M/s Desai & Co, Hubli V. CIT, Hubli

ITA 597/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63725 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 01-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 23-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: V CHANDRASHEKAR
• Keywords: Business income
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.597/BANG/2011 ASSESSMENT YEAR : 2006-07 M/S. DESAI & CO., P.B. ROAD, VIDYANAGAR, HUBLI. PAN : AAAFD 9759P VS. THE COMMISSIONER OF INCOME TAX, HUBLI. APPELLANT RESPONDENT APPELLANT BY : SHRI V. CHANDRASHEKAR, ADVOCATE RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 01.10.2012 DATE OF PRONOUNCEMENT : 05.10.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 24.03.2011 OF THE COMMISSIONER OF INCOME-TAX, HUBLI (CIT) PA SSED U/S. 263 OF THE ACT RELATING TO ASSESSMENT YEAR 2006-07. 2. THE CIRCUMSTANCES UNDER WHICH THE ORDER U/S. 263 WA S PASSED BY THE LD. CIT ARE AS FOLLOWS. THE ASSESSEE IS A PARTNERS HIP FIRM CARRYING ON THE BUSINESS OF DEALING IN TRACTORS AND TRAX VEHICLES, SPARE PARTS AND ACCESSORIES. FOR THE A.Y. 2006-07, THE ASSESSEE FI LED A RETURN OF INCOME ITA NO.597/BANG/11 PAGE 2 OF 11 DECLARING TOTAL INCOME OF Q 59,10,997. THE ASSESSEES RETURN WAS TAKEN UP FOR SCRUTINY. 3. THE ASSESSEE DURING THE PREVIOUS YEAR HAD SHOWN IN THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT A SUM OF RS.32,67,000 UND ER THE HEAD PROVISIONS FOR EXTENDED WARRANTY. THE AO IN THE COURSE OF AS SESSMENT PROCEEDINGS ISSUED A LETTER DATED 10.12.2008. THE AO MADE THE F OLLOWING ENQUIRIES WITH REGARD TO THE PROVISION FOR EXTENDED WARRANTY AND S OUGHT FOR THE FOLLOWING INFORMATION:- (A) COPY OF AGREEMENTS OR ANY OTHER DOCUMENTS WHIC H EVIDENCED ASSESSEES LIABILITY IN THIS REGARD. (B) BASIS ON WHICH THE ESTIMATION OF RS.32,67,000/ - HAS BEEN MADE. (C) SINCE THIS IS A PROVISION ON ANTICIPATED LIABI LITY, THE SECTION/SUB-SECTION OF THE INCOME-TAX ACT UNDER WHI CH THE DEDUCTION HAS BEEN CLAIMED. (D) PROVISIONS MADE UNDER THIS HEAD IN THE F.Y. 20 03-04 AND ACTUAL EXPENDITURE INCURRED IN THE F.YS. 2004-05 AN D 2005-06, IF ANY. 4. THE ASSESSEE IN REPLY TO THE AFORESAID LETTER SUBMI TTED ON THE PROVISION FOR EXTENDED WARRANTY AS FOLLOWS:- PROVISION FOR EXTENDED WARRANTY RS. 32.67 LAKHS: THE SCHEME OF EXTENDED WARRANTY IS EXPLAINED AS UND ER: IN RESPECT OF SALE OF TRACTORS THE WARRANTY FOR THE YEAR OF SALE IS COVERED BY THE PRINCIPALS. THE DEALER HAS T O COVER THE LIABILITY FOR THE WARRANTY IN RESPECT OF THE VEHICL ES SOLD IN THE SECOND AND THIRD YEAR. FOR THIS PURPOSE AN AMOUNT O F RS.9,000/- IS COLLECTED FROM THE CUSTOMER AT THE TIME TO SALE OF VEHICLE IN THE SALE INVOICE BEING THE WARRANTY DEPOSIT OF RS.4,000 /- FOR THE SECOND YEAR AND AN AMOUNT OF RS.5,000/- FOR THE THI RD YEAR