<NAME>, Vice-President

1. The questions for decision in these three appeals disposed of by this common order are -

(a) whether Tariff Item 68 goods unconditionally and fully exempted from duty under Notification No. 55/75-C.E., dated 1.3.1975 as amended were not includible for computing the aggregate value of clearances for judging the eligibility of the appellants to benefit of exemption under Notification No. 71/78 or No. 80/80 dated 19.6.80;

(b) whether the fact that the goods falling under Tariff Item 68 manufactured by the appellants were totally and unconditionally exempted from payment of duty and consequently the appellants exempted from licensing control under Notification No. 111/78 would make such goods falling under Tariff Item 68 non-excisable and the value of their clearance not includible in determining eligibility of the appellants to benefit of exemption under Notification No. 71/78 or No. 80/80.

(c) whether on the facts and circumstances of the case, invoking the longer time limit of 5 years for raising demand of duty against the appellants is not legal and justified; and

(d) whether the imposition of penalty in the 3 cases is on the facts and circumstances of the cases not justified and called for.

2. These three appeals arise out of orders-in-original Nos. 8 of 1985, 9 of 1985 and 10 of 1985 passed by Collector of <ORG> Bombay-I all dated 24.6.85. These are the outcome of three show cause notices (1) dated 26.2.1983 read with corrigendum dated 7.12.1983, (2) dated 19.7.83 read with corrigendum dated 7.12.1983 and (3) dated 7.12.1983. The first show cause notice raising in all a demand of Rs. 38,276.31 P. relates to the period 1.4.1982 to 31.1.1983. The second show cause notice dated 19.7.1983 read with corrigendum dated 7.12.1983 raised in all a demand of Rs. 4,492.82 P. for the period 1.2.83 to 31.3.83. The third show cause notice dated 7.12.83 raised a demand in all of Rs. 1,28,162.97 P. for the period 1.4.79 to 18.6.80 (relatable to Notification No. 71/78 dated 1.3.78) and 19.6.80 to 31.3.1982 (relatable to Notification No. 80/80-C.E., dated 19.6.80). The notice also called upon the appellants to show cause why penalty be not imposed against them for breach of various rules set out in the notification. The gist of the allegations against the appellants in brief was that the appellants were manufacturer of P & P medicines falling under Tariff Item 14-E (of the First Schedule of the <ORG>s and Salt Act , 1944) were exempt from licence control as far Notification No. 71/78-C.E., dated 1.3.73 read with Notification No. 111/78-C.E., dated 9.5.78 as according to the declaration filed by them for the year 1978-79, their turnover was less than Rs. 5 lakhs. The appellants did not file any declaration for the subsequent years 1979-80, 1980-81 and 1981-82. During verification of the declaration filed by the appellants for the year 1982-83 for goods falling under Tariff Item 14-E the <ORG> officers found that the appellants were also manufacturing and clearing goods falling under Tariff Item 68 i.e. Pharmacopoeial products. The appellants had however, not filed any declaration under Tariff Item 68 for the Pharmacopoeial products claiming exemption from licencing control as required under Notification No. 111/78 dated 9.5.78 nor show the value of clearance of these products both under Tariff Item 68. In the declarations filed by them under Tariff Item 14-E, they claimed exemption for the years 1978-79,1982-83. It is common ground that if value of clearance of goods falling under Tariff Item 68 which in each year is far in excess of Rs. 20 lakhs, be added to appellants clearance of goods falling under Tariff Item 14-E, the same would exceed Rs. 20 lakhs and appellants would be ineligible to benefit of exemption under Notification No. 71/78 till the period 18.6.80 and No. 80/80 for the period 19.6.82 to 31.3.82 as detailed above. After usual investigation, 3 show cause notices, as set out above were issued alleging that the appellants had not filed classification list, price list and list of products manufactured by them, nor determined nor paid the <ORG> duty on the goods cleared, cleared the goods without cover of valid documents, licence and failed to make statutory records and documents and had thus committed breach of Rule 173-E, 173-F, 173-C, 173-G(1) read with Rule 9(1), 173-G(2) read with Rule 51-A, 173-G(4), 173-G(3) read with Rule 53 and 226 of the <ORG> Rules, 1944.

3. The notices raised demand of duty and proposed penalty as already set out above. The appellants filed replies dated 27.2.85, 20.5.83 and 18.8.83 to the show cause notices. In the replies, the appellants denied the charges as being totally false, misconceived and untenable. In the replies to the notices, the appellants urged that pharmacopoeial products falling under Item 68 of the <ORG> Tariff were wholly and unconditionally exempted from payment of <ORG> duty under Notifications No. 55/75 and 104/82. The appellants factory was also exempted from <ORG> control. The appellants therefore, submitted that there was no legal and statutory obligation upon the appellants to follow any <ORG> procedure and make any declaration. It was also submitted that prior to introduction of Notification No. 71/78-C.E., dated 1.3.78, the appellants were holding <ORG> licence but on account of exemption from payment of <ORG> duty and <ORG> licence control under the two Notifications No. 71/78 and No. 111/78, the appellants surrendered their licence and the same were cancelled by the <ORG> Department. It was further submitted that wholly and unconditionally exempted goods falling under Tariff Item 68, i.e. Pharmacopoeial goods cannot be clubbed into aggregate value of clearance for purposes of determining eligibility to exemption under Notification No. 71/78 and No. 80/80. For this argument, they referred to besides Section 2-D of the <ORG>s and Salt Act , 1944, to a number of decisions in the reply. It was also urged that the claim was time-barred as there were 3 <ORG> decisions in favour of the appellants stand and in such a case, demand could not be for more than 6 months. Show cause notice was liable to be quashed on the ground of limitation. About penalty, the appellants relying on a decision of the <ORG>, urged that the contraventions, if any, took place in view of unsettled policy of law with conflicting decisions, hence no penalty should be imposed in these cases. The Collector afforded an opportunity of hearing to the appellants and then passed orders as aforesaid confirming demand of duty for the periods set out above. He also imposed a penalty of Rs. 10,000/-, Rs. 1,000/- and Rs. 25,000/- in the 3 cases by the 3 orders respectively. Aggrieved with these orders, the appellants have filed 3 appeals before the <ORG> which have been heard together.

