Contingent warranty provision not deductible where liability had not crystallised and depended on future claims.

A provision for warranty claims was treated as contingent rather than as a liability existing in praesenti, because it depended on future claims arising and was therefore uncertain and uncrystallised. A sum set apart for a liability that may arise on a future event is not allowable expenditure, even under the mercantile system of accounting. On that basis, the provision was not deductible in computing business income and the disallowance was justified.

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Issues: Whether the provision made for warranty claims was allowable as a deduction, or whether it represented a contingent liability not deductible in computing business income.

Analysis: Warranty under section 62 of the Sale of Goods Act is a collateral undertaking, breach of which gives rise to a claim for damages. The provision made towards future warranty claims depended on actual claims arising during the year and was not a liability existing in praesenti. On that footing, the amount set aside was uncertain, uncrystallised, and contingent. A sum set apart for a liability that may arise on a future event does not amount to allowable expenditure, even under the mercantile system of accounting.

Conclusion: The provision for warranty claims was not an allowable deduction and the disallowance was justified.

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