2014 (8) TMI 766 - AT - Income Tax

Provision of repairs and maintenance of office building Proper evidences not shown Provisions to be treated as contingent liability Held that - The assessee had made a claim under the head provision for repairs and maintenance, that the bills for repairs were received by it in the succeeding year, that the AO had disallowed the expenditure - Neither before the AO nor before the FAA, the assessee had furnished the basic document that could prove that repairing work was actually carried out during the year - The assessee has not led evidence that could prove that finding arrived at by the officers of the department was factually incorrect - the order of the FAA does not suffer from any legal infirmity. Relying upon M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA - provision can be made an allowed in certain conditions - Deductions are not permissible for anticipated losses or contingent liabilities, even if they are inevitable - Merely because an expense is claimed to be relating to a transaction of a particular year, it does not become a liability payable of that year unless and until it is established that the liability was determined and crystallized in the year on the basis of maintaining accounts on the mercantile basis - incurring of expenditure for repairing was not established by the assessee for the year under appeal and so-called provisions made by it does not fall under the criteria as laid down by the courts for allowing provisions , the contentions raised by assessee rejected Decided against Assessee.

Summary

Issues:
Challenging disallowance of provision for repairs & maintenance, treatment as contingent liabilities, accounting system followed, deduction under section 37(1), and proof of expenditure incurred.

Analysis:
1. The assessee-company, engaged in trading cosmetics, filed its income return declaring total income. The AO finalized the assessment, determining total income. The key issue was the disallowance of a provision for repairs and maintenance amounting to Rs. 14 lakhs.

2. The AO disallowed the expenditure as the bills were received in the subsequent year. The FAA upheld the disallowance stating the liability had not crystallized during the year, and the provision made could not be allowed as a deduction. The FAA relied on the mercantile system of accounting and precedent cases, confirming the AO's decision.

3. The AR argued that the liability had crystallized during the year, citing the Bharat Earth Movers case. The DR contended that no evidence was produced to prove the work done during the year. The tribunal observed that the assessee failed to provide evidence of incurring the expenditure during the relevant year.

4. The tribunal highlighted the necessity for the assessee to prove expenditure incurred for business purposes. The absence of evidence regarding the repair work during the year led to the rejection of the appeal. The tribunal also discussed the legal principles governing provisions, emphasizing the need for a present obligation and a reliable estimate for recognition.

5. The tribunal rejected the appeal, emphasizing that the provision made did not meet the criteria for deductions as per established legal principles. The decision was based on the lack of evidence supporting the claim of expenditure incurred during the relevant year.

This detailed analysis of the judgment highlights the key issues, arguments presented, legal principles applied, and the ultimate decision reached by the tribunal regarding the disallowance of the provision for repairs and maintenance.