2012 (9) TMI 730 - AT - Income Tax

Incentive payment to drivers not contingent, liability arose in accounting period. Disallowance reversed, claim allowed. Assessee appeal successful.

Shree Dhain Auto Transport Corporation Versus The Asst. CIT, Circle-5, Vadodara

The Tribunal concluded that the liability for the incentive payment to drivers was not contingent, as it arose during the relevant accounting period. The ... Disallowance of payment of incentive to the drivers - the liability was contingent in nature for the year under consideration - Held that:- As decided in Bharat Earth Movers Versus CIT [2000 (8) TMI 4 - SUPREME COURT] if an assessee is maintaining accounts on mercantile system and a liability accrued, though discharged at a future date, held to be an allowable deduction while working out the profit and gains. The Hon’ble Court has held that having regard to the accepted principle of commercial practice and accountancy such deduction is permissible, so the liability was held as not a contingent liability. Decision of the AO was nothing but simply following the past history of the disallowance. Meaning thereby, even after the extreme step of search was taken by the Revenue Department, but the genuineness of the payment of the incentive to the drivers was not doubted - the liability of payment of incentive had definitely arisen during the accounting period under consideration and that liability was undisputedly discharged at a future date. The incurring of the liability was ascertainable for the year under appeal, therefore it is to be satisfied that it was not a contingent liability. In the result the findings of the authorities are reversed and direct to allow the claim - in favour of assessee. Issues Involved:1. Disallowance of liability for payment of incentive to drivers amounting to Rs. 47,60,000/-.Detailed Analysis:Issue 1: Disallowance of Liability for Payment of Incentive to DriversFacts and Background:The assessee, engaged in the transportation business, received contracts to transport two-wheelers from Hero Honda Company and Bajaj Auto to dealers. The assessee claimed an expenditure of Rs. 47,60,000/- as an incentive to drivers, which was disallowed by the Assessing Officer (AO) on the grounds that it was a contingent liability. The assessee argued that the liability was ascertained and confirmed, with the amount payable to drivers substantiated by credit notes and an incentive payment register. The entire amount was paid in the following financial year (2008-09).Assessing Officer's View:The AO considered the liability contingent because:- The incentive was payable only if drivers remained employed for a specified period.- The payment was subject to the management's discretion if the driver left early.- The continuity of driver employment was uncertain, making the liability unascertained.The AO referenced AS-29 and concluded that the liability was contingent, relying on precedents such as Rajasthan State Mines & Minerals (208 ITR 1010) and T.N. Small Industries Development Corporation (242 ITR 122).First Appellate Authority's (CIT(A)) View:The CIT(A) upheld the AO's decision, stating:- The incentive was contingent on future actions and conduct of the drivers.- The liability could not be determined with certainty for the year under consideration (A.Y. 2007-08).- The expenditure would accrue only when the conditions were satisfied in the future.Assessee's Argument:The assessee contended that:- The incentive scheme was established by Hero Honda Motors and Bajaj Auto for timely delivery of vehicles.- The incentive was calculated based on kilometers traveled and was duly accounted for in the financial year 2006-07.- The amount was credited in the sales account and offered for tax.- The expenditure should be allowed in the year it was incurred, following the mercantile system of accounting.- Reliance was placed on Bharat Earth Movers (245 ITR 428) and Metal Box Company of India Ltd. (73 ITR 53).Revenue's Argument:The Revenue supported the AO's and CIT(A)'s views, emphasizing:- The payment was dependent on the drivers' continued service.- The liability was spread over three years, indicating it was not immediate.- The genuineness of payments to the same drivers was not verified, suggesting a contingent liability.Tribunal's Analysis and Decision:The Tribunal examined the facts and legal precedents:- The incentive scheme was genuine and aimed at promoting prompt delivery.- The assessee received Rs. 1,07,85,370/- as incentive, out of which Rs. 47,60,000/- was provisioned for drivers.- The provision was made in the balance sheet for the year ending 31.03.2007.- The actual payment was made in F.Y. 2008-09, with sufficient evidence supporting the disbursement.- The AO did not dispute the business purpose of the expenditure but only its timing.- Following the mercantile system, the expenditure should be allowed in the year it accrued, not when paid.- The Tribunal referenced Bharat Earth Movers, which allows deductions for liabilities accrued but discharged later.- The Tribunal found the AO's reliance on Rajasthan State Mines & Minerals and T.N. Small Industries Development Corporation misplaced, as those cases dealt with different issues.Conclusion:The Tribunal concluded that the liability for the incentive payment arose during the accounting period under consideration and was not contingent. The disallowance was reversed, and the claim was allowed.Result:The appeal of the Assessee was allowed.