2008 (9) TMI 357 - HC - Income Tax

Mercantile system of accounting - payment made to expatriates in the sum of Rs 4, 03, 31, 726/- - The case of the revenue is that since the approval for remittances had been received in the subsequent year there could not have been an accrued liability in the current year - provision made for bad/doubtful debts section 115JA held that - there was no legal bar to the assessee entering into the agreement with EDS Global Services Inc. USA. The only question was of seeking approval for remittances of the amounts outside India for which approval of the Reserve Bank of India was required. The fact that the liability had accrued as per the contract cannot be disputed. Once that is the case then where the assessee follows the mercantile system of accounting it cannot be said that the liability had not accrued in terms of the contract.

Summary

Issues:
1. Accrual of liability for payment made to expatriates.
2. Provision for bad/doubtful debts under Section 115JA of the Income Tax Act.

Accrual of Liability for Payment Made to Expatriates:
The appellant/revenue raised two issues before the court regarding the payment made to expatriates and the provision for bad/doubtful debts. The first issue pertained to the treatment of a payment of Rs 4,03,31,726 to expatriates as an accrued liability in the assessment year 2000-2001. The revenue argued that since the Reserve Bank of India's permission for remittances was received in the subsequent year, the liability could not have accrued in the current year. However, the Commissioner of Income Tax (Appeals) had deleted the addition made by the Assessing Officer, stating that the liability had accrued under the mercantile system of accounting, even if the payment was to be made later. The Tribunal also found that the liability arose due to the terms of the contract and that the Reserve Bank of India's approval for remittance did not affect the accrual of liability. The court agreed with the Tribunal's decision, emphasizing that there was no legal bar to entering into the agreement, and the liability had accrued as per the contract, making it deductible in the year of accrual itself.

Provision for Bad/Doubtful Debts under Section 115JA:
The second issue raised by the revenue was related to the provision made for bad/doubtful debts for computing book profits under Section 115JA of the Income Tax Act. The Assessing Officer had made an addition on account of the provision claimed by the assessee, but the Income Tax Appellate Tribunal had deleted the addition. The Tribunal's decision was in line with previous decisions of the court and the Supreme Court, including CIT v. Eicher Ltd., CIT v. HCL Comnet Systems & Services Ltd., and CIT v. M/s HCL Comnet Systems & Services Ltd. The court found that this issue was settled by previous decisions and did not require further consideration. Therefore, the court dismissed the appeal, stating that no substantial question of law arose for their consideration on both issues proposed by the revenue.

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