DCIT, Chandigarh V. M/s Rocky Distillers Pvt. Ltd., Chandigarh

ITA 479/CHANDI/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81074 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 06-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: MANASVINI BAJPAYEE
• Keywords: Business expenditure
• Section: 194C; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R.SOOD, ACCOUNTANT MEMBER ITA NO. 479/CHD/2011 ASSESSMENT YEAR: 2007-08 THE D.C.I.T., V M/S ROCKY DISTILLERS P. LTD., CIRCLE 1(1), KOTHI NO. 302, SCO 45-46-47, SECTOR 9D, III FLOOR, SECTOR 17A, CHANDIGARH. CHANDIGARH. PAN: AABCR7946L & ITA NO. 332/CHD/2011 ASSESSMENT YEAR: 2007-08 M/S ROCKY DISTILLERS P. LTD., VS THE ADDL. CIT, (NOW PERNOD RICARD INDIA P.LTD.), RANGE 1, 194/195, 4 TH FLOOR, CHANDIGARH. KRIPAL BUILDING, INDUSTRIAL AREA, PHASE-2, CHANDIGARH. PAN : AAACS4781P (APPELLANT) (RESPONDENT) DEPARTMENT/APPELLANT BY : SHRI S.K.MIT TAL, DR ASSESSEE /RESPONDENT BY : SHRI DEEPAK CHOPRA & MS. MANASVINI BAJPAYEE DATE OF HEARING : 26.11.2014 DATE OF PRONOUNCEMENT : 11.12.2014 O R D E R PER BHAVNESH SAINI,JM BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER OF LD. CIT(APPEALS) CHANDIGARH DATED 16.12.2010 FOR ASSESS MENT YEAR 2007-08. 2. WE HAVE HEARD LD. REPRESENTATIVES OF BOTH THE PA RTIES, PERUSED THE FINDINGS OF AUTHORITIES BELOW AND CONSI DERED THE MATERIAL AVAILABLE ON RECORD. 2 3. BOTH THE APPEALS ARE DECIDED AS UNDER : ( DEPARTMENTAL APPEAL ) 4. ON GROUND NO. 1, REVENUE CHALLENGED THE ORDER OF THE LD. CIT(APPEALS) IN DELETING THE ADDITION MADE BY ASSES SING OFFICER ON DISALLOWANCE OF RS. 63,11,871/- ON THE REIMBURSE MENT OF FREIGHT EXPENSES BY APPLYING THE PROVISIONS OF SECT ION 40(A)(IA) OF THE INCOME TAX ACT. DURING ASSESSMENT PROCEEDING S, THE ASSESSEE WAS ASKED AS TO WHY TDS WAS NOT DEDUCTED O N FREIGHT PAID TO VARIOUS PARTIES FOR PURCHASE OF RAW MATERIA L. SINCE, IT WAS FOUND THAT TDS WAS DEDUCTED ONLY ON PAYMENTS TO M/S KARTIK SALES AMOUNTING TO RS. 17,77,884/-, AN ADDIT ION OF RS. 63,11,871/- WAS MADE (RS. 80,89,755/- - RS. 17,77,8 84/- ). IT WAS SUBMITTED BEFORE LD. CIT(APPEALS) THAT ASSESSIN G OFFICER WAS EXPLAINED THAT THE ASSESSEE COMPANY HAD DEDUCTED TD S WHERE THE PAYMENTS WERE MADE DIRECTLY BY IT. IT WAS ALSO EXPLAINED THAT IT HAD A PRACTICE OF DISPATCHING SOLD GOODS ON EX-FACTORY PRICE OR ON TO PAY BILITY. THE ASSESSEE EXPLAINE D THAT THE DISTRIBUTORS PAY THE FREIGHT AND THE ASSESSEE LATER ON REIMBURSES THE SAME TO THEM. IN THE PROFIT & LOSS ACCOUNT, TH E SAID EXPENSES ARE ACCOUNTED FOR UNDER THE HEAD FREIGHT, CARTAGE AND DISTRIBUTION COST, WHEREAS THE FACT OF THE MATTER WAS THAT SAME WAS REIMBURSED BY THE ASSESSEE TO THE DISTRIBUTOR. 