IN RESPECT OF VEHICLES SOLD DURING THE FINANCIAL YEAR 2005-06. FOR YOUR IMMEDIATE REFERENCE WE ENCLOSE HEREWITH SOME O F THE COPIES OF THE SALE BILLS WHEREIN YOU WILL NOTICE TH AT AN AMOUNT OF ITA NO.597/BANG/11 PAGE 3 OF 11 RS.9,000/- IS COLLECTED IN THE INVOICE ITSELF TO CO VER THE LIABILITY FOR WARRANTY FOR THE SECOND AND THIRD YEAR. IN THE SECOND YEAR OF SALE THE ACTUAL WARRANTY CLAI MS ARE PAID BY RAISING THE BILL BY DEBIT TO WARRANTY CLAIM S AND CREDITING SALES AND VAT ACCOUNT. THE ACTUAL AMOUNT OF WARRANT Y CLAIMS IS CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT. LIKE WISE THE PROVISION MADE IN THE FIRST YEAR FOR THE EXTENDED W ARRANTY IS REVERSED AND ACCEPTED AS INCOME IN THE SECOND YEAR. ACCORDINGLY THE PROVISION MADE IN THE FIRST YEAR FOR THE THIRD YEAR IS ACCEPTED AS INCOME IN THE THIRD YEAR OF SALE AND THE ACTUAL AMOUNT OF WARRANTY CLAIMS DURING THAT YEAR IS CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT AS EXPLAINED ABOVE. THE TRACTORS SOLD FROM THE FINANCIAL YEAR 2005-06 A RE COVERED BY THE TRIRAKSHA SCHEME OF THE COMPANY. LIK E WISE AN AMOUNT OF RS. 14,52,000/- BEING THE PROVISION FOR T HE SECOND YEAR HAS BEEN REVERSED AND ACCEPTED AS INCOME FOR T HE YEAR ENDING 31-3-2007 AND AN AMOUNT OF RS.18,15,000/- BE ING THE PROVISION FOR THE THIRD YEAR MADE IN THE FIRST YEAR IS REVERSED AND ACCEPTED AS INCOME FOR THE ACCOUNTING YEAR ENDING 3 1-3-2008. FOR YOUR READY REFERENCE WE ALSO ENCLOSE HEREWITH C OPIES OF THE FINANCIAL STATEMENTS FOR THE ACCOUNTING YEAR ENDED 31-3-2007 AND 31-3-2008. HENCE THE PROVISION MADE IS ACCORDI NG TO PRUDENT ACCOUNTING PRACTICE AND THERE IS NO LOSS OF REVENUE TO THE GOVERNMENT. THE AMOUNT OF PROVISION MADE IS EQU AL TO THE AMOUNT OF WARRANTY DEPOSIT COLLECTED FROM THE CUSTO MERS IN THE SALE BILLS. 5. THE ASSESSING OFFICER PASSED AN ORDER U/S. 143(3) O F THE ACT IN WHICH HE DID NOT MAKE ANY DISALLOWANCE WITH REGARD TO THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PROVISION FOR EXTENDED WARRANTY. 6. THE LD. CIT IN EXERCISE OF HIS POWERS U/S. 263 OF T HE ACT WAS OF THE VIEW THAT THE ACTION OF THE AO IN ALLOWING THE CLAI M OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PROVISION FOR EXTENDED WARR ANTY WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. I N THE SHOW CAUSE NOTICE U/S. 263 OF THE ACT DATED 02.02.2011, THE CIT EXPRE SSED THE VIEW THAT ALL PROVISIONS ARE NOT ALLOWABLE EXPENDITURE. THE ASSE SSEE IN REPLY TO THE AFORESAID NOTICE OF THE CIT, EXPLAINED THE TRUE NAT URE OF THE PROVISION FOR ITA NO.597/BANG/11 PAGE 4 OF 11 EXTENDED WARRANTY DISCLOSED IN THE PROFIT & LOSS AC COUNT. IT WAS ON THE SAME LINES AS WAS GIVEN TO THE ASSESSING OFFICER IN THE COURSE OF ASSESSMENT PROCEEDINGS WHICH WE HAVE ALREADY SET OUT IN THE EA RLIER PART OF THIS ORDER. THE