4. At the hearing of the appeals, <NAME>, learned Consultant for the appellants submitted that excisable goods ceased to be excisable goods after full exemption from duty. According to him, Tariff Item 68 goods Pharmacopoeial medicines manufactured by the appellants falling under Tariff Item 68 were fully and unconditionally exempted under Notification No. 55/57-C.E., dated 1.3.75 or No. 104/82 dated 28.2.82 and therefore, the value of clearance of these goods could not be clubbed for judging the eligibility of the appellants to benefit of exemption under Notification No. 71/78 or No. 80/80 dated 19.6.80. For this legal proposition, <NAME>, in all fairness, placed before the Bench, the decisions in his favour and decisions against. <NAME> submitted that decisions supporting the appellants view are -

(i) <CITATION> . - 1978 ELT (J 525) (Del.)

(ii) <CITATION> . - 1978 Tax Law Reporter No. 645

(iii) <CITATION> - 1985 (19) ELT 57 (All.)

(iv) <CITATION> - 1985 (22) ELT 732 (MP)

(v) <CITATION> - 1984 (17) ELT 310 (Pat.)

5. For the contrary view, he brought to the notice of the <ORG>, the following two decisions -

(i) <CITATION> - 1978 ELT (J 57) (Mad.)

(ii) <CITATION> . - 1983 ELT 2265 (Del.)

6. Relying on <ORG> and <ORG> (supra), <NAME> submitted that wholly exempted goods were not includible in the value of clearance of all excisable goods. He however, in fairness, drew attention of the Bench to Delhi High Court decision in <ORG> case (supra) where contrary view is taken. Relying on <CITATION> [1975 (36) STC 191 (SC)], <NAME> submitted that taxable goods ceased to be taxable goods after full exemption. He also submitted that 5 year time limit could hot be applied in the case of the appellants as the non-filing of declaration by the appellants with respect to Tariff Item 68 goods was due to unsettled position of law and thereafter conflicting decisions of <ORG> and plea of bonafide on the part of the appellants. Proceeding further, <NAME> submitted that in view of this unsettled legal position, penalty was not imposable against the appellants. For the purpose, he relied on a decision of <ORG> in <CITATION> [1980 ELT 295 SC]. Besides <ORG> decision, he also relied on the following four decisions -

1. <CITATION> - 1985 (19) ELT 269 (Tribunal)

2. <CITATION> 1985 (22) ELT 708 (Cal.)

3. <CITATION> - 1984 (16) ELT 324 (Tribunal)

4. <CITATION> 1984 (17) ELT 499 (Tribunal)

5. <CITATION> - 1986 (24) ELT 9 (Karnataka) Relying on <CITATION> 1986 (24) ELT 9 (Karnataka), <NAME> submitted that demand against the appellants was liable to be set aside for the period as data relied on by the <ORG> does not support the allegations. Proceeding further, <NAME> submitted that appellants manufacture of goods falling under Tariff Item 68 had also been exempted from Licensing Control without the requirement of even filing the declaration in respect of these goods. <NAME> further submitted that as the appellants were not only exempt from payment of duty with respect to Tariff Item 68 goods but were also exempt from Licensing Control, goods falling under Tariff Item 68 must be held to be non-excisable and this was a distinctive feature from the decisions against the appellants contention (already referred to above). In this connection, <NAME> referred to a <ORG> decision in <ORG> 1978 ELT J-457. Reference in this connection was also made to <NAME> v. State of Gujrat - AIR 1981 SC 1055.

7. Smt. <NAME> learned Departmental Representative representing the respondents, controverting <NAME> arguments, submitted that fully unconditionally exempted goods do not cease to be excisable goods and the value of their clearance would have to be included for the purpose of determining aggregate value of clearance under the two notifications. For the purpose, she relied on the <ORG> decision in <CITATION> - 1983 ELT 2265 (Del.) and the <ORG> decision in <CITATION> . - 1986 (23) ELT 313. She submitted that <ORG> decision in <CITATION> (supra) had been taken note of by the <ORG> in 1986 (25) ELT 843 and in spite of this decision, the <ORG> following the <ORG> decision held that fully and unconditionally exempted goods do not cease to be excisable. Therefore, value of such goods would be includible for finding out the aggregate value of clearance under the two notifications. She submitted that merely because the manufacturer was exempt from Licensing Control would not mean that the goods manufactured by the manufacturer would cease to be excisable. She also referred to two decisions of the <ORG> Order No. 576/86-C dated 3.10.86 <CITATION> where the <ORG> had taken a similar view. According to her, licencing and excisability were two different concepts. About time-bar, she submitted that the appellants had not filed any declarations with respect to Tariff Item 68 goods and in the declarations filed in respect of 14-E goods, they had not disclosed anything about clearance of Tariff Item 68 goods. It was thus a clear case of suppression of fact or wilful mis-statement to evade payment of duty. She also submitted that on the facts and circumstances of the case, penalty was rightly imposed against the appellants. She urged for dismissal of the appeals.

