LexM/S. ROTORK CONTROLS INDIA (P) LTD. versus COMMISSIONER OF INCOME TAX, CHENNAI
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
A B [2009] 8 S.C.R. 1152 MIS. ROTORK CONTROLS INDIA (P) LTD. v. COMMISSIONER OF INCOME TAX, CHENNAI (Civil Appeal Nos. 3506 - 3510 of 2009) MAY 12, 2009 [S.H. KAPADIA AND AFTAB ALAM, JJ.) Income Tax Act, 1961: s.37 - Provision for warranty - Estimation of contingent liability - Manufacture and sale of G large number of sophisticated product for long - Every year some of the items found to be defective - Sale becoming virtually impossible without warranty - Provision for warranty made based on historical trend - Entitlement to deduction - Held: Entitled - Such obligation arising from past events to D be recognized as provisions. Words and phrases: 'provision: 'liability', 'obligating event' - Meaning of, in the context of Income Tax Act, 1961. Appellant-assessee was manufacturing and selling E Value Actuator. At the time of sale, the assessee . company provided a standard warranty whereby in the event the product sold becomes defective within a specified period, the company would undertake to rectify or replace the defective part free of charge. For the F assessment year 1991-92, the assessee made a provision for warranty @ 1.5% of the turnover. This provision was made on account of warranty claims likely to arise on the sales effected by the assessee and to cover up that expenditure. The assessee made reversal of excess G provision. The assessee claimed deduction in respect of net provision which was disallowed by the A.O. on the ground that the liability was merely a contingent' liability H 1152 •· 'ROTORK CONTROLS INDIA (P) LTD. v. COMMISSIONER 1153 OF INCOME TAX, CHENNAI ; not allowable as a deduction under Section 37 of Income A Tax Act, 1961. The decision was upheld by appellate authority. On appeal, Tribunal held that right from the assessment year 1983-84 the CIT (A) as well as the Tribunal allowed the warranty claim on the ground that Valve Actuators were sophisticated equipments; that in B the course of its manufacture and sale a reasonable warranty was given to the purchasers; that every item of sale was covered by the warranty scheme; that no purchaser was ready and willing to buy Valve Actuators without warranty and consequently every item sold had C a corresponding obligation under the warranty clause(s) attached to such sales. Applying the Rule of Consistency, the Tribunal held that the assessee on the facts and circumstances of the case was entitled to deduction under Section 37 of the 1961 Act in respect D of provision for warranty. The High Court held that the assessee was not entitled to deduction in respect of the provision made for warranty claims. Hence these appeals. Allowing the appeals of assessee and dismissing the appeals of Department, the Court E HELD: 1. A provision is a liability which can be measured only by using a substantial degree of F estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If G these conditions are not met, no provision can be recognized. [Para 1 O] [1167-B-D] 2. Liability is defined as a present obligation arising from past events, the settlement of which is expected to H 1154 SUPREME COURT REPORTS [2009] 8 S.C.R. A result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those B obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow c of resources to settle that obligation. Where there are a number of obligations, (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In the case of a manufacture and 0 sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army
Excerpt shown. Read the full judgment & AI analysis in Lexace.