5. THE LD. CIT(APPEALS) CONSIDERING THE MATERIAL ON RECORD, DELETED THE ADDITION. HIS FINDINGS IN PARA 15 OF T HE APPELLATE ORDER ARE REPRODUCED AS UNDER : 15 1 HAVE CONSIDERED RIVAL CONTENTIONS AND MATERIA L ON RECORD. THE ASSESSEE CLAIMED FREIGHT EXPENSE AT 3 RS.8089755/- AND ENCLOSED PARTYWISE DETAILS WHERE S UCH PAYMENTS WERE MADE BY THE ASSESSEE AND WHERE GOODS WERE DISPATCHED WITH 'TO PAY BILITY' AND FREIGHT WA S PAID BY THE DEALER. THE ASSESSEE PAID FREIGHT AT RS.1777884 /- AND DISPATCHED GOODS WITH 'TO PAY BILITY' AND THE DEALE R PAID RS.6311871/-. IT WAS SUBMITTED THAT PROVISIONS OF S ECTION 40(A)(IA) WERE NOT APPLICABLE TO THE ASSESSEE ON AM OUNTS OTHER THAN RS.1777884/- BECAUSE TDS IS TO BE DEDUCT ED BY THE PERSON WHO MADE THE PAYMENTS OF FREIGHT. THE CO UNSEL DREW MY ATTENTION TO LEDGER_ ACCOUNT OF FEW DEALERS TO ESTABLISH THAT FREIGHT OF RS.6311871/- WAS REIMBURS ED TO THE PARTIES CREDITED TO THEIR RESPECTIVE ACCOUNTS. LN VIEW OF THE FACTS & CIRCUMSTANCES OF THE CASE, I AM SATISFI ED THAT PROVISIONS OF SECTION 40(A)(IA) WERE NOT APPLICABLE WHERE GOODS WERE DISPATCHED WITH 'TO PAY BUILTY' AND ASSE SSEE ONLY REIMBURSES THE CLAIM OF FREIGHT. THIS GROUND I S THEREFORE DECIDED IN FAVOUR OF THE APPELLANT AND ADDITION OF RS.6311871/- IS DELETED. 6. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL. 7. THE LD. DR RELIED UPON ORDER OF THE ASSESSING OF FICER. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE REITER ATED SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND REFER RED TO PB- 195 & 196 WHICH ARE THE DETAILS OF AMOUNTS REIMBURS ED TO VARIOUS PARTIES. ON GOING THROUGH THE SAME, IT IS CLEAR THAT WHERE ASSESSEE MADE PAYMENTS DIRECTLY TO THE PARTY, TDS WAS DEDUCTED AND ON REIMBURSEMENT OF THE FREIGHT, NO TD S WAS DEDUCTED. THE FREIGHT OF RS. 63,11,871/- WAS REIMB URSED TO PARTIES AND CREDITED TO THEIR RESPECTIVE ACCOUNTS. SINCE IT WAS REIMBURSEMENT OF THE EXPENSES, INCURRED BY THE DIST RIBUTOR, THEREFORE, LD. CIT(APPEALS) WAS JUSTIFIED IN HOLDIN G THAT NO TDS 4 WAS LIABLE TO BE DEDUCTED. WE RELY ON DECISION OF ALLAHABAD HIGH COURT IN CASE OF CIT VS VECTOR SHIPPING SERVIC ES P. LTD. 357 ITR 642. THIS GROUND OF APPEAL OF THE REVENUE I S ACCORDINGLY DISMISSED. 8. ON GROUND NO. 2, REVENUE CHALLENGED THE ORDER OF THE LD. CIT(APPEALS) IN DELETING THE ADDITION MADE BY THE A SSESSING OFFICER ON DISALLOWANCE OF RS. 11,11,174/- ON THE L IABILITY ON ACCOUNT OF FREIGHT BY APPLYING THE PROVISIONS OF SE CTION 40(A)(IA) OF THE INCOME TAX ACT. DURING ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER OBSERVED THAT THERE WAS A FREIGHT ACCRUAL OF RS. 11,11,174/- DETAILED IN OTHER LIABILITIES, THUS FREIGHT WAS INCURRED BUT NOT ACTUALLY PAID. THIS AMOUNT WAS, H OWEVER, CLAIMED IN PROFIT & LOSS ACCOUNT AND WAS ADDED BACK AS PROVISIONS OF SECTION 194C READ WITH SECTION 40(A)( IA) OF THE ACT. IT WAS SUBMITTED BEFORE LD. CIT(APPEALS) THAT THE A MOUNT WAS NOT ACTUALLY PAID AND SINCE LIABILITY WAS NOT DISCH ARGED, SECTION 194C WAS NOT APPLICABLE. 