IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 07.12.2009 Coram : THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIAN and THE HONOURABLE MR.JUSTICE M.M.SUNDRESH Tax Case (Appeal) No.762 of 2008 Commissioner of Income Tax, Central III, Chennai. Appellant v. M/s. FL Smidth Ltd. Formerly M/s. Fuller India Ltd., Capital Towers, Chennai 34. Respondent Tax Case Appeal preferred under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras 'A' Bench dated 27.10.2006 in ITA No.273/Mds/2005 for the assessment year 2001-02. Against the order of the Commissiner of Income Tax (Appeal)-II, Madras-34, dated 29.11.2004, in ITA No.124/04-05 and arising out of the Assessment order of the Deputy Commissioner of Income Tax, Central Circle-III (2), Chennai34, assessment year 2001-2002, dated 31.03.2004 in P.A.NO./G.I.No.AAACF1731A. For appellant : Mr.K.Subramaniam, Standing Counsel for Income Tax Department For respondent : Dr.Anitha Sumanth JUDGMENT (Judgment of the Court was delivered by K.RAVIRAJA PANDIAN, J.) The appeal is filed by the revenue against the order of the Income Tax Appellate Tribunal, Madras 'A' Bench 27.10.2006 in ITA No.273/Mds/2005 for the assessment year 2001-02. 2. This appeal was admitted on the following substantial question of law : https://hcservices.ecourts.gov.in/hcservices/ "Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the provision for future warranty expenses is contingent liability or is allowable under section 37 of the Income Tax Act, 1961?" 3. The facts are : The assessee is engaged in manufacture and supply of cement plant, engineering and structural drawings, goods and services. The assessing officer did not allow the deduction in respect of provision for warranty of a sum of Rs.9,79,68,895/-. Against that order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) directed the assessing officer to modify the order and pass necessary consequential order. Against that order, the department preferred an appeal before the Tribunal and the Tribunal, following the assessee's own case for the assessment year 2000-01 and following the decision of this Court in CIT v. Beema Manufacturers P. Ltd., (2003) 130 Taxman 400, held that the provisions for warranty made by the assessee was allowable deduction because the provision made by the assessee towards the warranty is a liability on the contingency of the goods becoming defective within the terms of warranty clause and therefore the same was allowable as business expenditure and dismissed the departmental appeal. Aggrieved by the same, the department has preferred this appeal. 4. The issue is now settled by the Supreme Court in the case of Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62, wherein it was held that the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. Warranty provision had to be recognised because the assessee 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. The value of the contingent liability like the warrant expense, if properly ascertained and discounted on accrual basis, can be an item of deduction under section 37 of the Act. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : 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 and held that the provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the Act. https://hcservices.ecourts.gov.in/hcservices/ 5. Following the said judgment, this Court in assessee's own case in the case of CIT III v. M/s. FL Smedth Ltd., Tax Case (Appeal) No.341 of 2004 by order dated 09.06.2009, after extracting paragraph 7 of the judgment of Supreme Court cited supra, answered the question of law in favour of the assessee and against the revenue. 6. It is not in dispute that the facts in this case are similar to the appeal in T.C. No.341 of 2004. Therefore, following the judgments of the apex Court Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62, and the Division Bench of this Court, CIT III v. M/s. FL Smedth Ltd., Tax Case (Appeal) No.341 of 2004, the questions of law are answered in favour of the assessee and against the revenue. The appeal is dismissed. No costs. Sd/ Asst.Registrar /true copy/ Sub Asst.Registrar mf To 1. The Assistant Registrar, Income Tax Appellate Tribunal Madras A Bench III Floor, Rajaji Bhavan, Besant Nagar, Madras-90. 2. The Deputy Commissioner of Income Tax, Central Circle-III (2), Chennai-34. 3. The Commissioner of Income Tax (Appeals) II, Chennai-34. 4. The Commissioner of Income Tax, Central III, Chennai. + 1 cc to Dr.Anitha Sumanth, Advocate, SR 66688 + 1 cc to Mr.K.Subramaniam, Advocate, SR 66855 T C (A) No.762 of 2008 SJ (CO) RH (23.12.09) https://hcservices.ecourts.gov.in/hcservices/