TMI Blog2014 (11) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of actual liability in praesenti and is not dependent upon future happening of an event, which would result in creation of liability subsequently. In the former cases, the liability has incurred or accrued, but actual payment remains unpaid and would be made in the next year(s) - a "provision" can be made in respect of amounts which have become due and payable in the relevant previous year and therefore could be debited to the profit and loss account, once they represent ascertained liability – in Calcutta Company Ltd. Vs. Commissioner of Income Tax, West Bengal [1959 (5) TMI 3 - SUPREME Court], wherein it was held that if liability has been definitely incurred in form of unconditional contractual liability, it would not become contingent because payment has to be paid in future. These principles were applied to allow deduction of "provision" for gratuity, in case of serving employees and to whom the gratuity was payable only on retirement/termination, subject to condition that the amount so estimated was sufficiently certain to be capable of being valued - Gratuity payable in future was an obligation arising out of the present engagement and the estimated liability was asce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- 13. We have heard both the counsel and perused the records. We find that the authorities below have totally erred in treating the provision of expenses not allowable. It is only those provisions which are contingent liability which are not allowable. In this case, no case has been made out that the provision made by the assessee for network repair and maintenance expenses was only a contingent liability. The fact of the matter is that the provision was made for the repairs in this regard as the relevant bills were not received and payment thereof was not made upto the close of the assessment year. Hence, in accordance with accrual system of accounting, the provision in this regard was created. Hence, the provision for network repair and maintenance expenses cannot be said to be a provision made for contingent expenses. There is no contingency in the expenditure to be incurred in this regard. The expenditure has to be incurred though the exact amount was not ascertained. In such circumstances, in our considered opinion, the said disallowance has to be deleted. Accordingly, we set aside the orders of the authorities below and decide the issue in favor of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has provided of sum of ₹ 28,62,275/-under the head network repair and maintenance. Since, provision for expenses cannot be treated as revenue expenditure under the Income Tax Act, 1961 therefore the amount of ₹ 28,62,275/- is disallowed and added back to the income of the assessee. XXXXXXXX 8. The following amounts shown as provisions under the various expenses head cannot be treated as actual revenue expenditure therefore the same are being disallowed and added back to the declared income of the assessee. a) Provision for credit verification cost Rs.11,41,060/- b) Provision for consultancy charges Rs.8,63,320/- c) Provision for car hire charges Rs.9,85,684/- Rs.29,90,064/- (Addition of ₹ 29,90,064/-) 8. The Assessing Officer while making the additions of ₹ 29,90,064, it is apparently clear, did not examine the matter meticulously and in depth. Facts and findings were virtually not elucidated. Perfunctory conclusion s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contentions and to negate and challenge the findings of the Tribunal that the amounts claimed as expenses were not provisions in the sense that no services had been rendered and the expenditure had not been incurred. The finding of the Tribunal is clearly that relevant bills had not been received but the services had been rendered and tasks performed. The expenditure was incurred. In view of the aforesaid position, we are not inclined to interfere on the first aspect/question raised by the Revenue. 11. The undisputed position is that the assessee follows mercantile system of accountancy. The term expenditure donates idea of spending, paying out or away; it is something which is gone irretrievably. (See Indian Molasses Co. (P) Ltd. v. CIT, (1959) 37 ITR 66). In mercantile system the term expenditure is not necessarily confined to money actually paid towards a liability, but would cover a liability accrued or has been incurred in praesenti, although the discharge could be at a future date. A liability accrues or is incurred when it is an ascertained liability and not a contingent liability, i.e. liability which may or may not accrue and is uncertain. A liability, which actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the present case, we find that the sum of ₹ 24,809 represented the estimated expenditure which had to be incurred by the appellant in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was an accrued liability which according to the mercantile system of accounting the appellant was entitled to debit in its books of account for the accounting year as against the receipts of ₹ 43,692-11-9 which represented the sale proceeds of the said lands. Even under s. 10(2) of the Income-tax Act, it might possibly be urged that the word expended was capable of being interpreted as expendable or to be expended at least in a case where a liability to incur the said expenses had been actually incurred by the assessee who adopted the mercantile system of accounting and the debit of ₹ 24,809 was thus a proper debit in the present case. We need not however base our decision on any such consideration. We are definitely of opinion that the sum of ₹ 24,809 represented the estimated amount which would have to be expended by the appellant in the course of carrying on its business and was incidental t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under: (i) For an assessee maintaining his accounts on the mercantile system, liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question IS whether a receipt of money is taxable or not or whether certain deductions from the receipt are permissible in law or not, the question is to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Sec.56 or any other provision of the Act. As pointed out by Lord Russel in the case of B.S.C. Footwear Ltd (1970) 77 ITR 857, the Income tax Law does not march step by step in the footprints of accountancy profession . 