2011 (6) TMI 804 - AT - Income Tax

Revenue's Appeal Partly Allowed; Disallowance of Discount Upheld; Treatment of Foreign Currency Travel Expenses Excluded from Turnover

The Tribunal partly allowed the Revenue's appeal, upholding the disallowance of the provision for discount due to it being adhoc and arbitrary. However, ... - Issues involved: Appeal against order of CIT(A) for assessment year 2005-06 regarding deletion of additions made in assessment order.Issue 1: Provision for discountThe assessee, engaged in manufacturing, declared total income in return filed on 31.10.2005. The Assessing Officer disallowed a provision for discount of Rs. 18,38,40,583, considering it an unascertained liability. The assessee contended that only Rs. 3,85,17,201 was a provision for discount, while the rest was an accrued liability. The provision was based on turnover discounts linked to performance targets for channel partners. The CIT(A) accepted the assessee's version, citing compliance with Accounting Standards. The Revenue argued that the provision was contingent and relied on legal precedents. The Tribunal held that for a provision to be allowed, there must be a present obligation, probable outflow of resources, and a reliable estimate. As the provision was adhoc and arbitrary, not quantifiable during the year, it was disallowed. The Revenue's grounds were allowed.Issue 2: Treatment of travel expenditureThe second issue concerned whether travel expenditure in foreign currency, when reduced from export turnover, should also be excluded from total turnover. The Tribunal noted that this issue was covered by a previous decision of the Chennai Bench, which favored the assessee. As the Revenue did not dispute this fact, the issue was decided in favor of the assessee.In conclusion, the Tribunal partly allowed the Revenue's appeal, upholding the disallowance of the provision for discount while ruling in favor of the assessee regarding the treatment of travel expenditure.