TaxTMI 
TaxTMI 
2005 (5) TMI 54
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....to the Revenue, falls for consideration of the court in the present appeal. The assessee had filed his return of income for the assessment year 2000-01 declaring an income of Rs. 31,62,190 on November 30, 2000. It was processed under section 143 and subsequently the same was taken for scrutiny and assessment under section 143(2) for which a notice was issued to the assessee on November 26, 2001. The representative of the assessee appeared before the Assessing Officer and vide order dated March 31, 2003 additions were made and the depreciation claimed by the company to the extent of Rs. 4,41,879 was disallowed and consequent liability along with interest under sections 234A, 234B and 234C was raised against the assessee. Aggrieved by this order of the Assessing Officer, appeal was preferred by the assessee before the Commissioner of Income-tax (Appeals), who partly allowed the appeal of the assessee vide order dated December 4, 2003 and held as under: "Contingent liabilities do not constitute 'expenditure'. Contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Expenditure which is deductib....
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....year ended March 31, 2004. Since the change has been made for bona fide reasons, and has also been followed regularly, the departmental authorities were not justified in refusing to accept it. As regards their objection that the liability in respect of the warranty is contingent in nature, we are unable to accept the same. The sale as well the warranty are inextricably bound with each other and, therefore, if the sale proceeds are taken note of in a year, the liability in respect of the warranty is also to be taken note of in the same year. The liability is not contingent. It is a definite and certain liability. Only the quantification of the liability is based on estimate, which in turn is based on past experience and data. From the data furnished at page 21 of the paper book, we find that in the assessment years 1997-98, 1998-99 and 1999-00, the percentage of warranty expenses in relation to the sale was 3.53%, 5.07% and 2.10%, respectively. On this basis, and adopting a conservative position, the assessee estimated the liability in respect of the warranty on sales made during the year under appeal at 2% of the sales. The sales for the year amounted to Rs. 11,62,96,506 and 2% the....
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....in the year of sale to that expenditure. Thus the asses-see was entitled to the deduction from its total income for the provisions made in regard to contingent liability arising therefrom. As far as the change in the accountancy system of the assessee is concerned, it has been accepted even by the Assessing Officer and the Commissioner of Income-tax (Appeals). It is nobody's case that this change was motivated or lacked bona fides. On the contrary, the authorities have recorded a definite finding that such a change was required and was bona fide. Thus, it would be difficult to say that if the assessee, as a consequence of such change in the accountancy system has made a provision for expenditure in furtherance of the warranty clause contained in the document of sale itself, it can be treated as invalid or improper. This in the facts and circumstances of the case would have to be construed as an existing liability for which provision has to be made by the assessee more so keeping in view the figures relatable to the business of the assessee in the past. It is not in dispute before us that when the assessee sells his goods the warranty clause is part of the sale transaction and the....
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.... the proposition whether the assessee would be allowed deduction in the accounting year, although the liability may have to be quantified and discharged at a future date, the liability is to be treated in the present time and would or would not be a contingent liability, the court held as under: "So is the view taken in Calcutta Co. Ltd. v. 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 above said 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 off....