ISSUE FOR CONSIDERATION
When goods are sold by a business, in most cases, the business also has a policy permitting customers to return the goods under certain circumstances. Though the actual sales returns may take place after the end of the year, many companies following the mercantile system of accounting, choose to follow a conservative policy for recognition of income arising from sales during the year, by making a provision for sales returns in respect of sales made during the year in the year of sale itself. The provision may be based either on the actual sales returns made in respect of such sales subsequent to the year-end till the date of finalisation of accounts, or may be based on an estimate of the likely sales returns based on past trends. Such provisions are authorized by accounting principles and at times are mandated in accounting for sales revenue.
The issue of allowability of deduction for such provision in the year in which such provision is made has arisen before the different benches of the Tribunal. While the Mumbai bench of the Tribunal has taken a view that such provision for sales returns is an allowable deduction, in the year of sales itself, recently the Bangalore bench of the Tribunal has taken a contrary view, holding that deduction of such provision is not allowable in the year in which it is made i.e, the year of sales.
BAYER BIOSCIENCE’S CASEThe issue first c
