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2022 (2) TMI 645 - AT - Income TaxDeduction being the provision created on account of fraud committed by one of its employees which caused loss to the leasing company - Disallowance of provision made by the assessee on account of settlement with the leasing company on the ground that no deduction towards the provision for unascertained liability is allowable - HELD THAT - As relying on BHARAT EARTH MOVERS VERSUS COMMISSIONER OF INCOME-TAX 2000 (8) TMI 4 - SUPREME COURT and M/S VODAFONE ESSAR SOUTH LTD. 2014 (11) TMI 804 - DELHI HIGH COURT we are of the considered opinion that the assessee is entitled to deduction being the provision created on account of fraud committed by one of its employees which caused loss to the leasing company. We, therefore, set aside the order of the CIT(A) and direct the AO to allow the deduction in full. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of ?24,69,085/- under section 143(3) of the Income Tax Act. 2. Restriction of claim of deduction to ?10,30,915/- against ?35,00,000/- towards loss on settlement with the leasing company. 3. Determination of whether the claim of ?24,69,085/- is an unascertained liability. 4. Consistency in following the mercantile system of accounting. 5. Non-adjudication of the ground for allowing deduction of ?35,00,000/- in subsequent assessment years if disallowed in AY 2013-14. Issue-wise Detailed Analysis: 1. Disallowance of ?24,69,085/- under section 143(3) of the Income Tax Act: The assessee company, engaged in trading construction, engineering, and technical tools, filed its return of income declaring ?7,13,69,375/-. During assessment, the AO noted a provision of ?35 lakhs for settlement with leasing companies due to fraud by an employee. The AO disallowed the provision, treating it as an unascertained liability, as the FIR indicated partial settlements and contradictory documents regarding the settlement amount. The CIT(A) upheld the disallowance of ?24,69,085/- while allowing ?10,30,915/- as incurred expenses. 2. Restriction of claim of deduction to ?10,30,915/- against ?35,00,000/- towards loss on settlement with the leasing company: The CIT(A) allowed only ?10,30,915/- as a deductible expense for the settlement made during the assessment year, disallowing the balance of ?24,69,085/-. The assessee argued that the provision was made on a reasonable estimate basis and should be fully deductible as per the mercantile system of accounting. 3. Determination of whether the claim of ?24,69,085/- is an unascertained liability: The AO and CIT(A) treated the provision of ?24,69,085/- as an unascertained liability, not allowable under section 37 of the Income Tax Act. The assessee contended that the liability was certain and should be deductible, referencing the Supreme Court's decision in Bharat Earth Movers vs. CIT, which allows deduction for liabilities that are certain and reasonably estimable, even if quantification and discharge occur in the future. 4. Consistency in following the mercantile system of accounting: The assessee consistently followed the mercantile system, where liabilities are recognized when incurred. The tribunal noted that under this system, liabilities that are certain and estimable should be deductible. The tribunal referenced multiple judicial precedents supporting the deduction of such provisions, including decisions from the Supreme Court and High Courts. 5. Non-adjudication of the ground for allowing deduction of ?35,00,000/- in subsequent assessment years if disallowed in AY 2013-14: The assessee raised a ground for allowing the deduction in subsequent years if disallowed in AY 2013-14. However, the CIT(A) did not adjudicate this ground. The tribunal, considering the judicial precedents and the mercantile accounting system, allowed the full deduction of ?35,00,000/- for the provision created due to the fraud. Conclusion: The tribunal found merit in the assessee's arguments and judicial precedents, allowing the full deduction of ?35,00,000/-. The tribunal set aside the CIT(A)'s order and directed the AO to allow the deduction in full, emphasizing the certainty and reasonable estimation of the liability under the mercantile system of accounting. Order: The appeal filed by the assessee was allowed, with the tribunal directing the AO to allow the full deduction of ?35,00,000/-. Pronouncement: The order was pronounced in the open court on 14th February, 2022.
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