2013 (5) TMI 310 - AT - Income Tax

Tribunal dismisses appeal on disallowed provision expense, citing lack of genuine liability.

The Tribunal upheld the disallowance of expenditure of Rs. 8,45,44,976/- as a provision, determining it was not an ascertained liability. The appeal was ... Expenditure on account of access charges payable - assessee claims ascertained liability for claiming expenditure and un-ascertained liability for non deduction of TDS - held that:- when claiming the provision to be allowed as expenditure the assessee treats it as a known and ascertained liability accrued during the financial year, however, when confronted with the obligation under the TDS provision, the assessee takes a contradictory stand that the deductees are not identifiable and in absence of details relating to correct amount to be paid and correct amount of TDS, adhoc deduction of tax on estimated provision was not possible. The assessee cannot be allowed to take such contradictory stand. It is also a fact that the assessee has not been able to substantiate as to how the said provision was only in respect of the contents/value added services for which revenue was recognized for relevant year as has been observed by the CIT(A). Ratio of the decision of apex court in Bharat Earth Movers [2000 (8) TMI 4 - SUPREME Court] are not applicable in the present case. Issues Involved:1. Disallowance of expenditure of Rs. 8,45,44,976/- as a provision.2. Applicability of Section 40(a)(ia) of the Income Tax Act due to non-deduction of tax at source.Issue-wise Detailed Analysis:Disallowance of Expenditure of Rs. 8,45,44,976/- as a Provision:The assessee, engaged in providing content-based services to telecom service providers, filed its return for the assessment year 2006-07. The Assessing Officer (AO) noticed that the assessee had shown access charges of Rs. 24,94,15,467/- under direct expenses in the profit and loss account. This included a provision of Rs. 8,45,44,976/- made on an ad hoc basis without actual invoices, which was reversed on 1st April 2006. The AO questioned the allowance of this provision as an expenditure under Section 36 of the Income Tax Act, as it was not an ascertained liability but an estimate.The AO held that since the assessee follows the mercantile system of accounting, expenses not yet accrued and due could not be allowed as a deduction. The AO also noted that the assessee's claim that no TDS was deductible on the provision was contradictory, as the liability was not ascertained and the parties were not identifiable. Consequently, the AO disallowed the expenditure.Upon appeal, the CIT (A) concurred with the AO, stating that the expenditure was not allowable as it was a provision and not a definite liability. Additionally, the CIT (A) held that the assessee adopted the provision route to avoid the consequences of Section 40(a)(ia) due to non-compliance with TDS provisions. An alternative argument by the assessee, claiming that Rs. 6 crore was paid before the due date of filing the return, was also rejected as the assessee could not substantiate that the provision pertained only to March 2006 and not earlier months.Applicability of Section 40(a)(ia) of the Income Tax Act Due to Non-Deduction of Tax at Source:The assessee argued that the provision was made under the matching concept principle of accountancy, and cited various judicial precedents to support the claim that provisions for known liabilities should be allowed even if the exact amount was not determined. However, the AO and CIT (A) found these arguments unconvincing, as the provision was based on estimates and the liability was not ascertained. The CIT (A) further noted that the assessee's practice of reversing provisions monthly indicated a lack of genuine liability.The Tribunal examined the submissions and judicial pronouncements. It found that the provision was made on an estimate basis, and the assessee's claim that the liability was known and ascertained was inconsistent. The Tribunal agreed with the lower authorities that the expenditure was not allowable, as the liability was neither ascertained nor the parties identifiable. The decisions cited by the assessee were found distinguishable, as they involved ascertained liabilities and identifiable parties.Conclusion:The Tribunal dismissed the appeal, upholding the disallowance of the expenditure of Rs. 8,45,44,976/- as it was a provision and not an ascertained liability. The grounds related to the disallowance under Section 40(a)(ia) became academic and were not adjudicated. The appeal filed by the assessee was dismissed.