Phool Singh, J.M. - (1.) THESE four appeals out of which three are from the side of assessee involving asst. yrs. 1987-88 to 1989-90 and one cross-appeal of the Department involving asst. yr. 1988-89 are directed against the orders dt. 26th September, 1990, recorded by the CIT(A), Bathinda, by which he has disposed of assessee's three appeals of asst. yrs. 1987-88 to 1989-90. As these appeals involve common issues, these were heard together and are being disposed of by this composite order.
(2.) In all the three appeals of the assessee, the only ground involved relates to the liability of provision for expenses on repair of transformers during the warranty periods, which have been disallowed by the authorities below. The facts, in short, are that the assessee-firm was dealing in the business of manufacture and distribution transformers and its major customers were various State Electricity 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 asst. yr. 1987-88, the AO while completing assessment order noted that the assessee-firm debited an amount of Rs. 2,74,119 to P&L a/c 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 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 upto 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 the Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC), the assessee submitted that case of the assessee-firm was also covered by the ratio of the decision of the Hon'ble Supreme Court. However, the AO did not agree with the contention of the assessee, who noted that facts and conditions of the case of Calcutta Co. Ltd. (supra) are quite different to the facts of the assessee. He further observed that the assessee should have claimed the actual expenses against manufacturing defects on the basis of estimation. Accordingly, the claim of the assessee about provision for warranty was not held allowable and he disallowed the claim of provision of Rs. 2,74,119 for alleged inbuilt liability under the head of 'Warranty'. In the asst. yr. 1988-89, the facts were identical and the amount so disallowed was Rs. 8,85,274 and on similar facts the claim of the assessee for Rs. 14,03,843 was disallowed by the AO for the asst. yr. 1989-90.
(3.) THE assessee preferred three different appeals against disallowances made by the AO and it appears that all the appeals were taken up together for disposal by the learned CIT(A). THE contention of the assessee before the CIT(A) was that provisions made in each assessment year constituted inbuilt liability of the assessee as per terms and conditions of the agreement with the purchaser of the transformers as transformers were sold with the warranty of 12-18 months and in some cases for 60 months against manufacturing defect. It was further submitted that on the basis of past experience, it was seen that expenses on account of warranty for goods covered upto the period 12 to 18 months was at an average of 2 per cent. and for goods covered by warranty of 60 months, was on an average of 6 per cent. Accordingly, the provisions were made in all the assessment years. Reliance was again placed on the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra) and further on the decision of Delhi High Court in the case of CIT vs. Nav Bharat Nirman (P) Ltd. (1983) 141 ITR 723 (Del), in which the Hon'ble Court has followed the ratio of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra). THE learned CIT(A) considered all the facts and noted that the assessee was making claim of deduction of warranty twice i.e. once on the basis of estimated provisions 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(A), 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(A), 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 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. (supra) and that of Delhi High Court decision in the case of Nav Bharat Nirman Co. (supra) were distinguishable and rather the decision of the Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (1985) 156 ITR 585 (SC) was applicable in which their Lordships have laid down as under : "Contingent liabilities does not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but a setting apart money which might become expenditure on the happening of an event is not an expenditure." Applying this ratio to the facts of the case, this ground of assessee was rejected confirming the view of the AO and the assessee is in appeal before us. 4.1 THE facts for asst. yrs. 1988-89 to 1989-90 were identical except the difference of amounts and CIT(A) confirmed the view of AO.;