Warranty rights are not inventory, while contractual employee bonus remains deductible remuneration under the service terms.

A contractual warranty on refrigerators and deep-freezers in closing stock was held not to be inventory, because it was treated as an intangible contractual right to sue and not tangible property; the stock addition was therefore deleted. Additions for the managing director's car use and telephone expenses were sustained because they had been accepted in the preceding year and no contrary basis was shown. Bonus paid at 20% under the terms of employment was treated as an enforceable service condition forming part of remuneration, so the disallowance was deleted and the deduction allowed.

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Issues: (i) whether the amount attributable to warranty on refrigerators and deep-freezers held in closing stock could be included in the value of closing stock; (ii) whether the additions made in respect of perquisites relating to use of a car and telephone expenses of the managing director were sustainable; (iii) whether bonus paid to employees at 20% under the terms of employment was allowable as deduction.

Issue (i): whether the amount attributable to warranty on refrigerators and deep-freezers held in closing stock could be included in the value of closing stock.

Analysis: The warranty was treated as giving rise only to a right to sue for breach and not as tangible property or goods. On that basis, it did not constitute inventory capable of being included in stock valuation. The discussion of inventory valuation standards also supported the view that inventories must be tangible property and that a warranty, being an intangible contractual advantage, could not be treated as part of closing stock.

Conclusion: The addition to closing stock on account of warranty was not justified and was deleted, in favour of the assessee.

Issue (ii): whether the additions made in respect of perquisites relating to use of a car and telephone expenses of the managing director were sustainable.

Analysis: The additions were upheld on the footing that they had been sustained in the immediately preceding year and no contrary basis was shown to disturb that view.

Conclusion: The additions relating to car use and telephone expenses were sustained, against the assessee.

Issue (iii): whether bonus paid to employees at 20% under the terms of employment was allowable as deduction.

Analysis: The appointment letters showed that payment of bonus at 20% of salary was a term of service. The payment therefore formed part of the remuneration structure and was allowable under the provision governing deduction of employee bonus, as well as under the general deduction provision relied upon by the assessee.

Conclusion: The disallowance of bonus was unsustainable and was deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded on the warranty and bonus issues, while the disallowance relating to the managing director's perquisites was maintained, resulting in a partial relief to the assessee.

Ratio Decidendi: A contractual warranty conferring only a right to claim damages is not tangible inventory and cannot be included in closing stock valuation; conversely, bonus that is an enforceable term of employment forms part of deductible employee remuneration.

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