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2015 (10) TMI 491 - HC - Income TaxProvision for transit breakages - whether has a scientific basis or is contingent in nature and as such is not an allowable deduction while computing the total income of the Assessee? - Held that - The Court is unable to discern any uniform scientific method followed by the Appellant in making provision for the breakages. As noticed by the ITAT in its order dated 16th March 2009, the explanation offered by the Appellant was that on an ad hoc basis it fixed a rate per case of bottles. In the case of Andhra Pradesh, the rate was ₹ 10 per case, for Goa and Karnataka it was ₹ 15 per case. Also the breakages are known within a period of 15 to 30 days after despatch of the goods. The Court also concurs with the view of the ITAT that with the first Assessee having entered the line of business only from AY 2001-02, it cannot be said to have gathered sufficient experience to have reasonably estimated such breakages for the AYs in question. In the circumstances, the liability on that score could at best be described as a contingent liability as defined in AS-29. There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages.The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS 29 ought not be recognised. The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur.Consequently, the question framed is answered in favour of the Revenue and against the Assessees. It is clarified that while giving an appeal effect to this order, the AO shall allow the actual transit breakages for AY 2001-02 as revenue expenditure consistent with the settled legal position. The Assessees would also be permitted to get the benefit of the reversal of the provision for transit breakages made in the AYs in question accordance with law.
Issues Involved:
1. Whether the provision for transit breakages has a scientific basis or is contingent in nature and thus not an allowable deduction while computing the total income of the Assessees. Issue-wise Detailed Analysis: 1. Provision for Transit Breakages: Scientific Basis or Contingent Liability Background and Assessee's Practice: The Assessees, engaged in the manufacture and sale of liquor, made provisions for breakages during transit based on past history and reversed these provisions upon the actual determination of breakages. The Assessing Officer (AO) disallowed these provisions, treating them as contingent liabilities. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the Assessee's appeal, but the Income Tax Appellate Tribunal (ITAT) reversed this decision, leading to the present appeals. AO and ITAT Findings: The AO and ITAT concluded that the provision for transit breakages lacked a scientific basis and was excessive. The ITAT noted that the provision was reversed at the beginning of the next financial year, indicating it was not based on a reliable estimate. Assessee's Arguments: The Assessees argued that the provisions were made on a scientific basis, relying on past data and accounting standards (AS 29). They cited various judicial decisions, including Bharat Earth Movers v. CIT, to support the claim that such provisions should be allowed as deductions. Revenue's Counterarguments: The Revenue contended that the breakages were known within a short period after dispatch, negating the need for such provisions. They argued that the provisions were excessive and not based on reliable estimates, thus qualifying as contingent liabilities. Court's Analysis: Accounting Standards (AS 29): The court referred to AS 29, which defines a provision as a liability that can be measured only by estimation and distinguishes it from contingent liabilities, which are not recognized unless they meet specific criteria. The court emphasized that provisions should be made for known liabilities and losses, even if the amount is uncertain. Judicial Precedents: The court examined various judicial decisions, including Bharat Earth Movers and Rotork Controls India P. Ltd., which allowed provisions for liabilities that could be estimated with reasonable certainty. However, the court noted that these cases involved liabilities that were more predictable than transit breakages. Assessment of Assessee's Method: The court found that the Assessees did not follow a uniform scientific method for estimating transit breakages. The provisions were made on an ad hoc basis, varying by region, and the Assessees lacked sufficient experience to make reliable estimates. Conclusion: The court concluded that the provision for transit breakages was a contingent liability, as it could not be estimated with reasonable certainty. Therefore, it should not be recognized as per AS 29. The actual breakages, when they occur, are allowable as revenue expenditure in the year they occur. Final Judgment: The court dismissed the appeals, holding that the provision for transit breakages was not an allowable deduction. The AO was directed to allow the actual transit breakages as revenue expenditure for AY 2001-02 and permit the benefit of the reversal of the provision for transit breakages in accordance with the law. Summary of Legal Position: (a) There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages to justify creating a provision for such breakages. (b) The provision is a contingent liability and should not be recognized as per AS 29. (c) Actual transit breakages are allowable as revenue expenditure in the year they occur. Outcome: The appeals were dismissed with no order as to costs.
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