Accrued warranty liabilities can be deductible when the taxpayer is substantively committed and the cost is reasonably estimable.

Estimated warranty costs on vehicles sold were deductible in the year of sale because the expenditure was treated as incurred once the taxpayer became definitively committed to the liability. Although the warranty obligation was expressed in contingent terms and depended on defects being notified within the warranty period, the commercial facts showed an existing and ascertainable level of defects at sale and allowed the remedial cost to be reasonably estimated. The analysis distinguished the tax subject matter on business profits from the deduction rules, and applied the principle that theoretical contingency does not prevent accrual where the liability is, in substance, sufficiently fixed.

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Issues: Whether the estimated warranty costs on vehicles sold were deductible in the year of sale under the income tax provisions.

Analysis: The subject matter of tax under section 65(2)(a) was profits or gains derived from business, but deductions were controlled by sections 101 and 104. The governing question under section 104 was whether the expenditure or loss had been incurred, meaning that the taxpayer had become definitively committed to the liability. Although the warranty liability was expressed in contingent form and depended on defects being notified within the warranty period, the surrounding commercial facts showed that a substantial and ascertainable proportion of vehicles were defective at the time of sale and that the likely remedial cost could be reasonably estimated. The Court treated theoretical contingencies as insufficient to prevent accrual where, in substance, the taxpayer had become committed to meet the warranty costs.

Conclusion: The warranty costs were deductible in the year of sale under section 104, and the appeal failed.

Ratio Decidendi: A liability may be treated as incurred for income tax purposes where, despite contingent wording, the taxpayer is in substance definitively committed to an estimable expenditure arising from existing facts.

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