The Assessing Officer has added our provisions for warranty, gratuity and leave encashment to book profit under clause (c) of Explanation 1 on the footing that they are unascertained liabilities. Are they?
No. Clause (c) adds back only amounts set aside to provisions made for meeting liabilities other than ascertained liabilities, and a provision for warranty made on the Rotork Controls basis is an ascertained liability. Provisions for gratuity, warranty and leave encashment are not contingent or unascertained and cannot be adjusted in computing book profit under s.115JB.
Decided by the High Court (Akil Kureshi J and M.S. Sanklecha J (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction)) on 2018-12-04, reported as Income Tax Appeal No.775 of 2016; appeal against ITAT order dated 31 July 2015. It bears on section 115JB, section 260A of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Deductions & Disallowances matters.
The word that decides these disputes is "ascertained", not "quantified". A liability that is present and real does not become unascertained because it has to be measured by estimation — that is the whole of Rotork Controls and Bharat Earth Movers, and clause (c) does not import a separate MAT test. This is the point to hold on to when an Assessing Officer argues that anything called a "provision" in the accounts must go back. The limits should be stated plainly to a client. This is a short order dismissing a Revenue appeal on the footing that no question of law arises, and it rests on an earlier Tribunal order in the same assessee's case which the High Court read and quoted; the substantive reasoning is the Tribunal's rather than the High Court's own. And an estimated liability is only ascertained where the estimation has a foundation — a historical trend, a scientific method, data systematically maintained. A provision pulled out of the air will fail the same test.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Assessing Officer disallowed a warranty provision of Rs.4,91,77,891 in computing the assessee's book profit under s.115JB. The Tribunal, by order dated 31 July 2015, deleted the disallowance relying on its own decision in the assessee's case for earlier assessment years, a copy of which was placed before the High Court by counsel for the Revenue. In that earlier order the Tribunal had held that provisions made under the heads gratuity, warranty and leave encashment are not contingent or unascertained liabilities and therefore cannot be adjusted in computing book profit under s.115JB, relying on the Supreme Court in Rotork Controls India Private Limited, on the Mumbai Tribunal in Indian Oil Tanking Ltd on warranty, on the Gujarat High Court in Inox Leisure Ltd on gratuity, and on the Himachal Pradesh High Court in H.P. Tourism Development Corporation Ltd on leave encashment. The Revenue's appeal against that earlier Tribunal order had been dismissed for non-removal of office objections. The Revenue appealed against the order for the year in question under s.260A.
The Tax Appeal was dismissed. The warranty was an ascertained liability and an allowable deduction, and no question of law arose (paragraph 4).
The Court noted that the Tribunal in the impugned order had relied on its decision in the same assessee's case for earlier assessment years, and that notwithstanding the manner in which the Revenue's earlier appeal had been disposed of, it perused the materials on record. It found that in the earlier judgment the Tribunal, after detailed consideration, had held the warranty liability to be an ascertained liability which therefore could not be added in computing book profit, relying on Rotork Controls India Private Limited, on Inox Leisure Limited and on H.P. Tourism Development Corporation Ltd (paragraph 3). The concluding portion of the Tribunal's earlier order, extracted in the judgment, reasons that Explanation 1 to s.115JB provides the list of items to be included or excluded in computing book profit, that under it amounts set aside to provisions made for meeting liabilities other than ascertained liabilities have to be included, so that if the liabilities are ascertained they cannot be added, and that on the facts the provisions for gratuity, warranty and leave encashment were not contingent or unascertained. On that footing the High Court concluded that the warranty was an ascertained liability and an allowable deduction and that no question of law arose (paragraph 4).
It can thus be seen that the warranty was an ascertained liability and allowable deduction.
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Handle my notice → Ask a CA on WhatsAppNo. Clause (c) adds back only amounts set aside to provisions made for meeting liabilities other than ascertained liabilities, and a provision for warranty made on the Rotork Controls basis is an ascertained liability. Provisions for gratuity, warranty and leave encashment are not contingent or unascertained and cannot be adjusted in computing book profit under s.115JB. This was decided by the High Court (Akil Kureshi J and M.S. Sanklecha J (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction)) and bears on section 115JB, section 260A of the Income Tax Act 1961. It is reported as Income Tax Appeal No.775 of 2016; appeal against ITAT order dated 31 July 2015. The word that decides these disputes is "ascertained", not "quantified". A liability that is present and real does not become unascertained because it has to be measured by estimation — that is the whole of Rotork Controls and Bharat Earth Movers, and clause (c) does not import a separate MAT test. This is the point to hold on to when an Assessing Officer argues that anything called a "provision" in the accounts must go back. The limits should be stated plainly to a client. This is a short order dismissing a Revenue appeal on the footing that no question of law arises, and it rests on an earlier Tribunal order in the same assessee's case which the High Court read and quoted; the substantive reasoning is the Tribunal's rather than the High Court's own. And an estimated liability is only ascertained where the estimation has a foundation — a historical trend, a scientific method, data systematically maintained. A provision pulled out of the air will fail the same test. If it applies to you, the first step is this: Separate the heads before arguing: warranty, gratuity and leave encashment each have their own line of authority, and clause (c) is answered head by head.
