INCOME TAX ACT, 1961

--Business expenditure--AllowabilityProvision or warranty--Assessee was engaged in manufacturing and selling of valve actuators with warranty. It created a provision of warranty on basis of earlier experience with customer, sale of similar equipments and analysis on a scientific basis, which was allowed by AO but disallowed by CIT in his revisional jurisdiction on the ground that warranty provision was contingent provision and would not constitute an expenditure. Held: Obligations arising from past events have to be recognized as provisions. These past events are known as obligation events. Therefore, warranty provision needs to be recognized because assessee was an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision were satisfied in this case therefore it was allowed as business expenditure.

Income Tax Act, 1961 Section 37(1)

CIT v. Nokia Siemens Networks India (P.) Ltd.