2001 PLP 789 (PTD)

NASIM SIKANDAR, J.

The revenue, by way of this application under section 136(2) of the Income Tax Ordinance, 1979, proposed following question of law said to have arisen out of an order of the Lahore Bench of the Appellate Tribunal, dated 30-1-1989. It was admitted for consideration by this Court on 18-2-1991:-- "Whether on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs.25,00,000 made by the Income-tax Officer as unexpired warranty commission was permanently parted with the principal?"

2. The assessee-respondent is a public limited Company and is engaged an the assembly and sale of the tractors. For the assessment year, 1984-85 they offered for taxation a sum of Rs.15,00,000 out of total receipts of Rs.46,61,033 received as warranty commission from Italian Suppliers at a rate of 0.596 of the value of OKD imports for carrying out servicing, repairs and replacement. It was explained in terms of the Industrial collaboration agreement with Italian Suppliers, dated 1-12-1981 that the aforesaid receipt was meant for providing after sales facilities the warranty period. Further that as accounts of the company were maintained on mercantile system, as long as the goods were held in stock and the period of warranty had not expired the advance so received did not become the income of the company and remained an advance. The Assessing Officer, however, disagreed. He was of the view that since the suppliers had permanently parted with that amount and since the nature of the expense was only stipulated and it was not actually incurred, the remaining amount of warranty commission needed to be treated as a revenue receipt. The learned First Appellate Authority, however, agreed with the assessee that the balance shown in the warranty commission did not become revenue receipt of the assessee-company as long as the warranty period did not expire. In other words, it was agreed that accounts having been maintained on mercintile basis, the assessee was justified in treating the amount as advance till the expiry of warranty period. The learned Tribunal also agreed. Hence the proposed question.

3. After hearing both the parties, we will readily agree with the revenue that period of warranty could not be said to have a direct nexus with the warranty commission of Rs.46,61,033 received by the company daring the period under review. The fact that the company itself Offered for taxation a sum of Rs.15,00,000 on expiry of one year warranty period at least shows that the total amount received under this head was income of the assessee? company. The claim that only the expired portion of the warranty commission matured into income is, however, not acceptable. After receiving commission, the company itself appears to have evolved a formula to apportion it with the total period of warranty. Evidently, no direct expense in discharge of warranty obligation was made during the period. Also the amount offered for taxation and the balance indicates that neither an expense was incurred out of the so-called advance nor any separate account for that purpose was maintained. It cannot, therefore, be the case of the assessee that part of the total receipt had to be spread over a period of three years to keep a separate account of the claim made in that regard. Learned counsel for the revenue is also right in pointing out that a period of warranty cannot otherwise be relevant as far as taxability of warranty commission is concerned. He states that a period of warranty of one year in respect of every CKD Engine imported during a particular year cannot be tied with a time limit as the period of warranty will start from the time of sale of the engine and will remain effective till one year thereafter. Since, according to learned counsel, the time of sale or the starting point cannot be the same in respect of every CKD Engine imported during a year, it would not be correct to say that period of one year warranty expired exactly after one year from the date of import of one consignment. His other argument also bears weight that an indefinite period of warranty or spread over a number of years will not bind the revenue to postpone levy for that period. Particularly, when the assessee failed to prove as a fact that he had actually performed any act to discharge the liability against the alleged advance.

4. The two forums below also failed to controvert the alternate argument of the Assessing Officer that balance amount in the warranty commission could be seen as a provision for future expense regarding servicing which could not be allowed. Also they failed to appreciate that in fact not a single expense on account of servicing or replacement was claims under this head during the whole year which impliedly meant that all such expense was incurred and treated with rest of the expenses of the project. ?The nature of receipt when seen from this angle as well, clearly indicates that the treatment given by the Assessing Officer was correct. The expiry o; warranty period of one year in respect of every engine sold during the accounting period obviously over-lapped and, therefore, the formula evolve by the assessee to offer part of the receipt as revenue receipt in the yea, under review was not factually correct.

5. That being so the answer to the afore-said question is given in the negative:

6. The Registrar shall send a copy of this judgment under his own signature and seal of the Court to the concerned Bench of the Income-tax Appellate Tribunal. M.B.A./C-28/L ?????????????????????????????????????????????????????????????????????????????????? Reference answered.