Provision for warranty ascertained by reasonable estimation is not a provision added back in book profit computation under tax law.

A warranty provision created for products sold in the year, computed from past experience using a reasonable scientific method, constitutes a present obligation arising from past events and is capable of reasonable estimation; therefore such a provision is an ascertained liability and does not qualify as an amount "set aside as provision for liabilities" under Explanation 1(c) to section 115JB. Operatively, the warranty provision need not be added back in computing book profit under section 115JB, resulting in acceptance of the assessee's position and rejection of the Revenue's challenge on this issue.

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Issues: Whether the provision for warranty of Rs. 34,48,532/- created by the assessee is required to be added back while computing book profit under section 115JB of the Income-tax Act, 1961 under Explanation 1(c) as an amount set aside as provision for liabilities, or whether it is an ascertained liability not liable to be added back.

Analysis: Clause (c) of Explanation 1 to section 115JB mandates addition of amounts set aside as provisions other than for unascertained liabilities. A provisioning for warranty based on past experience and a reasonable scientific method, relating to products sold in the year, constitutes a present obligation arising from past events and is capable of reasonable estimation. Established precedents hold that a liability crystallized during the accounting year and reasonably estimable is not an unascertained or contingent liability merely because payment may occur in a subsequent year. The facts show the provision was created in respect of warranties on products sold during the year and is based on historical data and estimation methodology. Applying the statutory provision to these facts leads to the conclusion that the warranty provision does not fall within the mischief of Explanation 1(c) to section 115JB.

Conclusion: The provision for warranty of Rs. 34,48,532/- is an ascertained liability and is not required to be added back in computing book profit under section 115JB. The assessee's appeal is allowed on this issue; the Revenue's appeal challenging deletion under normal provisions is dismissed.

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