co. (P.) Ltd. to the effect that the expenditure deductible for Income-tax purpose is towards the liability which actually exists. However, setting apart money which might become an expenditure on the happening of an event is not expenditure. To repeat, these observations were made in the context of section 37 at page 598 of the judgment. 41. The Court also noticed the decision of Metal Box and reaffirmed its validity at page 599 of the judgment. Some very pertinent observations came to be made by the Court on page 600 of the reported judgment in the following words: "As there were several methods which the assessee might choose to adopt in meeting his liability to pay gratuity, the treatment which he would receive under the Income-tax Act would depend upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is as per the regular method of accounting, then there cannot be any objection for the admissibility of such a claim as discussed by me in para 24. In my view, the assessee's case satisfies all the three tests enumerated supra and, accordingly, in my view, the claim of warranty is an allowable deduction. Per Singhal 45. After going through the order proposed by my learned Brother and having discussion at length with him, I have not been able to persuade myself to agree with the conclusion arrived at by him in para No. 26 of his order regarding deduction on account provisions made for warranty liability. Therefore, I proceed to express my dissenting view. 46. The issue for our consideration is whether the assessee is entitled to deduction in respect of the provisions made for warranty liability in respect of goods being manufactured/constructed by the assessee. The facts regarding this issue are in short compass and have been set out in the proposed order in para 20. However, it would be useful to refer to few more facts, which in my opinion, arc relevant for disposal of this issue. Though the production commenced in the assessment year 1989-90, but the actual and effective bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titute of Chartered Accountants of India as well as International Standard of Accounting. 48. On the other hand, the contention on behalf of Revenue is that warranty liability is contingent in nature and therefore, not allowable at all in view of the Supreme Court decision in the case of Shri Sajjan Mills Ltd. According to the ld. Senior D.R., it makes no difference whether such claim of assessee is tested under section 28 or 37. It is also the contention of the Sr. D.R. that claim of the assessee is pre-matured since the occasion for such liability has not arisen. According to him, the Boilers were in the stage of construction as only a part of construction was completed in the year under consideration while according to the terms of warranty, the assessee is liable only from the date of delivery or from the date of commission as the case may be. Since the Boilers were in the construction stage itself, the claim of the assessee was thus pre-matured and therefore, not allowable. 49. According to the proposed order, the claim of the assessee regarding warranty liability is allowable for the following reasons:-- (a) That starting point of computation of taxable income is the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be computed in accordance with the provisions of sections 30 to 43C. Similar provisions were on the statute in the form of section 10(1) and section 10(2) of 1922 Act. These old provisions were subject matter of the consideration before the Hon'ble Supreme Court in the case of Badridas Daga. In that case the question arose whether the loss on account of embezzlement by an emplovee could be allowed as deduction. The Supreme Court held that such deduction could not be allowed either under section 10(2)(xi) or under section 10(2)(xv). It then proceeded to observe that deductions and allowances enumerated in section 10(2) are not exhaustive of all the allowances which could be made in ascertaining the profits of the business taxable under section 10(1) which are to be understood according to the ordinary commercial principles. It is in this context, it was observed that if any deduction cannot be allowed under section 10(2), then it can be allowed under section 10(1) since tax is to be levied on true profits provided such deduction springs directly from the carrying on of the business and is incidental to it. The relevant portion which is quite often referred to in various cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 10(2) and therefore, the same could be considered under section 10(1) itself because ultimately it is the true profits of the business which are to be taxed. Therefore, it is very much clear that starting point of computation is not under section 10(1) (corresponding to section 28 of 1961 Act) as has been held by my ld. Brother. Therefore, the profits are first to be computed in accordance with the provisions of sections 30 to 43C and if any claim of the assessee cannot be considered under these sections, then it can be considered under section 28 and for that purpose, the aspect of commercial profits would arise. 