9. THE LD. CIT(APPEALS) FOUND THAT SINCE ASSESSEE I S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE PROVISION MADE FOR FREIGHT IS AN ALLOWABLE EXPENSE AND DELETED THE ADDITION. 10. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE D O NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVENUE. THE LD. DR RELIED UPON ORDER OF THE ASSESSING OFFICER, ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE, BY REFERRING TO PB-195, 1 96 AND 197 SUBMITTED THAT IT WAS A DOUBLE ADDITION. HE HAS RE FERRED TO PB-197 TO SHOW THAT THE PROVISION WOULD SHOW THAT T HIS WAS A CASE OF DOUBLE DISALLOWANCE SINCE ASSESSING OFFICER HAD ALREADY 5 DISALLOWED AN AMOUNT OF RS. 63,11,871/- ON GROUND N O. 1 ABOVE. ON GOING THROUGH THIS DISALLOWANCE, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVENUE. PB-197 IS SC HEME PROVISION MOVEMENT DURING THE YEAR UNDER CONSIDERAT ION AND SHOWS OPENING PROVISION AND SCHEME PROVISION CREATE D DURING THE YEAR IN A SUM OF RS. 63,11,871/- AND AFTER SCHE ME PROVISION UTILIZED DURING THE YEAR AND WRITE OFF CN ISSUED FR OM SCHEME ACCOUNT, THERE WAS A CLOSING BALANCE OF RS. 11,11,1 74/-. IT WOULD, THEREFORE, SHOW THAT IT WAS A DOUBLE ADDITIO N MADE BY THE ASSESSING OFFICER BECAUSE THIS AMOUNT WAS INCLUDED IN THE AMOUNT OF RS. 63,11,871/- ON WHICH GROUND NO. 1 OF THE DEPARTMENTAL APPEAL HAS ALREADY BEEN DISMISSED ABOV E. IN THIS VIEW OF THE MATTER AND CONSIDERING FINDING OF THE L D. CIT(APPEALS), THIS GROUND OF DEPARTMENTAL APPEAL HA S NO MERIT AND IS ACCORDINGLY, DISMISSED. 11. ON GROUND NO. 3, REVENUE CHALLENGED THE ORDER O F LD. CIT(APPEALS) IN DELETING THE ADDITION MADE BY ASSES SING OFFICER ON ACCOUNT OF UNDER VALUATION OF STOCK OF RS. 18,07 ,997/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE BO OKS OF ACCOUNT WERE VERIFIED. IT WAS POINTED OUT TO THE A SSESSEE THAT AS PER BILLS OF CONCENTRATE ALCOHOLIC BEVERAGE (CAB), THE AVERAGE RATE OF PURCHASE IS RS. 1102.62 PER BULK LITRE. FU RTHER, THE CLOSING STOCK HAS BEEN VALUED AT RS. 1079.66 PER BU LK LITRE. THE ASSESSEE WAS ASKED TO EXPLAIN THE DIFFERENCE IN THE VALUATION OF CAB. FURTHER, DURING THE COURSE OF EXAMINATION OF BOOKS OF ACCOUNT, IT WAS FOUND THAT FREIGHT INWARD AND OTHER TRUCK EXPENSES ARE INCLUDED IN THE PURCHASES BUT HAS NOT BEEN ADDED IN THE VALUATION OF THE CLOSING STOCK OF CAB. THE ASSESSEE 6 SUBMITTED THAT LAST TWO PURCHASES HAVE BEEN MADE AT AN AVERAGE OF RS. 1072/- PER BULK LITRE APPROXIMATELY AND THE CLOSING STOCK IS VALUED AT AN AVERAGE RATE OF 1081 PER BULK LITRE . IN SUPPORT OF THIS CONTENTION, TWO BILLS WERE ALSO PLACED ON RECO RD. THE ASSESSING OFFICER NOTED THAT OUT OF THE BILLS PRODU CED ALONGWITH LETTER DATED 10.11.2009, THE FIRST BILL IS DATED 24 .03.2007 AND THE DESCRIPTION OF THE GOODS IS GIVEN AS HIGH BOUQU ET SPIRIT. THIS BILL IS NOT OF CAB BUT OF HIGH BOUQUET SPIRIT. HENCE, THE RATE MENTIONED IN THE BILL CANNOT BE USED FOR VALUA TION OF CLOSING STOCK. THE SECOND BILL IS DATED 12.03.2007 AND