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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: Shri C.N. Prasad & Shri G Manjunatha
there is no iota of evidence in the assessment order regarding furnishing of any kind of evidence, therefore, the AO was right in disallowing the provision as it is only a contingent liability but not ascertained liability.
We have heard both the parties and gone through the orders of authorities below. The AO disallowed provisions for schemes on the ground that the said liability is not accrued to the assessee for the relevant period. The AO further observed that even in mercantile system of accounting, any deduction towards liability is allowed only when such liability is an ascertained liability which accrued to the assessee for the relevant financial year. In this case, the assessee failed to file any evidence to show that the liability is accrued for the relevant period for the post events which resulted in accrual of liability, whether or not such liability is paid during the relevant financial year. The assessee also not filed any evidence as regards previous pattern of expenditure so as to maintain such a provision. Considering the nature of liability which is yet to crystallise but loaded with uncertainty of the event to cause the liability, therefore, there is no justification to accept the plea of the assessee company to allow such a 25 Total Lubricants deduction. It is the contention of the assessee that it has provided for provision for schemes on the basis of reasonable estimate of liability based on past events which is supported by budget and estimates prepared by marketing department and also approved by management. The assessee further contended that the assessee is in the highly competitive business of lubrication oil necessarily to promote its goods by incurring various expenditure for advertisement and promotion of schemes which has been done in consultation with marketing team and the liability has been quantified on the basis of budgets and estimates. It is not a contingent liability. The assessee has made provision on reasonable estimate and such liability has been incurred in the subsequent year on settlement of bills by the dealers and agents.
Having heard both the sides and considered material on record, we do not find any merit in the arguments of the assessee for the reason that though the assessee claims to have provided expenses in its books of account, on the basis of budgets and estimates towards schemes promoted for increase in sales, no evidence has been furnished before the AO to justify that the provision created in the books of account is supported by any evidences. No doubt, in mercantile system of accounting, all expenses and liabilities necessarily to be booked in the relevant financial year whether or not such liability or expenses is paid. If the liability is crystallised or ascertained in the relevant period even if such liability is paid in subsequent year, the same needs to be provided in the books of account. In this case, on perusal of details available on record, we find that the 26 Total Lubricants assessee claims to have made provision on the basis of past events which is supported by budges and estimates made by marketing department. Such practice has been followed in the past. The assessee further contended that it has incurred expenditure against provision in the subsequent year. The assessee has filed paper book which contains details of provision made in the relevant year and expenditure incurred in the subsequent year against such provision.
On perusal of the details filed by the assessee, we find that the assessee has made payments against various bills which pertains to next financial year which is evident from the fact that the assessee has furnished a list of expenses on page 92 of paper book. On further verification of the details, we find that many of the bills submitted by the assessee are dated in August and October, 2006.
Therefore, we are of the view that when the assesee claims to have made provision on the basis of events which is supported by budgets and estimates made by the marketing wing, making a claim in the subsequent financial year that too after 8-10 months appears to be unusual. If at all any provision is made on the basis of past events on account of non submission of bills and expenses by the claimants, such expenditure has to be related to either for the relevant financial year or the next period, but it should not go beyond one or two months later in the subsequent financial year. Therefore, we are of the considered view that there is no clarity in the details filed by the assessee with regard to the provision created for schemes and subsequent payment of such liability on actual claim.
27 Total Lubricants 31. Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Hon’ble Supreme Court in the case of Rotork Control India Pvt Ltd vs CIT (supra). We have gone through the case law relied upon by the assessee in the light of the facts of the present case and find that in the case before the Hon’ble Supreme Court , the Hon’ble Court has laid down certain tests to ascertain whether the liability is ascertained or not. As per the finding of the Court, a provision is recognised when (a) an enterprise has an obligation as a result of a past event; (b) it is probable that outflow of resources will be required to settle the obligation; (c) a relatable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised. Under these facts, the Hon’ble Supreme Court held that in the assessee’s case all the conditions are fulfilled as long as provisions are allowable deduction.
In the present case, on perusal of the facts available on record it is not clear whether all the 3 conditions stated by the Hon’ble Supreme Court are met or not. Though the assessee claims to have made provisions on the basis of past events and such liability has been paid in the subsequent year, the details filed by the assessee does not throw any light on these aspects. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of the decision of the Hon’ble Supreme Court in the case of Rotork Control India Pvt Ltd vs CIT (supra), after considering details filed by the assessee with regard to the provision created and subsequent payment of such liability. If the provision
28 Total Lubricants created by the assessee is ascertained liability in terms of the decision of the Hon’ble Supreme Court in the case of Rotork Control India Pvt Ltd vs CIT (supra), then the AO is directed to allow provision for schemes on accrual basis as provided by the assessee. If such liability is not ascertained liability in the light of judgement of Hon’ble Supreme Court, then the AO is directed to allow deductions towards such expenses on payment basis. 33. In the result, ground raised by the revenue as well as the assessee are allowed, for statistical purpose.
