Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1991-92 to 1994-95 - Whether for a provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible - Held, yes - Whether if historical trend indicates that in past large number of sophisticated goods were being manufactured and defects existed in some of items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from gross receipts under section 37(1), provided data is systematically maintained by assessee - Held, yes FACTS The assessee-company was manufacturing and selling valve actuators in large numbers. At the time of sale it provided a standard warranty, whereby in the event of any actuator or part thereof becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch, whichever was earlier, it undertook to rectify or replace the defective part free of charge. For the relevant assessment years, the assessee made a provision for warranty on account of warranty claims likely to arise on the sales effected by it and to cover up that expenditure. Since the provision made exceeded the actual expenditure, it reversed the excess amount and claimed deduction in respect of the net provision under section 37(1). The Assessing Officer declined deduction holding that the liability was merely a contingent liability. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal, the Tribunal noticed that right from the assessment year 1983-84 the Commissioner (Appeals) as well the Tribunal had allowed the warranty claim of the assessee on the grounds that valve actuators were sophisticated equip- ments; that in the course of manufacture and sale of valve actuators a reasonable warranty was given to the purchasers; that every item of sale was covered by the warranty scheme; that no purchaser was ready and willing to buy valve…

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