TMI Blog2003 (8) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... s and prejudicial to the interest of the Revenue. As per the direction of the learned CIT under s. 263, the assessment was revised and a sum of Rs. 10,50,000 claimed by the assessee under the head 'provision for expenses on warranty' was added back to the assessee's income. 4. Against the order of AO, the assessee approached the learned CIT(A), who deleted the addition by observing that the assessee was under a definite obligation at the time of sale of goods and, therefore, the provision made by the assessee was realistic and that liability although not accurately quantified was ascertained. 5. Rival contentions have been considered. The assessee-company is engaged in the business of manufacture and sale of computer components. The sale of these machines was made under the terms and conditions of free service for maintenance for one year from the date of installation. The assessee-company was maintaining its accounts on mercantile system of accounting and, therefore, made a provision of Rs. 10,50,000 towards expenses on warranty. During the year under reference, the assessee sold electronic post controller to its customers under the terms and conditions that it will provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67) 65 ITR 643 (SC), disallowed the assessee's contention regarding allowability of the provision of Rs. 10,50,000 on account of warranty expenses. 6. In the order passed by the learned CIT(A) dt. 30th July, 1997 against the order passed by the AO under s. 143(3)/263, the learned CIT(A) observed that the controllers supplied by the assessee were guaranteed against defective materials' poor workmanship, faulty design and for trouble-free work for a period of 12 months from the date of installation. In case any defect or deficiency arises during the period the supplier had to set right the defects/deficiency within 48 hours. It was further found that, as per the condition of after-sale service, the assessee was required to do free servicing of entire system supplied by it, for a period of one year form the date of commissioning of the controllers. The assessee was also required to depute one engineer at Benukoot (at the site of the purchaser) for one year at assessee's cost. Expenses were borne by the assessee except the bachelor accommodation to be provided by the buyer. In view of the various clauses, the learned CIT(A) observed that the appellant made provision for its known li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder under s. 263 was not applicable to the facts and circumstances of the case and he had also dealt with in detail the cases so relied on. 8. In view of the above discussion and on the basis of material placed on the record, we can reach to the conclusion that the assessee sold the goods with a condition that all the expenditures on account of maintenance of items sold would be borne by it and that the assessee was under a definite obligation to maintain the machines sold to the customers. The buyers were not under obligation to reimburse the expenses to the assessee and it was the assessee only who by way of obligation, under the terms of the supply, bound to incur such maintenance expenses. Thus the provision for warranty was made for a definite and accrued liability, the exact quantification of which was ascertained in the subsequent year and on the basis of actual expenditure incurred by the assessee. The assessee was following mercantile system of accounting, on the basis of standard practice followed in the computer industry, it made provision for expenditure on account of warranty. The liability of expenditure had accrued as soon as the sales were made with warranty cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not raise any definite obligation during the time when the business is carried on, it cannot fall within the expression "expenditure laid out or expended wholly and exclusively for the purpose of the business". However, in the instant case, liability has accrued or arisen on account of the warranty being conditional sale which is clearly ascertained even though quantified in the next year. Thus the case relied on by the learned CIT(A) is not applicable to the facts and circumstances of the case. 10. In the case of Swadeshi Cotton Flour Mills (P) Ltd., bonus relating to the earlier years when paid subsequently in the year, the liability arose by way of award and it was held that bonus was eligible for deduction in the year the payment was made. Thus it was held that a liability for an assessee maintaining mercantile system of accounting is to be claimed and deducted in the year, it became ascertained either by arrangement or by adjudication. In the instant case before us, the assessee having maintaining mercantile system of accounting, the liability on account of warranty was ascertained by arrangement itself and the assessee was under definite obligation at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 15. The Hon'ble Kerala High Court in the case of CIT vs. Malayala Manorama Co. Ltd. (2000) 161 CTR (Ker) 383 : (2000) 242 ITR 144 (Ker) observed that provision is a charge against profit. It is created by way of appropriation of profits to meet liabilities, which are known and foreseeable but whose exact timing and hence, whose quantification alone are uncertain at the moment. In contrast to the provision, a reserve is a stand-by created out of profits of a business to meet contingencies which are unknown and which cannot be foretold on the basis of knowledge of current facts. The reserve is created by way of appropriation of profits and, therefore, it is not a charge against profits and it does not go out of the business but is retained in the business as a part of the capital. 16. Applying the ratios laid down in the above judgments, we can conclude that in the instant case before us, a provision was made for the expenses which were bound to be incurred on maintena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is erroneous as well as prejudicial, this action will be attracted. In the instant case, the provision for expenses made on account of warranty allowed by the AO in the original assessment was not an erroneous view but it was supported by the standard accounting practices followed by the assessee as well as accepted by the Department itself in earlier years. The action of the AO was also supported by the judgments of the Hon'ble Supreme Court and High Courts as discussed above, therefore, cannot be treated as an erroneous view. Furthermore, the Hon'ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 113 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom) observed that the power of suo motu revision under s. 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. This section does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erron ..... X X X X Extracts X X X X X X X X Extracts X X X X
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