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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
AadoSa / O R D E R महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
This appeal filed by the Revenue is arising out of the order of the Commissioner of Income Tax (Appeals)]-2, in short CIT(A), in appeal No. CIT(A)-2/IT/31/2013-14 vide dated 17.04.2017. The Assessment was framed by the Dy. Commissioner of Income Tax- Circle 1(1), Mumbai (in short DCIT/ITO/ AO) for the A.Y. 2010-11 2 vide order dated 18.03.2013, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance made by AO of being provisions for expenses that the provisions based on sales effected during the year end on which incentives are payable to the dealers. Therefore, the CIT(A) noted that the provisions is not in the nature of contingent liability. For this Revenue has raised the following ground No. 1: -
1. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) eared in deleting the disallowance of Rs.77,08,733/- being provision for expenses without giving a finding that the amount of Rs. 77,08,733/- is provision based on sales effected during the year and on which incentives are payable to the dealers and therefore the said provision is not in the nature of contingent liability and without causing enquiries to be made to ascertain the claim of the assessee regard u/s 250(4) of the Act or giving opportunity to the AO under Rule 46A. Reliance is placed on the decision of Hon. Delhi Court in the case of CIT vs. Jansarnpark Advertising and Marketing P. Ltd. in dated 11.03.2015?".”
Briefly stated facts are that the AO noticed from the profit and loss account that the assessee has debited an amount of ₹ 3 77,08,733/- under the head provisions for expenses. The AO required the assessee vide show cause notice dated 7.3.2013 to explain as to why the above provisions for expenses should not be disallowed. The assessee replied vide letter dated 15.03.2013 that the assessee has claimed year end provisions for expenses amounting to ₹77,08,733/-. He explained that the provisions for expenses included in the above amounts represents are reimbursable to dealers for rendering services on behalf of the assessee company to its customers in respect of sale services of note counting machines, loose note counting machines, fake note counting machines, etc. as well as services under annual maintenance contract (AMC). The assessee explained that the provision is made in accordance with the normal accounting practice as ascertained liability. According to AO, this is unascertained liability, which cannot be allowed as revenue expenditure. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after going through the facts and circumstances of the case and explanation of assessee deleted the addition by observing in Para 3.4 and 3.5 as under: - “3.4. I have considered the facts and circumstances of the case, submissions and arguments of the appellant and the assessment order. During the course of hearing the Authorized Representative (AR) of the appellant has explained and submitted that the incentives payable at the end of the year in terms of the policies/ schemes rolled out in the earlier part of the 4 year of which a reliable estimate can be made is not in the nature of contingent liability and ought to be allowed u/s. 37(1) of the Act, basis the following:
- The provision relates to expenditure incurred wholly and exclusively for the purpose of business of the appellant anti that all site conditions under section 37(l) of the Act were satisfied - There is a present obligation at the end of the year under consideration as a result of rolling out the schemes /policies in fire earlier part of the year under consideration.
-The provision has been created since the incentives will finally be disbursed in the subsequent year, on proper verification of tire achievement of sales/service targets by the eligible parties and on completion of the audit of the accounts confirming that the financial statements give a true and fair view Accordingly, there will definitely be an outflow of resources which will take place in the subsequent year.
- As discussed at paras 1.22 to 1.25 above, enough data was available with 5 the appellant as at the year end to ascertain as to the whether the sales targets are met/the collection amount that is outstanding from the party, to make a reliable estimate oft/re incentives payable.
The appellant has vehemently argued that the provision created is not contingent in nature since enough data was available with the appellant as at the year end to ascertain as to the whether the sales targets are met/the collection amount that is outstanding from the party, to make a reliable estimate incentives payable. In this regard the appellant has placed reliance on Ahmedabad Tribunal's decision in case of Shree Drain Auto Transport Corporation v. ACIT (33 taxmann.com 665) (2013, the facts of which case are identical to facts of appellant. The appellant has placed further reliance on decisions of Apex Court in case of Bharat Earth Movers v. CIT (112 Taxman 61) to substantiate its contention that the liability towards incentives payable should be allowed in the year under consideration in which the liability is recognized and provision has been created though the payment may be effected subsequently and Rotork Controls India (P.) Ltd. (180 Taxman 6 422). The appellant has submitted that applying the three-test principle laid down by the Apex Court in the Rotork Controls India (I') Ltd., the incentives payable at the end of the year in terms of the policies/ schemes rolled out in the earlier part of the year of which a reliable estimate can be made is not in the nature of contingent liability.
3.5. After considering the explanations furnished by the Authorized Representative, I am of the opinion that the provision for incentives created was wholly for the purpose of the business of the appellant, created based on a reliable estimate. Further, the incentives were disbursed in the subsequent year on proper verification of the achievement of sales/service targets by the eligible parties and on completion of the audit of the accounts. Therefore, I uphold the appellant's contention that provision created for the expenditure incurred (incentive payable) corresponding to the income earned should be allowable as a deduction in the year in which the said income/ revenue has been offered for tax. Accordingly, the disallowance for provision of estimated expenses u/s. 37(1)140(a) of 7 the I.T. Act is deleted. Ground No. 1 of the appeal is allowed.” Aggrieved, now Revenue came in appeal before Tribunal.