(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 14.01.2008 made in ITA No.439/Mds/2007 for the assessment year 2003-04.
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 claim for warranty is allowable as a deduction while computing the taxable income under the Act?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in not following its earlier orders when there is no change in the factual and legal positions?
3. The facts are : The assessee is engaged in the business of design, fabrication, supply of plant and machinery, and supervision of erection and commissioning thereof, for cement plants. The assessee was assessed to income tax regularly and in respect of the assessment year 2003-04, it filed its return of income on 27.11.2003. The return was processed under section 143(1) of the Act and thereafter, taken up for enquiry pursuant to notice under section 143(2) dated 26.03.2004. The assessment was completed under section 143(3) by order dated 24.03.2006. In the profit and loss account for the aforesaid assessment year, the assessee offered a sum of Rs.19,14,45,818/- as 'other income', including a net sum of Rs.5,24,36,167/- towards 'provision no longer required warranty expenses'. During the aforesaid assessment year the assessee had claimed Rs.2,23,17,922/- as warranty expenses and included in the total income returned, a sum of Rs.7,47,54,089/- representing the amount written back on account of provision for warranty claims of the earlier years as no longer required. Thus, net amount of Rs.5,24,36,167/- was disclosed under 'other income'. The assessee, in the course of the enquiry for completion of assessment, explained that the provision for warranty aforesaid was necessitated in the very nature of the appellant's business, particularly on account of certain contractual obligations. The assessing officer disallowed the expenditure incurred on account of warranty amounting to Rs.2,39,03,363/- on the basis of the assessment completed for the previous year. The assessee carried the matter on appeal before the Commissioner of Income Tax (appeals) who allowed the assessee's appeal following the order of the Tribunal in assessee's own case for the assessment year 1999-2000. The revenue carried the matter on further appeal before the Tribunal. The Tribunal decided the matter ex parte against the assessee following the decision of this Court in the case of CIT v. Rotork Controls India Ltd., 293 ITR 311. The correctness of the same is canvassed in the present appeal.
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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