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TMI Blog2013 (4) TMI 663X X X X Extracts X X X X X X X X Extracts X X X X ..... onvenience. 2. One common issue raised is that Ld. Commissioner of Income Tax (A) has erred in deleting the disallowance of warranty provision which are contingent and unascertained liability. Provision of warranty expenses is not an allowable deduction as the said liability is a contingent liability and not a liability in praesenti. 3. Since the facts of this issue are identical in both the years, hence, we are adjudicating this issue with reference to the orders of the authorities below for assessment year 1998-99. 4. In this case the Assessing Officer observed that the scrutiny of the balance sheet has revealed that the provision under the warranty had increased by Rs. 60,25,000/-. This was included in the warranty expenses claim in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-02 39,304 36,829 29,387 46,746 7,442 During the year, the warranty provision of Rs.2,66,33,000/- was claimed in the P&L account. The utilized amount of Rs.2,06,08,000/-was debited to the warranty provision account leading thereby in an increase of provision by Rs.60,25,000/-. The creation of provision of warranty is in conformity with the provision of Section 145 of the Act and mandatory accounting standards notified by the CBDT vide notification No. SO 69E dated 25.01.1996. Clause 6(b) of the aforesaid notification defines that "accrual refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al practice and accountancy. Such provision of warranty arrived at by correlating to cost of sales made during the year is neither unascertained nor contingent liability. Therefore, the AO was not justified in disallowing the warranty provision of Rs.60,25,000/- and the addition so made is deleted in the light of judicial rulings cited supra. Ground NO.1 of appeal is allowed." 6. Against the above order the Revenue is in appeal before us. 7. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Departmental Representative has contended that provision for warranty is not an allowable expenditure as there is no provision in law for allowing the expenditure pertaining to provision for warranty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld as under:- "A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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