DCIT-1(1)(2), MUMBAI vs. M/S HDFC SALES PVT. LTD., MUMBAI

On appeal before the ld. CIT(A), the assessee filed detailed written submission which has been recorded by ld. CIT(A) in para-5.2 of his order. In written submission, the assessee specifically contended that the provisions made by assessee do not represent an adhoc provision. The heads of expenses for which provisions were made are actual expenses incurred by assessee during the year and provisions were made for the expenses incurred for which full details were received and are available on record. The financial statement of assessee was finalized on 27.04.2015 just 27 days after the close of Financial Year. Keeping in view the nature of business and volume of transaction of the assessee, it is not practically possible to get all information relating to quantum of expenses incurred in the month of March in such a short span of time.

We have heard the submission of ld. Departmental Representative (DR) for the revenue and ld. Authorised Representative (AR) of the assessee and perused the material available on record. Ground No.1 relates to deleting the addition of Rs. 10.24 crore being a provision of average one 4 Mum 2019-M/s HDFC Sales Pvt. Ltd. month expenses. The ld. DR for the revenue submits that the assessee made a provision of expenses at the end of year for unascertained liabilities. The provisions of 31 items of expenses were made fully on estimation basis. There was no justification for making such estimate provision on adhoc basis. The Assessing Officer while passing the assessment order has clearly held that the provisions of expenses were purely n adhoc basis and this fact was admitted by assessee. The Tax Auditor has also confirmed this fact in the Tax Audit Report. The provisions are contingent in nature and liable to be disallowed. The ld. DR further submits that the item wise details of expenses for which the assessee made provision is recorded by ld. CIT(A) on page 8,9 & 10 of the impugned order. The ld. DR invited our attention on item no.1 wherein the assessee made provision for motor car expenses and reimbursement of fuel expenses of Rs. 7.84 lakhs each, however, actual expenses were only Rs. 1.64 lakhs. Similarly, the provision for brokerage and consultancy fees –HSPL /HRL was shown at Rs. 1.12 lakhs and Rs. 14.10 lakhs, however, no actual expenses were incurred. The ld. DR also made similar submission with regard to item no.18, 20 & 21 wherein provisions were made for Rs. 55 lakhs on account of entertainment expenses and incurred only Rs. 58,000/-, on repair and maintenance provision was made for Rs. 10.18 lakhs and actual expenses were incurred Rs. 3.89 lakhs and for repair and maintenance of building 5 ITA No. 852 Mum 2019-M/s HDFC Sales Pvt. Ltd. provisions of Rs. 7,000/- was made and nothing was incurred. On the basis of aforesaid figures, the ld. DR submits that there was no scientific basis for making provision of the expenses, the estimation projected is misleading. The provisions of expenses are without any substantiation, purely adhoc and are liable to be disallowed.

To buttress his submission, the ld. DR for the revenue relied upon the decision of Ahmadabad Tribunal in Hardik Jigishbhai Desai Vs. DCIT in ITA No. 1084/Ahd/2013 reported vide [2016] (11) TMI 668- ITAT Ahmadabad. The ld. DR further submits that if there was certain liability, the assessee should have made TDS. No TDS was made, therefore, the expenses is not allowable. And relied upon the decision of Cochin Tribunal in Abad Builders (P.) Ltd. vs ACIT reported in [2014] 43 taxmann.com 128 (Cochin Trib.). The ld. DR finally submits that the assessee was following the same practice from last various years. This was a wrong practice adopted by assessee which is not permissible under the law. The policy and practice which is adopted by assessee, if not permissible by law; the assessee cannot take the plea that such practice was never questioned by the revenue. The case of assessee was selected for scrutiny for the first time in the year under consideration. The ld. DR prayed for reversing the decision of ld. CIT(A) and to restore the order passed by Assessing Officer. Mum 2019-M/s HDFC Sales Pvt. Ltd.