AS PER THIS BILL, CAB FOR 12000 LITERS HAVE BEEN PURCHASED FOR AN AMO UNT OF RS.1.32 CR. THUS THE RATE OF CAB COMES OUT TO RS. 1102.64 PER BULK LITRE. THUS, THE CLOSING STOCK IS TO BE VALUED AT THE SAME RATE AND NOT AT RS. 1079.66 PER BULK LITRE. THE UN DER VALUATION IN CLOSING STOCK WAS WORKED OUT AS RS. 22.98 PER BU LK LITRE. AS PER THE DETAILS OF CLOSING STOCK ATTACHED WITH THE AUDIT REPORT, THE QUANTITY OF ENA/IMPORTED SPIRIT IS 78677. THE UNDER VALUATION OF THE CLOSING STOCK OF RAW MATERIAL WAS VALUED AT RS. 18,07,997/- AND ADDITION WAS ACCORDINGLY MADE. 12. THE LD. CIT(APPEALS), CONSIDERING THE MATERIAL ON RECORD AND BILLS PRODUCED, DELETED THE ADDITION. HIS FIND INGS IN PARA 21 OF THE APPELLATE ORDER ARE REPRODUCED AS UNDER : I HAVE CONSIDERED RIVAL CONTENTIONS AND MATERIAL ON RECORD. I FIND THAT THE ASSESSEE PRODUCED TWO PURCHASE BILLS DA TED 24.03.07 & 12.03.07 FOR PURCHASE OF 24,000 BULK LITERS OF CONCENTRATE ALCOHOLIC BEVERAGE (CAB) AND HIGH BOUQU ET SPIRIT (HBS) ISSUED BY SEAGRAM DISTILLERS PVT. LTD., NASIK AND SEEGRAM INDIA PVT. LTD., GOA. THE ASSESSING OFFICER REJECTED T HE PURCHASE 7 BILL DATED 24.3.07 AS ACCORDING TO HIM, THE PRODUCT STYLED AS HBS IS DIFFERENT FROM CAB AND THUS CALCULATED THE RATES PER BL AT RS. 1102.64 AS AGAINST RS. 1079.66. THE COUNSEL CONTENDED TH AT THE PRODUCT IS ONE & THE SAME AND END PRODUCT MANUFACTU RED BY THE ASSESSEE IS WHISKEY. THE LD. COUNSEL ALSO DREW MY ATTEN TION TO THE 2 BILLS WHEREIN EXCISE DUTY CHARGES IN ONE BILL WAS 2% AND IN THE OTHER IT WAS 6% AS THE DISTILLERIES WERE SITUATED I N 2 DIFFERENT STATES NAMELY MAHARASHTRA AND GOA. THE COUNSEL WORKED OUT THE COST OF CAB AT PAGE 35 OF THE PAPER BOOK AT RS.1077 . MY ATTENTION WAS ALSO DRAWN TO VARIOUS ANNEXURES OF THE EXCISE RU LES AND POINTED OUT THE MISTAKE IN ARRIVING AT THE AMOUNT O F RS.1807997/-. I AM SATISFIED THAT THE PRODUCT CAB AND HBS IS THE SAME AND THE END PRODUCT IS ONE KNOWN AS WHISKE Y. THE COST OF CAB HAS BEEN PROPERLY ARRIVED AT AFTER INCLUDING DIRECT EXPENSES. IN THE CIRCUMSTANCES, THERE APPEARS NO DIF FERENCE IN VALUATION OF CLOSING STOCK OF CAB. THE ADDITION OF RS. 1807997/- IS THEREFORE DELETED, ALLOWING ASSESSEE'S PLEA ON THIS GROUND. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE L D. DR RELIED UPON ORDER OF THE ASSESSING OFFICER. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISS IONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT ASSESSE E HAS PROVIDED THE DOCUMENTATION IN RESPECT OF MAHARASHTR A, WHICH SHOWS CAB AND GOA POLICY. THE DETAILS OF PURCHASES AND COMPUTATION OF THE AVERAGE PRICE HAS BEEN GIVEN. I T WOULD SHOW THAT FREIGHT AND OTHER EXPENSES HAD ALSO BEEN INCLU DED WHILE VALUING THE CLOSING STOCK. PROPER EVIDENCES WERE P RODUCED TO SHOW THAT CLOSING STOCK HAS BEEN PROPERLY VALUED. ON CONSIDERATION OF RIVAL SUBMISSIONS AND FINDING OF F ACTS RECORDED BY LD. CIT(APPEALS), WE DO