2011 (5) TMI 539 - HC - Income Tax

Disallowance on account of provision of MBO incentive - the assessee followed mercantile system of accounting - Held that - The assessee was following this system consistently in the past - since the assessee has been making a provision for this liability in the past and the liability stood proved and crystallized during the previous year itself and there being insignificant difference between provision made and actual payments made in the preceding years the method adopted by the assessee could be said to be scientific one - The business liability having definitely arisen in the accounting year the deduction can be allowed both for the liability quantified and discharged on a future date and the provision made permitting such liability incurred would be deductable expenditure - Decided in favour of assessee. Disallowance on account of belated payment of employees and employer s contribution to PF - Held that - As both the appellate authorities have held that the payment was made by cheque within the grace period of five days beyond the statutory period and that being so the same would constitute the payment in due date within the definition of Section 36(1) (V-a) read with Circular No. E-128(I) 60-III dated March 19 1964 - Decided in favour of assessee.

Summary

Issues:
1. Allocation of expenses - Direct and common
2. Treatment of Management by Objectives (MBO) incentive provision
3. Disallowance of late payment of PF contributions

Allocation of Expenses:
The case involved an appeal against the order of the Income Tax Appellate Tribunal regarding the Assessment Year 2001-02. The Assessing Officer (AO) had raised concerns about the allocation of expenses, both direct and common, by the assessee company. The AO found the allocation to the Sales and Marketing (S&M) division disproportionate and made a disallowance of Rs. 1,22,98,122. However, the Commissioner of Income Tax (Appeals) (CIT(A)) held that the apportionment based on head-count was irrational and deleted the addition.

Treatment of MBO Incentive Provision:
Regarding the Management by Objectives (MBO) incentive provision claimed by the assessee, the AO disallowed the entire provision of Rs. 76,23,754 as unascertained liability. However, the CIT(A) deleted this addition, citing a Supreme Court decision and allowing the provision as it was consistently followed by the assessee under the mercantile system of accounting.

Disallowance of Late PF Contributions:
The AO disallowed late payments made by the assessee towards employees' and employer's contribution to PF, citing non-compliance with Section 43B of the Income Tax Act. The CIT(A) overturned this disallowance, stating that the grace period of five days beyond the statutory due date allowed under the PF Act applied. The Tribunal upheld the CIT(A)'s decision on this issue.

The Tribunal dismissed the appeal, noting that no substantial question of law had arisen based on the findings of the lower authorities. The judgment highlighted the importance of consistent application of accounting methods, reasonable allocation of expenses, and compliance with statutory provisions in determining tax liabilities.