SULZER INDIA LTD,PUNE vs. ADDL CIT 8(3), MUMBAI

The grounds raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) reads as under:-

The brief facts of the case are that the assessee company is engaged in the business of manufacturing hi-tech engineering equipments and components.

It was observed by the A.O. in the course of assessment proceeding u/s 143(3) r.w.s. 143(2) of the Act that the assessee company has claimed a sum of Rs. 96,53,731/- on account of legal and professional fees incurred during the previous year relevant to the assessment year and out of the above an amount of Rs. 11,15,000/- was a provision made by the assessee company in the books of account and the same was disallowed by the A.O. and added to the total income of the assessee company as well as to the Book Profit of the assessee company u/s 115JB of the Act , as per the assessment order dated 27th December, 2011, passed u/s. 143(3) of the Act.

Aggrieved by the assessment order dated 27th December 2011 , passed u/s 143(3) of the Act by the A.O., the assessee company filed the first appeal before the learned CIT(A).

Before the learned CIT(A), the assessee company submitted that the assessee company has made provision for legal and professional expenses of Rs.11,15,000/- at the year end , since the bills were not received by the assessee company till the end of the previous year relevant to the assessment year. The assessee company submitted that the assessee company is following mercantile system of accounting and therefore based on the services rendered before the last day of the financial year for which bills have not been raised by the vendors/service providers, the assessee company made a reasonable provision for expenditure. The assessee company submitted that if no provision is made and the expenditure is booked only in the next financial year in which the bill is received, it may amount to prior period expenditure and disallowed by the Revenue. These provisions are made on a best estimate basis and once the invoices are received from the concerned parties, the assessee company has passed the entries of the exact amount of the invoice, after reversing the entry for provision on the first day of the month following the month in which the provision is made. The assessee ITA 7324/Mum/2012 4 company referred to the Accounting Standard (AS) -1 relating to disclosure of accounting policies issued by the CBDT u/s 145 of the Act which provides that the tax-payer should adopt such accounting policies that represents a true and fair view of the state of affairs of the business in the financial statements prepared and presented and one of the major consideration in selecting and application of accounting policies is “Prudence” which means that provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and provisions are made on the basis of the best estimate. The assessee company referred to the Accounting Standards AS-29 issued by the ICAI dealing with ‘Provisions, Contingent Liabilities and Contingent Assets” and notified under the Companies(Accounting Standard) Rules, 2006 which defines a ‘provision as a liability’ which can be measured only by using a substantial degree of estimation and the same should be recognized when (i) an enterprise has a present obligation as a result of past event , (ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and (iii) a reliable estimate can be made of the obligation . The assessee company submitted that the assessee company is following mercantile system of accounting and keeping in view the matching concept, the revenues for a period have to be matched with the costs incurred. The assessee company submitted that provision of Rs.11,15,000/- for the year end expenses are made on a ‘best estimate’ basis for services availed although invoices / debit notes have not been received by the year end. The assessee company relied upon the decision of Hon’ble Supreme Court in the case of Metal Box Company of India Ltd. v. Their workmen, 73 ITR 53 (SC) and Kedarnath Jute Mfg. Co. Ltd. v. CIT, 82 ITR 363 (SC). The assessee company also submitted that the learned CIT(A) has allowed the ground in the assessment year 2007-08. Without prejudice to the above, it was submitted that if provisions of Rs.11,15,000/- made for legal and professional fee are disallowed in the impugned assessment year, then the AO be directed to allow ITA 7324/Mum/2012 5 the actual expenditure on legal and professional fee incurred by the assessee company in the subsequent assessment year inclusive of the said amount of Rs.11,15,000/- of which the invoices from vendors were received in the immediately succeeding year.

Aggrieved by the orders dated 01.10.2012 of the learned CIT(A) , the assessee company is in second appeal before the Tribunal.