CIT, HOWEVER, WAS OF THE VIEW THAT THE AO COMPL ETED THE ASSESSMENT WITHOUT CONSIDERING THE ADMISSIBILITY OF DEDUCTION. HE HELD THAT THE AMOUNT ALLOWED AS DEDUCTION WAS ONLY PROVISION AND IT CANNOT BE SAID TO BE AN EXPENDITURE INCURRED DURING THE PREVIOUS YEAR. T HE RELEVANT OBSERVATIONS OF THE CIT IN THIS REGARD ARE AS FOLLO WS:- 3.1 IT IS UNDISPUTED AND QUITE MANIFEST FROM THE SUBMISSIONS OF THE ASSESSEE FIRM THAT THE AMOUNT DEBITED UNDER THE HEAD EXTENDED WARRANTY IS A PROVISION FOR THE SUBSEQUE NT PERIOD AND NOT BEING AN EXPENDITURE INCURRED IN THE RELEVANT F INANCIAL YEAR THE ASSESSEE FIRM HOWEVER, CONTENDS THAT THE PROVIS ION TOWARDS. WARRANTY IS A PRUDENT ACCOUNTING PRINCIPLE FOR THE BUSINESS OF THE ASSESSEE, IN AS MUCH AS THAT THE WARRANTY FOR T HE YEAR OF THE SALE OF TRACTORS IS COVERED BY THE PRINCIPALS WHERE AS THE LIABILITY FOR THE WARRANTY IN RESPECT OF THE VEHICLES SOLD IN THE SECOND AND THIRD YEAR REST WITH THE DEALERS. THE ASSESSEE FURT HER CONTENDS THAT TO COVER UP THE LIABILITY FOR THE WARRANTY, IT IS COLLECTING AN AMOUNT OF RS. 9,000/- FROM THE CUSTOMERS AT THE TIM E OF SALE OF THE VEHICLE IN THE SALE INVOICE BEING THE WARRANTY DEPOSIT OF RS. 4,000/- FOR THE SECOND YEAR AND AN AMOUNT OF RS. 5, 000/- FOR THE THIRD YEAR IN RESPECT OF THE VEHICLES SOLD DURI NG THE FINANCIAL YEAR 2005-06. IN THIS REGARD, THE ASSESSEE DEMONSTR ATED BEFORE THE AO AS UNDER: IN THE SECOND YEAR OF SALE THE ACTUAL WARRANTY CLAIMS ARE PAID BY RAISING THE BILL, BY DEBIT TO WARRANTY CLAIMS AND CREDITING SALES AND VAT ACCOUNT. THE ACTUAL AMOUNT OF WARRANTY CLAIMS IS CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT. LIKEWIS E THE PROVISION MADE IN THE FIRST YEAR FOR THE EXTEND ED WARRANTY IS REVERSED AND ACCEPTED AS INCOME IN THE SECOND YEAR. ACCORDINGLY THE PROVISION MADE IN THE FIRST YEAR FOR THE THIRD YEAR IS ACCEPTED AS INCOME IN THE THIRD YEAR OF SALE AND THE ACTUAL AMOUNT OF WARRANTY CLAIMS DURING THAT YEAR IS CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT AS EXPLAINED ABOVE. THE TRACTORS SOLD FROM THE FINANCIAL YEAR 2005- 06 ARE COVERED BY THE TRIRAKSHA SCHEME OF THE COMPANY. LIKEWISE AN AMOUNT OF RS. 14,52,000/- ITA NO.597/BANG/11 PAGE 5 OF 11 BEING THE PROVISION FOR THE SECOND YEAR HAS BEEN REVERSED AND ACCEPTED AS INCOME FOR THE YEAR ENDING 31.03.2007 AND AN AMOUNT OF RS. 18,15,000/- BEING THE PROVISION FOR THE THIRD YEAR MADE IN THE FIRST YEAR IS REVERED AND ACCEPTED AS INCOME FOR THE ACCOUNTIN G YEAR ENDING 31.03.2008. HENCE THE PROVISION MADE IS ACCORDING TO PRUDENT ACCOUNTING PRACTICE AND THERE IS NO LOSS OF REVENUE TO THE GOVERNMENT. THE AMOUNT OF PROVISION MADE IS EQUAL TO THE AMOUNT OF WARRANTY DEPOSIT COLLECTED FROM THE CUSTOMERS IN THE SALE BI LLS. 3.2 IT CLEARLY TRANSPIRES FROM THE ABOVE THAT THE W