34. The next issue that came up for our consideration for AY 2006-07 from assessee’s appeal is disallowance of provision for bonus and ex-gratia. The assessee has made provision for payment of ex-gratia to one of the employees, Mr. Ramesh Pullur, who retired from service on 31-03-2006. The assessee has made provision for retirement benefits payable to said employees, as such liability is ascertained at the year end and also quantified on the basis of amount payable. The assessee has paid an amount of Rs.57,50,000 towards retirement benefit to the employee on 03-04-2006. In this regard, furnished details of payments alongwith form
16. The AO disallowed provision for bonus and ex- gratia on the ground that the assessee has made a mere provision without any accrual of liability, therefore, it cannot be allowed as deduction. It is the contention of the assessee that provision for bonus / ex-gratia has been made as such liability is ascertained in the relevant year which is evident from the fact that the employee has retired on 31-03-2006 and his retirement benefit has been 29 Total Lubricants paid on 03-04-2006. Though the assessee has made adhoc provision of Rs.80 lakhs, the balance amount of Rs.22,50,000 over and above the actual payment of Rs.57,50,000 has been reversed in the subsequent year. Therefore, the AO was incorrect in disallowing provision created for known and ascertained liability.
Having heard both the sides and considered material available on record, we find merit in the arguments of the assessee for the provision created for bonus / ex-gratia payable to retiring employee accrues to the assessee in the relevant financial year which is evident from the fact that the employee retired from service on 31-03-2006. We further notice that the assessee has settled dues payable to employee on 03-04-2006 by cheque. However, even though the assessee knows retirement benefits payable to the assessee, made an adhoc provision of Rs.80 lakhs which is over and above actual payment due to the employee. Since the retirement benefits payable to the employee has been paid on 03-04-2006, the assessee should have made provision for actual liability in its books of account for the relevant financial year. In this case, assessee has made provision of Rs.80 lakhs on adhoc basis though it has paid retirement benefits to the employee at Rs.57,50,000. Therefore, we are of the view that the assessee is eligible for deduction towards provision for bonus / ex gratia to the extent of Rs.57,50,000. Insofar as the remaining amount of Rs.22,50,000, the assessee is not eligible for deduction for the assessment year 2006-07. Since the assessee claims that balance amount has been reversed in the subsequent
30 Total Lubricants financial year and offered to tax, the AO is directed to examine the claim of the assessee and make suitable adjustment, if necessary. Accordingly the ground raised by the assessee is partly allowed.
36. The next issue that came up for our consideration from departmental appeal for AY 2007-08 is disallowance of web portal expenses as capital expenditure. The assessee has made payment of Rs.5 lakhs to SIF for development of web portal to capture data about the secondary sales from depots to ultimate customers. Since said portal run into technical difficulties and become non functional, web portal expenditure have been charged to P&L Account. The AO disallowed expenditure claimed under the head web portal expenses on the ground that expenditure incurred for development of web portal is capital in nature as it has made with a view to bring into existence an asset of an advantage of enduring benefit and it should have that result. Even if the expenditure does not result in creation of an asset, it would not cease to be an expenditure of the nature of capital. It is the contention of the assessee that expenditure incurred for web development portal shall not be treated as capital expenditure since the assessee had to terminate said activity as it was not found to be technically feasible and as such no fixed asset came into existence.
37. Having heard both the sides and considered material available on record, we find merits in the arguments of the assessee for the reason that expenditure incurred for development of web portal does not create any new asset to get enduring benefit to the assessee. The assessee has incurred expenses for 31 Total Lubricants upgradation of already existing web portal which run into technical difficulties and became unfunctional. Therefore, said expenditure cannot be treated as capital expenditure. The CIT(A) after considering relevant facts has rightly deleted addition made made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
38. In the result, appeal filed by the assessee in ITA o.7021/Mum/2011 for AY 2004-05 is allowed; appeal filed by the assessee in for AY 2005-06 is dismissed; appeal filed by the revenue in ITA Nos. 6782, 6749 & 6794/Mum/2011 for AYs 2005-06 to 2007-08 arte partly allowed; appeal filed by the assessee in ITA 7023/Mum/2011 for AY 2006-07 is partly allowed, for statistical purpose. Order pronounced in the open court on 24th January, 2018.