JCIT (ASSTT) V. M/S. KEVIN ENTERPRISE

TAXAP/235/2007

AI Insights

The case revolves around the dispute concerning the deduction of a provision made by M/S. Kevin Enterprise for warranty costs amounting to Rs. 42,21,368 from their sales revenue. The Assessing Officer initially disallowed this deduction, viewing it as a contingent liability not permissible under the mercantile system of accounting. However, both the CIT(A) and the Tribunal overturned this decision, leading to the revenue's appeal to the High Court. The High Court, referencing a Supreme Court decision, upheld the Tribunal's decision, allowing the deduction.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 720476 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 22-12-2014
• Assessment Year: misc
• Other Referred Cases: Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, The Income Tax Officer, Baroda vs. Kevin Enterprise
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SWATI SOPARKAR
• Assessee Lawyers: K M PARIKH
• Keywords: Contingent Liability; Deduction; Mercantile system of accounting; Warranty Provision
• Section: 37

Judgement Text

"O/TAXAP/235/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 235 of 2007 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ JCIT (ASSTT)....Appellant(s) Versus M/S. KEVIN ENTERPRISE....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 4 O/TAXAP/235/2007 JUDGMENT Date : 22/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. Being aggrieved and dissatisfied with the impugned order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench (hereinafter referred to as ‘the Tribunal’) dated 28.04.2006 in ITA Nos. 762/Ahd/2001 for the Assessment Year 1997-98, the revenue has preferred the present Tax Appeal. 1.1 This appeal was admitted by this Court for consideration of the following substantial question of law: “Whether the ITAT was right in law and on facts in deleting the addition of Rs. 42,21,368/- made under the head provision made on account of warranty which is in the nature of contingent liability?” 2. The assessee had made provision of Rs. 42,21,368/- on account of warranty and reduced this figure from the total sales recorded in the books of account. During the course of assessment proceedings the Assessing Officer held that the assessee having consistently followed mercantile system of accounting provision for contingent or unaccrued liability is not allowable as deduction as the expenditure allowable should be one which pertains to an actual and existing liability. 2.1 Being aggrieved by the same, the assessee filed appeal before CIT(A). The CIT(A) deleted the addition made by the Page 2 of 4 O/TAXAP/235/2007 JUDGMENT Assessing Officer. The revenue therefore preferred appeal before the Tribunal. The Tribunal confirmed the findings of CIT(A) and dismissed the appeal. Being aggrieved by the said order, the present appeal is preferred. 3. We have heard learned counsel for both the sides and perused the record of the case. The issue involved in this appeal is already concluded by a judgment of the Apex Court in the case of Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, [2009] 314 ITR 62 (SC). In that case, the assessee was engaged in the business of manufacture of valve actuators, which were sophisticated goods. The statistical data indicated that every year some of these were found defective. The valve actuator, being a sophisticated item, no customer was prepared to buy it without a warranty. Therefore, the warranty became an integral part of the sale price. In other words, the warranty stood attached to the sale price of the product. It was held that warranty provisions had to be recognized because the assessee therein had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee therein had incurred a liability during the assessment year which was entitled to deduction u/s.37 of the Income-tax Act, 1961. 3.1 In Tax Appeal No. 966 of 2007 and allied matters, similar facts and question of law were raised and this Court vide judgement and order dated 26.11.2014 in the case of The Income Tax Officer, Baroda vs. Kevin Enterprise has already answered the question in favour of assessee relying upon the Page 3 of 4 O/TAXAP/235/2007 JUDGMENT decision of the Apex Court in the case of Rotork Controls India Pvt. Ltd. (supra). 4. Mr. K.M. Parikh, learned counsel appearing for the Revenue was not in a position to dispute the above proposition of law. Since the issue is already concluded as aforesaid, we are not assigning elaborate reasons while disposing of the present appeal and accordingly, answer the question raised in this appeal in favour of the assessee and against the Revenue. The Tribunal is justified in deleting the addition of Rs. 42,21,368/- made under the head provision made on account of warranty which is in the nature of contingent liability?” 5. The impugned order passed by the Tribunal is confirmed. The appeal stands dismissed accordingly. (K.S.JHAVERI, J.) (K.J.THAKER, J) divya Page 4 of 4 "