2006 (9) TMI 341 - AT - Income Tax

Summary

Issues involved: Rectification of order regarding disallowance of orphan claims based on judgments of Hon'ble Supreme Court in cases of Bharat Earth Movers v. CIT and General Insurance Corpn. of India v. CIT.

Issue 1: Disallowance of orphan claims

The assessee claimed a deduction for provision in respect of unidentified claims known as orphan claims, debited in the Profit & Loss account. The provision was made purely on estimate as the liabilities were not certain and were based on court summons lacking adequate policy particulars. The Tribunal upheld the disallowance of these claims, stating that the judgments of the Hon'ble Supreme Court in Bharat Earth Movers and General Insurance Corpn. of India cases were not applicable. The Tribunal emphasized that for a business liability to be allowable as a deduction, the incurring of the liability must be certain, which was not the case with the orphan claims. The Tribunal distinguished the General Insurance Corpn. of India case, noting that the provision for redemption of preference shares was on capital account, unlike the orphan claims which were on revenue account. Therefore, the provisions for orphan claims were not admissible under sections 30 to 43A and had to be added to the profit of the business under rule 5(a) of Part B of the First Schedule.

Issue 2: Rectification of Tribunal's decision

The assessee filed a miscellaneous application against the Tribunal's decision, arguing that it was contrary to the judgment of the Hon'ble Supreme Court in the General Insurance Corpn. of India case. The assessee contended that the provision for orphan claims was not an expenditure as held in the General Insurance Corpn. of India case, and therefore, the Tribunal's decision needed rectification. The Tribunal, however, found no apparent error in its decision, as it had considered the relevant judgments and provided reasons for its conclusion. The Tribunal reiterated that the provision for orphan claims was not allowable under sections 30 to 43A, and thus, the request for rectification was rejected.

In conclusion, the Tribunal upheld the disallowance of orphan claims made by the assessee, citing the uncertainty of incurring the liabilities and the non-applicability of the judgments in the Bharat Earth Movers and General Insurance Corpn. of India cases. The Tribunal rejected the assessee's application for rectification, maintaining that there was no apparent error in its decision regarding the treatment of the provision for orphan claims.