Warranty provision and borrowing costs allowed where supporting facts and tax treatment were adequately established.

A warranty provision is allowable where the assessee substantiates the accrued liability with a scientific basis and reliable supporting material; the adjustment was deleted because the factual basis was found adequate and consistent with the earlier year, with no contrary material shown. Processing fee and interest on borrowing were also not disallowed because the processing fee had already been added back for tax-computation purposes and the interest component was subject to tax deduction at source, leaving no basis for the revenue's challenge.

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Issues: (i) Whether the disallowance of provision for warranty was sustainable; (ii) Whether the disallowance of processing fee and interest paid on the borrowing was sustainable.

Issue (i): Whether the disallowance of provision for warranty was sustainable.

Analysis: The assessee had furnished details and computation for the warranty provision, and the factual finding was that the Assessing Officer's observation that no scientific basis was supplied was incorrect. The issue had also been decided in the assessee's favour for the immediately preceding year, following the principle laid down in Rotork Controls India Ltd. The facts for the year under appeal were similar, and no contrary material was shown.

Conclusion: The disallowance of provision for warranty was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether the disallowance of processing fee and interest paid on the borrowing was sustainable.

Analysis: The processing fee had already been added back by the assessee in the computation of income on account of non-deduction of tax at source, and the interest component had been subjected to tax deduction at source. The revenue's challenge did not displace these findings.

Conclusion: The disallowance of processing fee and interest was not sustainable and was deleted in favour of the assessee.

Final Conclusion: The additions made in assessment were not upheld, and the revenue's appeal failed in entirety.

Ratio Decidendi: A provision for warranty is allowable where it is supported by a scientific basis and reliable factual material showing an accrued liability, and an addition cannot survive where the expenditure has already been accounted for or the corresponding tax deduction position is otherwise established.

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