DCIT, NEW DELHI vs. M/S APEX STRATEGIC CONSULTING SERVICES PVT. LTD.,, NEW DELHI

Brief facts of the case for the disposal of this appeal are that the assessee is a company engaged in the business of undertaking promotional, mailing and marketing, publicity activities on behalf of the major insurance companies. For the Asstt. Year 2012-13, they have filed their return on 29.9.2012 declaring an income of Rs.16,51,520/-. Learned AO, however, 2 made certain additions including Rs.3,83,57,753/- by disallowing the provision debited to the Profit and Loss Account.

In the appeal, learned CIT(A) while confirming certain additions, however, deleted the addition made by the learned AO to the tune of Rs.3,83,57,753/- on the ground that this provision is unascertained expenditure but it was the liability that was existing at the end of the financial year but the payments made subsequent to the end of the financial year but before the finalization of the accounts. The revenue is, therefore, preferred this appeal.

It is the argument of learned DR that this particular amount is an unascertained liability; there is a deferment of payment of tax which involves the element of interest and further the contention of the assessee by placing reliance on the Accounting Standard 4 is untenable because as per Income-tax Act, such a provision is not an allowable expenditure. She justified the order passed by the learned AO by placing reliance on the decision reported in CIT vs. Gajapathy Naidu (1964) 53 ITR 114.

Per contra, it is the submission on behalf of the assessee that in the case of Gajapathy Naidu (supra), the Hon’ble Supreme Court held that a contingent liability cannot be taken cognizance of but in so far as the present case is concerned, the liability was crystallized during the financial year itself but the payment was made subsequent thereto before finalization of the accounts. Learned AR submitted that, on the other hand, the decision of the Hon’ble Apex Court in the case of Bharat Earth Movers vs CIT, 245 ITR 428 (SC) wherein it was held that the liability in praesenti, though discharged at a future date, is not a contingent liability and is 3 allowable u/s 37 of the Act, is applicable to the facts of the present case.

It is further submitted by the learned AR that the assessee complied with the requirement of AS-4 and it is only a matter of adjustment of the event that was existing at the end of the financial year but discharged subsequently before the finalization of the accounts and this course has been followed by the assessee for quite a long time and even in the scrutiny u/s 143(3), such a disallowance was not made. He substantiated his submissions by placing on record the assessment order for the Asstt. Year 2011-12, which was also referred by the ld. CIT in his order. Lastly, learned AR submitted that this is a revenue neutral transaction because if such an expense is not allowed in the current assessment year, it has to be allowed in the next year inasmuch as there is no doubt expressed by the learned AO as the genuineness or incurring of such expenditure.

We have gone through the record in the light of the submissions on either side. There is no denial of the fact that, as a matter of fact, learned CIT(A) after referring to the bills and vouchers reached a conclusion that the assessee has been following the mercantile system of accounting, the expenses were not relating to the months of January, February and March, 2012 for the financial Year 2011-12 and in view of the system of accounting followed by the assessee, the deduction should be allowed although the liability may relate to earlier years and discharged at a future date. Learned CIT(A) also referred to AS-4 which is to the effect that if the event occurs between the period from the end of the financial year to the date of approval of accounts and the liability exists as on the date of balance sheet date then they are called adjusting events and are allowable. In other words, AS-4 says that the conditions for an event prevail on the balance and 4 crystallized between the close of the financial year and approval of accounts, such events shall be known as adjusting events and have to be recorded in the previous year.

It, therefore, goes without saying that as on the last date of the financial year, the liability was crystallized but for a variety of reasons, the materialization took place subsequent to the closure of accounts but before the approval of the same. In the circumstances, in the case of Bharat Earth Movers (supra), it is held by the Hon’ble Supreme Court that the liability is in praesenti though it will be discharged at a future date and makes no difference if the future date on which the liability shall have to be discharged is not certain. The provision made by the assessee for meeting the liability incurred by it before the date of closure of accounts is an allowable deduction out of gross receipts of the accounting year during which the provision for meeting such expenditure was made and such a liability is not a contingent liability. We, are, therefore, convinced that the case on hand is fully covered by the ratio laid down in the case of Bharat Earth Movers (supra) by the Hon’ble Apex count and by no stretch of imagination, could it be said that the matter involves contingent and conditional liability but on the other hand, it is the expenditure that was already incurred during the financial year but payment takes place after the closure of accounts but before approval of the same.

Learned CIT(A) also, on further verification of the assessment order and the balance sheet for the Asstt. Year 2011-12, found that for such year the balance sheet revealed that the postage payable to the extent of Rs.13,17,446/- but no disallowance was made by the AO. Rule of consistency demand that unless and until something illegal is shown, AO has 5 to follow the course of action taken for the earlier years. We found that the liability said to have been discharged in this matter by way of provision was in respect of the expenses already incurred during the financial year 2011-12 and payments made subsequent to the closure of the books of accounts but before the approval of the same. While respectfully following the decision of the Hon’ble Apex Courtin the case of Bharat Earth Movers (supra) and also Radhaswami Satsang vs CIT (1992) 193 ITR 321 (SC), we are of the considered opinion that the amount under the provision is an allowable deduction.Further, in these peculiar circumstances, no revenue implications are there. While accepting the contention of the assessee, we find that the appeal is devoid of merit and is liable to dismissed. Accordingly, we confirm the impugned order.

In the result, appeal of the revenue is dismissed.