The DCIT, Circle-1(1)(1), Ahmedabad V. M/s. Arvind Lifestyle Brands Ltd., Ahmedabad

ITA 474/AHD/2020

AI Insights

The case involves cross appeals by the Revenue and the assessee, Arvind Lifestyle Brands Ltd., against the order of the CIT(A) regarding the disallowance of provisions for expenses and the deductibility of certain expenditures under Section 40(a)(ia) of the Income Tax Act. The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 16,73,32,769 made by the Assessing Officer, who had initially disallowed these provisions citing lack of evidence that the expenses were incurred. The CIT(A) found that the provisions were made on a scientific basis and were consistent with past practices. The Tribunal upheld the CIT(A)'s decision but required further verification on specific cases where TDS was not deducted. The assessee also appealed against the CIT(A)'s confirmation of disallowance under Section 40(a)(ia) for non-deduction of TDS on certain expenditures, which the Tribunal allowed for statistical purposes after restoring the matter to the Assessing Officer.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 125388 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 20-08-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 22-09-2020
• Other Referred Cases: Novartis India Ltd. vs. ACIT, CIT vs. Triveni Engineering and Industries Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BIREN SHAH
• Keywords: TDS
• Section: 37; 271(1)(c); 234B; 40(a)(ia); 139(1); 13; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER & SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER I .T .A . No .4 74 /A h d / 20 20 ( A s se ss m e nt Y e a r : 20 16- 1 7 ) De pu t y C o m mi s s io ne r o f I nc o me Tax , C ir c l e- 1 ( 1 )( 1 ) , Ah me da bad V s.M /s . A r vi nd L if es t yle Br a n ds Ltd ., A r v in d Pr e m is e s , A r v i nd M il ls Pr e mi s e s , N ar o d a R o ad , A h m e d a b ad [ P AN N o. A A AC H 7 2 5 2A ] (Appellant) .. (Respondent) I .T .A . No .4 51 /A h d / 20 20 ( A s se ss m e nt Y e a r : 20 16- 1 7 ) Ar v in d Li f e st yle B r an d s Lt d. , Ar v in d Pr e mis es , N ar o d a R o a d, R ai lw a yp u r a P os t, A h me da ba d V s.A s sis ta n t C o mm i s s i o ne r o f I nc o m e Ta x, C ir cl e - 1( 1) ( 1) , A h m e d a b ad [ P AN N o. A A AC H 7 2 5 2A ] (Appellant) .. (Respondent) Appellant by : Shri Biren Shah, A.R. Respondent by: Shri Kamlesh Makwana, CIT D.R. D a t e of H ea r i ng 21.08.2023 D a t e of P r o no u n ce me nt 25.08.2023 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: These cross appeals has been filed by the Revenue and the assessee against the order passed by the Ld. Commissioner of Income Tax(Appeals)- 1, (in short “Ld. CIT(A)”), Ahmedabad in Appeal No. CIT(A), Ahmedabad- 1/10454/2018-19 vide order dated 09.07.2020 passed for Assessment Year 2016-17. 2. The Revenue has taken the following grounds of appeal:- ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 2 - “1. The ld. CIT(A) has erred in law and facts in deleting the disallowance of Rs.16,73,32,769/- being the addition made on account of provision of expenses. 2. The ld. CIT(A) ought to have held that the allowability of Rs.13,58,03,489/- u/s. 40(a)(ia) of the Act of the preceding year is linked to the finality of main disallowance. 3. The ld. CIT(A) ought to have appreciated that reducing the taxable income of AY 2016-17 by Rs.13,58,03,489/-, being the disallowance made u/s. 40(a)(ia) for AY 2015-16, may lead to double deduction as the issue is still subjudice before the ITAT. 4. The ld. CIT(A) has erred in law and facts in deleting the adjustment of Rs.16,73,32,769/- being the addition made on account of provision of expenses while computing the income u/s. 115JB. 5. The appellant craves, to leave, to amend and/or to alter any ground or add a new ground which may be necessary.” 3. The assessee has taken the following grounds of appeal:- “1. In law and in the facts and circumstances of the appellant’s case, the learned CIT(A) has grossly erred in treating Ground No. 1 of the appellant’s appeal, as being general in nature and dismissing it. 2. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of Rs.4,66,854/- being Employees’ contribution to ESIC made by the Assessing Officer on the ground that the aforesaid payment was made after the due date prescribed under the relevant ESI Act, even though the payment was made within the time prescribed under section 139(1) of the I.T. Act for filing the return of income. ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 3 - 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming alternate disallowance of provisions for expenditure of Rs. 1,48,55,890/- being (30% of Rs. 4,95,19,636) in view of provision of section 40(a)(ia) of the I.T. Act made by the Assessing Officer for non- deduction of tax at source. 4. In law, on the facts and circumstances of the case, the learned CIT(A) has grossly erred in confirming the action of A.O in levying interest under section 234A and 234B of the I.T. Act when no such interest is chargeable. Thus, this ground should be deleted. 5. In law, on the facts and circumstances of the case, the learned CIT(A) has grossly erred in confirming the action of A.O for initiating the penalty proceedings under section 271(1)(c) of the I.T. Act when no such penalty is leviable. Since the proceedings are wrongly initiated. He may be directed to withdraw such proceedings. 6. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.” We shall first take up Department’s appeal Ground No.1:- CIT erred in deleting disallowance of Rs. 16,73,32,769/- being the addition made on account of provision of expenses. 