8. We have carefully considered these submissions made by both the parties. Taking up first, the question whether the goods in question having been fully and unconditionally exempted under Notification No. 55/75-C.E., dated 1.3.75 as amended and the argument that on this being done, goods ceased to be excisable goods, the question need not detain us long. We have already referred to divergent decisions on the point to which Sh. <NAME> for the appellants has, in all fairness, referred during his arguments. Smt. <NAME> has referred to a very recent decision of <ORG> in Karnataka Cement Pipe Factories case [1986 (23) ELT 313 (Karnataka)]. The decision refers to almost all the divergent decisions of different <ORG> on the point including some of those referred to by Shri <NAME> during arguments (paras 7,8,9 and 10 of the order). <ORG> following the decisions of Delhi, Andhra Pradesh and Madras <ORG> held that excisable goods exempted from excise duty by virtue of notifications issued by <ORG> do not cease to be 'excisable goods'. The Hon'ble High Court held -

"The character of a product, as excisable goods, does not depend upon the actual levy of duty, but depends on the description as 'excisable goods' as contained in the First Schedule to the Act."

After referring to Rule 8(1) of Central Excise Rules, <ORG> further held as under -

"The submissions made on behalf of the petitioner that the moment a manufacturer is allowed exemption in respect of any goods by virtue of a notification, it ceases to be 'excisable goods."

"The contention advanced on behalf of the respondents that the words, "as being subject to a duty of excise" in Section 2(d) is only descriptive of the goods and not to the actual levy, is the correct approach to the question."

As for <NAME> reliance on the <ORG> decision in <CITATION> - AIR 1975 SC 1987 for the argument that after exemption the goods ceased to be taxable goods, it may be stated that the <ORG> in 1986 (25) ELT 843 (<ORG>) in <ORG> case on which Smt. <NAME> has placed reliance in para 7 of the decision, repelled the contention placing reliance on the <ORG> judgment in <CITATION> - (AIR 1976 SC 2271 -1978 J-457) and held that even on exemption excisable goods continue to be excisable goods. <NAME> reliance therefore, on <NAME>'s case does not help the appellants.

9. It may also be stated that the Tribunal in <CITATION> . 576/86-C dated 3.10.86 inter alia following the Karnataka High Court decision and <ORG> decision in <CITATION> - 1983 ELT 2265 (Del.) had taken a similar view.

9A. In view of the foregoing, we hold that excisable goods on being exempted from payment of duty by exemption notification issued under Rule 8(1) of Central Excise Rules, do not cease to be excisable goods and for that reason, unless the relevant notification specifically so provides, would not be excludible from the value of clearances.

10. <NAME> during arguments submitted that the goods manufactured by the appellants were free from excise control and were exempt from licensing therefore, it be held that goods manufactured by them were not excisable. He argued that exemption from duty is distinct from licensing. According to him, in this case, the appellants with respect to the goods were not only exempt from duty but also exempt from licensing. For this argument, he placed reliance on certain observations of <ORG> in <ORG> <ORG> - (1978 ELT J-457). On the same ground, he sought to distinguish the <ORG> decision in M/s. <ORG> case Order No. 576/86-C. According to him, the fact that the appellants were exempt from licensing distinguished their case from the decision in <ORG> case.

11. We do not accept <NAME> argument on the point. The <ORG> decision in <ORG> case which we have followed is clear that character of a product as excisable goods depends on the description as "excisable goods" as contained in the First Schedule to the Act. In view of this decision, the fact that the appellants manufacture of goods was exempt from excise control or from licensing would make no difference to the question of goods being excisable or their inclusion in the value of clearance unless as already said, the notification itself make such exclusion permissible. It is nobody's case that notification in question provides for such exclusion.

12. As for <NAME> strong reliance on the <ORG> decision in <CITATION> - 1984 (17) ELT 310 for the argument that unconditionally exempted goods is not includible for the value of clearance and the argument that such value could not be said to be 'cleared' within the meaning of word 'clearances' used in the notification, it is sufficient to say that Delhi High Court decision in <ORG> case (supra) held the value of such clearance to be includible. Besides, we observe that in <CITATION> (17) ELT 402 (<ORG>), in spite of the <ORG> case having been cited before the <ORG> (para 24 and 25 of the decision) followed the <ORG> decision and the <ORG> decision in Tamilnadu (Madras) State Handloom Weavers Society Ltd. and held the value includible. It would therefore, not be proper to differ from this <ORG> decision. <ORG> case therefore, does not help the appellants.

13. <NAME> submitted that the appellants activity of manufacture was within the knowledge of the <ORG> as earlier the appellants held a licence prior to introduction of Notification No. 71/78 After issue of this notification, the appellants surrendered the licence which was cancelled by <ORG>. According to him, on these facts, invoking the longer time limit of 5 years under Section 11A of the <ORG>s and Salt Act , 1944 which is applicable in the case of mis-statement, suppression of facts, collusion, fraud and the like, should not be invoked in the appellants case and the time limit for raising the duty, if any, should be the normal and shorter time limit of 6 months. We cannot agree with <NAME>'s submissions of the point. The mere fact that in some distant past one was engaged in manufacturing activity and for the par-pose held a licence, would in our view, be not sufficient to attribute knowledge to <ORG> about the appellants manufacturing activity during the period in question. On the other hand, it is common ground that the appellants did not bring the fact of their manufacture under Tariff Item 68 goods to the knowledge of <ORG> and at the same time continued to avail of the exemption in respect of Tariff Item 14-E goods which would otherwise, have not been available to them. In our view, on these facts, the lower authorities have rightly invoked the longer time of 5 years in raising demand of duty against the appellants.