ARRANTY PROVISION MADE BY THE ASSESSEE DURING THE FINANCIAL YEAR 2005- 06 IS NOT AN EXPENDITURE ACTUALLY INCURRED DURING T HE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07. THE C ONTENTION OF THE ASSESSEE FIRM THAT THE AMOUNT OF EXTENDED WARR ANTY COLLECTED IN THE FIRST YEAR OF SALE OF TRACTORS BY THE PRINCIPAL FROM THE CUSTOMERS IS REVERSED IN THE SECOND AND THIRD Y EAR OF SALE OF TRACTORS, WHICH IS EQUIVALENT TO THE AMOUNT ORIGINA LLY COLLECTED, HENCE, THERE IS NO LOSS OF REVENUE IS NOT ACCEPTABL E FOR THE REASON FIRSTLY, THAT EACH ASSESSMENT YEAR IS A SEPARATE YE AR AND IS GOVERNED BY THE RELEVANT PROVISIONS OF LAW INCLUDIN G THE AMENDED PROVISIONS OF THE FINANCE BILL APPLICABLE T O THAT PARTICULAR ASSESSMENT YEAR, SECONDLY, THAT THE INCO ME SHOULD BE ASSESSED IN THE YEAR IN WHICH IT HAS ACCRUED OR ARI SEN TO THE ASSESSEE AND LASTLY, THAT ANY PROVISION MADE IS NOT AN ALLOWABLE EXPENDITURE AGAINST THE BUSINESS INCOME AS PER THE PROVISIONS OF THE LAW. FINALLY, THE CIT SET ASIDE THE ORDER OF THE AO ON T HE ISSUE OF PROVISION FOR EXTENDED WARRANTY. 7. AGGRIEVED BY THE ORDER OF THE CIT, THE ASSESSEE HA S PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSEL FO R THE ASSESSEE, WHO BROUGHT TO OUR NOTICE THAT THE AO HAD MADE DUE ENQUIRIES BEFORE COMPLETING THE ASSESSMENT U/S. 143(3) OF THE ACT AN D THE OBSERVATIONS OF THE CIT IN THE ORDER U/S. 263 WERE NOT CORRECT. TH E LD. COUNSEL FURTHER DREW OUR ATTENTION TO THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. V. CIT 314 ITR 62 ( SC) . IN PARTICULAR, ITA NO.597/BANG/11 PAGE 6 OF 11 OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE HONBLE SUPREME COURT AT PAGES 71 TO 73, WHEREIN THE HONBLE SUPREME COUR T HAS EXPLAINED THE MATCHING CONCEPT AS WELL AS WHAT IS A PROVISION. I T WAS SUBMITTED THAT IN THE LIGHT OF THE DECISION OF THE HONBLE APEX COURT AND IN THE LIGHT OF THE FACT THAT THE ASSESSEE WAS FOLLOWING A CONSISTENT S YSTEM WHEREBY THE MATCHING CONCEPT PRINCIPLE IS DULY COMPLIED WITH AN D ALSO THE PRINCIPLE THAT ONLY ACTUAL EXPENDITURE ON ACCOUNT OF EXTENDED WARRANTY PROVISION WERE CLAIMED IN THE RELEVANT ASSESSMENT YEAR, THE C IT OUGHT NOT TO HAVE INVOKED JURISDICTION U/S. 263 OF THE ACT. IT WAS F URTHER BROUGHT TO OUR NOTICE THAT THE BASIS ON WHICH THE ASSESSEE ESTIMAT ED ITS LIABILITY ON ACCOUNT OF WARRANTY EXPENSES IN THE SECOND AND THIRD YEAR O F SALE IS ALSO SCIENTIFIC AND IS BEING FOLLOWED CONSISTENTLY. 9. