COMMISSIONER OF INCOME TAX Vs. INDIAN TRANSFORMERS LTD.
HIGH COURT OF KERALA
COMMISSIONER OF INCOME TAX
Indian Transformers Ltd.
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G. Sivarajan, J. -
(1.) THE Commissioner of Income Tax (Appeals) has filed these three appeals against the separate orders of the Income Tax Appellate Tribunal, Cochin Bench (for short "the Tribunal"), in the case of the same respondent -assessee for different assessment years 1991 -92, 1992 -93 and 1993 -94, respectively. Since the question involved in all the three cases is one and the same, these appeals are disposed of by this common judgment.
(2.) THE matter arises under the Income Tax Act, 1961 (for short "the Act"), in respect of a claim made by the respondent -assessee under section 37 of the Act. The respondent -assessee is a company engaged in the business of manufacture and sale of electrical transformers. In the assessment for the years 1991 -92, 1992 -93 and 1993 -94, the assessee claimed deduction of Rs. 3,50,000/ -, Rs. 4,01,000/ - and Rs. 4,78,000/ -, respectively, representing provision for after sales services based on the warranty issued at the time of sale of the transformers. The Assessing Officer disallowed the claim and added back the provision mainly on the ground that the provision is made in respect of a contingent liability and not in respect of a definite and ascertained liability. However, the said claim was allowed by the first appellate authority in appeal. The same was confirmed by the Tribunal in the appeal filed by the Revenue. Being aggrieved by the order of the Tribunal on this issue, the Department has come up in appeal. This court, while admitting the appeals, ordered notice on the following questions of law :
"(1) Whether, on the facts and in the circumstances of the case also in the light of the decisions reported in A. P. S. Cold Storage and Ice Factory v. : 119ITR709(All) and CIT v. , the assessee is entitled to claim deduction of the provisions made towards repairs of transformers ?
(2) Whether, on the facts and in the circumstances of the case, (i) in the absence of an ascertained liability, (ii) the provision being only on an estimate without any basis, the Tribunal is right in law and fact in allowing the deductions of the provision towards repairs of transformers ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in affirming the finding of the Commissioner of Income Tax (Appeals) that the provision was towards an ascertained liability only -
Shri George K. George, the learned Central Government standing counsel for taxes appearing for the appellant, submitted that the provision made by the respondent -assessee for after sales services based on the warranty issued to the customers at the time of sale of transformers is only a contingent liability. Standing counsel further submitted that the liability will accrue or arise only on a claim being made by the purchasers of transformers during the accounting period relevant to the assessment years concerned and that in the instant case at the most the claims are preferred by the purchasers only in respect of two amounts which are mentioned by the first appellate authority in its order. Standing counsel further submitted that both the appellate authorities had seriously erred in holding that the respondent -assessee had made a provision for after sales services based on definite and ascertained liability. Standing counsel in support of his contentions has also relied on the decisions of the Supreme Court in Indian Molasses Co. P. Ltd. v. : 37ITR66(SC) and in Shree Sajjan Mills Ltd. v. : 1986ECR276(SC) .
(3.) SHRI Sarangan, learned senior counsel appearing along with Shri S. Ananthakrishnan for the respondent, submitted that the assessee had made the provision for after sales services based on the warranty issued to the customers in the accounting period during which the sales of transformers were effected to the customers from its experience and on a reasonable basis which is a permissible deduction. Senior counsel took us to the order of the Commissioner of Income Tax (Appeals) where the said authority has noted the submission of the authorised representative of the appellant that the claims made towards repairs and after sales service charges during the warranty period were being allowed year after year and that the first appellate authority has clearly noted that in the case of MES, Goa, the appellant had made a provision for Rs. 42,000/ - towards replacement of HF/LV coils and leak repeated failure of the transformers and had obtained excise permission for warranty and that in the case of BHEL a provision for Rs. 90,000/ - has been made based on the claim made by them during the previous year. Senior counsel further pointed out that the BHEL had sent a letter dated October 20, 1990, to the appellant wherein it was mentioned that they had purchased ten numbers of OFW 2.75 MVA transformers from one of the GEC subsidiaries of M/s. ITL, Cochin, that all of them failed within a year of operation which resulted in serious dislocation at Rourkela which was brought to the notice of the chairman, GEC also. Senior counsel further submitted that the authorised representative of the assessee had furnished the details of the actual expenditure incurred for the current years which were very much higher than the provision made which had been debited in the account for the subsequent year. The senior counsel also submitted that the authorised representative had explained that the sum of Rs. 12,23,381/ - brought back to the accounts did not relate to any provision for warranty claim. Senior counsel submitted that both the appellate authorities have clearly entered a finding of fact after verifying the facts as noted in paragraph 9 of the Tribunal's order that the provision made is in respect of a definite and ascertained liability. Senior counsel further submitted that before the appellate authority, the assessee had relied on the decision of the Supreme Court in Calcutta Co. Ltd. v. : 37ITR1(SC) . Senior counsel also relied on the decision of the Privy Council in Commissioner of Inland Revenue v. Mitsubishi Motors New Zealand Ltd.,  3 WLR 671;,  222 ITR 697 and the decision of the Supreme Court in Bharat Earth Movers v. : 245ITR428(SC) which had applied the principles laid down in Calcutta Co. ltd.'s case : 37ITR1(SC) in support of his contentions.;
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