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The Tax Publishers Sulzer India Ltd. v. Addl. CIT [ITA No. 7324 (Mum) of 2012, dt. 16-5-2016] : 2016 TaxPub(DT) 2535 (Mum-Trib) Provisions made--Allowability *Facts:* Assessee had made a provision of Rs. 11,15,000 on estimated basis towards legal expenses and professional expenses, this was disallowed by assessing officer as being contingent in nature. On appeal Commissioner (Appeals) upheld the same. Assessee went in further appeal: Held in favour of the assessee that the expenditure is a current obligation of a past event thus deserves to be allowed but to verify that no double deduction was claimed was remanded to assessing officer. The plea of the assessee was that the expense was provided based on estimate and the actual invoice had come in the next year where the provision was reversed and the actual bookings took effect. This being on accrual basis on mercantile system of accounting and based on AS-29 provisions and contingencies was allowable expenditure. The ITAT applied the Supreme Court decision of Rotork Controls where it was read as under: Honb'le Supreme Court has elaborated on the 'Provisions' for expenses and tests to be conducted before which the provisions for expenses shall be allowed as an expenditure while computing the income chargeable to tax under the Act of the taxpayer in the case of Rotork Controls India Private Ltd. v. CIT, (2009) 314 ITR 62 (SC) and held as under: Findings 10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) 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. If these conditions are not met, no provision can be recognized. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation.

The Tax Publishers

Sulzer India Ltd. v. Addl. CIT [ITA No. 7324 (Mum) of 2012, dt. 16-5-2016] : 2016 TaxPub(DT) 2535 (Mum-Trib)

Provisions made--Allowability

Facts:

Assessee had made a provision of Rs. 11,15,000 on estimated basis towards legal expenses and professional expenses, this was disallowed by assessing officer as being contingent in nature. On appeal Commissioner (Appeals) upheld the same. Assessee went in further appeal:

Held in favour of the assessee that the expenditure is a current obligation of a past event thus deserves to be allowed but to verify that no double deduction was claimed was remanded to assessing officer.

The plea of the assessee was that the expense was provided based on estimate and the actual invoice had come in the next year where the provision was reversed and the actual bookings took effect. This being on accrual basis on mercantile system of accounting and based on AS-29 provisions and contingencies was allowable expenditure. The ITAT applied the Supreme Court decision of Rotork Controls where it was read as under:

Honb'le Supreme Court has elaborated on the 'Provisions' for expenses and tests to be conducted before which the provisions for expenses shall be allowed as an expenditure while computing the income chargeable to tax under the Act of the taxpayer in the case of Rotork Controls India Private Ltd. v. CIT, (2009) 314 ITR 62 (SC) and held as under:

Findings

10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when:

(a) 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. If these conditions are not met, no provision can be recognized.

12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation.