Warranty provision allowable as business deduction where present obligation and reliable estimate of liability are shown.

A provision for warranty and after-sales service expenses is deductible where it represents a present business obligation arising from past sales, the outflow of resources is probable, and the amount can be reliably estimated. The provision was supported by the assessee's contract warranty terms and by a historical comparison showing that the amount provided was broadly commensurate with actual warranty expenditure and, in several years, lower than the eventual outlay. On that basis, the provision was treated as a fair and reasonable estimate of a definite business liability and allowed as a business deduction under section 37.

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Issues: Whether the provision made by the assessee for warranty and after-sales service expenses was a deductible business liability under section 37 of the Income-tax Act, 1961.

Analysis: The provision for warranty was supported by the nature of the assessee's business, the warranty clause in the sale contracts, and the historical trend of provision made versus actual expenditure incurred over several years. The figures showed that the provision was broadly commensurate with the actual liability and, in most years, was even lower than the expenditure eventually incurred. The governing principle is that a warranty provision is allowable where there is a present obligation arising from past events, an outflow of resources is probable, and the amount can be estimated reliably.

Conclusion: The provision for warranty and post-sales expenses was held to be a fair and reasonable estimate of a definite business liability and was allowable as a deduction. The Revenue's appeals were dismissed, in favour of the assessee.

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