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TMI Blog2022 (2) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... 35,00,000/- claimed by the Appellant towards loss arising on settlement of claim with the leasing company. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the above claim of the Appellant, to the extent of Rs. 24,69,085/- is unascertained liability. 4. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating: - that the Appellant was consistently following mercantile system of accounting; - that the above loss was incurred during the year under appeal on account of fraud undertaken by the employee. - that the above loss was quantified based on reasonable estimate on the basis of material / information available with the Appellant. 5. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not adjudicating the following specific ground of appeal taken by the Appellant: "without prejudice to the above, in an unlikely situation of upholding the disallowance of the aforesaid provision of Rs. 35,00,000 in AY 2013-14, the Appellant should be allowed deduction of the said amount of Rs. 35,00,000 subsequent AY(s), when the settlement was fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains the nature of fraud and also mention that till 27/08/2013 the company paid total sum of Rs.' 17,13,638/- towards partial settlement of the claim of leasing companies. As against this, the assessee company has filed a copy of letter dated 31/08/2013 addressed to SFIO, Okhla Industrial Area which mentions that the assessee has already settled the payment to the leasing companies by paying Rs. 39,92,063/- and these payments were made by 18.6.2014. Both these documents have been filed by the assessee which contradict each other. It appears from these documents that the company was required to make the settlement with the leasing companies but the quantum of settlement was not fixed. Since, in the FIR dated 27/08/2013, the amount paid on account of settlement is mentioned as Rs, 17,13,638/- therefore, the provision of Rs. 35,00,000/- created in the financial year 2012-13 amounts to provision for unascertained liabilities. As the provision of 35,00,000/- was on account of unascertained liability, the same cannot be allowed as deduction as claimed by the assessee. Accordingly, an amount of Rs. 35,00,000/- is being added back to the income of the assessee." 4. In appeal, the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability and it should be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 8. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Vodafone Essar South Ltd., reported in 230 Taxman 541, he submitted that the Hon'ble High Court in the said decision has held that where the assessee follows mercantile system of accounting expenses due and payable should be allowed as an expenditure is not confined only to the money actually paid towards the liability, but, also covers a liability to accrue although discharge could be at a future date. Referring to the following decisions, he submitted that similar view has been taken in these decisions also:- (i) Canara Housing Development Company v. Joint Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g company which was to be indemnified by the assessee company, the provision for Rs. 35 lakhs was made in the books of account which was fair and reasonable. 11.1 We find force in the above argument of the ld. Counsel. The Hon'ble Supreme Court in the case of Bharat Earth Movers (supra), reported in 245 ITR 428, at paras 4 to 7of the order has observed as under:- ''4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 5. In Metal Box Company of India Ltd. Vs. Their Workmen (1969) 73 ITR 53 the appellant company estimated its liability under two gratuity schemes framed by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the above-said settled principles to the facts of the case at hand we are satisfied that provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. The High Court was not right in taking the view to the contrary. 7. The appeal is allowed. The judgment under appeal is set aside. The question referred by the Tribunal to the High Court is answered in the affirmative, i.e. in favour of the assessee and against the Revenue." 12. We find, the Hon'ble Delhi High Court in the case of CIT vs. Vodafone Essar South Ltd. (supra), has held as under:- "10. The first appellate authority has observed that the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d primarily relied upon the terminology or nomenclature of "provision" to disallow the claim of expenditure of Rs. 29,90,064/- and Rs. 28,62,275/- and opine that the provisions made should not be treated as expenditure incurred. This is not the correct and true test, which is to be applied. A "provision" can be made in respect of amounts which have become due and payable in the relevant previous year and therefore could be debited to the profit and loss account, once they represent ascertained liability. We do not find any negative elucidation on the relevant aspects in the orders passed by Assessing Officer and the C.I.T (Appeals). Albeit, there is elucidation and finding recorded by tribunal that the services had actually been performed and liability was accepted by the respondent assessee. The amounts therefore represented ascertained liabilities. These were shown as "provisions" as the services were rendered close to the assessment years and relevant bills had not been received. This would not make the provisions a contingent liability. 13. Appropriate would be to refer to the decision of the Supreme Court in Calcutta Company Ltd. Vs. Commissioner of Income Tax, West Bengal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave answered the referred question in the affirmative." 14. The aforesaid principles were applied to allow deduction of "provision" for gratuity, in case of serving employees and to whom the gratuity was payable only on retirement/termination, subject to condition that the amount so estimated was sufficiently certain to be capable of being valued. Gratuity payable in future, it has been held, was an obligation arising out of the present engagement and the estimated liability was ascertainable. As a present obligation, it could be allowed as a deduction in the profit and loss account. Subsequently, Section 40A(7) of the Act was enacted to specify and stipulate that provision for gratuity would be allowed in the profit and loss account when additional conditions stated therein were also satisfied. [See decision of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT, (1985) 156 ITR 585 (SC)] 15. Again in Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC), it has been observed:- "The law is settled: If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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