A provision is a liability which can be measured only by using a substantial degree of estimation

The assessee’s contention is that the provision made towards the non performance guarantee is more in the nature of warranty. Thus, the company assured quality and performance and on any shortfall agreed for damages making provision based on the performance capacity of the machineries supplied. Based on the materials available, on the assured capacity of the machinery and the quality of the product, the assessee had worked out the provision. Consequently, we do not find any ground to support the reasoning of the Commissioner of Income Tax (Appeals) which persuaded the Tribunal to reject the assessee’s case. In this regard, we may point out that the decision of this Court reported in 293 ITR 311 CIT v. ROTORK CONTROLS INDIA LIMITED AND OTHERS was reversed by the Apex Court in the decision reported in [2009] 314 ITR 62 ROTORK CONTROLS INDIA P. LTD v. CIT, wherein the Apex Court held that a provision is recognized when an enterprise has a present obligation as a result of a past event; that it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made on the amount of the obligation. If these conditions are not met, no provision could be recognized. Although the Commissioner of Income Tax (Appeals) pointed out the obligation that had arisen to the company has to be seen by reason of its assurance given on the aspect of quality production and the extent of production, yet he failed to take it to the logical end in granting the relief. Thus, when the company made reliable estimate based on the performance capacity and the quality therein and the materials relating thereto, we do not find any justifiable ground to reject the plea of the assesee on the provision made to the extent of Rs.20 lakhs. The Commissioner of Income Tax (Appeals) pointed out to the distinction between the liquidated damages for the delay execution and the liquidated damages for non performance. However, the Commissioner of Income Tax (Appeals) committed an error in his finding on the ground that the amount claimed in the nature of warranty was not stated so, but described as provision towards the liquidity damages. We do not find that the description of the claim would govern the claim on the provision for warranty when the terms of the agreement specifically provided that the liquidated damages was for non performance. Given the above fact, one can not reject the claim for provision made towards the warranty on the performance of the machineries supplied.

As far as the balance provision of Rs.20 lakhs towards rectification expenses is concerned, it was stated that the said provision was based on the information that some of the equipments supplied by the company required repair and replacement and that technical team estimated such expenses for making provision in the account. The claim thus based on materials and the information of the technical team, the claim would certainly fall for consideration within the dictum of decision of the Apex Court reported in (2009) 314 ITR 62 ‐ ROTORK CONTROLS INDIA P. LTD v. CIT. In the circumstances, we have no hesitation in setting aside the Tribunal’s order in rejecting the claim of the assessee in respect of assessee’s claim to the tune of Rs.40 lakhs being provision towards warranty. Consequently, the order of the Tribunal is set aside and the above Tax Case (Appeal) is allowed. No costs.