NOT FIND ANY MERIT IN TH IS GROUND OF APPEAL OF THE REVENUE. THE LD. CIT(APPEALS), ON GO ING THROUGH 8 THE BILLS ON RECORD FOUND THAT PRODUCT IS ONE AND T HE SAME THING AND END PRODUCT MANUFACTURED BY THE ASSESSEE IS WHI SKEY. THERE WERE DIFFERENCES IN EXCISE DUTY CHARGED BY TW O DIFFERENT STATES, NAMELY MAHARASHTRA AND GOA AND ASSESSEE HAS ALSO POINTED OUT MISTAKE IN CALCULATION MADE BY THE ASSE SSING OFFICER. THE LD. CIT(APPEALS) WAS SATISFIED THAT C AB AND HBS ARE SAME ITEMS AND THE END PRODUCT IS WHISKEY. THE COST OF CAB HAS BEEN APPROPRIATELY ARRIVED AT AFTER CALCULATING DIRECT EXPENSES. 14. THE LD. DR HAS NOT PRODUCED ANY MATERIAL BEFORE US TO CONTRADICT THE FINDING OF FACT RECORDED BY LD. CIT( APPEALS). THEREFORE, THERE WERE NO DIFFERENCES IN THE VALUATI ON OF THE CLOSING STOCK OF CAB, THEREFORE, THIS GROUND OF APP EAL OF THE REVENUE IS DISMISSED. 15. ON GROUND NO. 4, REVENUE CHALLENGED THE ORDER O F LD. CIT(APPEALS) IN DELETING THE DISALLOWANCE OF RS. 86 ,716/- MADE BY ASSESSING OFFICER ON THE LATE PAYMENTS OF EPF AS PER PROVISIONS OF SECTION 2(24)(X) READ WITH SECTION 36 (1)(VA) OF THE INCOME TAX ACT. THE ASSESSING OFFICER DISALLOWED T HE AMOUNT IN QUESTION SINCE EPF WAS NOT DEPOSITED OUT OF THE PRE SCRIBED TIME. THE ASSESSING OFFICER RELIED UPON UNREPORTED DECISI ONS OF ITAT CHANDIGARH BENCH. 16. THE LD. CIT(APPEALS) FOUND THAT THE ISSUE IS CO VERED BY DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS M/S NUCHEM LTD. IN ITA NO. 323 OF 2009 IN WHICH DECISION OF THE APEX COURT IN THE CASE OF CIT V ALO M EXTRUSIONS LTD. 227 CTR 417 (319 ITR 306) HAS BEEN FOLLOWED AN D ADDITION 9 HAS BEEN DELETED HOLDING THE PROVISO WAS CURATIVE I N NATURE, HENCE RETROSPECTIVE IN OPERATION. THE LD. CIT(APPE ALS), CONSIDERING THESE DECISIONS, FOUND THAT CERTAIN DEP OSITS HAVE BEEN MADE WITHIN THE GRACE PERIOD AND OTHER PAYMENT S WERE ALSO MADE BEFORE DUE DATE OF FILING OF THE RETURN AND AR E THUS, ALLOWABLE AND THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY JUDGEMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF M/S ALOM EXTRUSIONS LTD. (SUPRA). 17. BOTH PARTIES STATED THAT ISSUE IS COVERED IN FA VOUR OF THE ASSESSEE BY JUDGEMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS M/S ALOM EXTRUSIONS LTD. (SUPRA). THE LD. CIT(APPEALS) WAS, THEREFORE, JUSTIFIED IN DELETING THE ADDITION. THIS GROUND OF APPEAL OF THE REVENUE HAS NO MERIT AND IS DISMISSED . 18. IN THE RESULT, DEPARTMENTAL APPEAL IS DISMISSED . ( ASSESSEE'S APPEAL ) 19. IN THE APPEAL OF THE ASSESSEE, ADDITION OF RS.2 ,30,51,031/- BEING PROVISION FOR TRADE SCHEME HAS BEEN CHALLENGE D IN ALL THE GROUNDS OF APPEAL. 20. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY WAS ASKED TO FURNISH VARIOUS TRADE SCHEMES RUN BY I T ALONGWITH COMPLETE DETAILS OF PROVISIONS MADE AMOUNTING TO RS . 