2023 (5) TMI 1096 - AT - Income Tax

Nature of liability - Adhoc provisions on account of contingent liabilities or ascertained liabilities - CIT-A deleted the addition - HELD THAT - AO has erred in holding provision for unsettled claims as contingent liability. We find that ld. CIT (A) has passed correct order which does not need any interference from us. The liability in this regard is duly ascertained. Hence, this ground raised by the Revenue is dismissed. Disallowance for provision for IBNR claims as contingent liability - CIT-A deleted the addition - HELD THAT - We find that ld. CIT (A) has taken correct decision, which does not need any interference on our part. The case law from Kolkata Bench of ITAT in the case of DCIT vs. National Insurance Co. Ltd 2011 (10) TMI 669 - ITAT KOLKATA duly holds that these are ascertained liabilities. Hence, we uphold the order of ld. CIT (A). Decided against revenue.

Summary

Issues Involved:
1. Disallowance of provision for unsettled claims.
2. Disallowance of provision for Incurred But Not Reported (IBNR) claims.

Summary:

1. Disallowance of Provision for Unsettled Claims:
The Revenue contended that the provision for unsettled claims amounting to Rs. 49,00,867/- was an ad-hoc provision for contingent liabilities and not ascertained liabilities, thus not allowable under Section 37 of the Income Tax Act, 1961. The Assessee argued that the provision was based on actual communications from policyholders and not ad-hoc, citing the Kerala Transport Co. vs ACIT case. The CIT (A) agreed with the Assessee, stating that the provision was made on the basis of actual communication and was not ad-hoc. The ITAT upheld CIT (A)'s decision, dismissing the Revenue's appeal and confirming that the liability was ascertained.

2. Disallowance of Provision for IBNR Claims:
The Revenue disallowed Rs. 4,47,15,583/- for IBNR claims, arguing they were contingent liabilities and not deductible. The Assessee contended that the provision was made as per IRDA regulations and based on actuarial valuation, thus representing ascertained liabilities. The CIT (A) agreed, citing the Kolkata ITAT Bench decision in DCIT vs. National Insurance Co. Ltd., which held that provisions made per IRDA regulations based on scientific calculations are ascertained liabilities. The ITAT upheld CIT (A)'s decision, confirming that the provision for IBNR claims was an ascertained liability and allowable as a deductible expense.

Conclusion:
The ITAT dismissed all appeals filed by the Revenue, upholding the CIT (A)'s decisions for both the provision for unsettled claims and the provision for IBNR claims, confirming them as ascertained liabilities and allowable under Section 37 of the Income Tax Act, 1961.