The ld. Counsel for the assessee company submitted before the Tribunal that the assessee company has made provision of Rs. 11,15,000/- towards legal and professional expenses which has been disallowed by the ITA 7324/Mum/2012 6 A.O. and confirmed by the CIT(A). The similar disallowance has been made by the AO u/s 115JB of the Act. The ld. Counsel submitted that the turnover of the assessee company is Rs. 146 crores and the export turnover is Rs. 51 crores. The assessee company is an engineering company and the assessee company has made provision of Rs.11,15,000/- for the expenses on best estimate basis keeping in view the actual services provided by the vendor to the assessee company by the end of the previous year relevant to the assessment year. The ld. Counsel for the assessee company submitted that Accounting Standard-29 issued by ICAI has clearly provided that provisions are to be made for all known liabilities and hence the assessee company made the provisions for expenses incurred for services availed based on services utilized till the year end. The ld. Counsel submitted that the provision of expenses of Rs. 7,75,000/- is fee payable to M/s. Exim Management for services availed for getting excise rebate claim of the assessee company from the government authorities for which services were availed of from M/s Exim Management who was handling the excise rebate claims on behalf of the assessee company. The invoices of M/s Exim Management for their fee for rendering services for getting excise rebate claim of the assessee company approved and disbursed by the Government Authorities were received by the assessee company from M/s. Exim Management in April 2008. The invoices of M/s. Exim Management were approved and paid by the assessee company in the month of April, 2008. The details of the invoices of M/s. Exim Management and the services rendered by M/s Exim Management towards excise rebate claims of the assessee company handled by them on behalf of the assessee company are placed in paper book pages 1-6 filed with the Tribunal. The ld. Counsel for the assessee company submitted that since the invoices were received subsequently in the financial year 2008-09 , the provision for liability towards fee payable to M/s. Exim Management has been made on the best estimate basis keeping in view the services actually performed by the said vendor M/s Exim Management till the year end. It was ITA 7324/Mum/2012 7 submitted that there is another provision of Rs. 3,40,000/- which is towards technical services provided by Godrej Infotech Ltd. for upgradation of existing BAAN IV C4 to INFOR ERL software and the bill has been received in the month of May, 2008 for Rs.13,48,320/-, against which the provision of Rs.3,40,000/- was made based on the actual work performed by Godrej Infotech Limited by the year end. It is also stated that the technical services provided in connection with the Software by the Godrej Infotech Limited has been allowed as revenue expenditure in the succeeding year and there is no dispute about the allowability of said technical services rendered by Godrej Infotech Limited as being a revenue expenditure under the provisions of the Act. The ld. Counsel submitted that the provisions made on the year end are reversed on the very next day i.e. on 1st April and the actual invoices received have been accounted for in the succeeding assessment year. He relied on the AS-1 to contend that the assessee company’s books of account reflect the true and fair picture , and Revenue can compute correct income which is to be brought to tax. The ld. Counsel relied on the decision of Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. v. CIT, 314 ITR 62 (SC), Bharat Earth Movers v. CIT, 245 ITR 428 (SC), Calcutta Co. Ltd. v. CIT, 37 ITR 1 (SC) and Yum! Restaurants (I) P. Ltd. v. ACIT, 33 Taxmann.com 633( Delhi HC). The ld counsel also relied upon decisions in the case of CIT v. Hero Management Services Limited 360 ITR 68(Del), CIT v. Armour Consultants Private Limited , 355 ITR 418(Mad.) , CIT v. Rajasthan State Bridge and Construction Corporation Limited 346 ITR 53(Raj.) , CIT v. Nagri Mills Co. Ltd 33 ITR 681(Bom.) and CIT v. Triveni Engineering & Industries Limited, 196 Taxman 94(Del.). Thus the ld. Counsel submitted that provisions for expenses of Rs.11,15,000/-- should be allowed as the provisions for expenses of Rs.11,15,000/- are made on best estimate basis based on Prudence by making an estimate on the basis of services actually availed by the assessee company till the end of the year. It was submitted that to the extent of provisions for expenses of Rs.11,15,000/- so made in the impugned ITA 7324/Mum/2012 8 assessment year, the assessee company has reversed the same in the next year and to that extent expenditure is claimed lower by that amount of Rs.11,15,000/- in next year and hence the impact is revenue neutral and no prejudice is caused to the Revenue. It is submitted that if the provisions for expenses of Rs.11,15,000/- are not allowed in the impugned assessment year, then the entire expenses shall be allowed in the subsequent assessment year.

The ld. D.R., on the other hand, supported the orders of authorities below.

We have considered the rival contentions and also perused the material available on record including case laws relied upon. The assessee company is consistently following mercantile system of accounting for which there is no dispute between the rival parties. We have observed that the assessee company have made provisions for expenses of Rs.11,15,000/- towards legal and professional expenses as per details set out above stated to based on the ‘Prudence’ on the basis of the best estimates made by the assessee company keeping in view the services stated to be actually availed by the assessee company from these relevant vendors prior to the end of the relevant previous year, although invoices from the relevant vendors were received by the assessee company after the end of the relevant previous year i.e. in the succeeding assessment year 2009-10. Thus, it is stated that the best estimates are made by the assessee company on the basis of Prudence, keeping in view the actual availment of the services by the assessee company before the end of the relevant previous year. The assessee company has relied upon the Accounting Standards-29 issued by the Institute of Chartered Accountants of India to contend that provision for expenditure of Rs.11,15,000/- was rightly made as it is an ascertained liability . It is stated before us that the assessee company received the invoices from the relevant ITA 7324/Mum/2012 9 vendors in the immediately succeeding assessment year 2009-10 as submitted in the paper book, page 1-6 and there-after these invoices were approved and paid for in the immediately succeeding assessment year i.e. 2009-10. The assessee company is stated to have passed the entries for the exact amount of invoices in the succeeding assessment year 2009-10 in the books of accounts , after reversing the provisions of Rs.11,15,000/- so made in the relevant previous year , on the very first day of April 2008 in its books of accounts .Thus, it is claimed that actual expenses incurred by the assessee company for availing of services from these relevant vendors were claimed lower by the amount of Rs.11,15,000/- in the succeeding assessment year 2009-10 as the claim for allowability of provisions for expenses towards legal and professional expenses of Rs.11,15,000/- is made in the impugned assessment year 2008-09.

Ground no II is with respect to the allowability of the provisions of expenses of Rs.11,15,000/- while computing book profit u/s. 115JB of the Act. Our above decision in Ground No. I shall apply mutatis mutandis to this ground no II raised by the assessee company. We order accordingly.

Ground No III is relating to chargeability of interest u/s 234B and 234C of the Act which is consequential to Ground No. I and II and hence disposed of ITA 7324/Mum/2012 13 accordingly as per our decision with respect to Ground No. I and II. We order accordingly.

In the result, the appeal filed by the assessee company in ITA N0. 7324/Mum/2012 for the assessment year 2008-09 is treated as allowed for statistical purpose.