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2020 (10) TMI 79 - AT - Income TaxDisallowance of provision for professional cost - Non adoption of consistent accounting principle - whether the above provision represents the liability incurred for the period and hence is an allowable deduction? - HELD THAT - A perusal of the audited account of the company shows that the assessee had a huge loss in the immediately preceding assessment year and probably for this reason the assessee had not made any provision for professional cost. As during the current year such loss has substantially reduced and in the subsequent years assessee has started showing income. No merit in the arguments of the Ld. Counsel for the assessee that inadvertently owing to clerical error no provision was made in financial year 2008-09 relevant to assessment year 2009-10. Accounts of the company are audited by reputed CA firm and therefore it cannot be said that it is an inadvertent error. Even if the same is considered as an inadvertent error, the assessee has not taken any step to revise the return of income. Therefore, we fully concur with the findings of the Ld. CIT(A) that assessee has not adopted consistent accounting principle on year to year basis and it is not open to the assessee to claim the expense on provision basis in one year and on accrual basis in the other year. As the assessee is not adopting consistent accounting principle on year to year basis. No infirmity in the order of the Ld. CIT(A) confirming the disallowance made by the AO - Decided against assessee.
Issues Involved:
1. Disallowance of provision for professional cost amounting to INR 94,97,000. 2. Consistency in accounting principles and treatment of provisions. Issue-wise Detailed Analysis: 1. Disallowance of Provision for Professional Cost: The appeal revolves around the disallowance of a provision for professional cost amounting to INR 94,97,000 made by the assessee. The assessee had debited this amount to the Profit & Loss account but failed to provide a basis for making the provision. The Assessing Officer (AO) noted that no invoice had been raised by Bain US as of 31-3-2011 and concluded that the provision was a contingent liability, not an ascertained one. The AO referred to the decisions in Sree Sajjan Mills Ltd v CIT [1985] 56 ITR 585 (SC) and Indian Molasses Co Ltd v CIT 37 ITR 66 (SC) to support the disallowance of contingent liabilities. On appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the allowability of any provision depends on whether the liability has been fully ascertained and if the assessee has been adopting consistent accounting principles year to year. The CIT(A) observed that the assessee had not followed a consistent policy, as no provision was made in the assessment year 2009-10, which could result in aberration of accounts. The Tribunal agreed with the CIT(A) and AO, noting that the assessee could not substantiate the basis for the provision. The Tribunal found no merit in the assessee's argument that the provision was made on a scientific and realistic estimate based on services availed from group companies. The Tribunal emphasized that the assessee did not follow a consistent accounting principle, and the provision was not an ascertained liability. 2. Consistency in Accounting Principles and Treatment of Provisions: The assessee argued that the provision was made for services availed from group companies during January to March 2010, based on a Support Service Agreement dated 1st April 2010. The assessee claimed that the provision was calculated on a pro-rata basis based on invoices received for services rendered until December 2009. The assessee also contended that the provision made during the year was reversed in the subsequent financial year, and expenses on an actual basis were recognized based on invoices received. However, the Tribunal found that the assessee had not adopted a consistent accounting principle. The Tribunal noted that the assessee had a huge loss in the preceding assessment year and did not make any provision for professional cost, likely due to the loss. The Tribunal rejected the argument that the lack of provision in the assessment year 2009-10 was due to a clerical error, as the accounts were audited by a reputed CA firm, and no steps were taken to revise the return of income. The Tribunal also dismissed the relevance of the Supreme Court decision in Rotork Controls India (P) Ltd. [314 ITR 62 (SC)], as the facts of the present case differed. In Rotork Controls, the provision for warranty was based on a historical trend and systematically maintained data, qualifying for deduction under section 37(1). In contrast, the assessee in the present case did not maintain consistent accounting principles. Conclusion: The Tribunal upheld the CIT(A)'s decision to confirm the disallowance of the provision for professional cost amounting to INR 94,97,000, emphasizing the lack of consistent accounting principles and the contingent nature of the liability. The appeal filed by the assessee was dismissed.
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