2025 (1) TMI 873 - AT - Income Tax

Validity of the jurisdiction exercised u/s.154 - disallowance of expenses claimed as a provision for expenses - HELD THAT - FAA has recorded a categorical factual finding that the provision for expenses was made not on estimate basis, but were made on the basis of the actual estimation of liability. Having recorded a clear factual findings that the provisions were not made on estimate basis, but were made on the basis of actual liability and also the fact that the expenses pertain to the current financial year, the learned first appellate authority could not have treated the expenses as contingent liability. Thus, in our view, not only the exercise of jurisdiction u/s. 154 of the Act is invalid, but on merits also the disallowance made is unsustainable. Therefore, we direct the A.O. to delete the disallowance. Grounds are allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

Whether the jurisdiction exercised under Section 154 of the Income Tax Act, 1961, by the Assessing Officer (A.O.) to rectify an alleged mistake apparent on the record was valid.
Whether the disallowance of expenses amounting to Rs. 2,06,50,000/- claimed as a provision for expenses was justified on the merits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Jurisdiction under Section 154

Relevant Legal Framework and Precedents: Section 154 of the Income Tax Act, 1961, allows the A.O. to rectify any mistake apparent from the record. The scope of this section is limited to correcting obvious errors that do not require elaborate arguments or investigation.
Court's Interpretation and Reasoning: The Tribunal noted an inherent contradiction in the A.O.'s approach. The A.O. concluded that the allowance of the expenses resulted in under-assessment, which typically requires action under Section 147, not Section 154. The Tribunal emphasized that the jurisdictions under Sections 147 and 154 are distinct and separate.
Key Evidence and Findings: The Tribunal observed that the A.O.'s reasoning was flawed as the alleged mistake was not apparent on the face of the record and required further investigation, which is beyond the scope of Section 154.
Application of Law to Facts: The Tribunal applied the legal framework of Section 154 and found that the A.O.'s action was not justified as the mistake was not apparent and required a detailed inquiry.
Treatment of Competing Arguments: The Tribunal considered the arguments presented by both the appellant and the respondent. The appellant argued that the jurisdiction under Section 154 was wrongly invoked, while the respondent supported the A.O.'s decision. The Tribunal sided with the appellant, finding the A.O.'s action invalid.
Conclusions: The Tribunal concluded that the exercise of jurisdiction under Section 154 was invalid and directed the A.O. to delete the disallowance.

Issue 2: Justification of Disallowance of Expenses

Relevant Legal Framework and Precedents: The disallowance was based on the premise that the provision for expenses was an unascertained liability, which is not allowable under the Act.
Court's Interpretation and Reasoning: The Tribunal found that the first appellate authority recorded a factual finding that the provision for expenses was made based on an actual estimation of liability, not merely on an estimate basis.
Key Evidence and Findings: The Tribunal noted that the bills for the expenses were received in the subsequent financial year, but the expenses pertained to the current financial year. The provision was made based on a fair estimation of the liability.
Application of Law to Facts: The Tribunal applied the principles regarding the nature of liability and found that the expenses were not contingent but were actual liabilities pertaining to the current year.
Treatment of Competing Arguments: The appellant argued that the expenses were actual liabilities, while the respondent maintained that they were contingent. The Tribunal favored the appellant's position, given the factual findings.
Conclusions: The Tribunal concluded that the disallowance of expenses was unsustainable on merits and directed the A.O. to delete the disallowance.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The jurisdictions u/s. 147 and 154 of the Act are distinct and separate. Therefore, the A.O. once having come to the conclusion that the allowance of provision for expenses has resulted in under assessment of income, he could not have proceeded u/s. 154 of the Act."
Core Principles Established: The Tribunal established that:
- Section 154 should only be invoked for mistakes apparent on the record that do not require detailed examination.
- Provisions for expenses based on actual estimation of liability, and pertaining to the current financial year, should not be considered contingent liabilities.
Final Determinations on Each Issue:
- The exercise of jurisdiction under Section 154 was invalid.
- The disallowance of expenses amounting to Rs. 2,06,50,000/- was unsustainable on merits.

The Tribunal allowed the appeal and directed the A.O. to delete the disallowance, pronouncing the order in the open court on 16.01.2025.

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