TaxTMI 
TaxTMI 
1997 (12) TMI 136
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....ectricity Boards, like Punjab State Electricity Board, U.P. State Electricity Board, Delhi Electric Supply Undertaking, etc. The assessee was supplying the distribution transformers to different Electricity Boards of different States, against their orders as per their terms and conditions like, price, payments, delivery, time warranty, period, etc. In the assessment year 1987-88, the Assessing Officer while completing assessment order noted that the assessee-firm debited an amount of Rs. 2,74,119 to Profits & Loss Account under the narration 'Inbuilt Liability', which was to be born by the assessee-firm. The assessee was called upon to show the provision as to how that amount was claimed as deduction. The assessee contended that they were dealing in the business of manufacturing and distribution of transformers and against goods supplied to different State Electricity Boards, the assessee-firm was giving warranty for 12 to 18 months and in some cases even up to 60 months against manufacturing defects and the amount of Rs. 2,74,119 was claimed as provision for carrying out the necessary manufacturing defects or replacement, etc. Relying upon the decision of Calcutta Co. Ltd.....
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....ons ranging between 2 per cent to 6 per cent depending upon the period of warranty, which was 12 to 18 months or 60 months and secondly on the basis of actual replacement carried out as the assessee itself has admitted that no separate account of warranty and current repair were being maintained. The learned CIT(Appeals), further noted that by adopting this method of accountancy the net effect was postponement of payment of tax on the provisions claimed for the period of warranty. Further, he noted that provisions can be made only in respect of determined liability and liability, which was contingent cannot be treated as determined liability. The case of the present assessee, in the opinion of the learned CIT(Appeals), was that expenses of warranty were contingent on the break-down of a transformer during the period of warranty and such provision cannot be made and particularly no such provision can be made at the time of sale. He further concluded that the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. and that of Delhi High Court decision in the case of Nav Bharat Nirman (P.) Ltd. were distinguishable and rather the decision of the Hon'ble Supreme ....
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....be carried out in the said warranty clause. Initially, the assessee worked out this amount of provision at 1 per cent to 2.5 per cent for repairs/replacement of damaged part of transformers being supplied to 12/18 months and 60 months warranty period respectively. The assessee noted from the experience of repairs carried out on damaged transformers during the accounting years 198384 to 1985-86 that the above amount was quite less and average so worked out on the basis of repairs costs for these three accounting years, which came to 1.90 per cent and 6.3 per cent for warranty period of 12/18 months and 60 months respectively. The assessee's learned counsel has pointed out to the copy of the note of provision of liability for repairs of transformers damaged during the warranty period submitted to the authorities below and appearing at pages 9 to 10 of the paper book and contended that on the basis of this estimate of 2 per cent of the total cost of sale of transformers with warranty period of 12/18 months and 6 per cent of total cost of transformers sold with 60 months warranty period was worked out and provision was made in each year accordingly. The counsel further adds that th....
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....Rs. 62,96,171 as against the provisions of Rs. 18,98,684, which is more than 350 per cent. The contention is that the assessee was not going to get any benefit in payment of taxes as noted by the CIT(Appeals). 9. So far as the legal position is concerned, the contention of the assessee's learned representative is the same as taken before the authorities below and reliance was placed or the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. and that of Delhi High Court decision in the case of Nav Bharat Nirman (P.) Ltd. and contended that the amount of provisions claimed by the assessee cannot be called contingent liability as the amount of provision was based on estimate and even that estimate was based on the assessee's experience in earlier years. The contention was that the assessee was following the consistent method of accounting and liability was being definite one and there was no occasion to treat that as contingent one and the Department should have allowed the claim of the assessee for deduction. 10. As against this, the learned D.R. placed reliance on the order of the CIT(Appeals) and submitted that the order is reasonable one and th....
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....only point requires scrutiny is whether the assessee's claim for deduction on account of provisions made for carrying on the repairs/replacement of defects is allowable or not. 13. At the very beginning, it may be relevant to point out that assessee has given out the basis for arriving at the amount of provisions to be made to carry out the inbuilt liability in the warranty period and note of provision of liability for repairs of transformers damaged during warranty period was submitted to the authorities below on the basis of expenses incurred by the assessee for the accounting years 1983-84 to 1985-86, the assessee has arrived the estimated cost of repairs of 2 per cent of sale value for those transformers, which were sold with warranty of 12/18 months and 6 per cent of the total cost of these transformers, which were sold with warranty clause of 60 months. The method of estimating cost of repairs had not been challenged by the Revenue as neither the Assessing Officer nor the CIT(Appeals) have found any defect in working out-such estimate. Once the assessee is coming with estimated cost of repairs of warranty clause then assessee's such claim is to be allowed as in the....
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.... capable of being valued. This reasoning is fully applicable to the fact of the present case. Even if the liability under-taken by the assessee to carry out the repairs/ replacement during the warranty period was contingent then such liabilities were specifically certain and capable of being valued as assessee have arrived at the estimate of such liability to be incurred on the basis of past experience and the Department has not doubted the same then such estimated liabilities are to be treated as trading expenses and must be allowed. On the basis of above, legal position which emerges out is that even contingent liabilities which are capable of being valued specifically are allowable and the liability of the assessee even if treated contingent is allowable in view of the decision of the Supreme Court in the case of Calcutta Co. Ltd. . 14. So far as the observations of the learned CIT(Appeals) that the claim on account of warranty is being claimed by the assessee twice, it is pointed out that the assessee had worked out the estimate of what is the expenses in carrying out the necessary repairs/replacement of defective/damaged transformers in warranty period and in case that esti....
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....anson (India) Ltd. would have applied in which facts were identical as the assessee was supplying industrial machines along with guarantees by way of warranties for their performance. That guarantee was in the shape of warranty. On the basis of past experience, the Co. started following the method of accounting of providing some provision to meet the expenditure consequent to the warranty. The provision was of Rs. 1,89,787 while the actual amount of expenditure incurred was Rs. 1,33,562 and the Assessing Officer disallowed the excess provision of Rs. 56,225. The CIT(Appeals) deleted the addition and the Tribunal confirmed that view on the basis that assessee has given out an estimate of such expenses for which provision was made and such estimate was based on assessee's experience in the earlier year. The accounting method followed by the assessee was contingent one and the Tribunal concluded that in such type of cases the Department should not disallow the provisions so made by the assessee on being too technical rather should adopt a pragmatic approach. Even if the Assessing Officer would have arrived at the conclusion after making necessary investigations that estimate. was ....