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TMI Blog2015 (10) TMI 491X X X X Extracts X X X X X X X X Extracts X X X X ..... at best be described as a 'contingent liability' as defined in AS-29. There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages.The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS 29 ought not be recognised. The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur.Consequently, the question framed is answered in favour of the Revenue and against the Assessees. It is clarified that while giving an appeal effect to this order, the AO shall allow the actual transit breakages for AY 2001-02 as revenue expenditure consistent with the settled legal position. The Assessees would also be permitted to get the benefit of the reversal of the provision for transit breakages made in the AYs in question accordance with law. - ITA 898/2009, ITA 899/2009 , ITA 900/2009 , ITA 901/2009 , ITA 237/2015 - - - Dated:- 6-10-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Deepak Chopra, Mr Aditya Gupta, and Ms Neha Sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a similar provision for all goods under dispatch and debit the same to the P L Account. However such provision is reversed on the first day of the following financial year and only actual breakages are debited to the P L Account in the succeeding year as and when the goods under dispatch reach the destination. 3. The Assessing Officer ( AO ), in the case of the first Assessee, by the order dated 26th March 2004 for AY 2001-02, held that in cases of breakage and pilferage, the liability is not certain. Consequently, the provision made was treated as a contingent liability and, therefore, not allowable. It was added back to the total income of the first Assessee. The Commissioner of Income Tax (Appeals) [ CIT (A) ] by an order dated 31st March 2006 allowed the Assessee s appeal. The CIT (A) held that the provision had been made on a scientific basis and that the method of accounting for transit breakages had been followed by the first Assessee year after year. The CIT (A) held that the decision of the Supreme Court in Bharat Earth Movers v.CIT 245 ITR 428 (SC) supports the case of the first Assessee. 4. The Revenue then appealed to the ITAT by filing ITA No. 2532/Del/2006 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced that the first Assessee s appeal, being ITA No. 1369 of 2009, against the order of the ITAT dated 14th September, 2009 in ITA No. 3195 of 2009 for the AY 2005-06 raising the same question of law is pending. 6. This Court has heard the submissions of Mr. Deepak Chopra, learned counsel appearing for the Assessees, Mr. N.P. Sahni, Senior Standing counsel and Mr. Raghvendra Singh, Junior Standing counsel for the Revenue. 7. Mr. Chopra relied on the decisions in Bharat Earth Movers (supra), Commissioner of Income Tax v. Vinitec Corporation P. Ltd. 278 ITR 337 (Del), Commissioner of Income Tax v. Insilco Ltd. 179 Taxman 55 (Del), Commissioner of Income Tax v. Sony India Pvt. Ltd. [2007] 160 Taxman 397 (Del), Commissioner of Income Tax v. Beema Manufactures Pvt. Ltd. [2003] 130 Taxman 162 (Del) and Commissioner of Income Tax v. Hewlett Packard (P) Ltd. [2008] 173 Taxman 162 (Del) to urge that the provision for transit breakages, having been calculated on a scientific basis, was an allowable deduction under Section 37(1) of the Act. Relying on the decision in Commissioner of Income Tax v. Balaji Distilleries Ltd. 126 Taxman 264 (Madras) and Commissioner of Income Tax v. Brindava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dispatch or at the latest on the delivery of the goods. The matching of the breakages by debiting it to the P L Account would occur soon thereafter within that financial/accounting year itself. Therefore, there was no occasion for making any provision for the contingent liability of transit breakages likely to take place during the ensuing financial year. Counsel for the Revenue pointed out that the estimates of transit breakages made by the Assessees for the AYs in question were off the mark and in fact in excess of the actual breakages, which in any event were allowed as revenue expenditure in the year in which such breakages occurred. They submitted that the ITAT s impugned orders do not call for any interference. 10. The Court proposes to begin examining the above contentions by first referring to the applicable AS. The cue for this is to be found in the CBDT Notification No. SO 69(E) dated 25th January 1996 issued under Section 145(2) of the Act, which states that provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. AS-29 deals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income Tax v. Balaji Distilleries Ltd. (supra) and Commissioner of Income Tax v. Brindavan Beverages (P) Ltd. (supra) recognised this. In fact, for AYs 2002-03 to 2004-05 the AO has allowed transit breakages as revenue expenditure in the year in which the breakages occurred. 14. The issue, however, is the justification for creating a provision for such breakages anticipating them in advance of the occurrence of the actual breakages. If such transit breakages cannot be estimated with a reasonable degree of certainty then the liability on that score would be considered 'contingent' in terms of the definition of that expression in AS 29 i.e. a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise . AS 29 itself makes it explicit that no provision for a contingent liability would be recognised. 15. As regards the judicial decisions on the point, the Court proposes to first discuss the decision in Bharat Earth Movers (supra). There the Assessee had floated a beneficial scheme for its employees for enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y estimated. 17. On facts, in Bharat Earth Movers (supra), the Supreme Court was satisfied that the provision made by the Assessee for meeting the liability incurred by it under leave encashment scheme proportionate with the entitlement earned by the employees of the company... is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability and that the liability is not a contingent liability. The decision acknowledged that where a scheme for leave encashment is floated by a company, the number of employees and their entitlements to leave encashment can be estimated with a reasonable degree of certainty. It would be a case of a 'known' liability. 18. In Commissioner of Income Tax v. Vinitec Corporation P. Ltd. (supra) the question for consideration was whether a provision for future warranty expenditure is a contingent liability. On facts, it was not in dispute that the warranty clause was part of the sale document and imposed a liability on the Assessee to discharge an obligation under the clause for the period of warranty. It was a liability which was capable of being construed in definite terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce it was in the nature of a contingent liability. In other words what was disallowed was the difference between the provision created and reversed. 23. The Court is unable to discern any uniform scientific method followed by the Appellant in making provision for the breakages. As noticed by the ITAT in its order dated 16th March 2009, the explanation offered by the Appellant was that on an ad hoc basis it fixed a rate per case of bottles. In the case of Andhra Pradesh, the rate was ₹ 10 per case, for Goa and Karnataka it was ₹ 15 per case. Also the breakages are known within a period of 15 to 30 days after despatch of the goods. The Court also concurs with the view of the ITAT that with the first Assessee having entered the line of business only from AY 2001-02, it cannot be said to have gathered sufficient experience to have reasonably estimated such breakages for the AYs in question. In the circumstances, the 'liability' on that score could at best be described as a 'contingent liability' as defined in AS-29. 24. Extensive reference has been made to AS-29 since one of the submissions of the Assessees is that its failure to make a provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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