54. If the contention of the assessee is accepted, then scheme of the Act would become redundant. The reason is that all the expenditures referred to in sections 30 to 40C are generally deductible in accordance with the principle of commercial accountancy. For example, general expenses of business i.e. the salary and wages, bonus, interest on borrowings, telephone, electricity, repairs, rent, rates and taxes etc., are allowable according to commercial accounting and would be allowable under section 28 also. In such cases, there would be no scope of sections 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court in the case of Metal Box (India) Co. Ltd. In order to appreciate this contention, it would be useful to refer the decision of the Court of appeal in the case of Peter Merchant Ltd. facts of which are similar to the present case. That case was relied on by the Revenue before the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. in support of the contention that future liability cannot be allowed as deduction. The Hon'ble Supreme Court has discussed the facts of that case and the ratio laid down by the Court of appeal at page 5 of the report as under: "Reliance was placed on behalf of the Revenue on the case of Peter Merchant Ltd v. Stedefor (Inspector of Taxes), in which a distinction was drawn between an actual, i.e., legal, liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made. The facts of that case were that the company, which carried on the business of managing factory canteens, had contracted with a factory owner to maintain the crockery, cutlery and utensils used in the canteen otherwise known as the light equipment in its original quantity and quality. The cost of replacements was admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see under section 10(1) of 1922 Act corresponding to section 28 of 1961 Act. Therefore, it follows that even under section 28, contingent liability cannot be allowed while computing the profits in the commercial manner. 58. Having held that contingent liability cannot be allowed under section 28, there is no scope of argument that such liability can be allowed on estimate basis if it is based on past experience of the assessee or the industry. Even otherwise, the decision of the Supreme Court in the case of Metal Box (India) Co. Ltd. does not help the assessee. What has been held in that case is that the contingent liability, if it is a properly ascertainable and it is possible to arrive at a proper discounted value; it can be taken into account for determining the commercial profits. It is to be noted that the Court was considering the deduction on account of statutory liability of gratuity which was properly ascertainable in accordance with the provisions of relevant Act on the basis of year of service and the proper amount could be known in respect of the year concerned. But in the present case, warranty liability cannot be properly ascertained. There is no and cannot be any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent to set apart a specified amount, but undoubtedly, the liability has not arisen till the happening or non-happening of the event." In view of the above, the claim of the assessee cannot be allowed on the principle of Accounting. 61. Lastly, even on facts, in my opinion, the claim of the assessee is prematured. According to the Guarantee clause, the assessee is liable to remove defects notified by the customer within a period of 12 months from the date of commissioning or 24 months from the date of despatch whichever is earlier. The perusal of the facts narrated by me shows that Boilers were still under construction and therefore, neither delivered nor commissioned. Therefore, in my view, the claim of the assessee appears to be pre-matured. 62. The decisions of the Tribunal in the case of Voltas Ltd. and in the case of Wanson (India) Ltd. relied upon by the ld. counsel for the assessee are contrary to the ratio laid down by the Apex Court in various cases cited by me in the order. Therefore, the same cannot be applied to the present case. For the similar reasons, the decision of Privy Council in the case of Mitsubishi Motors arising from New Zealand, cannot be applied. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. According to it, the contract value necessarily included the cost required to be incurred by the assessee on warranties, that the cost was estimated on the basis of past experience of the company's collaborators or promoters, that since the boilers were being erected/installed in India for the first time it was thought that some provision should be made for foreseeable warranty cost, that even though the warranty period commenced only after the delivery of the boiler, the provisions had to be made in the accounts on progressive execution of the projects as per the Accounting Standards 7 (AS-7) wherein it is stipulated that the costs attributable to the contract include expected warranty costs which can be reasonably estimated. Several authorities were cited in support of the contentions. 