2020 (9) TMI 868 - AT - Income Tax

Addition of provision of average one month expenses - accrued liability or ascertained liability as such allowable u/s 37(1) - whether no disallowances can be made under section 40(a)(ia)? - HELD THAT - The assessee made provision with regard to 31 different items. The Assessing Officer has not brought any fact on record that recipient were certain or identifiable. The assessee has made provision in the last month the Financial Year only on the basis of estimation of earlier month of the Financial Year. AO has not examined whether the provision made for the month of March 2015 was not a reliable estimate on account of past obligations. Similarly, in case of Abad Builders (P.) Ltd. 2013 (11) TMI 1679 - ITAT COCHIN made disallowance under section 40(a)(ia) as the assessee has not made TDS on provision of sundry creditor. The assessee claimed deduction of the same amount in subsequent AY. CIT(A) confirmed the disallowance by taking view that the assessee cannot claim double deduction of a very same amount on which assessee deducted and paid TDS. In the said case, the recipient was identifiable and the assessee has not pleaded that such obligation was a result of past events. We may further reiterate that in both the case law relied by ld. DR for the revenue a recipient was identifiable, however, in the case in hand, no such recipient were identifiable, moreover, the provisions were made for multiple purposes. The assessee made provision of ₹ 10.24 crore and ultimately made expenses of ₹ 10.46 crore, which clearly demonstrate that assessee made the provision after due diligence which cannot be said to be an adhoc provision. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of ?10.24 crore as provision for expenses.
2. Deletion of addition/disallowance of ?10.24 crore from book profit under section 115JB.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?10.24 Crore as Provision for Expenses:

The revenue appealed against the decision of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the addition of ?10.24 crore made by the Assessing Officer (AO) as a provision for expenses. The AO had disallowed this provision, considering it as an adhoc and contingent liability, arguing that it was made at the end of the financial year without proper substantiation. The AO noted that the provisions were reversed at the beginning of the next year, and the tax auditor confirmed this in Form 3CD.

The assessee contended that the provisions were not adhoc but were made for actual expenses incurred during the year, following consistent accounting policies. The CIT(A) agreed with the assessee, stating that the provisions were made on a certain basis for each head of expenses, representing a true and fair view of the business. The CIT(A) also noted that the actual expenses incurred were ?10.46 crore, slightly higher than the provision made, indicating due diligence.

The Tribunal examined the submissions from both parties. The Departmental Representative (DR) argued that the provisions were purely adhoc and not based on any scientific estimation, pointing out discrepancies in the provisions and actual expenses for various items. The DR also cited decisions from the Ahmedabad and Cochin Tribunals to support the disallowance.

The Authorized Representative (AR) of the assessee defended the CIT(A)'s order, emphasizing that the provisions were based on actual expenses and consistent accounting practices. The AR highlighted that the provisions were reversed for administrative convenience and to ensure correct accounting as per the Companies Act and section 145 of the Income Tax Act.

The Tribunal considered the rival submissions and the decisions cited. It noted that the AO had not demonstrated that the provisions were unreliable estimates based on past obligations. The Tribunal found that the provisions were made with due diligence and were not adhoc, as the actual expenses incurred were higher than the provisions. Therefore, the Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal on this ground.

2. Deletion of Addition/Disallowance of ?10.24 Crore from Book Profit Under Section 115JB:

Given that the Tribunal upheld the CIT(A)'s decision on the first issue, the adjudication of the second issue regarding the deletion of ?10.24 crore from book profit under section 115JB became academic. Consequently, the Tribunal did not find it necessary to address this ground separately.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order that the provisions made by the assessee were not contingent liabilities but were based on actual expenses incurred, following consistent accounting practices. The Tribunal also agreed that no disallowance could be made under section 40(a)(ia) as the provisions did not identify specific recipients or exact payment amounts. The appeal was dismissed in its entirety.