On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that the assessee is engaged in the business of marketing and selling of home loans, Life Insurance product, Corporate Agency Services and promoting and marketing of general insurance, mutual funds and financial products and carrying out operation of HDFC Group. The ld. AR of the assessee further submits that the amount of provision does not represent adhoc provision. The head of expenses for which provisions were made are actual expenses incurred by the assessee during the year and the provisions were made for expenses incurred for which full details were received. The Audit of financial statements of assessee was finalized on 27.07.2015, just 27 days after the close of Financial Year. It may be appreciated that keeping in view the nature and business activities and volume of frequency of different type of transaction, it is not practically possible to get all the information relating to the quantum of expenses incurred for the month of March in a short period of time. The assessee furnished complete details to the Assessing Officer. The assessee made provision for Rs. 10.26 crore, however, actual expenses of Rs. 10.46 crore was incurred, which confirmed the fact that the provisions were made with due diligence and cannot be considered as adhoc. Though the provisions were made on estimation, which were based on consistency over the years keeping in view the expenses incurred on certain basis for each 7 Mum 2019-M/s HDFC Sales Pvt. Ltd. head of expenses. The ld. AR further explained that reversal of provision and is merely for administrative convenience and for insuring correct accounting as per Companies Act and in accordance with section 145 of the Act. The observation of Auditor in the Tax Audit Report is merely a disclosure in the said report which cannot be considered as “qualification”. The Auditor has not confirmed anything to give an impression that provision must be disallowed for computing the income under the Act. The Assessing Officer while issuing show-cause notice has not raised the issue that no TDS was made on the provision of expenses. The ld. AR for the assessee finally submits that when the assessee was regularly following the practice of making provision on account of various expenses in the month of March, which is reversed on 1st April in the next year and expenses are considered on the basis of actual payment in the subsequent year and the same has been taxed in the next year, the same cannot be held to be contingent expenses. The assessee has adopted true and fair estimation for the month of March, which is in accordance with the Accounting Standard. The ld. AR further reiterate that no disallowance can be made in the context of section 40(a)(ia) as no payment was exactly identified or quantified. In support of his submission, the ld. AR of the assessee relied on the following decisions: Mum 2019-M/s HDFC Sales Pvt. Ltd.

We have considered the rival submission of both the parties and carefully gone through the orders of lower authorities. We have also deliberated on various case laws cited by ld. Representative of the parties. The AO disallowed the provision of expenses by taking view that the provisions made by assessee are adhoc provisions made at the end of the year. These provisions are contingent in nature and have to be disallowed in computing the income. The ld. CIT(A) granted relief to the assessee by taking view that the assessee is regularly following the practice of making provision for various expenses for the month of March, which is reversed on 1st April of next year and that expenses are considered on the basis of actual payment in the subsequent year. The ld. CIT(A) also concluded that these provision cannot be held to be contingent expenditure as the expenditure have already been incurred and the provision has been made on certain basis for each head of expenses so that the accounts adopted by assessee represent a true and fair affairs of business and is with consistent of accounting standard. The 9 Mum 2019-M/s HDFC Sales Pvt. Ltd. ld. CIT(A) also held that the assessee incurred actual expenses of Rs. 10.46 crore against the provision of Rs. 10.24 crore. The ld. CIT(A) also relied upon the decision of Delhi High Court in Triveni Engineering & Industries Ltd. (supra). On the issue of non-deduction of TDS, the ld. CIT(A) agreed with the submission of assessee that no disallowance can be made under section 40(a)(ia) as the scheme of TDS proceed on the assumption that the person whose liability is to pay income knows the identity of beneficiary or recipient of the income and that amount of payment should be exactly quantified. The operative part of the order of ld CIT(A) is extracted below;

Before us the ld. DR for the revenue in his submissions vehemently submitted that the projected estimation of the provisions of expenses is projected purely on estimation and that there is mismatch of projected figures of expenses and the actual expenses incurred on various counts, which we have recorded above. Second contention of the ld. DR for the revenue is that no TDS was made on such provisions. The ld. DR for the revenue also relied on the decisions of Ahmedabad Tribunal in Hardik Jigishbhai Desai (supra) and the decision of Cochin Tribunal in Abad Builders (P.) Ltd. (supra). In Hardik Jigishbhai Desai (supra), the assessee debited the provision of commission expenses to the Profit & Loss Account without making TDS. The Assessing Officer disallowed Mum 2019-M/s HDFC Sales Pvt. Ltd. the expenses by taking view that debiting the commission expenses resulted in deduction of profit and TDS should have been made on such expenses. The ld. CIT(A) confirmed the disallowance made by Assessing Officer. On appeal before the Tribunal, the disallowance was maintained. In the said case, the recipient of commission was identifiable. However, fact of the present case is quite different. The assessee made provision with regard to 31 different items. The Assessing Officer has not brought any fact on record that recipient were certain or identifiable. The assessee has made provision in the last month the Financial Year only on the basis of estimation of earlier month of the Financial Year. The Assessing Officer has not examined whether the provision made for the month of March 2015 was not a reliable estimate on account of past obligations. Similarly, in case of Abad Builders (P.)

In view of the aforesaid discussions, we do not find any merit in the grounds of appeal raised by revenue; hence we affirm the order passed by ld CIT(A). In the result Ground No.1 of appeal is dismissed.

In the result, appeal of the revenue is dismissed.