14. As (or <NAME> argument about penalty, that in view of divergent view of <ORG> as to unconditionally exempted goods being excisable for non-excisable and such value being includible or otherwise in !he value of clearance, we do see considerable force in the argument. From the impugned order, we observe that in all the years, the value of clearance of specified goods for the purpose of Notification No. 71/78 was within exemption limit. The appellants became ineligible for exemption only when value of clearance of goods falling under Tariff Item 68 unconditionally exempted under Notification No. 55/75 dated 1.3.75 is included in determining the value of aggregate clearances. About such includibility, (as already said,) there are divergent <ORG> decisions.

15. It may be that the appellants may not have filed a declaration mentioning about manufacture of such goods in the belief that they were not includible in the value of clearances based on a number of decisions of <ORG>. (To us also it appears that) but on these facts owing to uncertain legal position about value of clearances of unconditionally exempted goods being includible in determining the value of aggregate clearances (having regard to the <ORG> decision and other decisions referred to in para 6 of the order above), the case does not call for imposition of any penalty. We, therefore, set aside the penalty imposed against the appellants in all the 3 cases.

Except as to relief of setting aside penalties, we dismiss these appeals.


REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 3506-3510 OF 2009 (Arising out of S.L.P.(C) Nos.14178-14182 of 2007) M/s. Rotork Controls India (P) Ltd. ... Appellant (s) Versus Commissioner of Income Tax, Chennai ... Respondent(s) WITH Civil Appeal No. 3511 of 2009 - Arising out of S.L.P. (C) No.7490 of 2009 Civil Appeal No. 3512 of 2009 - Arising out of S.L.P. (C) No.5616 of 2009 Civil Appeal No. 3513 of 2009 - Arising out of S.L.P. (C) No. 12063 of 2009 (SLP(C) .........CC No.4633 of 2009) Civil Appeal No. 3514 of 2009 - Arising out of S.L.P. (C) No.722 of 2009 Civil Appeal No. 3515 of 2009 - Arising out of S.L.P. (C) No.723 of 2009 Civil Appeal No. 3516 of 2009 - Arising out of S.L.P. (C) No.4776 of 2009 Civil Appeal No. 3517 of 2009 - Arising out of S.L.P. (C) No.3440 of 2009 Civil Appeal No. 3518 of 2009 - Arising out of S.L.P. (C) No.4182 of 2009 Civil Appeal No. 3519 of 2009 - Arising out of S.L.P. (C) No.4183 of 2009 Civil Appeal No. 3520 of 2009 - Arising out of S.L.P. (C) No.4184 of 2009 Civil Appeal No. 3521 of 2009 - Arising out of S.L.P. (C) No.8983 of 2009 Civil Appeal No. 3522 of 2009 - Arising out of S.L.P. (C) No.8982 of 2009 Civil Appeal No. 3523 of 2009 - Arising out of S.L.P. (C) No.8311 of 2009 Civil Appeal No. 3524 of 2009 - Arising out of S.L.P. (C) No. 12064 of 2009 (SLP(C) .........CC No.5279 of 2009) JUDGMENT

<NAME>, J.

1. Delay condoned.

2. Leave granted.

FACTS IN THE LEAD MATTER Civil Appeal Nos. of 2009 - Arising out of

S.L.P.(C) Nos.14178-14182 of 2007 - M/s. Rotork Controls India (P) Ltd. v. <ORG>, Chennai.

3. In these civil appeals filed by the assessee we are concerned with the assessment years 1991-92, 1992-93, 1993-94 and 1994-

