TMI Blog2005 (5) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... venue Building, New Delhi, has challenged the correctness of the order of the Income-tax Appellate Tribunal dated August 6, 2004 on the ground that the present appeal under section 260A of the Income-tax Act, 1961, raises a question of law as the Appellate Tribunal has answered the following question in favour of the assessee. "Whether provision for future warranty expenses is contingent liability or is allowable under section 37 of the Act?" It is contended that the above question ought to have been answered in favour of the Revenue and the view taken by the Appellate Tribunal suffers from a patent error of law. The decision is contrary to the judgments of the court as well as not in conformity with the statutory provisions. Thus the above substantial question of law according to the Revenue, falls for consideration of the court in the present appeal. The assessee had filed his return of income for the assessment year 2000-01 declaring an income of Rs. 31,62,190 on November 30, 2000. It was processed under section 143 and subsequently the same was taken for scrutiny and assessment under section 143(2) for which a notice was issued to the assessee on November 26, 2001. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner Income-tax (Appeals) in so far as it had remanded the matter to the Assessing Officer in relation to allowing of the commission and verification thereof. The Tribunal while granting relief to the assessee by accepting its contention that the provision for future warranty expenses was liable under section 37 and was not a contingent liability, held as under: "This explanation has also been given before the Assessing Officer and it was contended that the change was made for the above reasons. The Assessing Officer or the Commissioner of Income-tax (Appeals) has not challenged the bona fides of the reasons for the change nor have they questioned the rationale behind the change. The changed system has been regularly followed by the assessee in all subsequent years up to the year ended March 31, 2004. Since the change has been made for bona fide reasons, and has also been followed regularly, the departmental authorities were not justified in refusing to accept it. As regards their objection that the liability in respect of the warranty is contingent in nature, we are unable to accept the same. The sale as well the warranty are inextricably bound with each other and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax purposes, but merely putting aside the money which may become expenditure on the happening of an event is not an expenditure. On the other hand, it is contended on behalf of the assessee while placing reliance upon Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) and Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 (PC) that the warranty for each item sold was contingent on a defect appearing and notified to the dealer once it was in consonance with the terms and conditions of sale. Theoretically, the contingencies could be disregarded if the taxpayer, who was in the year of sale under an accrued legal obligation to make payment under those warranties even though it may not be required to do so until the following year. It was definitely committed in the year of sale to that expenditure. Thus the asses-see was entitled to the deduction from its total income for the provisions made in regard to contingent liability arising therefrom. As far as the change in the accountancy system of the assessee is concerned, it has been accepted even by the Assessing Officer and the Commissioner of Income-tax (Appeals). It is nobody's case that this cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would arise in favour of the employee only on his retirement as it was a contingent provision. Even in this case, their Lordships held that till insertion of the provision of section 40A(7), the provisions made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deducted either under section 28 or section 37 of the Act. In the present case, we are not concerned with the claim of deduction which is relatable to the provisions of section 40A(7) of the Act or a situation akin thereto. In our opinion, the judgment of the Supreme Court in Bharat Earth Movers [2000] 245 ITR 428 has a direct bearing on the issue in controversy before us. Dealing with the proposition whether the assessee would be allowed deduction in the accounting year, although the liability may have to be quantified and discharged at a future date, the liability is to be treated in the present time and would or would not be a contingent liability, the court held as under: "So is the view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) wherein this court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod and require work under warranty; that since theoretical contingencies could be disregarded, the taxpayer was in the year of sale under an accrued 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." The ratio decidendi of the above cases is squarely applicable to the facts of the present case. It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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