Section 40A(7) — the law in short
What the courts have decided on section 40A(7), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Price Waterhouse Coopers Pvt Ltd v CIT
Supreme CourtHelps taxpayer
You forgot to add back something your own audit report flagged. Is that concealment?
No. It is a bona fide and inadvertent human error — a computation mistake, not concealment or inaccurate particulars. The audit report disclosed the item, so nothing was hidden, and the penalty was deleted.
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CIT v Textool Co Ltd
Supreme CourtHelps taxpayer
We paid our gratuity money straight to LIC while the fund's approval was still pending. Will s.36(1)(v) be denied?
No, on these facts. Section 36(1)(v) allows a contribution towards an approved gratuity fund, and the department read that as requiring payment into the fund itself. The Court held that the object of the condition is that the employer should have no control over the money, and where the assessee had no control over the fund LIC created and every rupee ultimately reached the gratuity fund the Commissioner later approved, the deduction stood.
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Rotork Controls India P Ltd v CIT
Supreme CourtHelps taxpayer
We give a warranty on every unit we sell and provide a percentage of turnover for it each year — can the Assessing Officer disallow that as a contingent liability?
Not where the provision is properly built. The Supreme Court held on 12 May 2009 that a warranty provision is deductible under section 37 where three conditions are met: a present obligation arising from a past event, the probability of an outflow of resources to settle it, and a reliable estimate of the amount. Where an enterprise sells large numbers of sophisticated goods, past experience of defects in some of them creates a present obligation on the sales already made, and the warranty is part of the sale price. The estimate must rest on a historical trend captured by a proper accounting system, reassessed each year, with unused provisions reversed.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