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE LD. CIT AND FURTHER RELIED ON THE DECISION OF THE HONBLE KARNA TAKA HIGH COURT IN THE CASE OF CIT V. MICROLAND LTD . WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT ON A FINDING THAT PROVISION FOR WARRANTY EXPE NSES WERE NOT MADE ON A SCIENTIFIC BASIS, HELD THAT THE AMOUNT CLAIMED AS D EDUCTION COULD NOT BE ALLOWED. THE LD. DR ALSO RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SUNDARAM FINANCE LTD. V. ACIT, CIVIL APPEAL NO.5895/2008 DATED 11.09.2012 . IN THE AFORESAID DECISION OF THE HONBLE SUPREME COURT, THE QUESTION WAS WITH REGARD TO DEDUCTION ON ACCOUNT OF PROVISION MADE IN RESPECT OF A NON-PERFO RMING ASSET AND THE HONBLE SUPREME COURT FOLLOWED ITS OWN DECISION IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. 320 ITR 577 AND HELD THAT THE DEDUCTION WAS NOT PERMISSIBLE. WE MAKE IT CLEAR THAT THE AFORESAID D ECISION WAS IN THE CONTEXT ITA NO.597/BANG/11 PAGE 7 OF 11 OF PRUDENTIAL NORMS TO BE FOLLOWED BY NON-BANKING F INANCIAL COMPANIES ISSUED BY THE RBI. THE QUESTION WAS WHETHER SUCH P RUDENTIAL NORMS WILL BE RELEVANT WHILE COMPUTING INCOME UNDER THE ACT. IN OUR VIEW, THIS DECISION WILL NOT BE OF ANY USE TO THE REVENUE TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT THE O UTSET, WE NOTICE THAT THE LAW WITH REGARD TO ALLOWING DEDUCTION WHER E THE SAME IS CLAIMED ON THE BASIS OF A PROVISION WAS LAID DOWN BY THE HO NBLE SUPREME COURT IN THE CASE BHARATH EARTH MOVERS V. CIT 245 ITR 428 (SC) . THE AFORESAID DECISION LAID DOWN THE PRINCIPLE THAT DEDUCTION CAN BE CLAIMED EVEN ON PROVISION AND THE ONLY REQUIREMENT IS THAT THE INCU RRING OF THE LIABILITY BY THE ASSESSEE SHOULD BE CERTAIN AND THAT THE ESTIMAT ION OF SUCH LIABILITY SHOULD BE REASONABLE. IN THE PRESENT CASE, AS WE H AVE ALREADY SEEN, THE AO MADE DUE ENQUIRIES ON THESE ASPECTS AND WAS SATISFI ED WITH REGARD TO THE CLAIM OF THE ASSESSEE. THE CIT IN EXERCISE OF POWER S U/S. 263 OF THE ACT CANNOT SEEK TO SUBSTITUTE HIS VIEW WITH THAT OF THE AO, WHEN TWO VIEWS ARE POSSIBLE ON AN ISSUE. 11. EVEN OTHERWISE, WE ARE OF THE VIEW THAT THE ASSESSE E HAS BEEN FOLLOWING A CONSISTENT METHOD OF ACCOUNTING. THE SAME WAS AS FOLLOWS:- ITA NO.597/BANG/11 PAGE 8 OF 11 ITA NO.597/BANG/11 PAGE 9 OF 11 12. IT IS CLEAR FROM THE ABOVE THAT THE ASSESSEE HAS BE EN FOLLOWING CONSISTENT METHOD OF ACCOUNTING. THE HONBLE SUPRE ME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. (SUPRA) HAD AN OCCASION TO DEAL WITH ALLOWING DEDUCTION ON ACCOUNT OF PROVISION FOR WARR ANTY CLAIMS. THE ASSESSEE IN THAT CASE SOLD VALVE ACTUATORS. AT THE TIME OF SALE, THE ASSESSEE PROVIDED STANDARD WARRANTY THAT IF THE PRODUCT WAS DEFECTIVE WITHIN THE STATED PERIOD, THE PRODUCT WOULD BE RECTIFIED OR RE PLACED FREE OF CHARGE. FOR AY 1991-92, THE ASSESSEE MADE A PROVISION FOR WARRA NTY AT RS.10,18,800 AT THE RATE OF 1.5% OF THE TURNOVER. AS THE ACTUAL EXP ENDITURE WAS ONLY RS. 5,18,554, THE EXCESS PROVISION OF RS.5,00,246 WAS R EVERSED AND ONLY THE NET PROVISION WAS CLAIMED. THE TRIBUNAL ALLOWED THE CLA IM ON THE BASIS THAT THE PROVISION HAD BEEN CONSISTENTLY MADE AND ON A REALI