| The Tax Publishers2019 TaxPub(DT) 6575 (Mum-Trib) : (2020) 180 ITD 0204 : (2020) 204 TTJ 0850 INCOME TAX ACT, 1961
Section 37(1)
Assessee was following the said method of accounting in respect of unbilled expenditure from past years and it had never been disputed by AO. Additionally, AS-1 provides for creating provision for expenditure on estimate basis keeping in view business prudence and information available. In fact, CIT(A) also not only recognized necessity of making provision for unbilled expenditure but had also allowed provision for expenditure not exceeding 10% of actual expenditure. But there is no such thumb rule either in Accounting Standards or elsewhere to restrict the provision to within the range of 10% of the actual expenditure. Assessee had reversed provision in subsequent year and offered to tax. More so, when assessee was consistently following this accounting method from past years, part disallowance sustained by CIT(A) also deserved to be deleted.
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Business expenditure - Excess provision made for sundry creditors relating to sales commission, promotion, advertisement, etc., and expenditure actually incurred - CIT(A) sustained disallowance of provision in excess of 10% of actual expenditure -
Assessee claimed deduction of excess provision made for sundry creditors relating to sales commission, promotion, advertisement, etc., and expenditure actually incurred held the same to be in the nature of contingent liability, and accordingly disallowed deduction. CIT(A) held that since provision made for unpaid expenditure and legal and professional fees fell within the rantge of 10% of actual expenditure incurred, same could be allowed. Howefer, provision made for sundry creditor relating to sale commission, promotion, advertisement, exceeded the range of 10% of actual expenditure incurred, therefore, same could not be allowed.Held: There could not be any doubt that for expenditure incurred during the year which could not be determined with certainly, sincee vendors had not raised bills/invoices, assessee was entitled to make provision on estimate basis, however, such estimate had to be a best estimate. It transpired from record, assessee was following the said method of accounting in respect of unbilled expenditure from past years and it had never been disputed by AO. Additionally, AS-1 provides for creating provision for expenditure on estimate basis keeping in view business prudence and information available. In fact, CIT(A) also not only recognized necessity of making provision for unbilled expenditure but had also allowed provision for expenditure not exceeding 10% of actual expenditure. But there is no such thumb rule either in Accounting Standards or elsewhere to restrict the provision to within the range of 10% of the actual expenditure. Assessee had reversed provision in subsequent year and offered to tax. More so, when assessee was consistently following this accounting method from past years, part disallowance sustained by CIT(A) also deserved to be deleted.
Relied:CIT v. Excel Industries Ltd., (2013) 358 ITR 295 (SC) : 2013 TaxPub(DT) 2414 (SC)
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