2.30 CR FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE SUBMITT ED VARIOUS DETAILS ON THIS ISSUE AS UNDER : (I) TRADE SCHEMES: THE MAIN SCHEMES RUN BY 'THE COMPANY ARE : 1. FESTIVE - TO PROMOTE SALES DURING FESTIVE SEASON (SPEC IALLY IN OCTOBER, NOVEMBER, NEW YEAR ETC.) 10 2. QTB - TURN OVER TARGET ACHIEVED DURING THE CALENDAR QUARTERS. 3. MONTHLY TURN OVER - TURN OVER TARGET ACHIEVED DUR ING THE MONTH 4. ADDITIONAL & SPECIAL SCHEME - RATE DISCOUNT - FO R E.G. COMPETITOR'S ACTIVITY. PROVISIONS ARE CREATED SCIENTIFICALLY ON A MONTHLY B ASIS ON THE QUANTUM OF SALES / DISPATCHES MADE TO DISTRIBUTORS A ND DEPENDING ON THE INDIVIDUAL SCHEMES WHICH ARE IN FORCE DURING THE RELE VANT PERIOD. (II) BASIS OF CREATION OF PROVISIONS OF RS.2.30 CRORES. AS WOULD BE APPARENT FROM THE DETAILS SUBMITTED BEFORE YOUR HONOUR, DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CR EATED A PROVISION OF RS. 2.30 CRORES ON ACCOUNT OF TRADE SCHEME EXPENSE S. THE TRADE SCHEME EXPENSES ARE PROMOTIONAL ALLOWANCES AND ARE IN THE NATURE OF VOLUME DISCOUNTS WHICH ARE OFFERED BY THE COMPANY TO THE DISTRIBUTORS TO PUSH UP THE SALES OF PRODUCTS MANUFACTURED BY TH E ASSESSEE COMPANY. THE DISCOUNTS ARE OFFERED CONSIDERING THE MARKET CONDITIONS AND COMPETITORS PRICING OF SAME CATEGORY PRODUCTS. IT MAY ALSO BE NOTED IN RESPECT OF THE PROMOTIONAL ALLOWANCES THAT THE TRANSACTIONS DEPICTED ARE WITH PARTIES WHO POSSESSED VALID LIQUOR LICENSES DURING THE RELEVANT PERIOD AND HAD TRANSACTED WITH THE ASSES SEE COMPANY DURING THAT PERIOD. THE RATE OF PROMOTIONAL ALLOWANCE PER CASE IS PRE- APPROVED AND IS BASED ON THE SALES TARGETS REQUIRED TO BE ACHIEVED BY THEM IN THE GIVEN TERRITORY. THE EXPENSES ARE INC URRED WHOLLY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE AND HE NCE ARE AN ALLOWABLE DEDUCTION. (III) REQUIREMENT FOR MAKING THE PROVISION IN TERMS OF THE ACCOUNTING STANDARDS PRESCRIBED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT) UNDER SECTION 14 5 OF THE ACT, EVERY ASSESSEE IS REQUIRED TO ACCOUNT FOR ALL KNOWN LIABILITIES. CLAUSE 4 OF THE ACCOUNTING STANDARD 1 PR OVIDES AS FOLLOWS- 4. ACCOUNTING POLICIES ADOPTED BY AN ASSESSEE SHOUL D BE SUCH SO AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS, PROFESSION OR VOCATION I N THE FINANCIAL STATEMENTS PREPARED AND PRESENTED ON THE BA SIS OF SUCH ACCOUNTING POLICIES. FOR THIS PURPOSE, THE MA JOR CONSIDERATIONS GOVERNING THE SELECTION AND APPLICATION OF ACCOUNTING POLICIES ARE THE FOLLOWING, NAMELY : (I) PRUDENCE : PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS O NLY A BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION; 11 (II) SUBSTANCE OVER FORM : THE ACCOUNTING TREATMENT AND PRESENTATION IN FINANCIAL STATEMENTS OF TRANSACTIONS AND EVENTS SHOULD BE GOVERNED BY THEIR SUBSTANCE AND NOT MERELY BY THE LEGAL FORM; (III) MATERIALITY : FINANCIAL STATEMENTS SHOULD DIS CLOSE ALL MATERIAL ITEMS, THE KNOWLEDGE OF WHICH MIGHT INFLU ENCE THE DECISIONS OF