TMI Blog2005 (5) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment year 1998-99, the CIT(A) has taken a different view and has sustained the action of the Assessing Officer. Nevertheless, as the facts are common in all the grounds, we deem it fit and proper to take up the issue together. As the facts are common, we take up for consideration the facts as they pertain to assessment year 2000-01. 3. The facts relevant to this dispute are that the assessee-company is engaged in manufacturing and sale of TV and Audio Systems and as a matter of policy offers warranty of one year on all its products sold. The assessee creates a Provision for warranty in respect of products sold and on which the warranty extends beyond 31st March of the financial year, calculated on the basis of past experience. The assessee has claimed an amount of Rs. 3,51,69,044 on account of provision of warranty in the profit and loss account and has also reversed the provision for warranty for the earlier assessment year 1999-2000 of Rs. 2,26,97,000 and a net provision of Rs. 1,24,72,044 has been charged to the profit and loss account. The Assessing Officer disallowed the claim of the assessee for provision for warranty holding it to be an unascertained and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake provision for warranty expenses for the unexpired period of warranty contracts executed at the time of making sales of the company products on a scientific basis. The provision is made on the basis of technical estimates computed scientifically as a percentage of total turnover on the basis of its past experience. That the assessee has been following consistent policy whereby the actual expenditures incurred on warranty claims during the year were adjusted with the provision made on this account in the immediately preceding assessment year. That similarly, the provision in respect of the sales made during the previous year under consideration has been charged to the profit and loss account and claimed as an allowable deduction. The assessee also contended before the CIT(A) that there was no contingency in the impugned expenditure and it was in line with the accounting principles and standards issued by ICAI. Reliance was also placed on a decision of the Apex Court in the case of Bharat Earth Movers Ltd. ( supra ), Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), Jay Bee Industries v. Dy. CIT [1999] 102 Taxman 25 (Asr.-Trib.), Kevin Enterprises v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd complexity involved in the manufacturing process and the use of its product, the provision for claim of warranty has been made in the account and is consistently followed. Reliance was placed on the following decisions of the Tribunal : ( a ) Thermax Babcock Wilcox Ltd. v. Dy. CIT [2001] 79 ITD 63 (Pune) (TM) ( b ) Singhal Co. v. ITO [1982] 1 ITD 476 (Chd.) ( c ) KCP Ltd. v. Asstt. CIT [1990] 34 ITD 1 (Hyd.) (SB) ( d ) ITO v. Wanson (India) Ltd. [1983] 5 ITD 102 (Pune) ( e ) CIT v. Majestic Auto Ltd. [1993] 204 ITR 14 (Chd.) (AT) ( f ) CIT v. Development Trust (P.) Ltd. [1991] 189 ITR 504 (All.) ( g ) Voltas Ltd. v. Dy. CIT [1998] 64 ITD 232 (Mum.) ( h ) Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 (PC) ( i ) Jay Bee Industries v. Dy. CIT [1999] 102 Taxman 25 (Asr.) (Mag.) ( j ) Voltas Ltd. s case ( supra ) ( k ) Kevin Enterprise v. Joint CIT [2001] 79 ITD 196 (Ahd.) ( l ) Majestic Auto Ltd. s case ( supra ) ( m ) Voltas Ltd. s case ( supra ). 7. It was further argued that the warranty claims was an accrued and ascertained liability and referred to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability. As in the instant case, having noted that the assessee is making sales of TV and audio systems, etc., in substantial quantities and such sales are spread across geographical areas and each item of sale is, in turn, embedded with several parts, etc., which are under warranty for defects, etc., the appearance of warranty claims over a continuous period cannot be avoided. The incurring of liability in this regard is reasonably certain. 9. The Hon ble Supreme Court in the case of Bharat Earth Movers ( supra ) had an occasion to consider the claim for deduction on account of a contingent liability. The following principles were laid down by the Hon ble Supreme Court : "If a business liability has definitely risen in 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 of 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 as contingent one. The liability is in present though it will be discharged at a future da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of quantification precisely or with a fair degree of reasonableness, are also debited to the profit loss account of the same year. This would ensure that the profit loss account of a particular year does not give a distorted picture of profits. On this count also, we find merit in the claim of the assessee that the provision for warranty claims is to be set off as deduction against the sales realization of a particular year. 10. Now with regard to the basis of estimation, the assessee has placed before us in the paper book, the details and the methodology of making the impugned provision. It is discernible that the assessee takes into consideration past historical cost, failure rate experienced in the past, length of warranty with regard to equipments and spares, increase in volumes over last period, etc. It is also clear that the actual expenses incurred on warranty are adjusted to the provision account and not to the profit and loss account, thereby obviating double deduction. On the basis of aforesaid, it has been vehemently argued by the counsel for the assessee that the amount claimed is neither excessive nor arbitrary as the same is based on historical experience of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue pertained to the provision for warranty. Similarly, ground No. 1 in the appeal of the assessee in ITA No. 1671/D/02 for assessment year 1998-99 stands allowed. Also, ground No. 1 in the appeal of revenue in ITA No. 966/D/03 for the assessment year 1999-2000 stands dismissed. 14. Now, we take up for consideration the remaining grounds in ITA No. 966/Del./03 and ITA No. 1671/Del/02. 15. First we take up IT Appeal No. 966/Del/03 (Appeal of Revenue - Assessment year 1999-2000) . 16. The second ground preferred by the revenue reads as under : "On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the disallowance of the claim of Rs. 4,50,000 made by the Assessing Officer in respect of fees paid by the assessee-company for membership of a Golf Club on the ground that it was in the nature of capital expenditure." 17. Briefly, the facts are that the assessee incurred a sum of Rs. 4,50,000 on entrance and membership fee for corporate membership fee of a Golf Club. The Assessing Officer disallowed the claim of the assessee for deduction treating it as a capital expenditure. The CIT(A) has since allowed the claim of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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