CIT v. Forbes Campbell Finance Ltd.

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The Tax PublishersTax Case Appeal Nos. 148 to 155 of 2005 2013 TaxPub(DT) 1280 (Mad-HC) : (2013) 053 (I) ITCL 0054 : (2013) 352 ITR 0602 : (2013) 086 DTR 0406 Income Tax Act, 1961 --Business expenditureAllowability Provision for service charges during warrantly period vis-a-vis ad hoc provision--Assessee was engaged in business of trading in various office equipments and appliances like typewriters, duplication papers, shredding machine, etc. Assessee offered one year warranty and free service during this period. Installation and service were done by various dealers appointed by company. Assessing officer pointed out that service dealers became eligible for service charges only when a claim was preferred by them. In the absence of any claim made or even a belated claim made, provision made could only be treated as a contingent liability and not deductible. It is also seen from the orders placed that apart from selling the machines through their various service dealers, assessee also sold directly through their branches. However, as far as servicing of the machines were concerned, they were done through service dealers only. Commissioner (Appeals) upheld order of assessing officer. *Held:* Provision was made to represent some contingent liability and it was not in respect of any ascertained liability with service done by service dealer in the relevant year of accounting, provision was predominantly towards the services which might be done by service dealer in some future period, and facts projected showed that even such probability was less than 50 per cent. Admittedly, the provision made was only on ad hoc basis, a fact which is recorded by the Tribunal. The said fact is further strengthened by the fact that even though the warranty period is for one year and the assessee has to make payment to the service provider as and when a demand is made, normally, such payment claim has to come during the period of warranty or within a reasonable time. Even though the agreement that the assessee had with the service provider is not placed before this court, nor was it placed before the authorities below, nevertheless, a reading of the Commissioner's order relating to the assessment year 1992-93 makes the facts clear by reason of the fact that more than 60 per cent, of the provision remained unpaid even after more than two years since the date of sale. This aspect persuaded the Commissioner (Appeals) to come to the conclusion that the assessee had not made the provision after taking stock of the situation properly. The assessee pleaded before the officer that the service charges were made immediately on the sale of the typewriter and the installation done by the service provider. The assessee does not deny the fact that the service charges payable to the dealer arises only as and when a claim is made by the service provider. In none of these assessment years, the assessee had pleaded that the provision made in the accounts towards the service charges were reversed within a reasonable time, or for that matter, any analysis was made by the assessee at the end of any of these years, to contend that the provision was made only on a scientific basis on a historical analysis of the facts as regards the sales as well as the service charges claim made by the service provider or an obligation arising out of the past events. [Para 18] Thus, given the factual finding that the provision made by the assessee was on ad hoc basis only when the consistent contention admitted by the assessee throughout had been that on every sale made, the provision was made in the accounts based on the number of sales effected every year as regards the service charges, useful purpose would be served by remanding the matter back to the Tribunal, or for that matter, to the assessing authority. [Para 21] If really the provision made was otherwise based on the past experience, certainly, the figures would not have stayed as having a correlation to the sales, or for that matter, as the Commissioner (Appeals) observed, more than 60 per cent of the provision would not have remained unpaid even after more than two years from the date of sale. [Para 22] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersTax Case Appeal Nos. 148 to 155 of 2005
2013 TaxPub(DT) 1280 (Mad-HC) : (2013) 053 (I) ITCL 0054 : (2013) 352 ITR 0602 : (2013) 086 DTR 0406

Income Tax Act, 1961

--Business expenditureAllowability Provision for service charges during warrantly period vis-a-vis ad hoc provision--Assessee was engaged in business of trading in various office equipments and appliances like typewriters, duplication papers, shredding machine, etc. Assessee offered one year warranty and free service during this period. Installation and service were done by various dealers appointed by company. Assessing officer pointed out that service dealers became eligible for service charges only when a claim was preferred by them. In the absence of any claim made or even a belated claim made, provision made could only be treated as a contingent liability and not deductible. It is also seen from the orders placed that apart from selling the machines through their various service dealers, assessee also sold directly through their branches. However, as far as servicing of the machines were concerned, they were done through service dealers only. Commissioner (Appeals) upheld order of assessing officer. Held: Provision was made to represent some contingent liability and it was not in respect of any ascertained liability with service done by service dealer in the relevant year of accounting, provision was predominantly towards the services which might be done by service dealer in some future period, and facts projected showed that even such probability was less than 50 per cent.

Admittedly, the provision made was only on ad hoc basis, a fact which is recorded by the Tribunal. The said fact is further strengthened by the fact that even though the warranty period is for one year and the assessee has to make payment to the service provider as and when a demand is made, normally, such payment claim has to come during the period of warranty or within a reasonable time. Even though the agreement that the assessee had with the service provider is not placed before this court, nor was it placed before the authorities below, nevertheless, a reading of the Commissioner's order relating to the assessment year 1992-93 makes the facts clear by reason of the fact that more than 60 per cent, of the provision remained unpaid even after more than two years since the date of sale. This aspect persuaded the Commissioner (Appeals) to come to the conclusion that the assessee had not made the provision after taking stock of the situation properly. The assessee pleaded before the officer that the service charges were made immediately on the sale of the typewriter and the installation done by the service provider. The assessee does not deny the fact that the service charges payable to the dealer arises only as and when a claim is made by the service provider. In none of these assessment years, the assessee had pleaded that the provision made in the accounts towards the service charges were reversed within a reasonable time, or for that matter, any analysis was made by the assessee at the end of any of these years, to contend that the provision was made only on a scientific basis on a historical analysis of the facts as regards the sales as well as the service charges claim made by the service provider or an obligation arising out of the past events. [Para 18] Thus, given the factual finding that the provision made by the assessee was on ad hoc basis only when the consistent contention admitted by the assessee throughout had been that on every sale made, the provision was made in the accounts based on the number of sales effected every year as regards the service charges, useful purpose would be served by remanding the matter back to the Tribunal, or for that matter, to the assessing authority. [Para 21] If really the provision made was otherwise based on the past experience, certainly, the figures would not have stayed as having a correlation to the sales, or for that matter, as the Commissioner (Appeals) observed, more than 60 per cent of the provision would not have remained unpaid even after more than two years from the date of sale. [Para 22]