95. For the sake of convenience we hereby refer to the facts concerning assessment year 1991-92.

4. Appellant-company sells Valve Actuators. Bulk of the sales is to <ORG>. At the time of sale appellant (assessee) provides a Standard Warranty whereby in the event of any Beacon Rotork Actuator or part thereof becoming defective within 12 months from the date of commissioning or 18 months from the date of despatch whichever is earlier, the company undertakes to rectify or replace the defective part free of charge. This warranty is given under certain conditions stipulated in the warranty clause. For the assessment year 1991-92, the assessee made a provision for warranty at Rs.10,18,800/- at the rate of 1.5% of the turnover. This provision was made by the assessee on account of warranty claims likely to arise on the sales effected by the appellant and to cover up that expenditure. It may be noted that since the provision made was for Rs.10,18,800/- which exceeded the actual expenditure, the appellant reversed Rs.5,00,246 as Reversal of Excess Provision. Consequently, the assessee claimed deduction in respect of the net provision of Rs.5,18,554/- which was disallowed by the A.O. on the ground that the liability was merely a contingent liability not allowable as a deduction under Section 37 of the Income-tax Act, 1961 ("the 1961 Act", for short). This decision was upheld by CIT (A). The matter was carried in appeal to the <ORG> by the appellant. It was held by the <ORG> that right from the assessment year 1983-84 the CIT (A) as well as the <ORG> had allowed the warranty claim(s) on the ground that Valve Actuators are sophisticated equipments; that in the course of manufacture and sale of Valve Actuators a reasonable warranty was given to the purchasers; that every item of sale was covered by the warranty scheme; that no purchaser was ready and willing to buy Valve Actuators without warranty and consequently every item sold had a corresponding obligation under the warranty clause(s) attached to such sales. This has been the view of the <ORG> and the <ORG> right from assessment year 1983-84. In fact the <ORG> allowed deduction on the above facts constituting normal trading practice. For example, during the assessment year 1983-84 the total sales during the year was Rs.1,45,36,599/- and in that year the appellant had earmarked 1% of the total sales towards the warranty claims which it would have to meet. This amount provided for was held to be reasonable having regard to the anticipated liability which was discharged in the subsequent year. From that year onwards it has been consistently held that looking to the nature of the business and the nature of the product manufactured and sold it was necessary for warranty clause to be attached to the sales effected by the appellant and that the warranty obligations constituted an integral part of the sales effected during the year. All throughout this period between assessment year 1983-84 and assessment year 1991-92, the <ORG> took the view that the provision made by the appellant was realistic. Applying the Rule of Consistency, the <ORG> held that the assessee on the facts and circumstances of the case was entitled to deduction under Section 37 of the 1961 Act in respect of provision for warranty amounting to Rs.5,18,554. At this stage one point needs to be emphasized. During the assessment year 1983- 84 to assessment year 1991-92 there was one instance when the <ORG> disallowed the warranty claim that was in the assessment year 1985-86. The reason was in that year the assessee had not adjusted the excess out of the provision to the expense of the immediate following year and as a result the Closing Balance of the Provision Account was found to be swelling up from year to year. In other words, during that year reversal was not effected. That is not the position during the assessment years 1991-92, 1992-93, 1993-94 and 1994-95. Accordingly, for the assessment year 1991- 92, the appellant herein succeeded before the <ORG>. Aggrieved by the decision of the <ORG>, the <ORG> carried the matter in appeal to <ORG> vide Tax Case Appeal No.163 of 2003 etc. Those appeals were for all the assessment years 1991- 92, 1992-93, 1993-94 and 1994-95. By common judgment dated 5.2.07, <ORG> held that the assessee was not entitled to deduction in respect of the provision made for warranty claims. It was held that no obligation was ever cast on the date of the sale and consequently there was no accrued liability. According to the impugned judgment, the liability had not crystalised on the date of the sale and, therefore, appellant was not entitled to deduction in respect of the provision made for warranty charges payable under the terms of sale. According to the impugned judgment, warranty provision was made against the liability which had not crystalised against the appellant and consequently it was a provision made for an unascertained liability and, therefore, the appellant was not entitled to claim deduction under Section 37 of the 1961 Act. The case of the <ORG> was accepted by <ORG>, hence these civil appeals are filed by the assessee.

CONTENTIONS

5. On behalf of the <ORG> Mr. <NAME>, learned senior counsel, submitted that provision for warranty is towards unforeseen liability, which is not certain nor it could be foreseen with precision in the relevant year, hence, claim of warranty as well as liability in respect thereof was contingent. Being contingent, deduction as expense(s) was not available. According to learned counsel, Section 37 of the 1961 Act does not refer to "making of provision" it only refers to "deduction permissible on account of actual expenditure incurred". In other words, according to learned counsel, Section 37 does not refer to anticipated claims. According to learned counsel, in this case the liability is contingent. The goods sold may be defective or they may not be defective and, therefore, warranty provision was made only to earn goodwill and stay in business. According to learned counsel, warranty is only an assurance about the quality of the product sold. The obligation to satisfy the claim in the warranty clause would depend upon factors, namely, whether the product was used in the manner required or whether the buyer was responsible for causing defect. In the alternative, learned counsel submitted that whether the liability for which provision is made was based on any scientific study is required to be examined before allowing deduction under Section 37 of the 1961 Act. Lastly, learned counsel urged that the amount which is provided for or kept apart cannot be held to be expenditure, actually incurred and consequently deduction is not admissible. Learned counsel submitted that in each case one has to find out whether there is an element of certainty that the liability would occur. In each case one has to ascertain whether there is any scientific data or material produced by the assessee about the liability incurred in the past and in the absence of such a data assessee was not entitled to deduction for warranty provision in its books of accounts. According to learned counsel, merely because the assessee is maintaining its account on mercantile basis, it cannot claim that the provision made towards warranty is an accrued liability. According to learned counsel, accounting treatment will not decide whether the warranty claim is actual liability, accrued liability or contingent liability. Since in the relevant year there was no claim for replacement of the defective pieces, the assessee could not have claimed deduction by merely making an entry in its books of accounts or by making a mere provision in its books of accounts. In this connection, learned counsel placed reliance on the judgment of <ORG> in the case of <CITATION> - (1964) 51 ITR 240. Learned counsel also placed reliance on the judgments of <ORG> in the case of <CITATION> - (1959) 37 ITR 66 ( <CITATION> . - (1985) 156 ITR 585 (SC).

