2020 (11) TMI 743 - AT - Income Tax

Provision of exgratia expenses - allowable expenses OR contingent liability - HELD THAT - In the case of the assessee, on finalization of accounts for the year ended 31.3.2009, the matter of appropriation of the net profit was considered by the Board of Directors of the assessee bank at its Board meeting held on 26.5.2009, wherein resolution was passed to the effect of recommending payment for exgratia to employees. Pursuant to such approval, the exgratia payment becomes due to the employees and the said amount was credited to Provision for Ex-gratia Payment Account in the books of accounts of assessee bank for the year ending 31.3.2010. Said exgratia to employees were actually paid by the assessee bank on 17.8.2009 and hence we hold that the same cannot by any stretch of imagination, could be held as contingent liability - provision for ex-gratia amount was debited to profit and loss account in the earlier assessment year i.e Asst Year 2009-10 and during the Asst Year 2010-11, the said liability account was debited while making the actual payment on 17.8.2009. Hence it could be safely concluded that there was no debit to profit and loss account and consequential claim of deduction during the year under consideration and accordingly, there cannot be any disallowance of any deduction thereon by the ld AO. In any case, we also find that this claim of deduction was upheld by this tribunal for the Asst Year 2007-08 2017 (7) TMI 1372 - BOMBAY HIGH COURT in assessee s own case which had been subsequently upheld by the Hon ble Jurisdictional High Court vide. We also find that this tribunal in assessee s own case for the Asst Year 2014-15 2018 (12) TMI 1844 - ITAT MUMBAI had allowed the similar claim of the assessee. Hence on all counts, this amount cannot be disallowed by the ld AO - Decided in favour of assessee.

Summary

Issues:
Allowability of provision for exgratia expenses as deductible expenses or contingent liability.

Analysis:
The appeal in ITA No.3532/Mum/2019 for A.Y.2010-11 questions the decision of the ld. Commissioner of Income Tax (Appeals)-3, Mumbai, regarding the provision of exgratia expenses of ?1,62,32,961/- debited in the profit and loss account. The main issue is whether this provision should be treated as allowable expenses or contingent liability. The assessee, a cooperative bank, had filed its return of income declaring total income of ?8,08,92,121/-, which was accepted initially but later reopened for assessment. The ld AO disallowed the deduction of exgratia amount, considering it a contingent liability as per Form 3CD. However, the assessee argued that as per the bye-laws, exgratia payment was approved by the Board of Directors and actually paid to employees, making it a due liability, not contingent. The Tribunal noted that the exgratia payment was credited to the account and actually paid, thus not a contingent liability. Previous tribunal and High Court decisions also supported the deduction claim, further strengthening the assessee's case. The Tribunal upheld the decision of the ld CITA, dismissing the revenue's appeal.

In conclusion, the Tribunal found that the provision for exgratia expenses was not a contingent liability but an allowable expense as approved by the Board of Directors and actually paid to employees. The decision was supported by previous judicial precedents in the assessee's favor. The Tribunal dismissed the revenue's appeal, upholding the deduction claim for the exgratia expenses.