2017 (9) TMI 804 - AT - Income Tax

Revision u/s 263 - allowability of provision for expenses - Held that - As found from record that assessee as an accounting practice, closes its books of accounts on monthly basis and, accordingly, inter-alia provision for the above-referred expenses i.e., rent, electricity and maintenance is generally made at the end of each month. On the first day of the next month, the provision entry is reversed and actual payment is recorded. However, during the assessment proceedings, instead of the year end provision figures in respect of the above-referred expenses, inadvertently, the month end provision numbers got filed. However, vide its letter dated 13/08/2015, assessee had clarified that the provision figures that were submitted during the assessment proceedings (and which were picked by CIT in the revision proceedings) were actually month end provision figures and not the provision figures which were outstanding at the year end. It is clear that as per the revised provision figures in respect of rent, utilities and office maintenance, the total provision outstanding as at the year-end is INR 2,85,917/- and not ₹ 1,23,09,109/- taken by CIT in his order u/s.263. We accordingly modify the order of CIT and direct the AO to verify the said provision of ₹ 2,85,917/- as been claimed to be subsequently paid / adjusted in the subsequent year i.e. A.Y. 2013-14. If the AO found that a sum of ₹ 2,85,917/- had not actually paid in the next year, he may add the same to the total income of assessee. Appeal is allowed in part

Summary

Issues:
1. Direction to modify assessment order by adding specific amounts to total income.
2. Disallowance of provisions for rent, electricity expenses, and office maintenance.
3. Interpretation of accounting practices regarding provision entries.
4. Application of section 263 of the IT Act by the CIT.
5. Discrepancy in provision figures and subsequent clarification by the assessee.

Analysis:
1. The appeal contested the CIT's order directing the AO to modify the assessment by adding specific amounts to the total income. The CIT disallowed provisions for rent, electricity expenses, and office maintenance, alleging no accrued liability. The appellant argued that the provisions outstanding at year-end were mistakenly represented by month-end figures during assessment. The revised figures showed a total provision of INR 2,85,917, differing significantly from the amount directed by the CIT. The tribunal modified the order, instructing the AO to verify the actual payments in the subsequent year and make adjustments accordingly.

2. The dispute centered on the disallowance of provisions for rent, electricity, and maintenance. The CIT contended that these provisions did not represent accrued liabilities and thus should not be deductible. The appellant clarified that the provision figures submitted were month-end estimates, not year-end amounts. The tribunal, after reviewing the revised provision figures, found the total outstanding provision to be INR 2,85,917, contrary to the CIT's directive of INR 1,23,09,109. Consequently, the tribunal allowed the appeal in part and directed the AO to verify the actual payments in the subsequent year for further action.

3. The case involved an examination of the appellant's accounting practices regarding provision entries for expenses like rent, electricity, and maintenance. It was revealed that the appellant closed its accounts monthly, making provisions at month-end and reversing them at the start of the next month upon actual payment recording. The confusion arose during assessment when month-end figures were inadvertently presented instead of year-end figures. The appellant's clarification highlighted the difference, leading to a revised understanding of the provision amounts.

4. The CIT invoked section 263 of the IT Act, questioning the assessing officer's oversight in crediting interest accrued but not due in the Profit & Loss Account. Additionally, the CIT challenged the treatment of license fees as capital expenditure, urging uniformity in disallowing such fees. The tribunal's analysis focused on the CIT's misinterpretation of the provision figures, leading to a revised order that aligned with the actual year-end provisions, emphasizing the importance of accurate accounting representations.

5. The discrepancy in provision figures prompted a detailed response from the appellant, clarifying the difference between month-end estimates and year-end provisions. The tribunal's scrutiny of the revised figures revealed the actual outstanding provision amount, refuting the CIT's initial directive. By highlighting the accounting discrepancies and subsequent clarifications, the tribunal ensured a fair assessment based on accurate financial representations and practices.