The Income Tax department has challenged the Karnataka High Court judgement that dismissed its plea, allowing the multi-national company’s India unit to reap tax benefits on the expenses incurred on warranty expenses based on estimates.
After preliminary arguments, a bench headed by Justice S H Kapadia asked Hewlett Packard(HP) to file its reply to the petition filed by the IT department.
The petition said the provision for warranty was a contingent liability which may or may not accrue during the year. The High Court had erred in holding that the assessee followed the mercantile system of accounting in its business and its sales ran into huge volume, said the petition.
Hewlett Packard had filed its income tax returns declaring a total income of around Rs 6.13 crore in April 2001 and had claimed deductions of around Rs 91 lakh on the provision of warranty.
The assessing officer while disallowing the company’s deductions had held that such provision was made against anticipated loss and contingencies and was only an estimate liability.
The IT department held that it was a contingent liability and would arise only on making claim by the customer.
