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30-08-2019, AGC Network, Section 145(2), 32(1)(ii), Tribunal Mumbai

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4 months 2 weeks ago #10682 by amit
Section - 145(2), 32(1)(ii), 32(1), 154, 36(1)(vii), 155(14)
Order Date - 30-08-2019
Favouring - Assessee Partly
Court - Tribunal Mumbai
Appellant - DCIT
Respondent - AGC Network Ltd.
Citation - 919Taxpundit12
Appeal No. - ITA no.5157/Mum./2012
Asstt. Year - 2008–09



These are five sets of cross appeals arising out of separate orders passed by the learned Commissioner of Income Tax (Appeals)–21, Mumbai, pertaining to the assessment years 2005–06, 2006–07, 2007–08, 2008–09 and 2009–10.

2. Since all these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed of by way of this consolidated order.

ITA no.8674/Mum./2011
Assessee’s Appeal – A.Y. 2005–06

3. In ground no 1, the assessee has challenged the disallowance of provision for expenditure amounting to ` 2,07,06,990.

4. Brief facts are, the assessee is a resident company. As stated by the Assessing Officer, it is engaged in the business of providing telecommunication equipment, service and solutions. Broadly, the assessee provides electronic private automated branch exchanges, call centre, data products, voice processing systems, low end EPABX, setting–up of Backbone network for cellular operators, teleconferencing, etc. For the assessment year under dispute, the assessee filed its return of income on 27th October 2005, declaring total income of ` 45,32,59,427. In the course of assessment proceedings, while verifying the annual report of the assessee, the Assessing Officer found that the assessee has made a provision for various expenditures incurred in respect of which bills were not received from the vendors as on 31st March 2005. The total of such expenditures worked out to ` 3,53,96,636. The Assessing Officer observed, in such situations where the bills are received after 31st March, but before filing of the return of income, the excess provision made is reversed and only the actual expenditures are debited to the Profit & Loss Account. However, in assessee’s case, the excess provision is reversed in the subsequent year. As a result, the entire expenditure in the nature of provision is claimed as deduction in current year. Being of the view that the method followed by the assessee does not give a true and fair view of the profit of the company, the Assessing Officer called upon the assessee to furnish the details of actual expenditure incurred vis–a–vis the provision made in the books of account. After perusing the details furnished by the assessee, the following facts emerged:–

5. Being of the view that the excess provision made is in the nature of contingent liability, the Assessing Officer disallowed the same and added back to the income of the assessee. Being aggrieved with such disallowance, the assessee preferred appeal before learned Commissioner (Appeals .

6. After considering the submissions of the assessee, learned Commissioner (Appeals), though, agreed that in respect of goods and services received towards the end of the month of March, the assessee may not have received invoices/bills of the vendors for which the assessee has to make estimation of provision for such expenditure on a reasonable and scientific basis. However, he observed, such estimation of provision for expenditure should be very near to the actual expenditure incurred for which the bills may not have been received. He observed, since the provision made by the assessee is far more than the actual expenditure, it cannot be said that the provision made is on reasonable or scientific basis. Learned Commissioner (Appeals) observed, if the provision made is within the range of 5 to 10% of the actual expenditure incurred for which the bills were received after the end of financial year, then the provision made can
be accepted as reasonable. Applying the said benchmark, learned Commissioner (Appeals) held that the provision made for unpaid expenditure and legal and professional fees since falls within the range of 10% of the actual expenditure incurred, they can be allowed. However, he observed, provision made for sundry creditor relating to sale commission, promotion, advertisement, exceeds the range of 10% of the actual expenditure incurred. Thus, he held that the said provision in excess of 10% of the actual expenditure cannot be allowed as business expenditure. Accordingly, he sustained the disallowance to the extent of ` 2,07,06,990. Further, learned Commissioner (Appeals) directed the Assessing Officer to grant consequential relief to the assessee in respect of such provision offered as income in assessmentyear 2013–14.

7. The learned Authorised Representative submitted, since the assessee follows mercantile system of accounting, it has to book all expenditures which have crystallized during the year. He submitted, as

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