2019 (1) TMI 1527 - AT - Income Tax

Disallowing of provision debited to the Profit and Loss Account - CIT-A deleted part addition on the ground that this provision is unascertained expenditure but it was the liability that was existing at the end of the financial year but the payments made subsequent to the end of the financial year but before the finalization of the accounts - Held that - AS-4 says that the conditions for an event prevail on the balance and crystallized between the close of the financial year and approval of accounts, such events shall be known as adjusting events and have to be recorded in the previous year. The provision made by the assessee for meeting the liability incurred by it before the date of closure of accounts is an allowable deduction out of gross receipts of the accounting year during which the provision for meeting such expenditure was made and such a liability is not a contingent liability. Rule of consistency demand that unless and until something illegal is shown, AO has to follow the course of action taken for the earlier years. We found that the liability said to have been discharged in this matter by way of provision was in respect of the expenses already incurred during the financial year 2011-12 and payments made subsequent to the closure of the books of accounts but before the approval of the same. While respectfully following the decision of the Hon ble Apex Courtin the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT and also Radhaswami Satsang vs CIT 1991 (11) TMI 2 - SUPREME COURT , we are of the considered opinion that the amount under the provision is an allowable deduction.Further, in these peculiar circumstances, no revenue implications are there. While accepting the contention of the assessee, we find that the appeal is devoid of merit and is liable to dismissed - Decide against revenue

Summary

Issues:
Appeal against addition made by AO - Provision debited to Profit and Loss Account disallowed - Contention on unascertained expenditure - Allowability of provision under Income-tax Act - Application of Accounting Standard 4 - Contingent liability vs. crystallized liability - Compliance with AS-4 - Revenue implications - Rule of consistency.

Analysis:
The case involved an appeal against the addition made by the Assessing Officer (AO) regarding the provision debited to the Profit and Loss Account by the assessee company engaged in promotional activities for insurance companies. The Commissioner of Income-tax (Appeals) confirmed certain additions but deleted the addition of ?3,83,57,753/-, leading to the revenue's appeal. The revenue argued that the provision was an unascertained liability involving interest, not allowable under the Income-tax Act, citing the decision in CIT vs. Gajapathy Naidu (1964) 53 ITR 114.

The assessee contended that the liability was crystallized during the financial year, though the payment was made after the financial year but before finalization of accounts. Referring to Bharat Earth Movers vs. CIT (245 ITR 428), the assessee argued that such liabilities, discharged at a future date, are allowable under section 37 of the Act. The assessee also highlighted compliance with Accounting Standard 4 (AS-4) and the revenue neutrality of the transaction.

The Tribunal analyzed the case, noting that the liability was crystallized before the end of the financial year but materialized after the closure of accounts but before approval. Following Bharat Earth Movers, the Tribunal held that such liabilities, though discharged in the future, are allowable deductions and not contingent liabilities. The Tribunal emphasized the importance of consistency, referencing the balance sheet of the previous year and previous assessments. Ultimately, the Tribunal found the provision to be an allowable deduction without revenue implications, confirming the deletion of the addition.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the decision based on the principles of crystallized liabilities, compliance with AS-4, and the precedent set by previous judicial decisions, emphasizing the rule of consistency and the absence of revenue implications in the case.