Dy. CIT v. LG Electronics (I) Ltd.
A.Y. : 2002-03. Dated : 30-1-2009
S. 37(1) — Provision for service warranty expenses on
actuarial basis allowed as expense.
The assessee-company, which was providing a one year
service warranty on sale of its electronics products, made a provision towards
services warranty expenses on actuarial basis and claimed deduction in respect
of the same u/s.37(1), which was disallowed by the Assessing Officer. On
appeal, the CIT(A) allowed the assessee’s claim.
The Tribunal, relying on the decisions of the following
cases, allowed the assessee’s claim :
(a) CIT v. Indian Transformers Ltd., (2004) 270
ITR 259; (2005) 142 Taxman 429 (Ker.)
(b) Bharat Earth Movers v. CIT, (2000) 245 ITR
428; 112 Taxman 61 (SC)
(c) Calcutta Co. Ltd. v. CIT, (1959) 37 ITR 1 (SC)
(d) IRC v. Mitsubishi Motors New Zealand Ltd.,
(1996) 222 ITR 697 (PC)
(e) CIT v. Vinitek Corpn. (P.) Ltd., (2005) 278
ITR 337; 146 Taxman 313 (Delhi )
The Tribunal noted as under :
1. In the light of plethora of judgments of both of the
Supreme Court as well as various High Courts it is well settled that once
the assessee is maintaining its accounts on the mercantile system, the
liability already accrued in a year though to be discharged at a future
date, would be a proper deduction while working out the profit and gains of
business, regard being had to the accepted principle of commercial practice
and accountancy. It is not as if such deduction is permissible only in the
case of amounts actually expended or paid.
2. The expression ‘the liability already accrued in the
year’ signifies that a business liability must have definitely arisen in
that accounting year. In other words, for allowing the deduction of a
liability while working out the profits and gains of business, a business
liability should have definitely arisen in that accounting year. What should
be certain is the incurring of the liability. The definite liability must be
in praesenti and not de futuro. The liability must have arisen under a
definite obligation. The obligation of the trader must not be of a purely
contingent nature for it to be a permissible outgoing or allowance or
deduction in the year of account.
3. The other condition to be satisfied is that the
definite liability in praesenti should also be capable of being estimated
with reasonable certainty though the actual quantification may not be
possible.
4. In the instant case, the issue related to the
assessee’s claim of deduction towards warranty liability under a condition
or stipulation made in the sale document imposing a liability upon the
assessee to discharge its obligation under warranty clause for the period of
warranty.
5. The assessee had made the provision of warranty
liability having regard to the past factor of actual expenses incurred by it
towards warranty liability. It had worked out the amount of liability by
applying a multiplying factor on the total sales made during the year on the
basis of past results. This method had been followed by the assessee
uniformly right from the first year of commencement of production.
