ITO, WARD 5(1), 5TH FLOOR vs. KEVIN ENTERPRISES

Facts

The assessee, Kevin Enterprise, a firm manufacturing Tower Packing called Mars Transfer Equipments, filed its return for Assessment Year 1993-94 declaring an income of Rs.3,94,970/-. The Assessing Officer (AO) determined the total income at Rs.7,02,930/- after disallowing various expenses and interest. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], which reduced the total income to Rs.4,13,250/-. Subsequently, the AO reopened the assessment under Section 148, disallowing a provision for warranties amounting to Rs.5,54,292.30. The CIT(A) partly allowed the appeals, noting escaped assessment for two years. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), which dismissed the Revenue's appeal. The present appeals are filed by the Revenue against the ITAT's order.

Held

The High Court held that the issue was concluded by the Supreme Court's judgment in the case of Rotork Controls India Pvt. Ltd. v. Commissioner of Income Tax, [2009] 314 ITR 62 (SC). In that case, it was held that warranty provisions had to be recognized because the assessee had a present obligation as a result of past events, leading to an outflow of resources, and a reliable estimate of the obligation could be made. Therefore, the liability was incurred during the assessment year and was entitled to deduction under Section 37 of the Income-tax Act, 1961. The learned counsel for the Revenue was not in a position to dispute this proposition. Accordingly, the question of law was answered in favour of the assessee and against the Revenue. The appeals were disposed of accordingly.

Key Issues

1. Whether the ITAT was right in law and on facts in deleting the addition of Rs.5,54,292/- made under the head provision for warranty, which is in the nature of a contingent liability? Assessee's Contentions: The judgment does not record specific contentions made by the assessee before the High Court. However, the ITAT's decision, which is under challenge, implies the assessee argued that the provision for warranty was a deductible liability. Revenue's Contentions: The Revenue argued that the provision for warranty was a contingent liability and therefore not deductible. The judgment does not record specific authorities or precedents relied upon by the Revenue.