2016 (6) TMI 1356 - AT - Income Tax

Allowability of provision for service charge payable on gunny bags. - assessee created provision in the books for service charges on gunny bags payable to Food and Supplies Department, Govt. of Haryana - based on objection of C AG - allowability u/s 37 - HELD THAT - An item of expenditure should be entitled to deduction u/s 37 it must have been incurred for discharging a liability actually existing during the accounting period. The mere setting apart of an amount to meet a liability cannot bear the character of expenditure till the liability becomes real. The provision of 1% on account of service charges of certain gunny bags procured from DFS Haryana, has been created by the assessee amounting to ₹ 20.11 lacs with no underlying agreement supporting the creation of the charge. No such document has been produced before us, even after a specific query raised by the Bench in this regard. Clearly the assessee has not been able to establish incurring the liability in the first place. Therefore no question arises of incurring the expenses what to say about creating a provision of the same. The provision of section 37(1) are very clear and it is settled law that onus is on the assessee to establish having incurred any expenditure. Having failed on this ground alone, we therefore hold that the assessee is not entitled to claim allowance of expenditure on account of service charges. The basis of arriving at the figure of 20.11 lacs has also not been provided by the assessee. Therefore we hold that the assessee is not entitled to any allowance on account of provision created for service charge and we therefore uphold the order of CIT(A) in this behalf. - Decided against assessee.

Summary

Issues:
Allowability of provision created in the books for service charge on gunny bags.

Analysis:
The appeal was filed against the order of Ld. CIT(A) upholding the addition of service charges on gunny bags. The AO disallowed the provision of service charges amounting to ?20.11 lacs, stating it was not allowable under the Income Tax Act, irrespective of the method of accounting. The assessee argued that the provision was made on an accrual basis and should be allowed. However, both the AO and Ld. CIT(A) held that the provision was not allowable as per the Income Tax Act, emphasizing that no liability had been incurred in this case.

During the appeal, the assessee reiterated that the provision was made on an accrual basis and provided evidence to support this claim. The Ld. CIT(A) referred to Section 145 A of the Act, stating that only actual amounts paid by the assessee could be included for valuation of goods. The Ld. CIT(A) emphasized that the taxability had to be decided based on the law's provisions, not on the entries made by the assessee. The Ld. CIT(A) concluded that the provision for service charges was not allowable under Section 145 A and various jurisdictional pronouncements.

The Tribunal analyzed the issue and highlighted the principles for the deduction of expenses. Referring to the Supreme Court decision in Kedar Nath Jute Manufacturing Co. Ltd. Vs. CIT, it was emphasized that expenses must be actually incurred or the liability for expenses must have been incurred in the relevant period. In this case, the provision for service charges was created without any underlying agreement or document to support the liability. The Tribunal noted that the assessee failed to establish the liability, and therefore, the expenses were not incurred. As the basis for the provision amount was also not provided, the Tribunal upheld the decision of Ld. CIT(A) and dismissed the appeal.

In conclusion, the Tribunal held that the provision for service charges on gunny bags was not allowable as the liability was not established, and the assessee failed to prove the expenses were actually incurred. The decision was based on the principles of deduction of expenses and the lack of supporting documentation for the liability.