The Assessing Officer disallowed a warranty provision of Rs.4,91,77,891 in computing the assessee's book profit under s.115JB. The Tribunal, by order dated 31 July 2015, deleted the disallowance relying on its own decision in the assessee's case for earlier assessment years, a copy of which was placed before the High Court by counsel for the Revenue. In that earlier order the Tribunal had held that provisions made under the heads gratuity, warranty and leave encashment are not contingent or unascertained liabilities and therefore cannot be adjusted in computing book profit under s.115JB, relying on the Supreme Court in Rotork Controls India Private Limited, on the Mumbai Tribunal in Indian Oil Tanking Ltd on warranty, on the Gujarat High Court in Inox Leisure Ltd on gratuity, and on the Himachal Pradesh High Court in H.P. Tourism Development Corporation Ltd on leave encashment. The Revenue's appeal against that earlier Tribunal order had been dismissed for non-removal of office objections. The Revenue appealed against the order for the year in question under s.260A. The matter was decided on 2018-12-04 by the High Court (Akil Kureshi J and M.S. Sanklecha J (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction)). On those facts the High Court held as follows. The Tax Appeal was dismissed. The warranty was an ascertained liability and an allowable deduction, and no question of law arose (paragraph 4).
The Court noted that the Tribunal in the impugned order had relied on its decision in the same assessee's case for earlier assessment years, and that notwithstanding the manner in which the Revenue's earlier appeal had been disposed of, it perused the materials on record. It found that in the earlier judgment the Tribunal, after detailed consideration, had held the warranty liability to be an ascertained liability which therefore could not be added in computing book profit, relying on Rotork Controls India Private Limited, on Inox Leisure Limited and on H.P. Tourism Development Corporation Ltd (paragraph 3). The concluding portion of the Tribunal's earlier order, extracted in the judgment, reasons that Explanation 1 to s.115JB provides the list of items to be included or excluded in computing book profit, that under it amounts set aside to provisions made for meeting liabilities other than ascertained liabilities have to be included, so that if the liabilities are ascertained they cannot be added, and that on the facts the provisions for gratuity, warranty and leave encashment were not contingent or unascertained. On that footing the High Court concluded that the warranty was an ascertained liability and an allowable deduction and that no question of law arose (paragraph 4). In the words reproduced by the source cited on this page: "It can thus be seen that the warranty was an ascertained liability and allowable deduction." The decision followed or applied Rotork Controls India Private Limited v CIT (SC) — relied on by the Tribunal and approved on this appeal; CIT v Inox Leisure Limited (Gujarat) — on gratuity under clause (c) to Explanation 1 to s.115JB; CIT v H.P. Tourism Development Corporation Ltd (Himachal Pradesh) — on leave encashment in computing book profit; Indian Oil Tanking Ltd (ITAT Mumbai) — on warranty as an ascertained liability for s.115JB.
It was decided by the High Court on 2018-12-04 and is reported as Income Tax Appeal No.775 of 2016; appeal against ITAT order dated 31 July 2015. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 115JB, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Tax Appeal was dismissed. The warranty was an ascertained liability and an allowable deduction, and no question of law arose (paragraph 4). It arises in Assessment & Scrutiny, How Tax Law Is Read and Deductions & Disallowances matters, on section 115JB, section 260A of the Income Tax Act 1961, and was decided by Akil Kureshi J and M.S. Sanklecha J (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a warranty provision, put the Rotork Controls foundation on record — the number of units, the historical incidence of defects, the method of estimation, and the reversal of unutilised provisions — and show that the warranty cost is embedded in the sale price. Do not concede that the presence of the word "provision" in the accounts settles the matter; clause (c) asks whether the liability is ascertained, not how the line is labelled. Where the provision is for a diminution in the value of an asset rather than for a liability, argue it under clause (i) and not clause (c) — after the Finance (No.2) Act 2009 the two clauses do different work. Trace the assessee's own earlier years: the High Court here relied on the Tribunal's detailed order for an earlier year in the same case, and consistency across years is what carried it.
Validity check could not be completed. Validity check could not be completed. No later treatment of this order was located and it is not known whether the Revenue sought special leave. Nothing doubting the proposition that a warranty provision on the Rotork Controls footing is an ascertained liability outside clause (c) was found on this pass. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a short "P.C." order and the substantive discussion is a block quotation from the Tribunal's order in the same assessee's earlier assessment year, which the High Court read and set out at paragraph 3. The two questions as framed by the Revenue both refer to "deleting the disallowance of warranty provision ... while computing book profit" and the second to "the deduction under section 115JB", which is loose drafting; the issue as the Court identified it at paragraph 2 is the disallowance of the warranty provision in computing book profit under s.115JB. The quoted Tribunal passage uses the phrase "alternate minimum tax" where the context is minimum alternate tax under s.115JB. The Court records that the Revenue's appeal against the earlier year's Tribunal order was dismissed for non-removal of office objections, and that it nevertheless examined the materials. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Tax Appeal was dismissed. The warranty was an ascertained liability and an allowable deduction, and no question of law arose (paragraph 4).
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