2015 (4) TMI 478 - HC - Income Tax

Court allows deduction for contingency provision under Income Tax Act, distinguishing accrued liabilities.

The Commissioner of Income-tax, Jaipur Versus Om Metals & Mineral (P) Limited, Kota

The court held that the provision for contingency made by the assessee was an allowable deduction under the Income Tax Act. The court distinguished ... Deduction of Provision for contingency - Ascertained liability - Allowable deduction - Held that:- The ITAT has come to a correct conclusion that the liability was ascertained and it has been an admitted fact that the work had been completed at the Dam namely; Right Bank Dam Division, Hidkal Dam and the provision was made only for supplies. Though it may be that the assessee made a provision at the rate of 6 ½ % of the supplies for possible loss due to deduction made by the Government for not keeping the supplies to the satisfaction of the department which, in-fact, had been deducted by the Government @ 10 %. However, to be on the safer side, the assessee made a provision @ 6 ½ % only. It is an admitted fact that the provision, if any made, was to make over the deficiencies, in respect of the work done as per direction of Government by which 10% deduction was made. Admittedly, the entire amount was included by the assessee in the total receipts and once entire receipt has been shown, the expenditure ought to have been allowed and therefore, this was an allowable deduction. In our view, the assessee has to ensure an expenditure and if not paid on or before close of the financial year, it certainly deserves allowance. Admittedly, the system of accounting, followed by the assessee, is mercantile and any expenditure, not paid by the close of the year, is as it is allowable and in-fact, even in a mercantile system of accounting, while income is also to be included, which has accrued to the assessee, so also the expenditure is to be allowed in similar fashion. In the light of the opinion of the Hon'ble Apex Court in the case of Bharat Earth Movers [2000 (8) TMI 4 - SUPREME Court]and Rotork Controls India (P.) Ltd. [2009 (5) TMI 16 - SUPREME COURT OF INDIA], and Calcutta Co. Ltd. [[1959 (5) TMI 3 - SUPREME Court]] in our view, the ITAT was correct and justified in allowing the amount of ₹ 87,224/- which was an ascertained liability on account of the allowable deduction. - Decided against the revenue. Issues Involved:1. Allowability of provision for contingency as a deductible expense under the Income Tax Act.2. Distinguishing between contingent liability and ascertained liability.3. Applicability of previous judgments and principles laid out by higher courts.Detailed Analysis:1. Allowability of Provision for Contingency as a Deductible Expense:The core issue was whether the provision for contingency amounting to Rs. 87,224/- made by the assessee for the assessment year 1977-1978 was an allowable deduction under the Income Tax Act. The assessee, a limited company involved in contract work, made this provision on the total amount of work executed. The Assessing Officer (AO) disallowed this amount, viewing it as a provision for a future, unascertained contingency.The Commissioner of Income Tax (Appeals) [CIT(A)] reversed this disallowance, relying on a previous ITAT order in the case of Instrumentation Limited, which allowed similar claims. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the revenue had not provided evidence to distinguish the current case from Instrumentation Limited or to indicate that the reference in Instrumentation Limited had been resolved differently.2. Distinguishing Between Contingent Liability and Ascertained Liability:The revenue argued that the provision was a contingent liability, created on an estimated basis, and thus not allowable. However, the court noted that the provision was made for possible deductions by the government for not meeting supply standards, which had already been deducted at 10%. The provision was made at a lower rate of 6 1/2 % to be on the safer side, indicating it was an ascertained liability.The court emphasized that under the mercantile system of accounting, liabilities accrued due, even if payable in the future, are deductible. This principle was reinforced by the Supreme Court in Bharat Earth Movers vs. CIT and Rotork Controls India (P.) Ltd. vs. CIT, which distinguished between contingent and accrued liabilities, allowing deductions for the latter.3. Applicability of Previous Judgments and Principles Laid Out by Higher Courts:The revenue cited several judgments, including Shri Sajjan Mills Ltd. vs. CIT, India Molasses Co. Ltd. vs. CIT, and Rajasthan State Mines & Minerals Ltd. vs. CIT, to support their argument against the allowance of the provision. However, the court found these cases distinguishable. The Supreme Court's later judgments in Bharat Earth Movers and Rotork Controls provided a more relevant precedent, supporting the deduction of accrued liabilities.The court reiterated principles from Metal Box Company of India Ltd. vs. Their Workmen, highlighting that provisions for known liabilities, even if the exact amount is uncertain, are deductible. This principle was applied to the present case, validating the provision made by the assessee.Conclusion:The court concluded that the ITAT was correct in allowing the Rs. 87,224/- as an ascertained liability and an allowable deduction. The provision was made for a known liability, fulfilling the criteria set out in relevant judgments. The question was answered in favor of the assessee and against the revenue, with no costs awarded.