2001 (8) TMI 286 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 83,58,500 as provisions for expenses.
2. Classification and treatment of provisions in the balance sheet.
3. Compliance with accounting standards and section 145(2) of the Income Tax Act.
4. Reversal of accounting entries and their implications.
5. Onus of proof regarding the expenses relating to the year under consideration.

Detailed Analysis:

1. Disallowance of Rs. 83,58,500 as provisions for expenses:
The main issue in this appeal is the disallowance of Rs. 83,58,500 claimed by the assessee as provisions for expenses. The assessee contends that these expenses were incurred in relation to the revenue earned during the period and were credited under "Provisions for expenses" in the balance sheet. The Assessing Officer (AO) disallowed this claim, arguing that the provision was misleadingly classified under "Provisions for tax" and was nullified the next day through reverse entries, treating it as a dummy account.

2. Classification and treatment of provisions in the balance sheet:
The AO found the classification of provisions for taxes in the balance sheet misleading, as the provision mainly related to expenses. The AO noted that on 31-3-1997, the provision for expenses was nullified the next day by passing reverse entries, indicating it was treated as a dummy account. The assessee argued that the classification under "Provisions for tax" was a typographical error and should be considered as "Provisions for expenses."

3. Compliance with accounting standards and section 145(2) of the Income Tax Act:
The assessee argued that the method of accounting followed was in conformity with the accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the Notification No. 9949, dated 25-1-1996, issued by the Central Board of Direct Taxes (CBDT) under section 145(2). The AO, however, observed that the accounting standards did not suggest creating a dummy account for provisions and nullifying the entry the next day. The AO also noted that the revenue recognition was not in consonance with these standards, as the assessee claimed to follow the mercantile system of accountancy and the percentage of completion project method but reversed professional fees receipts on the ground that the same had not been accepted by the other party.

4. Reversal of accounting entries and their implications:
The AO disallowed the claim on the grounds that the provision for expenses was nullified by reverse entries, indicating no liability existed at the end of the year. The assessee argued that the provisions for expenses account had to be nullified after receiving bills from sub-contractors. The Tribunal found that the lower authorities failed to appreciate the accounting system followed by the assessee. The Tribunal noted that the assessee followed the mercantile system of accounting, where expenses are debited and a corresponding amount is credited under "Provision for expenses" if invoices are not received by the end of the year. The Tribunal observed that the reversal of entries did not nullify the liability itself but only the "Provision for expenses" account.

5. Onus of proof regarding the expenses relating to the year under consideration:
The Tribunal held that the onus lies on the assessee to establish that the expenses represented by the provisions related to the year in which the deduction is claimed. The Tribunal noted that the AO had not considered the claim on merit due to the outright rejection based on the wrong appreciation of entries. The Tribunal set aside the order of the CIT(A) and restored the matter to the file of the AO to re-adjudicate the matter after ascertaining whether the sum of Rs. 83,58,500 represented the expenditure related to the year under consideration. The assessee was given a reasonable opportunity to provide evidence in this regard.

Conclusion:
The Tribunal allowed the appeal of the assessee pro tanto, directing the AO to re-examine the claim on merit and verify if the provisions for expenses related to the year under consideration. The Tribunal emphasized the need for proper classification and adherence to accounting standards while recognizing revenue and expenses.