2013 (10) TMI 80 - HC - Income Tax

Provision for future liabilities (expenses) - whether allowable - mercantile basis of accounting - Held that - future expenses if estimated satisfactorily can be allowed as expense - following decision in Bharat Earth Movers v. CIT 2000 (8) TMI 4 - SUPREME Court - decided against the revenue. Disallowance u/s 14A - Held that - Calculation mistakes while applying Rule 8D were pointed out by the respondent-assessee, but these have not been adverted to in view of the findings recorded by the tribunal on merit. Rule 8D is not retrospective as held by this Court in Maxopp Investment Limited v. CIT, 2011 (11) TMI 267 - Delhi High Court . Further to invoke Rule 8D, the Assessing Officer has to first record a finding that he was not satisfied with the correctness of the claim for expenditure made by the assessee in relation to income, which did not form part of the total income under the Act. No such satisfaction has been recorded by the Assessing Officer. - Decided against the revenue.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961
2. Disallowance of provision for current liabilities

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961:
The High Court criticized the Assessing Officer's casual approach in making substantial additions to the returned income without proper reasoning. The Officer applied Rule 8D without confirming if the pre-conditions were met and ignored the respondent's submission regarding the source of funds for investments. The tribunal found the disallowance made by the assessee under Section 14A reasonable, contrasting with the Assessing Officer's disallowance. The Court emphasized that Rule 8D is not retrospective and requires the Officer to first question the expenditure claimed by the assessee, which was not done in this case. The Court concluded that the revenue's contention was unfounded.

Issue 2: Disallowance of provision for current liabilities:
The Assessing Officer disallowed a provision for current liabilities amounting to Rs. 2,51,96,577, citing inaccuracy in the particulars furnished by the assessee. The Court noted the lack of detailed discussion by the Officer on this addition, especially considering its significant impact on tax liability. The CIT(Appeals) supported the assessee's position, highlighting agreements and factual findings related to the provisions made. The Court referred to the Supreme Court's decision emphasizing that if a business liability has arisen in the accounting year, it should be allowed as a deduction, even if payment occurs in the future. The tribunal's factual findings aligned with this principle, leading to the dismissal of the appeal.

In conclusion, the High Court dismissed the appeal, finding no grounds to interfere with the tribunal's order. The judgment highlighted the importance of proper assessment procedures, adherence to legal requirements, and factual considerations in tax-related matters.