THE issue before the Bench is - Whether provisions for network repair and maintenance and credit verification cost and provision for consultancy charges and provision for car hiring charges are disallowable as a contingent liability where the services had actually been performed and liability was accepted by the assessee and the amounts represented ascertained liabilities and were shown as "provisions" as the services were rendered close to the assessment years and relevant bills were not received. And the answer favours the assessee.
Facts of the case
A) The assessee made provision for network repair and maintenance expenses. Assessing Officer made addition on account of provisions for network repair and maintenance and disallowance on account of credit verification cost, provision for consultancy charges and provision for car hiring charges. Commissioner of Income Tax (Appeals) upheld the disallowance made by Assessing Officer.
Tribunal held that no case was made out that the provision made by the assessee for network repair and maintenance expenses was only a contingent liability. It was held that the provision was made for the repairs in this regard as the relevant bills were not received and payment thereof was not made upto the close of the assessment year. Hence, in accordance with accrual system of accounting, the provision in this regard was created. Hence, the provision for network repair and maintenance expenses could not be said to be a provision made for contingent expenses. Hence, said disallowance has to be deleted.
On the question of disallowance on account of Tribunal held that provisions made by the assessee could not be treated as contingent liability when nothing was brought by the Revenue on record that expenditure in this regard was contingent in nature. The provision was made as the payment in this regard could not be made upto the close of the year as the bills in this regard were received late. Hence, there was no contingency in the expenditure to be incurred. Only the exact amount had not been ascertained. Hence, following the mercantile system of accounting such provision could not be disallowed.
B) Assessing Officer allowed 20% of the brand launch expenses by treating the same as deferred revenue expenditure. Remaining amount was disallowed.
Commissioner of Income Tax (Appeals) held that assessee although incurred the expenditure in a particular year but the fruits of such benefit would continue to be received over a period of ensuing years. Commissioner (Appeals) held that 1/5th of the expenditure should be allowed for the period under consideration and the balance should be disallowed and appellant could spread the same for the four successive years subject to other provisions of the Act.
Tribunal allowed the appeal of the assessee by observing that in the matter of taxation, expenditure is either to be capitalized or is revenue in nature. It was held that expenditure involved was revenue in nature and was incurred wholly and exclusively for the purpose of business.
Having heard the parties, the Court held that,
A) ++ the services had actually been rendered and the assessee had accepted the claim which was due and payable but relevant bills had not been received till the end of the Assessment Year. The aforesaid position is the factual finding given by the Tribunal;
++ Tribunal followed the reasoning for deleting disallowance of Rs.28,62,275/-, holding that the services had actually been rendered but only relevant bills had not been received. In view of the fact that the respondent-assessee was following mercantile system of accountancy, the amount due and payable had accrued and, therefore, allowable as an expenditure;
++ Revenue has not filed copy of the documents or papers, which were filed by the assessee in support of their contentions and to negate and challenge the findings of the Tribunal that the amounts claimed as expenses were not provisions in the sense that no services had been rendered and the expenditure had not been incurred. The finding of the Tribunal is clearly that relevant bills had not been received but the services had been rendered and tasks performed. The expenditure was incurred. In view of the aforesaid position, we are not inclined to interfere on the first aspect/question raised by the Revenue;
++ the assessee follows mercantile system of accountancy. The term "expenditure" donates idea of spending, paying out or away; it is something which is gone irretrievably. (See Indian Molasses Co. (P) Ltd. v. CIT. In mercantile system the term expenditure is not necessarily confined to money actually paid towards a liability, but would cover a liability accrued or has been incurred in praesenti, although the discharge could be at a future date. A liability accrues or is incurred when it is an ascertained liability and not a contingent liability, i.e. liability which may or may not accrue and is uncertain. A liability, which actually exists and is also not disputed by assessee, but merely not paid, is not a contingent liability when the work or obligation has been actually performed by the third party to whom the payment is due. When the assessee accepts performance of the work or obligation and accepts liability to pay, it partake the character of actual liability in praesenti and is not dependent upon future happening of an event, which would result in creation of liability subsequently. In the former cases, the liability has incurred or accrued, but actual payment remains unpaid and would be made in the next year(s). Off course, the assessing officer can examine and go into valuation of the liability and decide whether it has been satisfactorily and fairly determined;
++ Assessing Officer while making the additions of Rs.29,90,064, it is apparently clear, did not examine the matter meticulously and in depth. Facts and findings were virtually not elucidated. Perfunctory conclusion stands recorded. With regard to expenditure of Rs.28,62,278/-, the Assessing Officer simply observed that it was a provision and, therefore, cannot be allowed and had to be added back. He did not go into the question whether or not the services were actually rendered as was claimed by the assessee and expenditure had been incurred. There is no discussion on the aspect of service rendered/performed, basis of computation, incurring of expenses etc. Similarly, with regard to the provision for credit verification cost, consultancy charges and car hire charges, there is hardly any reasoning given to add back and disallow the expenses;
++ Assessing Officer and Appellate Authority in their orders had primarily relied upon the terminology or nomenclature of "provision" to disallow the claim of expenditure of Rs.29,90,064/- and Rs.28,62,275/- and opine that the provisions made should not be treated as expenditure incurred. This is not the correct and true test, which is to be applied. A "provision" can be made in respect of amounts which have become due and payable in the relevant previous year and therefore could be debited to the profit and loss account, once they represent ascertained liability. We do not find any negative elucidation on the relevant aspects in the orders passed by Assessing Officer and the C.I.T (Appeals). Albeit, there is elucidation and finding recorded by tribunal that the services had actually been performed and liability was accepted by the respondent assessee. The amounts therefore represented ascertained liabilities. These were shown as "provisions" as the services were rendered close to the assessment years and relevant bills had not been received. This would not make the provisions a contingent liability;
++ appropriate would be to refer to the decision of the Supreme Court in Calcutta Company Ltd. Vs. Commissioner of Income Tax, West Bengal, - 2002-TIOL-819-SC-IT-LB, wherein it was held that if liability has been definitely incurred in form of unconditional contractual liability, it would not become contingent because payment has to be paid in future. However, liability should have been fairly and accurately estimated;
B) ++ it is noticeable that the Assessing Officer himself had held that the expenses were of revenue nature but he had treated them as deferred revenue expenditure by allowing 1/5th i.e. Rs.2,11,36,275/- in the current year and the balance amount of Rs.8,45,45,104/- was directed to be amortised in the next four years;
++ first appellate authority has referred to the distinction between capital and revenue expenditure but did not disturb the final finding of the Assessing Officer that the expense was revenue in nature. Therefore, the discussion distinguishing capital and revenue expenditure was superfluous and inconsequential. When an expenditure is revenue in nature and not capital, then provisions of Section 37(1) of the Income Tax Act, 1961 (Act, for short) would come into play and the expenditure which qualifies and meets the requirements of the said Section has to be allowed as a deduction. It is in these circumstances that the Tribunal has allowed the appeal of the assessee;
++ reasoning of the Tribunal is in consonance and as per the ratio in Commissioner of Income Tax, Delhi-IV versus Industrial Finance Corporation of India Limited.
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