6. Mr. <NAME>, learned senior counsel, appearing on behalf of the assessee, submitted that in this case <ORG> had erred in not following the Rule of Consistency. In this connection, it was urged that right from assessment year 1983-84 upto assessment year 1991-92, the <ORG> had come to the conclusion that Valve Actuators were sophisticated items; that, the appellant has been following scientific method of accounting which included the concept of "reversal"; that looking to the nature of business and the nature of the product the appellant was entitled under the Commercial Accounting Principles to create provisions for warranty and accordingly the appellant was entitled to deduction under Section 37 of the 1961 Act. According to learned counsel, for the assessment years in question, the <ORG> has accordingly followed its earlier view which has prevailed right from assessment year 1983-84 and it has, therefore, directed deletion of the disallowance of Rs.5,18,554/- for the assessment year 1991-92. While explaining the concept of "reversal", learned counsel pointed out that 1.5% of total sales of Rs.1 crore (amounting to Rs.1.50 lakhs) was taken by the appellant as a provision for warranty claims in its balance-sheet by debiting its profit and loss account and by crediting the provision for warranty claims in the balance- sheet. This is in the first year. In the second year Rs.1.50 lakhs which was the provision for first year was brought forward by way of Opening Balance of the Provision Account in the Ledger Account. If expenditure incurred in the second year was not Rs.1.50 lakhs but only Rs.1 lakh then such actual expenditure of Rs.1 lakh alone  was debited to the Provision Account which, as stated above, had the Opening Balance of Rs.1.5 lakhs and accordingly in the second year Rs.50,000/- was taken to the credit of profit and loss account and offered for tax. In other words, in the year in which the provision made by the appellant exceeded actual expenditure by Rs.50,000/- the same was offered for tax as income. In other words, there was reversal to the extent of Rs.50,000/- in the second year. This is the example of reversal. According to learned counsel, the concept of "reversal" forms part of scientific method of accounting which is being followed by the assessee from the assessment year 1983-84 onwards right upto assessment year 1991-92, 1992-93, 1993-94 and 1994-95. While overruling the judgment of the <ORG>, <ORG> has failed to notice this important aspect of reversal. According to learned counsel, if one applies the concept of "reversal" which has been applied in the present case, there is no escapement of income from assessment and the entire exercise would be revenue neutral. Learned counsel placed reliance on the judgment of <ORG> in the case of Commissioner of Inland Revenue v. <ORG> - (1996) 222 ITR 697 (PC). Learned counsel also placed reliance on the judgments of <ORG> in the case  of <CITATION> - (2000) 245 ITR 428 ( <CITATION> - (1969) 73 ITR 53 (SC).

7. Learned counsel next submitted that assuming for the sake of argument that the liability for warranty claim is a contingent liability, the amount claimed by the appellant as deduction was still allowable if deduction claimed is equal to the warranty expenses actually incurred and the deductibility of such expenses viewed over a number of years is beyond doubt. In this connection, learned counsel urged that if having regard to surrounding circumstances of the appellant's business as a whole, a certain item of expenditure is bound to incur year after year in different degrees then the business liability has definitely arisen and such liability cannot be considered as contingent liability.

8. It was next urged that under Section 145 of the 1961 Act, as it stood prior to 1997, the income of the appellant had to be determined on the basis of method of accounting followed by the appellant year to year and that method could be departed from by the A.O. only if it was in a position to give a finding that the correct income was incapable of being determined on the basis of the  assessee's impugned method of accounting. As stated above, from assessment year 1983-84 the appellant, according to learned counsel, has been making provision for warranty claims consistently at the rate of 1.5% of its total sales turnover and from 1987 appellant has introduced in its accounts the concept of "reversal" of excess provision which has been accepted by the <ORG> right upto assessment years in question. According to learned counsel, there is no finding in the order of the A.O. for the assessment years in question saying that the method of accounting of the appellant was incapable of income determination. In the circumstances, learned counsel submitted that <ORG> had erred in reversing the decision of the <ORG>.

Relevant Provisions of Law:

9. We quote herinbelow relevant provisions of the Income-tax Act , 1961 as it stood at the material time:

"General

37. (1) Any expenditure (not being expenditure of the nature described in Section 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

Expenses or payments not deductible in certain circumstances 40A.(7)(a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason

(b) Nothing in Clause (a) shall apply in relation to:

(i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year;

(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely:

(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason;

(2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and (3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance  of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977.

Explanation 1.-For the purposes of sub-clause (ii) of clause

(b) of this sub-section, "admissible amount" means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent of the salary [as defined in clause (h) of rule 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made.

Explanation 2.-For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid." 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.

11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

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. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983- 84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can  be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case.

13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the <ORG> is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn  that revenue including warranty costs has to be fully provided for. When <ORG> Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty  expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of  resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that <ORG> should not to have interfered with the decision of the <ORG> in this case.