6. On behalf of the Department, it was contended that the liability in respect of the warranty was not an ascertained liability in the relevant years, that it was merely contingent, that the liability was to commence only after the boilers were delivered, that even before the delivery the assessee had created a provision in anticipation which is not permissible, that till the delivery of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to the effect that the profits of the business have first to be ascertained on commercial principles and thereafter the deductions provided for in sections 30 to 43C should be allowed and therefore the warranty liability, even though not deductible under section 37(1) being a contingent liability, is deductible under section 28 itself in accordance with accounting principles, and held that this argument was not tenable. He took the view that the legal position was the other way round, and the profits had first to be computed as per sections 30 to 43C and it was only thereafter that the provisions of section 28 come into play and if a claim for deduction was not allowable under those provisions there was no question of allowing the same under section 28. He noted that there was no dispute that the liability was contingent and that even the ld. AM had accepted this to be the position and had also held in paragraph 42 that such a contingent liability cannot be allowed as deduction under section 37(1). If that is so, it cannot be allowed as deduction even under section 28, because of the prohibition under section 37(1). In support of this view, the ld. JM cited the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per sections 30 to 43C that the provisions of section 28 can be considered and that if a claim is prohibited by sections 30 to 43C the same cannot be considered under section 28 on commercial or accounting principles, is correct or not because I am in agreement with the opinion expressed by him that even if the claim is examined under section 28, despite the fact that being a contingent liability the same is not allowable under section 37(1), still it is not allowable as deduction thereunder, for, in my view, a contingent liability does not merit deduction, under the very scheme of the Income-tax Act, while computing the profits of the business. It is no doubt true that the profits have to be ascertained on commercial principles and further that accounting principles and standards have to be given due respect or weight in computing the profits, but to hold that a claim which is sound or prudent on commercial or accounting principles must be, ipso facto, allowed as a deduction also under the Income-tax law and must be so allowed irrespective of other relevant principles or considerations under the Income-tax law, is unacceptable. That would open the floodgates and even claims tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is only the principle of accountancy that was really important. With respect, the real question to be examined is whether the claim represents a real or present liability which has accrued in the relevant accounting years. This question does not appear to have been examined. On the other hand, the ld. JM with respect, has examined this aspect in paragraph 58 of his order. In this paragraph, he has also attempted to distinguish the decision of the Supreme Court in Metal Box (India) Co. Ltd.'s case. He has contrasted the present case with the facts in Metal Box (India) Co. Ltd.'s case by observing that in the present case the warranty liability cannot be properly ascertained and even the estimate of 2% of the billing amount arrived at by the assessee had no basis. I am in agreement with the view expressed by the ld. JM that Metal Box (India) Co. Ltd.'s case is distinguishable. I would however add that in my view Metal Box is distinguishable not only because the quantum of the provision made has no established basis but because - and mainly because - the provision made by the assessee in the present case is not on the basis of any statute, as in the case of Metal Box (India) Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , ipso facto, is not enough to get it allowed under the Income-tax law, if the liability, which the provision seeks to represent, has not accrued. The fact that the claim is entered in the accounts is not conclusive of its allowability. The accounting standards or accounting or commercial principles cannot control the legal position. The correct position, in my humble view, would be that if the claim is in accordance with the legal position under the Income-tax law, the fact that there are no entries made in the accounts would not be fatal to its allowability and the fact that entries have also been made in the accounts would undoubtedly support the claim; but under no circumstances can a deduction be allowed solely on the ground that it is in accordance with the accounting or commercial principles, if the claim does not satisfy the conditions imposed by the Income-tax law. 14. The rule in Badridas Daga's case, cited by the ld. JM in a slightly different context, is applicable to the present claim. According to the rule, it is necessary the assessee to show that the claim arises out of the carrying on of the business and is incidental thereto and if that is established, the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court that a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees and this he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. It was further held that "even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account....'. These observations were heavily relied upon by the assessee before me. But, in my view, these observations have to be understood in the context in which they were made. The assessee in that case had claimed to deduct its liability under two gratuity schemes while arriving at the profits for the purpose of the Payment of Bonus Act. There was an actuarial valuation. It was in this context that the observations relied on by the assessee were made by the Supreme Court. Even from thes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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