4. The brief facts in relation to this ground of appeal are that the assessee made provision for expenses of Rs. 16.73 crores at year end and the same was claimed as revenue expenditure for the current year. Such ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 4 - expenditure was not allowed by the Assessing Officer on the ground that assessee has not provided any evidences which prove that the expenditure debited are actually incurred for the business of the assessee. Further, the Assessing Officer observed that provision for expenditure is reversed in subsequent year and no actual expenditure has been incurred by the assessee before the date of filing of return of income against such provisions and accordingly the Assessing Officer made a disallowance of Rs. 16,73,32,769/-. 5. In appeal before CIT(A), the assessee submitted that it is following mercantile system of accounting and the assessee creates necessary provision in respect of such expenditure for which the bills are not received till the end of the year, but the services are availed by it. The assessee submitted that the entire expenditure has been booked on scientific basis and similar expenditure has also been shown by the assessee in earlier years and such method of accounting has been accepted by the Department. The CIT(A) allowed the appeal of the assessee with the following observations:- “5.4 On careful consideration of entire facts, it is observed that the Appellant has made provisions for various expenditure on consistent basis on year to year basis at year end. During the course of Assessment Proceedings as well as Appellate Proceedings the Appellant has provided details of provisions for expenses created during the year, reversal of such provisions in the subsequent year and actual expenses incurred before the date of filing Return of Income. ...... ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 5 - The appellant has claimed that as bills pertaining to various services availed by it before finalization of accounts were not received, it has made provisions of such expenditure based upon actual service available it and such provision is made on scientific basis. It is not the case that appellant has made provision for such expenditure for very first time in annual accounts but same has been made consistently on year to year basis and even in subsequent years hence there cannot be any intention to reduce taxable income. The nature of expenditure as mentioned in tabular chart clearly prove that expenditure is incurred for the purpose of business. It is not the case that whatever provision is made in current year is only reversed in subsequent year but appellant has in fact incurred such expenditure in subsequent year. It is also found that appellant has shown Nil income in year under consideration after set off of brought forward loss of earlier year, shown Nil income in subsequent year as well as earlier year hence there cannot be any intention to claim excessive expenditure. The provision for expenditure made in AY 2015-16 was Rs 13.89 crore and similar provision made in AY 2017-18 is also Rs 13.00 crore hence provision for expenditure of Rs 16.73 crore is commensurate to business of appellant, it is also observed that chartered accountant while giving his audit report has certified that proper books of accounts are maintained by appellant and even he stated that such books of account give true & fair view of book result. The AO has even accepted book results while passing the assessment order which further supports the contention of appellant that provision made in current year is towards genuineness business expenditure, and not contingent in nature. ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 6 - 5.5 The appellant has made similar provision in earlier assessment year for Rs. 13.89 crore, such provision is reversed in current year and actual expenditure is also incurred against such provision in current year which is not disputed by AO while passing the assessment order along with the fact that similar treatment is given in earlier assessment years. These facts clearly proves that provision made by appellant in books of account is on scientific basis and such expenditure is for the purpose of business. Merely when appellant has made provision at year end and same is reversed in subsequent year, AO cannot held that such expenditure pertains to subsequent year or meant for future year. The ratio of following decisions squarely applies to facts of the case. .... 5.6 It is further observed that while passing the assessment order for AY 2013-14, AO has treated such expenditure as contingent expenditure but my predecessor CIT(A) vide his order dated 30 th August, 2017 in Appeal No. CIT(A)-1/DCIT, Cir-1(1)(1)/140/2016-17 has held such expenditure as genuine business expenditure and not accepted contention of AO for treating such expenditure as contingent expenditure or unascertained expenditure. Similar finding is followed by my predecessor CIT(A) in his appellate order for AY 2015-16 and 2016-17. Consisting facts of year under consideration along with decisions referred supra, disallowance of provision for expenses made by AO for Rs.16,73,32,769/- is deleted and this ground of appeal is allowed.” 