Warranty provision and interest disallowance principles affirmed: scientific estimation and commercial expediency supported the assessee's deductions.
A provision for warranty, when made on a scientific and actuarial basis with a direct nexus to the assessee's obligation, is an ascertained liability and allowable as a business deduction; the deletion of the disallowance was upheld. Proportionate interest on borrowed capital is not disallowable merely because funds were used in dealings involving group concerns where the borrowing was for business purposes, had RBI approval, and no material showed diversion for non-business use; the interest disallowance was therefore deleted.
Issues: (i) Whether provision for warranty was allowable as a deduction as an ascertained liability. (ii) Whether proportionate interest on borrowed capital was disallowable on the ground that funds were diverted to group concerns.
Issue (i): Whether provision for warranty was allowable as a deduction as an ascertained liability.
Analysis: The provision for warranty was made on a scientific and actuarial basis and had a direct nexus with the assessee's warranty obligation. The liability was considered capable of being estimated with reasonable certainty, and the fact that payment would arise in future did not make it unallowable.
Conclusion: The provision for warranty was allowable as deduction, and the deletion of the addition was upheld in favour of the assessee.
Issue (ii): Whether proportionate interest on borrowed capital was disallowable on the ground that funds were diverted to group concerns.
Analysis: The borrowed ECB funds were obtained for business purposes with RBI approval. The expenditure incurred on behalf of group companies was treated as having been incurred on grounds of commercial expediency, and no material was brought on record to establish diversion of borrowed money for non-business use or a direct nexus warranting disallowance.
Conclusion: The interest disallowance was rightly deleted, and the finding was in favour of the assessee.
Final Conclusion: Both additions deleted by the appellate authority were sustained, and the Revenue's appeal failed in entirety.
Ratio Decidendi: A reasonably estimated warranty obligation based on scientific valuation is an allowable business liability, and interest on borrowed funds cannot be disallowed absent proof of diversion or lack of commercial expediency.
TaxTMI 
AI Drafter ✕
TaxTMI 
