2009 (3) TMI 82 - HC - Income Tax

Provision for doubtful debts and the provision for leave encashment revenue contend that the liability was only a contingent liability and not an ascertained/determined liability, so it is not allowable - issue involved in this appeal is squarely covered by the judgment of the Supreme Court in the case of BHARAT EARTH MOVERS VS. CIT (2000 (8) TMI 4 - SUPREME Court) which is decided in favour of the assessee. Therefore, we are of the view that the Tribunal is correct in following the judgment of the Supreme Court and allowing the assessee s appeal

Summary

Issues:
1. Allowability of provision for encashment of leave.
2. Contingent liability vs. ascertained liability.
3. Interpretation of Tax Audit Report qualification.
4. Applicability of Supreme Court judgment in BHARAT EARTH MOVERS case.

Analysis:
1. The Tax Case Appeal involved a dispute regarding the allowability of a provision for encashment of leave claimed by the assessee. The Revenue challenged the decision of the Income Tax Appellate Tribunal, which had allowed the claim based on the Supreme Court's ruling in BHARAT EARTH MOVERS case (2000) 245 ITR 428. The key question was whether the provision for leave encashment was a contingent liability, as mentioned in the Tax Audit Report, or an ascertained liability capable of being quantified with reasonable certainty.

2. The assessee, engaged in the manufacture and sale of Electric Rice cookers and Mixies, had filed its return of income for the relevant assessment year, showing a provision for warranty claims. The assessing officer reopened the assessment under Section 147, disallowing the provision for warranty claims and adding back the provision for leave encashment in the computation of book profits under Section 115JA. The Commissioner of Income Tax set aside the assessment under Section 263, directing the disallowance of both provisions. The Tribunal, relying on the BHARAT EARTH MOVERS case, allowed the claim for leave encashment. The Revenue contended that the liability was contingent and not ascertained, as indicated in the Tax Audit Report.

3. The Revenue's argument was that the Tribunal erred in not recognizing the contingent nature of the liability and the qualification in the Tax Audit Report regarding the provision for leave encashment. However, the Court found that the issue was conclusively settled by the Supreme Court's decision in the BHARAT EARTH MOVERS case, which favored the assessee. The Court upheld the Tribunal's decision, stating that no error or illegality was found in the order warranting interference. The Revenue failed to provide any material or case law to challenge the Tribunal's decision, leading to the dismissal of the Tax Case Appeal.

4. In conclusion, the judgment reaffirmed the principle established by the Supreme Court in the BHARAT EARTH MOVERS case regarding the allowability of provisions for contingent liabilities like leave encashment. The Court upheld the Tribunal's decision, emphasizing the absence of any legal basis for overturning it. The dismissal of the appeal highlighted the importance of adhering to established legal precedents in tax matters, especially when determining the treatment of contingent liabilities in financial statements.