6. The Department is in appeal before us against the aforesaid relief granted by CIT(A). The Department submitted that the aforesaid expenses ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 7 - have been claimed on a purely provisional basis and the same have been reversed in the subsequent assessment year by the assessee which itself proves that the aforesaid provisional expenses are purely notional / contingent in nature and hence the same are not allowable. In response, the Counsel for the assessee submitted that the aforesaid expenses have been incurred on a scientific basis and the assessee have been claiming such expenses on a consistent basis for various assessment years and the Department has also accepted this consistent method followed by the assessee. 7. We have heard the rival submissions and perused the material on record. We are inclined to agree with the view of the Ld. Counsel for the assessee for the reason firstly that the assessee has been consistently following this methodology for claiming expenses on a year to year basis and this practice has been accepted by the Department. We observe that Ld. CIT(A) has allowed the appeal of the assessee on identical set of facts for Assessment Years 2013-14, 2015-16 and 2016-17. Further, in the case of Novartis India Ltd. vs. ACIT (ITAT Mumbai in ITA No. 7644/Mum/2017), the ITAT held that disallowance of excess / short year in provisions in current year and allowing in subsequent year is a revenue neutral exercise. The ITAT Mumbai held that provisions made on best estimate basis is allowable as deduction as disallowance of excess and short year in provisions in the current year and allowing the same in the subsequent year is a revenue neutral exercise. While passing the order, the ITAT Mumbai made the following observations:- ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 8 - “60. Considered the rival submissions and material placed on record, we observe that there are two types of provisions accounted at the year end, first is the related expenses for the year under consideration without ascertaining the portion/head of expenses or the actual value. In the second type of provisions, the portion/head of expenses are ascertained but the actual value of the expenses are estimated. The assessee regularly follows the procedure of creating provisions and suo moto disallows the expenditure which are excessive in the next assessment year. The historical data shows that the assessee makes the adjustment every year which are in the range of 7-8% and it consistently follows the same and if there is short, it accounts the same in the with next assessment year. It will have tax neutral effect considering the fact that the same rate of tax are applicable. We observe that in the case of Rotork Controls India (P) Limited (supra), the Hon’ble Supreme Court held as under:- “Held, reversing the decision of the High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective: that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warranty. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 9 - during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961. The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37.” 61. Respectfully following the above said decision of the Hon’ble Supreme Court, the ground raised by the assessee is allowed.” ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 10 - 8. Further, in the case of CIT vs. Triveni Engineering and Industries Ltd. 196 taxmann 94 (Delhi), the Delhi High Court held that when admittedly, the expenditure incurred by the assessee on project was admissible deduction and only dispute was regarding the year of allowability of expenditure, considering that assessee was a company assessed at uniform rate of tax, entire exercise of seeking to disturb the year of allowability of expenditure would, in any case to a tax revenue neutral exercise. In view of the above decisions and the facts of the assessee’s case, in our considered view, the Ld. CIT(A) has not erred in facts and in law in allowing the appeal of the assessee on this issue. 9. In the result, Ground No. 1 of the Department’s appeal is dismissed. Ground Nos. 2&3:- Allowability of Rs. 13,58,03,489/- under Section 40(a)(ia) of the Act. 10. The brief facts in relation to this ground of appeal are that the assessee had made provision for various expenditures at year end in Profit & Loss Account and same was claimed as deduction for the year under consideration. The Assessing Officer observed that the assessee has made provision for expenses of Rs. 16,73,32,769/- out of which the assessee is not required to deduct tax at source on an amount of Rs. 3,36,75,149/-. The Assessing Officer further observed that assessee has deducted TDS on total expenditure of Rs. 8,41,37,984/- and accordingly, expenditure on which TDS was not deducted was worked out at Rs. 4,95,19,636/-. The Assessing Officer disallowed 30% of such expenditure on which TDS was not deducted and accordingly made alternate disallowance of Rs. 1,48,55,890/- to total income of the assessee under Section 40(a)(ia) of the Act. ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 11 - 11. In appeal CIT(A) observed that the addition made by the Assessing Officer for Rs. 16,72,32,769/- on account of provision for expenses has already been deleted by CIT(A). So far as the alternate disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act is concerned, the CIT(A) confirmed the order of the Assessing Officer and held that the assessee is liable for deducting TDS under Section 40(a)(ia) of the Act. However, CIT(A) observed that for the immediately preceding assessment year, i.e. A.Y. 2015-16, CIT(A) had upheld the disallowance of Rs. 13,58,03,489/-. The CIT(A) observed that since it is a policy of the assessee to make a reversal entry for provision in subsequent financial year, then if such amount is reversed by the assessee in current assessment year i.e. A.Y. 2016-17, then the same would be reduced from the taxable income. Accordingly, CIT(A) directed the Assessing Officer to verify the above accounting entries and if it is found that provision made in the earlier years is reversed in the current year, then income to that extent would be reduced. 