TaxTMI 
TaxTMI 
TaxTMI 
2012 (9) TMI 730
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..../s.143(3) r.w.s.115WE(3) dated 30.12.2009 are that the assessee is in transportation business. Ld. AR has informed that the assessee has been given the contract to transport the two-wheelers of Hero Honda Company and Bajaj Auto from their respective manufacturing plant, up-to the dealers. The AO has raised an issue in respect of a sum debited to P&L account, amounting to Rs. 47,60,000/- under the head "incentive to drivers". According to AO, the said liability was not an ascertained liability, but a contingent liability. In compliance the assessee has informed that the said amount was payable to drivers. To substantiate, a credit note had been issued in the form of a "card" to the drivers. The said credit note was duly signed by the assessee as well as by the drivers, being entitled for the payment. It has also been informed that the entire amount of Rs. 47,60,000/- was paid to those drivers in the ensuing Financial Year 2008-09. On that basis, it was contended that the liability was an ascertained as also a confirmed liability, therefore ought to be allowed. Assessee has produced "incentive payment register" to establish that the payment had actually been made to all those drivers....
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....ability for the year under consideration, hence disallowed the same by holding as a contingent liability. Being aggrieved, the matter was carried before the first appellate authority. 3. Ld.CIT(A) has affirmed the action of the AO by passing a brief order as follows:- "4.3. I have carefully considered the facts of the case, submissions of the appellant and the assessment order. A perusal of the driver incentive card reveals the follows: i) That the driver would get Incentive if he works for the company upto 2009. ii) If the driver leaves in between it is at the discretion of the company to give incentive or not. iii) If the driver is negligent or misconducts then the incentive would be forfeited. In other words the incurring of incentive expenditure is contingent upon future action and conduct of the drivers which is not within the control of the appellant nor it could be said with certainty as to what would be the liability on this count. The expenditure though is related to business would said to accrue when the conditions are satisfied and it has certainly not accrued during A.Y. 2007-08. I am thus in agreement with the AO that the liability arises from future events ....
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.... argued that once the AO has not doubted the genuineness of the payment, then the other option with the Revenue Department could be to allow the payment in the year in which it was disbursed. But that action could not be in accordance with law because the assessee has consistently maintained "mercantile system of accounting". Since the corresponding income had been disclosed for the year under consideration, therefore the connected expenditure should also be allowed in that very year. For this legal proposition, reliance was placed on Bharat Earth Movers 245 ITR 428 ( S.C.) and Metal Box Company of India Ltd. 73 ITR 53(S.C.). He has also placed reliance on Rotork Controls India P Ltd 314 ITR 62 ( S.C.). 4. From the side of the Revenue, ld.Sr.DR Mr.S.S.Jha has supported the orders of the AO and CIT(A). He has pleaded that by the very nature of the scheme, the payment was depending upon the continuity of the service of the drivers which means that in case of discontinuance of the service of a driver, the assessee was not under obligation to pay the amount of incentive. The period of payment was also about three years because as per the terms of the "incentive card" the obligation of....
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.... that the liability had not actually accrued in the F.Y. 2006-07. We have examined the legal side of this observation of the AO. If for a moment the AO's view is being considered, then the expenditure ought to have been allowed in the year in which it was actually paid. But that too was not possible rather it was an incorrect legal proposition because the assessee has consistently maintained "mercantile system of accounting" therefore on payment basis an expenditure could not be allowed which did not pertain to the year of payment. Otherwise also, payment could not be allowed in the year in which it was disbursed because the corresponding income and the matching services rendered did not relate to that year but it related to the past period. Hence that proposition has to be ruled out. Resultantly, the AO's alleged view would lead to a situation where the impugned expenditure would neither be allowable in the year in which it had accrued or a provision was made; nor it would be allowable in the year in which it was actually paid, although the expenditure was found to be genuine. At this juncture, we may like to mention that in subsequent two Assessment Years, i.e. AYs 2008-09 & 2009....