14. In this case <ORG> has principally gone by the judgment of <ORG> in the case of <NAME> (supra). That was the case of gratuity. For the assessment year 1974-75 the assessee-company sought to deduct a sum of Rs.18,37,727/- towards the amount of gratuity payable to its employees and worked out actuarially. No provision was made for Rs.18,37,727/-. The claim for deduction was made on the ground that the liability stood ascertained by actuarial valuation and, therefore, was deductible under Section 37 of the 1961 Act. The <ORG> allowed the deduction only in respect of the amounts actually paid by the assessee and the rest was disallowed on the ground of non-compliance with the provisions of Section 40A(7) of the 1961 Act. This view of the <ORG> was affirmed by CIT(A). The <ORG> held that for the earlier assessment year relating to 1973-74, actuarially ascertained liability for gratuity arising under Payment of Gratuity Act , 1972 was an allowable deduction. However, for the  assessment year in question, the <ORG> held that the increased liability claimed by the assessee for deduction was allowable on general principles of accounting. This view was taken by the <ORG> on the basis that the actuarially determined liability was not provided for in the assessee's books of account. In appeal by the <ORG>, <ORG> held that the assessee was not entitled to deduction without complying with the provisions of Section 40A(7) of the 1961 Act. This view of <ORG> was affirmed by this <ORG>. It was held that Section 40A(7) which stood inserted by Finance Act , 1975 w.e.f. 1.4.73 has been given an overriding effect over Section 28 as well as Section 37 of the 1961 Act. Consequently, the deduction allowable on general principles was ruled out as Section 40A(1) made it clear that Section 40A had effect notwithstanding anything contained in Sections 30 to 39 of the 1961 Act. In other words, as regards deduction in respect of gratuity, the assessee was required to comply with the provisions of Section 40A(7) after Finance Act , 1975. It is interesting to note that prior to 1.4.73 actual payment or provision for payment was eligible for deduction either under Section 28 or under Section 37 of the 1961 Act. This has been reiterated in <NAME> (supra). The position got altered only after 1.4.73. Before that date,  provision made in the P & L Account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis could be deducted either under Section 28 or Section 37 of the 1961 Act. This has been explained in <NAME> (supra) at page 599. Section 40A(7) deals only with the case of gratuity. Even in the case of gratuity but for insertion of Section 40A(7) , provision made in the P & L Account on the basis of present value of the contingent liability properly ascertained and discounted on an accrued basis was entitled to deduction either under Section 28 or under Section 37 of the said Act. This aspect, therefore, indicates that the present value of the contingent liability like the warranty expense, if properly ascertained and discounted on accrued basis, could be an item of deduction under Section 37 of the said Act. This aspect is not noticed in the impugned judgment. We may add a caveat. As stated above, the principle of estimation of the contingent liability is not the normal rule. As stated above, it would depend on the nature of business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting being adopted by the assessee. It will also depend upon the historical trend. It would also depend upon the number of articles  produced. As stated above, if it is a case of single item being produced then the principle of estimation of contingent liability on pro rata basis may not apply. However, in the present case, it is not so. In the present case, we have the situation of large number of items being produced. They are sophisticated goods. They are supported by the historical trend, namely, defects being detected in some of the items. The data also indicates that the warranty cost(s) is embedded in the sale price. The data also indicates that the warranty is attached to the sale price. In the circumstances, we hold that the principle laid down by this <ORG> in the case of <ORG> (supra) will apply. In that case this <ORG> held that contingent liabilities discounted and valued as out-of- necessity could be taken into account as trading expenses if these were capable of being valued. It was further held that an estimated liability even under a gratuity scheme even if it was a contingent liability if properly ascertainable and if its present value stood fairly discounted, was deductible from the gross profits while preparing the P & L Account. In view of this decision it became permissible for an assessee to provide, in his P & L Account, for the estimated liability under a gratuity scheme by ascertaining its present value on accrued basis and claiming it as an ascertained liability to be  deducted in the computation of profit and gains of the previous year either under Section 28 or under Section 37 of the 1961 Act. However, the above principle would not apply after insertion of Section 40A(7) w.e.f. 1.4.73. It may be stated that the principles of commercial accounting, mentioned above, formed the basis of the judgment of this <ORG> in the case of <ORG> (supra) and those principles are affirmed by the judgment of <ORG> in <NAME> (supra) upto 1.4.73. In this case we are concerned with warranty claims. In respect of warranty claims during the relevant assessment years in question there is no provision similar to Section 40A(7) of the 1961 Act. We may add that the above principle of commercial accounting in <ORG> (supra) also find place in the judgment of this <ORG> in the case of <CITATION> - (1997) 225 ITR 802 (SC), in which the <ORG> has explained the meaning of the word "expenditure" in Section 37 of the 1961 Act. In other words, the principle enunciated in <ORG> (supra) which has been reiterated in <NAME> (supra) (upto 1.4.73) which deals with making of provision on the basis of estimated present value of contingent liability holds good  during the assessment years in question qua warranty claims.

15. Before concluding, we may refer to the judgment of this <ORG> in the case of <ORG> (supra). In that case the facts were as follows:

"One <NAME> was the managing director of the assessee company in 1948. He had by then served the company for 13 years, and was due to retire at the age of 55 years on September 20, 1955. There was, it appears, an agreement by which the company was under an obligation to provide a pension to <NAME> after his retirement. On September 16, 1948, the company executed a trust deed in favour of three trustees to whom the company paid a sum of Pound 8,208- 19-0 (Rs. 1,09,643) and further undertook to pay annually Rs. 4,364 (Pound 326.14 sh.) for six consecutive years, and the trustees agreed to execute a declaration of trust. The trustees undertook to hold the said sums upon trust to spend the same in taking out a deferred annuity policy with <ORG> in the name of the trustees but on the life of <NAME> under which Pound 720 per annum were payable to <NAME> for life from the date of his superannuation. It was also provided in the deed that notwithstanding the main clause the trustees would, if so desired by the assessee company, take out instead a deferred longest life policy, with the said insurance company in their names, but in favour of <NAME> and Mrs. <NAME> for an annuity of Pound 558-1-0 per annum payable during their joint lives from the date of <NAME>'s superannuation and during the lifetime of the survivor, provided further that if <NAME> died before he attained the age of 55 years the annuity payable to Mrs. <NAME> would be Pound 611-12-0 during her life. It was further provided that should <NAME> die before attaining the age of 55 years, the trustees would stand possessed of the capital value of the deferred annuity policy, upon trust to purchase therewith an annuity for Mrs. <NAME> with the above insurance company or other insurance company of repute. The other conditions of the deed of trust need not be considered, because they do not bear upon the controversy.

In furtherance of these presents, the trustees took out a policy on January 12, 1949. In addition to conditions usual in such policies, it provided for the following benefits :

Amount per annum of Pound 563-5-8 p.a. if both Mr. and deferred annuity. Mrs. <NAME> be living on September 20, 1955.

Pound 720-0-0 p.a. if Mrs. <NAME> should die before September 20,  1955, leaving <NAME> surviving her.