12. Both the Department and the assessee are in appeal before us against the aforesaid order passed by Ld. CIT(A). While the contention of the Department is that CIT(A) erred in not appreciating that reducing the taxable income of A.Y. 2016-17 by Rs. 13,58,03,489/- being the disallowance made under Section 40(a)(ia) of the Act for A.Y. 2015-16 made lead to double deduction, the contention of the assessee is that this issue has been decided in favour of the assessee by ITAT in assessee’s own case for A.Ys. 2012-13, 2013-14, 2014-15 and also A.Y. 2015-16 and therefore, the issue may be decided accordingly. ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 12 - 13. We have heard the rival contentions and perused the material on record. 14. Now in the instant facts, the Counsel for the assessee has placed reliance on the decision of Ahmedabad ITAT in the assessee’s own case for A.Y. 2012-13, 2013-14 and 2014-15 in ITA Nos. 1817/Ahd/2017 and 3 others, wherein the ITAT held that the TDS provisions are not applicable when the recipient of such sum / income payable by the assessee is not identifiable. While, in principle we agree with the aforesaid proposition laid down in the assessee’s own case, however, we also observe that the assessee has taken a consistent position that such provision of expenses has been made by the assessee on the basis of actual services availed by the assessee during the year under consideration and such provision is made on a scientific basis. Therefore, we are of the considered view that in such circumstance it is not possible to accept the proposition that the recipients of income / payees are not identifiable at all by the assessee, since assessee has consistently maintained the position the provision for expenses has been made by the assessee on the basis of services which have been availed by the assessee during the year under consideration. This provision is reversed in the subsequent year, upon receipt of final bill / invoices which has been raised by the service provider and the actual amount is being booked by the assessee as expenses in the subsequent year. Accordingly, it cannot be accepted that the assessee is not aware about the identity of the recipients / payees when provision for expenses have been booked on the basis of services availed by the assessee. Accordingly, the matter is being restored to the file of the Assessing Officer with a direction to verify to ascertain in ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 13 - which specific cases the payees / recipients are not ascertainable and the amount payable to these recipients / payees cannot be determined and thereafter decide the issue in accordance with law, after giving due opportunity to the assessee of being heard. Accordingly, the matter is restored to the file of the Assessing with the aforesaid directions. 15. Accordingly, Ground Nos. 2 & 3 of the Department’s appeal are dismissed and Ground No. 3 of the assessee’s appeal is allowed for statistical purposes. Ground No.4 of the Department’s appeal:- CIT(A) erred in deleting the adjustment of Rs.16,73,32,769/-, being the addition made on account of provision of expenses while computing the income under Section 115JB. 16. Since, in Ground No. 1 of the Department’s appeal, we have held that CIT(A) has not erred in facts and in law in deleting the disallowance of Rs. 16,73,32,769/- being the addition made on account of provision of expenses, Ground No. 4 of Department’s appeal, being consequential, is hereby dismissed. 17. In the result, Ground No. 4 of the Department’s appeal is dismissed. 18. Ground No.3 of Assessee’s appeal has been allowed for statistical purposes in the preceding part of our ruling. 19. Before us, the Counsel for the assessee submitted that assessee shall not pressing for Ground No. 2 being addition on account of late deposit of ITA Nos. 451/Ahd/2020 & 474/Ahd/2020 Arvind Lifestyle Brands Ltd. vs. ACIT Asst. Year –2016-17 - 14 - Employees’ contribution to PF / ESIC. Accordingly, Ground No. 2 of the assessee’s appeal is dismissed. 20. The other Grounds of Appeal raised by the assessee are general in nature and hence do not require any specific adjudication. 21. In the combined result, the assessee’s appeal is partly allowed for statistical purposes and the Department’s appeal is dismissed. This Order pronounced in Open Court on 25/08/2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 25/08/2023 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 22.08.2023 2. Date on which the typed draft is placed before the Dictating Member 23.08.2023 3. Other Member..................... 4. Date on which the approved draft comes to the Sr.P.S./P.S 23.08.2023 5. Date on which the fair order is placed before the Dictating Member for pronouncement .08.2023 6. Date on which the fair order comes back to the Sr.P.S./P.S 25.08.2023 7. Date on which the file goes to the Bench Clerk 25.08.2023 8. Date on which the file goes to the Head Clerk.......................................... 9. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 10. Date of Despatch of the Order..........................................