IN HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH Date of Decision: 19.05.2015 1. Income Tax Appeal No. 434 of 2014 Commissioner of Income Tax, Faridabad ..Appellant versus M/s Carrier Air-Conditioning and Refrigeration (Formerly known as Aircon Limited). ..Respondent 2. Income Tax Appeal No. 439 of 2014 Commissioner of Income Tax, Faridabad ..Appellant versus M/s Carrier Air-Conditioning and Refrigeration (Formerly known as Aircon Limited). ..Respondent CORAM: HON'BLE MR. JUSTICE S.J.VAZIFDAR, ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE G.S.SANDHAWALIA. 1. Whether Reporters of local papers may be allowed to see judgment? 2. Whether to be referred to Reporters or not ? 3. Whether judgment should be reported in Digest? Present : Mr. Tajender K.Joshi, Advocate, for appellant. Mr. Deepak Chopra, Advocate with Mr. Piyush Singh, Advocate, for respondent. **** S.J.VAZIFDAR A.C.J. (Oral) This order will dispose of Income Tax Appeal Nos. 434 and 439 of 2014 as similar questions of law are involved in both cases. facts have been taken from I.T.A. No. 434 of 2014. 2. Both these appeals are against order of Income Tax Appellate Tribunal dismissing appellant s appeal against order of Commissioner of Income Tax (Appeals). C.I.T. (Appeals) deleted RAVINDER SHARMA 2015.05.25 14:56 I attest to accuracy and authenticity of this document ITA No. 434 of 2014 2 disallowance of warranty provision. matter pertains to assessment years 1998-99 and 2001-02. 3. appellant contends that following substantial question of law arises:- i) Whether on facts and in circumstances of case, Hon ble ITAT was right in law in treating provision for warranty in present case as ascertained liability, despite failure on part of assessee to establish historical or scientific basis of arriving at said provision. ii) Whether on facts and in circumstances of case, Hon ble ITAT was right in law in disregarding fact that conditions laid down in Rotork Controls India P. Ltd. vs. CIT (2009) 314 ITR 62 (SC) and Majestic Auto Ltd. 156 460 are not fulfilled in present case. We have answered questions in favour of respondent-assessee and against appellant-revenue. 4. In our view substantial question of law does not arise. In any event, questions are answered in favour of respondent-assessee in view of judgment of Division Bench of this Court and by judgment of Supreme Court. 5. respondent filed return of income of 11,72,00,980/-. revised return declared same income. assessment was completed under section 143(3) of Income Tax Act, 1961 (for short Act ) at total income of 11,64,04,200/-. assessee had debited amount of 2,66,33,000/- on account of warranty expenses in Profit and Loss account. respondent stated that warranty costs were determined on basis of past experience and are provided for in RAVINDER SHARMA 2015.05.25 14:56 I attest to accuracy and authenticity of this document ITA No. 434 of 2014 3 year of sale. This provision was increased from previous year by amount of 60,25,000/-. 6. Proceedings under section 147 and 148 of Act were initiated. Assessing Officer enquired why warranty expenses to extent of 60,25,000/- should not be added back to respondent s income. In its written submissions filed before Assessing Officer, respondent stated that it had calculated provision for warranty expenses based on actual expenses incurred in past; that it consistently followed practice of making provision for warranty in its books of accounts; that entire sale consideration in respect of which provision was made had been recorded in books as revenue; that corresponding warranty expenses had to be necessarily deducted in order to arrive at respondent s taxable income and basis of making warranty provision was also disclosed in financial statements. 7. Assessing Officer held that warranty expenses are not allowable deduction and that liability was contingent and not in praesenti. Assessing Officer held that test was whether provision provides for known liability of which amount can be determined with substantial accuracy. He held that decisive factor is not methodology of accountancy or practice followed by respondent but principle is whether such liability is contingent or in praesenti. Observing that it was liability that may or may not have to be discharged, Assessing Officer added amount of 60,25,000/- back to respondent s net income and initiated penalty proceedings under section 271(1)(c) of Act. C.I.T. (A) allowed respondent s appeal. Income Tax Appellate Tribunal RAVINDER SHARMA 2015.05.25 14:56 I attest to accuracy and authenticity of this document ITA No. 434 of 2014 4 dismissed appellant s appeal leading to appellant s filing present appeals. 8. respondent follows mercantile system of accounting. warranty expenses are therefore included in Profit & Loss account. It is not disputed that entry in this regard is reversed and amount is added to Profit & Loss account if expenses towards meeting warranty are not actually incurred for any reson upon expiry of warranty period. Assessing Officer s view that warranty expenses are liable to be added to respondent s income on account of warranty being contingent liability is not well founded. respondent is engaged in business of manufacture and sale of air conditioners. As noted by C.I.T. (A), under agreements entered into by it with its customers, respondent gives free of cost repair and replacement warranty for minimum period of one year from date of sale. 9. respondent contended that amount debited to its Profit & Loss account was based on past experience. respondent has been in this same line of business for several years. It is not suggested that records, including books of account are not reliable or that expenses towards meeting obligations for fulfilling warranties were not incurred. There is in any event no loss to revenue. If respondent does not incur any expenses towards meeting its obligation under warranty clause on account of claims thereunder not matching provision for any reason including on account of expiry of warranty period without warranty being invoked, unspent/unutilized provision is debited to warranty provision account. RAVINDER SHARMA 2015.05.25 14:56 I attest to accuracy and authenticity of this document ITA No. 434 of 2014 5 contention that provision was not made on any scientific basis is equally unfounded. provision is based essentially on respondent s past experience. 10. question is answered in favour of respondent by judgment of Division Bench of this Court in case of Commissioner of Income Tax v. Majestic Auto Ltd. [2006] 156 Taxman 460 (P&H) which was also relied upon by Tribunal. Division Bench held as under:- 6. In Bharat Earth Movers case (supra), Hon'ble Supreme Court dealing with proposition that assessee would be entitled to deduction in accounting year, although liability may have to be quantified and discharged at future rate, held that such liability is to be treated in present time and would not be contingent liability. It was held as under: So is view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) wherein this Court has held that liability on assessee having been imported, liability would be accrued liability and would not convert into conditional one merely because liability was to be discharged at future date. There may be some difficulty in estimation thereof but that would not convert accrued liability into conditional one; it was always open to tax authorities concerned to arrive at proper estimate of liability having regard to all circumstances of case .. 11. matter is also covered in respondent s favour by judgment of Supreme Court in Rotork Controls India P. Ltd. v. RAVINDER SHARMA 2015.05.25 14:56 I attest to accuracy and authenticity of this document ITA No. 434 of 2014 6 Commissioner of Income Tax [2009] 314 ITR 62 (SC). It was contended on behalf of Department that provision for warranty is towards unforeseen liability which is not certain nor could it be foreseen with precision and was, therefore, only contingent. It was contended that being contingent, deduction as expense(s) was not available. Supreme Court rejected contentions. Further, in paragraph No. 14, Supreme Court expressly held that if warranty provisions are based on experience and historical trend(s) and if working is robust, then question of reversal in subsequent two years in example furnished therein may not arise in significant way. 12. In circumstances, both appeals are dismissed. (S.J.VAZIFDAR) ACTING CHIEF JUSTICE (G.S.SANDHAWALIA) JUDGE 19.05.2015 ravinder RAVINDER SHARMA 2015.05.25 14:56 I attest to accuracy and authenticity of this document Commissioner of Income Tax, Faridabad v. M/s Carrier Air-Conditioning and Refrigeration (Formerly known as Aircon Limited)