(Judgment of the Court was delivered by K.RAVIRAJA PANDIAN, J.) The appeal is filed by the assessee against the order of the Income Tax Appellate Tribunal, Madras 'A' Bench dated 27.06.2008 made in ITA No.2137/Mds/2006 for the assessment year 2002-03.
2. This appeal was admitted on the following substantial questions of law :
1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming that the disallowance of the provision for warranty, amounting to Rs.7,10,000/-?
2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal while holding that the warranty provision is not allowable as deduction, ought not to have held that in the event of the provision for warranty not being allowed, the reversal of the provision in the current year is not also liable to be included as income and consequently the assessment is not correct?
3. The facts are : The assessee is engaged in the business of design, manufacture, sale, erection and commissioning of equipments and projects. In respect of the assessment year 2002-03 the assessee filed its return of income on 29.10.2002 admitting an income of Rs.36,60,370/-, after claiming relief under
section 80HHC of the Act. The assessment was completed under section 143(3) of the Act on 10.03.2004. While making the above assessment, the assessing authority disallowed claims in respect of service tax and CST liability, purchase of software and provision for warranty. The assessee carried the matter on appeal before the Commissioner of Income Tax (Appeals), who confirmed the disallowance in respect of purchase of software and provision for warranty. The assessee appealed further to the Tribunal. The Tribunal remitted the issue relating to expense on computer software, however, rejected the claim in respect of warranty. The correctness of the same is canvassed in the present appeal by the assessee.
4. The issue is now settled by the Supreme Court in the case of Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62, wherein it was held that the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. Warranty provision had to be recognised because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. The value of the contingent liability like the warrant expense, if properly ascertained and discounted on accrual basis, can be an item of deduction under section 37 of the Act. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation and held that the provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the Act.
5. Following the said judgment, this Court in the case of CIT III v. M/s. FL Smedth Ltd., Tax Case (Appeal) No.341 of 2004 by order dated 09.06.2009, after extracting paragraph 7 of the judgment of Supreme Court cited supra, answered the question of law in favour of the assessee and against the revenue.
6. It is not in dispute that the facts in this case are similar to the appeal in T.C. No.341 of 2004. Therefore, following the judgments of the apex Court Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62, and the Division Bench of this Court, CIT III v. M/s. FL Smedth Ltd., Tax Case (Appeal) No.341 of 2004, the questions of law are answered in favour of the assessee and against the revenue. The appeal is allowed. No costs.
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