2016 (7) TMI 1465 - HC - Income Tax

Provision towards liability for damaged goods - ITAT deleted the additions - Held that - It is required to be noted that there is a change in the method of accounting employed during the years under review from that of employed in the immediately preceding year. We have also considered the Government Notification No. 9949 dated 25.01.1996 whereby certain accounting standards for assessees following mercantile system of account have been made compulsory from A.Y. 1997-98 and find that the case of the assessee is covered by the same. The Apex Court in the case of Rotork Controls India (P.) Ltd (2009 (5) TMI 16 - SUPREME COURT OF INDIA) observed that a provision is a liability which can be measured only by using a substantial degree of estimation and that a provision is recognized when (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation and (c ) reliable estimate can be made of the amount of the obligation. The Apex Court observed that if these conditions are not met, no provision can be recognized. - ITAT rightly deleted the additions - Decided against the revenue.

Summary

Issues:
1. Disallowance of provision for damaged goods for the current year and earlier years.
2. Disallowance of liability for damaged goods.

Analysis:
1. The High Court considered appeals challenging the orders of the Income Tax Appellate Tribunal related to the disallowance of provisions for damaged goods. The substantial question of law in each appeal focused on whether the Tribunal was correct in confirming the order passed by the Commissioner of Income Tax (Appeals) in deleting the additions made by the Assessing Officer.

2. The Court examined the arguments presented by both parties. The revenue contended that the Tribunal's decision in the assessee's own case for previous years should not be applied to the current years under consideration. The revenue emphasized that the liability for damaged goods was contingent on future events and should not have been recognized as a provision.

3. The assessee, represented by learned counsel, relied on past practices and accounting standards to justify the provisions made for damaged goods. Reference was made to relevant case laws, including Rotork Controls India (P) Ltd. and Hewlett Packard India Sales (P.) Ltd, to support the recognition of provisions based on estimation and present obligations.

4. The Court noted the change in the accounting method employed by the assessee and considered the applicability of relevant government notifications and accounting standards. Following the principles outlined in Rotork Controls India (P.) Ltd case, the Court concluded that provisions should be recognized when certain conditions are met, and if not, no provision can be recognized.

5. Ultimately, the Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal, ruling in favor of the assessee and against the revenue. The Court found no error in the disallowance of additions made by the Assessing Officer, confirming the Tribunal's orders in each appeal.

6. In conclusion, the High Court's judgment favored the assessee, emphasizing the importance of meeting specific criteria for recognizing provisions and highlighting the relevance of past decisions and accounting standards in determining the outcome of the appeals.