TMI Blog2022 (2) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... RDER PER R.K. PANDA, AM: This appeal filed by the assessee is directed against the order dated 31.10.2017 of the CIT(A)-35, New Delhi, relating to AY 2013-14. 2. The grounds of appeal raised by the assessee read as under:- General 1. That based on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming disallowance of ₹ 24,69,085/- in terms of order dated November 02, 2016 passed under section 143(3) of the Act (hereinafter referred as impugned assessment order ) by the Addl. Commissioner of Income-tax, Special Range-4, New Delhi ( Ld. AO ). Disallowance of Provision for settlement with the leasing company 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the claim of deduction to ₹ 10,30,915/- as against ₹ 35,00,000/- claimed by the Appellant towards loss arising on settlement of claim with the leasing company. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the above claim of the Appellant, to the extent of ₹ 24,69,085/- is unascertained liability. 4. That on the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be indemnified by the company for which the provision of ₹ 35 lakhs was made in the books of account. It was argued that eventually the amount was settled with the leasing company at ₹ 39,92,063/- out of which ₹ 10,30,915/- was paid on 30th March, 2013 and the balance was paid during the FY 2013-14. 3.2 However, the AO was not satisfied with the arguments advanced by the assessee and made an addition of ₹ 35 lakhs by observing as under:- 6. As per the provision of Income Tax Act, only the expenditure incurred for the purposes of business of the assessee can be allowed as deduction u/s 37 of the Income Tax Act. Further, no deduction towards the provisions for unascertained liability is allowable. The documents furnished by the assessee suggest that in this case an FIR was filed on 27/08/2013 with Police Station, Okhla Industrial Area, New Delhi. This FIR explains the nature of fraud and also mention that till 27/08/2013 the company paid total sum of Rs.' 17,13,638/- towards partial settlement of the claim of leasing companies. As against this, the assessee company has filed a copy of letter dated 31/08/2013 addressed to SFIO, Okhla Industrial Area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on 31st March, 2013. 7. He submitted that the estimate made by the assessee is on fair and reasonable basis and the liability is ascertainable the moment it is incurred. He submitted that in the instant case, the assessee has filed an FIR on 27th August, 2013, copy of which is placed at pages 116 to 120 of the paper book. He submitted that the assessee in its accounts has shown this liability on estimate basis which was reasonable under the facts and circumstances of the case and the assessee is following mercantile system of accounting. Therefore, it was incumbent upon the assessee to show the same on accrual basis. Referring to the decision of the Hon ble Supreme Court in the case of Bharat Earth Movers vs. CIT, reported in 112 taxman 61, he submitted that the Hon ble Supreme Court in the said decision has held that if a business liability has definitely arisen in the accounting year, deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability and it should be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards the provision for unascertained liability is allowable. According to the AO, the assessee has only filed an FIR and the copy of the FIR mentions that the assessee has already settled the payments with the leasing company by paying ₹ 39,92,063/- and this payment was made on 18th June, 2014. According to the AO, these documents filed by the assessee contradict with each other. Since the provisions of ₹ 35 lakh was on account of unascertained liability, he disallowed the same. We find, the ld.CIT(A) allowed an amount of ₹ 10,30,915/- and disallowed the balance amount, the reasons of which have already been reproduced in the preceding para. It is the submission of the ld. Counsel for the assessee that the liability is allowable the moment it was incurred and the estimate made by the assessee was fair and reasonable. Since the assessee is following mercantile system of accounting, therefore, in relation to the loss caused to the leasing company which was to be indemnified by the assessee company, the provision for ₹ 35 lakhs was made in the books of account which was fair and reasonable. 11.1 We find force in the above argument of the ld. Counsel. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness; (iii) A condition subsequent, the fulfillment 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 particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. 6. So is the view taken in Calcutta Co. Ltd. Vs. Commissioner of Income-Tax, West Bengal (1959) 37 ITR 1 wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the above-said settled principles to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 exists and is also not disputed by assessee, but merely not paid, is not a contingent liability when the work or obligation has been actually performed by the third party to whom the payment is due. When the assessee accepts performance of the work or obligation and accepts liability to pay, it partake the character 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). Off course, the assessing officer can examine and go into valuation of the liability and decide whether it has been satisfactorily and fairly determined. 12. Assessing Officer and Appellate Authority in their orders had primarily relied upon the terminology or nomenclature of provision to disallow the claim of expenditure of ₹ 29,90,064/- and ₹ 28,62,275/- and opine that the provisions made should not be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 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 to the same and having regard to the accepted commercial practice and trading principles was a deduction which, if there was no specific provision for it under section 10(2) of the Act was certainly allowable deduction, in arriving at the profits and gains of the business of the appellant under section 10(1) of the Act, there being no prohibition against it, express or implied in the Act. It is to be noted that the appellant had led evidence before the Income-tax authorities in regard to this estimated expenditure of ₹ 24,809 and no exception was taken to the same in regard to the quantum, though the permissibility of such a deduction was questioned by them relying upon the provisions of s. 10(2) of the Act. It therefore follows that the conclusion reached by the High Court in regard to the disallowance of ₹ 24,809 was wrong and it should have answered the referred question in the affirmative. 14. The aforesaid principles were applied to allow deduction of provision for gratuity, in case of serving employ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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