Punjab & Haryana H.C : the claims made are merely provisions/contingent liabilities and hence not allowable as per the settled law

High Court Of Punjab & Haryana

CIT vs. Majestic Auto Ltd.

Sections 37(1), 256(2)

Asst. Year 1982-83

Adarsh Kumar Goel & Rajesh Bindal, JJ.

ITC Nos. 199 & 200 of 1994

24th July, 2006

Counsel Appeared

S.K. Garg Narwana, for the Petitioner : Sanjay Bansal, for the Respondent


By the court :

This order will dispose of ITC Nos. 199 and 200 of 1994 as the similar question of law is involved in both the cases. The facts have been taken from ITC No. 200 of 1994.

2. This is a petition under s. 256(2) of the IT Act, 1961 (for short, ‘the Act’) seeking direction to the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short ‘the Tribunal’) for referring the following question of law to this Court for opinion :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the additions of Rs. 1,29,864 on account of provision for warranty claim and of Rs. 9,49,810 on account of free service charges despite the fact that the claims made are merely provisions/contingent liabilities and hence not allowable as per the settled law ?

3. Brief facts are that the assessee-company is engaged in the business of manufacturing of spokes, Nipples and Moped. For the accounting period ending on 31st Dec., 1981, relevant to the asst. yr. 1982-83, return of income was filed by the assessee on 29th July, 1982, declaring a taxable income of Rs. 23,90,960 which was later on revised to Rs. 23,68,000. During the course of assessment proceedings, the AO observed that an amount of Rs. 1,29,864 on account of warranty claim and for an amount of Rs. 9,49,810 for free service charges had been made by the assessee. Both these provisions made by the assessee were disallowed by the AO treating that to be contingent liabilities and accordingly added back to the income of the assessee. Aggrieved against the order of assessment, the assessee went in appeal before the Commissioner of Income-tax (Appeals) [for short, ‘CIT(A)’] who vide its order dt. 2nd Nov., 1987, dismissed the appeal. Still aggrieved against the order passed by the CIT(A), the assessee went in appeal before the Tribunal, who accepted the appeal of the assessee vide its order dt. 21st Sept., 1988. Against the order passed by the Tribunal, the Revenue moved an application under s. 256(1) of the Act which on a difference of opinion amongst the Members constituting the Bench was referred to third Member and ultimately, the same was rejected by majority opinion of the Members.

4. The main contention of the counsel for the Revenue is that at the stage of consideration of petition for reference of a question of law to this Court, there was difference of opinion amongst the Members of the Tribunal and the matter was required to be referred to third Member. This itself shows that the question of law arises in the case and the same should be directed to be referred to this Court for opinion. Further, it was submitted that the claim of the type in hand is nothing else but a contingent liability which is not a permissible deduction.

5. On the other hand, contention of the counsel for the assessee is that the issue being covered in favour of the assessee by various judgments including judgment of Hon’ble Supreme Court, no question of law arises and the petition filed by the Revenue should be dismissed. The same being Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC) and CIT vs. Vintec Corporation (P) Ltd. (2005) 196 CTR (Del) 369 : (2005) 278 ITR 337 (Del).

6. In Bharat Earth Movers case (supra), Hon’ble the Supreme Court dealing with the proposition that the assessee would be entitled to deduction in the accounting year, although the liability may have to be quantified and discharged at a future date, held that such a liability is to be treated in the present time and would not be contingent liability. At p. 432 of reports, it was held as under :

“So is the view taken in Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) wherein this Court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e. in favour of the assessee and against the Revenue.”

7. Reference to a judgment of Privy Council in the case of IRC vs. Mitsubishi Motors New Zealand Ltd. (1996) 222 ITR 697 (PC) would also be quite relevant for the purpose of decision of this case wherein it was held as under : “Held, dismissing the appeal, that, although the taxpayer’s liability under the warranty for each vehicle sold was contingent on a defect appearing and being notified to the dealer within the warranty period so that no liability was incurred by the taxpayer until those conditions were satisfied, regard could be had to its estimation of warranty claims based on statistical information, which showed that as a matter of existing fact not future contingency 63 per cent of all vehicles sold by the taxpayer contained defects likely to be manifested within the warranty period 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 s.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.”

8. Referring to the above judgments, Delhi High Court in Vintec Corporation case (supra) has held as under : “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. Once an assessee is maintaining his accounts on the mercantile system, a liability 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.”

9. From the findings of facts recorded by the Tribunal in the present case, it is evident that the quantification on account of warranty claim and for free service has been made by applying scientific basis. That being so, we do not find any question of law arises in the present cases. Accordingly, these petitions are dismissed.

[Citation : 296 ITR 309]

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