Tribunal allows full deduction of claimed amount under mercantile system, overturns CIT(A) decision.

The tribunal allowed the appeal, directing the Assessing Officer to permit the full deduction of Rs. 35,00,000/- claimed by the assessee. The tribunal emphasized the certainty and reasonable estimation of the liability under the mercantile system of accounting, overturning the CIT(A)'s decision to disallow a portion of the deduction.

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Issues Involved:
1. Disallowance of Rs. 24,69,085/- under section 143(3) of the Income Tax Act.
2. Restriction of claim of deduction to Rs. 10,30,915/- against Rs. 35,00,000/- towards loss on settlement with the leasing company.
3. Determination of whether the claim of Rs. 24,69,085/- is an unascertained liability.
4. Consistency in following the mercantile system of accounting.
5. Non-adjudication of the ground for allowing deduction of Rs. 35,00,000/- in subsequent assessment years if disallowed in AY 2013-14.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 24,69,085/- under section 143(3) of the Income Tax Act:
The assessee company, engaged in trading construction, engineering, and technical tools, filed its return of income declaring Rs. 7,13,69,375/-. During assessment, the AO noted a provision of Rs. 35 lakhs for settlement with leasing companies due to fraud by an employee. The AO disallowed the provision, treating it as an unascertained liability, as the FIR indicated partial settlements and contradictory documents regarding the settlement amount. The CIT(A) upheld the disallowance of Rs. 24,69,085/- while allowing Rs. 10,30,915/- as incurred expenses.

2. Restriction of claim of deduction to Rs. 10,30,915/- against Rs. 35,00,000/- towards loss on settlement with the leasing company:
The CIT(A) allowed only Rs. 10,30,915/- as a deductible expense for the settlement made during the assessment year, disallowing the balance of Rs. 24,69,085/-. The assessee argued that the provision was made on a reasonable estimate basis and should be fully deductible as per the mercantile system of accounting.

3. Determination of whether the claim of Rs. 24,69,085/- is an unascertained liability:
The AO and CIT(A) treated the provision of Rs. 24,69,085/- as an unascertained liability, not allowable under section 37 of the Income Tax Act. The assessee contended that the liability was certain and should be deductible, referencing the Supreme Court's decision in Bharat Earth Movers vs. CIT, which allows deduction for liabilities that are certain and reasonably estimable, even if quantification and discharge occur in the future.

4. Consistency in following the mercantile system of accounting:
The assessee consistently followed the mercantile system, where liabilities are recognized when incurred. The tribunal noted that under this system, liabilities that are certain and estimable should be deductible. The tribunal referenced multiple judicial precedents supporting the deduction of such provisions, including decisions from the Supreme Court and High Courts.

5. Non-adjudication of the ground for allowing deduction of Rs. 35,00,000/- in subsequent assessment years if disallowed in AY 2013-14:
The assessee raised a ground for allowing the deduction in subsequent years if disallowed in AY 2013-14. However, the CIT(A) did not adjudicate this ground. The tribunal, considering the judicial precedents and the mercantile accounting system, allowed the full deduction of Rs. 35,00,000/- for the provision created due to the fraud.

Conclusion:
The tribunal found merit in the assessee's arguments and judicial precedents, allowing the full deduction of Rs. 35,00,000/-. The tribunal set aside the CIT(A)'s order and directed the AO to allow the deduction in full, emphasizing the certainty and reasonable estimation of the liability under the mercantile system of accounting.

Order:
The appeal filed by the assessee was allowed, with the tribunal directing the AO to allow the full deduction of Rs. 35,00,000/-.

Pronouncement:
The order was pronounced in the open court on 14th February, 2022.

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