8.3 The appellant is not entitled for the provision and that is why it has resorted to colourable device to represent the same so that it can circumvent the provisions of the Act as invoked by the Ld AG. The essence of the matter is that the appellant has tried to do something which it cannot accomplish directly within the scope of the IT law. Regarding the question of taxability as per the principle of law vis-a-vis accountancy practice has been already discussed in earlier paragraphs Tuticorin Alkali Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the fact the frequency of payment of the said amount, the appellant would derive a benefit which would spread over not only for the period of expenditure but on subsequent years to come. The facts and circumstances of the present case justifies that the appellant although incurred the expenditure in a particular year but the fruits of such benefit would continue to be received over a period of ensuing years. In fact allowing the entire expenditure in one year would give a much distorted picture of profit of a particular year. Reliance is placed on Madras Industrial Investment Corporation Ltd v CIT (Supreme Court), Hindustan Aluminum Corporation Ltd v CIT (1983) 144 ITR 474 (Cal). The facts and circumstances of the case justifies that the appellant should have debited only 1/5th of the amount of expenditure in the P L alc for the year under consideration and the balance should have been spread over for the four succeeding years with a view to avoid presentation of distorted picture of the profit. Such spreading over of the said expenditure over a period of 5 years would have been in accordance with the expected accounting practice which is in no way contrary to any specific pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure involved is capital in nature. Ld. Counsel of the assessee submitted that brand launch expenses incurred in the pre-operative period has been added to the pre-operative expenses. He further submitted that the Hon'ble Apex Court decision in the case of Madras Industrial Investment Corporation vs. CIT. (Supra) is not applicable on the facts of the case. In this regard, Ld. Counsel of the assessee referred to decision of this tribunal in ACIT vs. Global Healthline P Ltd. passed in ITA NO. 3319/Del/2012 vide order dated 7.9.2012. In this case, the tribunal has held as under:- 6.We have heard the rival contentions and perused the records. We find that the case law relied upon by the Assessing Officer in the case of Madras Industrial Corporation Ltd, vs.CIT, 225 ITR 802 is not applicableon the facts of the present case. In the aforesaid case the said Corporation issued debentures in December, 1966 at a discount. The total discount on the issue of 1.5 crores amounted to 3,00,000/- for the assessment year 1968-69. The company wrote off 12,500/- out of the total discount of 3,00,000/-being the proportionate amount of discount for the period of six months ending 30.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the ratio in Commissioner of Income Tax, Delhi-IV versus Industrial Finance Corporation of India Limited, (2009) 185 Taxman 296 (Delhi) wherein it has been held:- 22. The judgments on which reliance is placed by the learned Counsel for the Revenue would be of no avail in the instant case. The learned Counsel for the Revenue had strongly argued that matching concept is to be applied, as per which part of the expenditure had to be deferred and claimed in the subsequent years and, therefore, approach of the AO was correct. However, this argument overlooks that even in Madras Industrial Investment Corporation (supra), on which the reliance was placed by Ms. Bansal, the general principle stated was that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business can be allowed in the year in which it is incurred. Some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time as was justifying such spread. It was a case of issuing debentures at discount; whereas the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, be spread over the period of the debentures. 23. XXXXX 24. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the Income Tax department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of matching concept is satisfied, which upto now has been restricted to the cases of debentures. 21. Similarly, this Court in ITA No. 597/2014, Commissioner of Income Tax-III versus M/s Spice Distribution Limited has held as under:- 4. The Tribunal has rightly noticed and referred to the decision of the Delhi High Court in Commissioner of Income Tax Vs. Pepsico India Cold Drink Ltd. in ITA No. 319/2010, decided on 30.03.2011 wherein, the judgment of the Supreme Court in Madras Industrial Investment Corporation Vs. Commissioner of Income Tax, 225 ITR 802 (SC) was examined and it was observed that the assessee is entitled to claim deferred revenue expenditure but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and adopted and they must disclose fair and true financial position and the income, but they cannot be contrary to the provisions or the mandate of the Act. The Act would then override the accountancy principles. There are several provisions in the Act like Section 43B which provide for different treatment than required under the provisions of the Companies Act or the accounting principles or standards. Reference can be made to Kedarnath Jute Mfg. Co. Ltd. Versus CIT, (1971) 82 ITR 363 where it was held, We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In Tuticorin Alkali Chemicals F ..... 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