2018 (11) TMI 1562 - HC - Income Tax

Additions made on account of provisions of performance related pay to director and staff - liability had not crystallized as assessee failed to furnish any evidence for accrual of expenses - tribunal deleted the addition - Held that - The principle that when a liability has accrued but the computation thereof with precession, is not possible presently, the provision could be made on the basis of actuary by applying some scientific method or procedure, is well established principle. Reference in this respect may be to the decision of the Supreme Court in case of M/s. Rotork Controla India Pvt. Ltd.,v/s. Commissioner of Income Tax 2009 (5) TMI 16 - SUPREME COURT OF INDIA In the present case, in fact, the facts are even better. Not only that the liability had crystallized, the computation thereof was also readily available. Payment could not be made simply, because, the approval of Board of Directors which was necessary, was awaited. The liability had thus, crystallized. On the principle of accrued liability, the Assessee was well within its right to claim the expenditure. - decided against revenue

Summary

Issues:
- Whether the Tribunal erred in deleting the additions made on account of provisions of performance related pay to director and staff amounting to ?1,77,87,000?

Analysis:
1. The case involved an appeal by the Revenue against the Judgment of the Income Tax Appellate Tribunal regarding the deletion of additions made on account of provisions for performance-related pay to the director and staff amounting to ?1,77,87,000. The primary issue was whether the liability had crystallized for the Assessee to claim such expenditure.

2. The Respondent-Assessee, a registered company, had filed a return of income for the Assessment Year 2009-10, including an expenditure of ?1.77 Crores for performance-related pay to the Director and other employees. The Assessing Officer objected to this expenditure, stating that the liability had not crystallized. The Commissioner deleted the addition, and the issue reached the Tribunal, which dismissed the Revenue's appeal based on the evidence presented.

3. The Tribunal noted that the Director and other employees were entitled to the performance-related pay, and the liability had crystallized, as evidenced by the provision made by the Assessee in the Profit and Loss Account. The approval from the Board of Directors was awaited, delaying the actual payments, which were eventually made post-approval with tax deductions. The Tribunal found no reason to interfere with the findings of the CIT(A) based on the bonafide nature of the expenses.

4. The Court affirmed the Tribunal's decision, citing the well-established principle that when a liability has accrued but precise computation is not immediately possible, provisions can be made based on scientific methods. The Court referenced a Supreme Court decision to support this principle. In this case, not only had the liability crystallized, but the computation was also available, with the only hindrance being the pending approval from the Board of Directors.

5. The Court concluded that the Assessee was justified in claiming the expenditure based on the principle of accrued liability. The liability had crystallized, and the delay in payment was solely due to the pending approval, which did not negate the Assessee's right to claim the expense. Therefore, the appeal by the Revenue was dismissed, upholding the Tribunal's decision in favor of the Assessee.