2016 (11) TMI 1256 - HC - Income Tax

Revision u/s 263 - Disallowance of provision made for contribution to Solatium Fund - whether the payment was made to the Solatium fund only in September 2005 at 0.1%. Therefore, during the subject Assessment Year, the provision could not be allowed as an expenditure as it was a contingent liability? - ITAT delted revision orders - Held that - We note that the impugned order of the Tribunal has after elaborate discussion come to the conclusion that in facts of this case, the order passed by the Assessing Officer dated 24th December, 2008, cannot be said to be erroneous in law. The provision made for contribution to the Solatium fund during the subject Assessment Year were as per the scheme introduced by the Central Government and as directed by IRDA. This provision was to be made at the rate of 1% of the premium received during the subject Assessment Year as done in the earlier Assessment Year also. This was to provide for contribution to a fund to be formed to make payment to victims of hit and run accident. In this case, the liability of making a contribution to the Solatium fund at 1% of premium received, is a certain liability in view of IRDA letter dated 13th May, 2004. Therefore, it is not a contingent liability during the subject Assessment Year. In fact, this Court in Shrikant Textiles v/s. CIT 1970 (3) TMI 40 - BOMBAY High Court has held that whether a liability is ascertained or contingent for a subject Assessment Year, cannot be decided/determined on the basis of the amounts paid in the subsequent/next Assessment Year. No substantial question of law. - Decided in favour of assessee

Summary

Issues:
1. Interpretation of provisions of section 263 of the Income Tax Act, 1961 regarding the disallowance of provision made for contribution to Solatium Fund.
2. Determination of whether the provision made for contribution to the Solatium fund was a certain liability or a contingent liability during the subject Assessment Year.

Analysis:
1. The Respondent, engaged in General Insurance, made a provision for its contribution to the Solatium fund, a scheme by the Central Government to compensate victims of hit and run motor accidents. The Assessing Officer accepted this provision, but the Commissioner of Income Tax revised the order under Section 263, disallowing the provision as a contingent liability due to a change in the contribution rate. The Tribunal, however, held that the provision was an ascertained liability for the subject Assessment Year as directed by the IRDA, and not contingent based on subsequent year's payments. It emphasized that the Assessing Officer's view was not erroneous or prejudicial to the Revenue, ultimately allowing the Respondent's appeal.

2. The Tribunal's decision was based on the certainty of the liability to contribute to the Solatium fund at 1% of premium received, supported by the IRDA directive. Citing legal precedents, it clarified that a liability need not be quantified or discharged immediately to be considered certain, as long as it can be estimated with reasonable certainty. The Court highlighted that the liability's nature for a subject Assessment Year cannot be determined based on payments made in subsequent years. Therefore, the provision made by the Respondent was not a contingent liability during the subject Assessment Year, leading to the dismissal of the appeal by the Revenue.

In conclusion, the judgment emphasizes the importance of assessing liabilities based on their certainty during the relevant Assessment Year, rather than subsequent payments or changes in rates. The decision provides clarity on the interpretation of Section 263 of the Income Tax Act in cases involving provisions for specific funds or schemes directed by regulatory authorities, ensuring a fair and consistent application of tax laws.