STIC MANNER. THE HIGH COURT REVERSED THE TRIBUNAL ON THE BASIS THAT THE L IABILITY WAS CONTINGENT AND NOT ALLOWABLE U/S 37 (1). THE HONBLE SUPREME C OURT HELD, REVERSING THE DECISION OF THE HONBLE HIGH COURT THAT : ITA NO.597/BANG/11 PAGE 10 OF 11 (1) A PROVISION IS A LIABILITY WHICH CAN BE MEASURE D ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISI ON IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OB LIGATION 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 THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE R ECOGNIZED; (2) A LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESU LT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS; (3) 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 OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERP RISE 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 OF RESOURCES TO SETTLE THAT OBLIGATIO N. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIE S OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMINED BY CONSIDERING THE SAID O BLIGATIONS AS A WHOLE; (4) IN THE CASE OF A MANUFACTURE AND SALE OF ONE SI NGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGEN T LIABILITY NOT ENTITLED TO DEDUCTION U/S 37 OF THE SAID ACT. HOWEV ER, WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION; (5) ON FACTS, THE ASSESSEE HAS BEEN MANUFACTURING A ND SELLING VALVE ACTUATORS IN LARGE NUMBERS SINCE 1983-84 ONWA RDS. STATISTICAL DATA INDICATES THAT EVERY YEAR SOME ACT UATORS ARE FOUND TO BE DEFECTIVE. THE DATA OVER THE YEARS ALSO INDIC ATES THAT BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPARED TO BUY T HE VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE, WARRANTY BE CAME INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS, WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PR ODUCT AND A RELIABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH W ARRANTY WAS ALLOWABLE . ITA NO.597/BANG/11 PAGE 11 OF 11 13. IN THE LIGHT OF THE AFORESAID PRINCIPLES, ON EXAMIN ING THE CASE OF THE ASSESSEE, WE ARE OF THE VIEW THAT THE ASSESSEE SATI SFIES BOTH THE MATCHING PRINCIPLE AS WELL AS THE CONDITIONS SUBJECT TO WHIC H THE PROVISION CAN BE RECOGNIZED AS A LIABILITY. WE ARE THEREFORE OF THE VIEW THAT THE ORDER OF THE ASSESSING OFFICER WAS NEITHER ERRONEOUS NOR PREJUDI CIAL TO THE INTERESTS OF THE REVENUE AND THEREFORE THE JURISDICTION U/S. 263 OF THE ACT COULD NOT HAVE BEEN EXERCISED. WE THEREFORE QUASH THE ORDER U/S. 263 OF THE ACT PASSED BY THE LD. CIT AND ALLOW THE APPEAL BY THE A SSESSEE. 14. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON THIS 5 TH DAY OF OCTOBER, 2012. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDIC IAL MEMBER BANGALORE, DATED, THE 5 TH OCTOBER, 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.