2024 (8) TMI 1024 - AT - Income Tax

Allowability of provision as allowable expenditure - Non consideration of the Hon ble DRP s direction for granting relief in respect of provision for expenses - Provision for Freight and Material Handling Charges have been made on a scientific basis or on the basis of previous years trends ? - HELD THAT - The assessee has merely submitted that the provision was made on accrual basis. The invoices were received in subsequent financial year. The assessee was asked to file the basis for making provision - During the assessment proceedings, assessee has not filed any document to prove the basis on which provision was made. The assessee has not filed any document before ITAT also to prove the basis on which the provision was made. The assessee merely filed a list of entities to whom payments were made in subsequent years. However, that does not prove that services were received from those entities during A.Y.2009-10. Assessee had to establish that the expenditure had accrued. Since it was a provision, assessee was required to prove that provision was made on some scientific basis. Assessee failed to prove the same. Thus, for all the reasons discussed above, we agree with the AO that provision of is not allowable expenditure. Disallowance of IT support expenses - DRP directed assessee to prove that the provisionwas made on some scientific basis, however, assessee had not filed any document to prove the same - As already observed that no single document has been submitted by assessee to prove that the provision was made on scientific basis. As per Income Tax Act, provisions is not an allowable expenditure, unless it is established that it was made on some scientific basis as held by the Hon ble Supreme Court in the case of Bharat Earth Movers Limited 2000 (8) TMI 4 - SUPREME COURT In this case, assessee has not filed any document to prove that the provision was made on scientific basis, rather assessee admitted that it was made on estimated basis. In these facts and circumstances of the case, we hold that provision is not an allowable expenditure. Decided against assessee.

Summary

Issues:
1. Non-consideration of DRP's direction for granting relief in provision for expenses.

Analysis:

Provision for Freight and Material Handling Charges:
The ITAT Pune 'C' bench recalled an order to adjudicate Ground Number 9 raised by the assessee regarding the provision for expenses. The Assessing Officer proposed disallowance of Rs. 16,27,824/- as a provision made by the assessee towards Freight and material handling charges. The Dispute Resolution Panel directed the AO to examine the basis of the provision. The assessee claimed the provision was made on an accrual basis and adjusted against subsequent year's invoices. However, the AO disallowed the amount as the provision lacked scientific basis. The ITAT upheld the AO's decision as the assessee failed to provide evidence of a scientific basis for the provision, leading to the disallowance of Rs. 16,27,824/-.

IT Support Expenses:
The AO proposed disallowance of Rs. 48,08,167/- out of the total IT support expenses debited by the assessee. The DRP directed the assessee to prove the provision was made on a scientific basis, but the assessee failed to provide any supporting documents. The assessee admitted the provision was made on an estimated basis, and no scientific basis was established. The ITAT emphasized that provisions are not allowable expenditures unless made on a scientific basis. As the assessee could not prove the provision was made on a scientific basis, the ITAT dismissed Ground No. 9 raised by the assessee, resulting in the disallowance of Rs. 48,08,167/-.

In conclusion, the ITAT upheld the disallowance of both provisions for Freight and Material Handling Charges and IT Support Expenses, as the assessee failed to demonstrate a scientific basis for the provisions. The judgment highlights the importance of establishing a scientific basis for provisions to claim them as allowable expenditures.

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