2011 (5) TMI 649 - AT - Income Tax

Theory of conservation in accounting - assessee wrote off trade liability and offered the amount to tax in A.Y. 98-99 - unilateral write off was premature, the assessee wrote back the amount in A.Y. 04-05 claiming it as deduction A.O. disallowed the same deeming it be contingent liability amount was settled in A.Y. 05-06 for lesser amount Held that - It is evident from the legal proceedings initiated by the vendor and from the fact that ultimately assessee had to pay off this liability though at a lesser amount. The liability to pay to vendor did exist in the relevant previous year, even as it did not reflect in the assessee s account. Thereby, disallowing the liability debited to profit and loss account, on the ground that it is a contingent liability, is erroneous. It is only elementary that all known liabilities are to be provided for while computing business profits. Other grounds of appeal are restored to the file of CIT(A) for adjudication on merit. - Decided partly in favor of assessee.

Summary

Issues:
- Disallowance of contingent liability of Rs. 1,07,83,402 on account of poor quality raw material supplied by a vendor.
- Claim for deduction of liability in the assessment year 2004-05.
- Challenge against the levy of interest u/s.234A, B & C.

Analysis:
1. Disallowed Contingent Liability:
The appellant contested the disallowance of Rs. 1,07,83,402 as a contingent liability arising from poor quality raw material supplied by a vendor. The Assessing Officer and CIT (A) held that the liability was contingent and not allowable. However, the ITAT Mumbai found the disallowance erroneous. The ITAT noted that the liability existed in the relevant previous year, even though it was not reflected in the accounts due to premature write-off. The reversal of the write-off was justified as the vendor pursued legal action, leading to payment by the appellant. The ITAT emphasized that known liabilities should be provided for in computing business profits, rejecting the argument that the liability crystallized later. The ITAT directed the Assessing Officer to delete the disallowance.

2. Claim for Deduction in Assessment Year 2004-05:
The appellant's claim for deduction of the liability of Rs. 1,07,83,402 payable to the vendor was based on the reversal of the premature write-off. The ITAT emphasized the need to account for known liabilities and rejected the contention that the liability crystallized later. The ITAT highlighted the principle of conserving accounting practices and directed the Assessing Officer to allow the deduction, citing the Hon'ble Supreme Court's stance on anticipated losses.

3. Challenge Against Levy of Interest:
The appellant challenged the levy of interest under sections 234A, B & C. The ITAT noted that the CIT (A) dismissed the grievances without addressing them on merits. Consequently, the ITAT remitted the matter to the CIT (A) for fresh adjudication, emphasizing the need for a speaking order and providing the appellant with an opportunity for a hearing in accordance with the law. The ITAT allowed the grounds challenging the interest levy for statistical purposes.

In conclusion, the ITAT Mumbai partially allowed the appeal, directing the deletion of the disallowed contingent liability and remitting the interest levy matter for fresh adjudication.