We have heard Mr. M.R. Bhatt, learned Senior Standing Counsel appearing with Mrs. Mauna M. Bhatt for the appellant – revenue on the proposed question of law which is as under :- “Whether the Appellate Tribunal is right in law and on facts in reversing the order passed by CIT (A) and thereby deleting the disallowance of warranty provision expenses of Rs.1,01,96,362/- even though the same as contingent liability ?”
2. Having heard learned Senior Standing Counsel, we are satisfied that expenses of Rs.1,01,96,362/- even though was a contingent liability which was to arise in future, but in view of the decision of the Apex Court in the case of Rotrok Controls India P Limited, 314 ITR 62 (SC), since the deductions were allowed by the Assessing Officer in the earlier years, there was no reason to disallow the deductions in the present assessment year.
3. For the aforesaid reason, we agree with the finding of the Tribunal recorded at paragraph 5 which is extracted below :-
“5. We have heard both the parties and gone through the facts of the case as also the decision relied upon. Undisputedly, the provision of warranty expenses has continuously been allowed by the AO himself right from AY 1987-88 until AY 1999-2000. This was for the first time that the AO disallowed the claim on the ground that the liability is contingent. The ld. DR appearing on behalf of the Revenue did not place any material before us which could controvert the submissions on behalf of the assessee that the provision has been made on the technical evaluation and previous experience based on category-wise expenses incurred towards the actual warranty in the preceding three years. In this connection, we may refer to a decision of the Hon'ble Supreme Court in the case of Rotrok Controls India P. Limited (Supra) wherein while adjudicating a similar issue, Hon'ble Apex Court held that :
“i) A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when; (a) 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. If these conditions are not met, no provision can be recognized;
ii) A liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits;
iii) A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole;
iv) In the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation;
v) On facts, the assessee has been manufacturing and selling Valve Actuators in large numbers since 1983-84 onwards. Statistical data indicates that every year some Actuators are found to be defective. The data over the years also indicates that being sophisticated item no customer is prepared to buy the Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty was allowable.”
5.1 Since undisputedly the assessee has provided for the warranty expenses based on technical evaluation and past experience, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty is allowable. Moreover, the AO himself allowed a similar claim under Section 143 (1) of the Act in the AYs. 1987-88 and 1999-2000 and under Section 143 (3) of the Act in the AYs 1988-89 to 1997-98. Considering the aforesaid facts and circumstances of the case, in light of the view taken by the Hon'ble Apex Court in the aforesaid decision, we have no alternative but to allow the claim of the assessee. Therefore, ground nos.1.1 and 1.2 in the appeal of the assessee for these three assessment years are allowed.”
4. Since we are in agreement with the view taken by the Tribunal, we do not find that question of law, much less, any substantial question of law arises for consideration in this appeal. This Tax appeal fails and is accordingly dismissed.
Sd/-
[V. M. SAHAI, J.] Sd/-
[N. V. ANJARIA, J.] Savariya