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TMI Blog2018 (10) TMI 1347X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of trading in Aircraft parts and engines. For the year under consideration, the assessee had furnished return of income declaring total income at Rs. 4.97 crores. The assessment under section 143(3) of the Act was completed after making various disallowances at Rs. 8.41 crores. The CIT(A) partly allowed appeal of assessee, against which both the assessee and Revenue went in appeal before the Tribunal. The Tribunal in ITA Nos.121/PN/2010 and 112/PN/2010 vide orders dated 15.06.2011 and 21.06.2011 had set aside the issue of Provision for Gratuity, Vacation leave and Warranty expenses with direction to the file of Assessing Officer. The case of assessee was taken up for re-scrutiny. The Assessing Officer noted that the assessee had claimed that provision for warranty expenses at Rs. 3.25 crores in the return of income, which was disallowed in earlier order passed under section 143(3) of the Act on the ground that warranty expenses were contingent in nature and were not incurred and hence, the claim of provision for warranty expenses was not allowable deduction. During the course of assessment proceedings for assessment year 2004-05, the assessee had made submission on 20.11.2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the sequence of events and refusal of the said concern to accept warranty claim. The assessee thus, recognized warranty provision in its Balance Sheet as on 31.03.2006 to the extent of Rs. 2.76 crores based on the actual overhauling charges billed to IAF of Rs. 2,27,29,604/- (basic price) + Rs. 49,58,019/- (interest). The assessee pointed out that though IAF pursued the matter but M/s. UMPO UFA was not ready to perform part of their contract and further vide letter dated 11.06.2009 IAF had asked for payment of claims from assessee and no payment was made and it was indicated that as per contract, the same would be recovered from outstanding invoice payments of assessee company, the assessee admits that though no such deduction was done till date. The Assessing Officer held that the said submissions do not elucidate regarding actual expenditure made towards warranty expenses. The Assessing Officer allowed the claim of warranty expenses to the extent of Rs. 48,12,377/- and balance claim of Rs. 2.76 crores was not allowed as deduction. The Assessing Officer relied on various judicial decisions in this regard and provision of warranty expenses was disallowed. 5. The CIT(A) upheld t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee especially where the assessee while writing letters to the Counterpart claimed it was not its liability. The learned Departmental Representative for the Revenue placed reliance on the order of CIT(A) in para 3 at page 8. 9. We have heard the rival contentions and perused the record. The issue arising in the present appeal is the provision made by the assessee on account of its liability of providing warranty of MIG engines supplied. The assessee had entered into Tripartite agreement with Russian company M/s. UMPO UFA, IAF and assessee; copy of said agreement is placed at page 1 onwards of Paper Book. As per understanding between the parties, M/s. UMPO UFA was to carry out overhaul of 30 pcs of R29B-300 engines and the price of engines was also fixed between the parties. The price of overhaul engines was fixed at USD 432,800 and the total amount of contract was USD 129,84,000. The said engines were to be delivered after overhaul. The overhauling had to be carried out by UFA. As per understanding, life of engines, quality and warranty services were also discussed. As per clause 5.3, UFA was to ensure the warranty period for the engines after overhaul for 180 hours of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct report. Alternatively the CUSTOMER has a right to deduct the amount from any outstanding invoice. M/s. UFA warranty obligations in this case are to be valid. 6.7 In case it is established that the claim is due to the Customer's fault all costs shall be borne by the customer for the rectification of the defect." 11. In other words, as per understanding between the parties, the claim during warranty period had to be made to the assessee and where the customer repairs the items during warranty period, then the assessee had to refund expenses borne. Alternatively, it was also provided that customer had the right to deduct amount from any outstanding dues to the assessee. In other words, though the assessee was not manufacturing or refurbishing the engines but it had to bear the cost of warranty expenses, wherein if within stipulated period any defect was found in the engines, then the same would be reimbursed by third party to the Contract i.e. M/s. UFA. Other terms and conditions were agreed upon between the parties, which we are not referring as they do not relate to the issue before us. 12. The question which arises in the present appeal before us is the allowability of provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (1969) 73 ITR 53 (SC), wherein few principles were laid down which were referred to and were extracted and reproduced as under:- "(i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is paid; permissible only in case of amounts actually expended or paid (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfillment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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