Pound 645-0-0 p.a. if <NAME> should die before September 20, 1955, leaving Mrs. <NAME> surviving him.

There was a special provision which must be reproduced : "Provided the contract is in force and unreduced, the grantees (i.e., the trustees) shall be entitled to surrender the annuity on the option anniversary (i.e., September 20, 1955), for the capital sum of Pound 10,169 subject to written notice of the intention to surrender being received by the directors of the society within the thirty day preceding the option anniversary." Two other clauses of the Second Schedule of the policy may also be quoted : "(III) If both the nominees shall die whilst the contract remains in force and unreduced and before the option anniversary the said funds and property of the society shall be liable to make repayment to the grantees of a sum equal to a return to all the premiums which shall have been paid under this contract without interest after proof thereof and subject as hereinbefore provided. (IV) The grantees shall before the option anniversary and after it has acquired a surrender value be entitled to surrender the contract for a cash payment equal to return of all the premiums (at the yearly rate) which have been paid less the first year's premium or five per cent of the capital sum specified in the special provision of the First Schedule whichever shall be the lesser sum, provided that if the deferred annuity has been reduced an equivalent reduction in the guaranteed surrender value as calculated above will be made."

The assessee company paid the initial sum and the yearly premia for some years before <NAME> died. In the assessment years 1949-50, 1950- 51, 1951-52 and 1952-53, it claimed a deduction of these sums from its profits or gains under section 10(2) (xv) of the Indian Income-tax Act (hereinafter called the Act), which provides :

"Such profits or gains shall be computed after making the following allowances, namely :-

any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation."

This claim was disallowed by the <ORG> and <ORG>. The <ORG> held that it was not necessary to decide if the expenditure was wholly or exclusively for the purposes of the company's business, and if so,  whether it was of a capital nature, because in the <ORG>'s opinion there was no expenditure at all. The reason why the <ORG> held this way may be stated in its own words :

"Clauses (I) and (II) do not contain any provision having a material bearing upon clause (III). Therefore, if it happens that both Mr. and Mrs. <NAME> die before 20th September, 1955, all the payments till then made through the trustees to <ORG> will come back to the trustees and, as there is not the slightest trace of any indication anywhere that the trustees should have any beneficial interest in these moneys there would be a resultant trust in favour of the company in respect of the moneys thus far paid out. In other words, what has been done amounts to a provision for a contingency which may never arise. Such a provision can hardly be treated as payment to an employee whether of remuneration or pension or gratuity, and cannot be a proper deduction against the incomings of the business of the company for the purpose of computing its taxable profits. In short, there has been no expenditure by the company yet; there has been only an allocation of a part of its funds for an expenditure which may (or may not) have to be incurred in future."

16. The question which arose for determination was : whether during the assessment years 1949-50, 1950-51, 1951-52 and 1952-53 the assessee-company was entitled to claim deduction of the yearly premium from its profits under Section 10(2)(xv) of the Income-tax Act, 1922. It was held that the provision in the policy for surrendering annuity and the provision in policy for return of premium was not entitled to deduction as the payment made to the trustees by the assessee-company was towards a contingent liability or towards a liability depending on a contingency, namely, the life of a human-being. It was held that putting aside of money which may become expenditure on the happening of an event is not an expenditure under Section 10(2)(xv) of the 1922 Act. It was held  on facts that the money was placed in the hands of trustees and/or the insurance company to purchase annuities, if required, but to be returned if the annuities were not purchased. Therefore, it was a case of setting apart of the money and consequently the assessee was not entitled to deduction under the said section.

17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of <ORG> (supra) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophisticated (specialiased) goods manufactured and sold by the assessee whereas the case of <ORG> (supra) was restricted to an individual retiree. On the other hand, the case of <ORG> (supra) pertained to an army of employees who were due to retire in future. In that case the company had estimated its liability under two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability  on actuarial valuation. It had made provision for such liability spread over to a number of years. In such a case it was held by this Court that the provision made by the assessee-company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this Court in the case of <ORG> (supra). In that case the assessee company had formulated leave encashment scheme. It was held, following the judgment in <ORG> (supra), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under Section 37 of  the 1961 Act. It would all depend on the data systematically maintained by the assessee. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in the case of Civil Appeal Nos. of 2009 - Arising out of S.L.P.(C) Nos.14178-14182 of 2007 - M/s. <ORG> v. <ORG>, Chennai, in which <ORG> has overruled the decision of the <ORG> allowing deduction under Section 37 of the 1961 Act. However, <ORG> has failed to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade.

18. For the above reasons, we set aside the impugned judgment of <ORG> dated 5.2.07 and accordingly the civil appeals stand allowed in favour of the assessee with no order as to costs.

Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.7490 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.5616 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No. of 2009 (SLP(C) .........CC No.4633 of 2009) Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.722 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.723 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4776 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.3440 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4182 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4183 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.4184 of 2009  Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.8983 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.8982 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No.8311 of 2009 Civil Appeal No. of 2009 - Arising out of S.L.P. (C) No. of 2009 (SLP(C) .........CC No.5279 of 2009)

19. For the reasons given hereinabove in Civil Appeal Nos.______________of 2009 - Arising out of S.L.P.(C) Nos.14178- 14182 of 2007 - M/s. <ORG> v. Commissioner of Income Tax, Chennai, the civil appeals filed by the <ORG> stand dismissed with no order as to costs.

................................<NAME>

(S.H. KAPADIA) ................................J.

(<ORG> ALAM) New Delhi;

May 12, 2009.