THE USER OF THE FINANCIAL STATEMENTS. THUS, IN COMPLIANCE THEREOF THE ASSESSEE MAKES THE PROVISION IN RESPECT OF THE TRADE SCHEME EXPENSES BASED ON SALE S REPORTS RECEIVED FROM THE VARIOUS TERRITORIES. ADMITTEDLY THE LIABILITY ON ACCOUNT OF THESE SCHEME EXPENSES MAY BE DISCHARGED AT A FUTURE DATE BUT THE PROVISION IS CREATED AT THE YEAR END TO ACCOUNT FOR THE KNOWN LIABILITY ON THIS ACCOUNT. THIS METHOD OF AC COUNTING IS JUDICIALLY APPROVED AND IS BEING FOLLOWED CONSISTENTLY YEAR AFTER YEAR BY THE ASSESSEE. THAT THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT (245ITR 428) HAS LAID DOWN THE FOLLO WING PRINCIPLES- 'THE LAW IS SETTLED. IF A BUSINESS LIABILITY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALT HOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING LIABI LITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE C ERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBL E. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CON TINGENT ONE. THE LIABILITY IS IN PRESENT THOUGH IT WILL BE DISCHARG ED 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 C ERTAIN '. IN ANOTHER LANDMARK JUDGMENT RENDERED BY THE HON'BLE SUPREME COURT IN METAL BOX COMPANY OF INDIA LTD. VS. T HEIR WORKMAN [73 ITR 53 SCJ, THE APPELLANT COMPANY PROVID ED FOR GRATUITY IN ITS BOOKS OF ACCOUNT. THE SAID AMOUNT WA S CLAIMED AS DEDUCTION ON THE BASIS THAT THE LIABILITY FOR THE SAID SUM HAD ACTUALLY ARISEN, EVEN THOUGH NO PART OF THAT AMOUNT REPRESENTED ANY ACTUAL OUTGOING EXPENDITURE DURING THE YEAR. THE HON'BLE SUPREME COURT HELD THAT PROVISION FOR GRATUITY, THO UGH AS SUCH NOT ACTUALLY PAID, IS AN ALLOWABLE EXPENDITURE AND A CCORDINGLY DEDUCTIBLE. IN THIS CONTEXT, THE COURT HAS HELD AS UNDER: 'AN ESTIMATED LIABILITY UNDER A SCHEME OF GRATUITY, IF PROPERLY ASCERTAINABLE AND ITS PRESENT VALUE IS DISCOUNTED, IS D EDUCTIBLE FROM THE GROSS RECEIPTS WHILE PREPARING THE PROFIT AN D LOSS ACCOUNT. THIS IS RECOGNIZED IN TRADE CIRCLES AND THER E IS NOTHING IN THE BONUS ACT, WHICH PROHIBITS SUCH A PRACTICE. SUCH A PROVISION PROVIDES FOR A KNOWN LIABILITY OF WHICH THE AMOUNT C AN BE DETERMINED WITH SUBSTANTIAL ACCURACY. IT CANNOT, TH EREFORE, BE TERMED AS RESERVE. 12 THEREFORE, THE ESTIMATED LIABILITY FOR THE YEAR ON A CCOUNT OF SCHEME OF GRATUITY SHOULD BE ALLOWED TO BE DEDUCTED FROM THE GROSS PROFITS. THE ALLOWANCE IS NOT RESTRICTED TO THE ACT UAL PAYMENT OF GRATUITY DURING THE YEAR '. THE DELHI HIGH COURT IN THE CASE OF CIT VS. MODERN SP INNERS LTD. (2005-TIOL-76-HC-DELHI-IT) HAS HELD AS FOLLOWS- 'IN THE EXPRESSION 'ASCERTAINED LIABILITY' THE EMPHAS IS IS ON THE WORD 'ASCERTAINED'. THE WORD 'LIABILITY' IS HARDLY OF ANY CONSEQUENCE AS LIABILITY TO PAY IS AN ADMITTED FACT. ONLY QUESTION BEFORE THE COURT IS WHETHER THE AMOUNT REF LECTED BY THE ASSESSEE WAS, OR WAS NOT, AN ASCERTAINED AMOUNT. THE WORD 'ASCERTAIN' HAS BEEN DEFINED IN THE BLACK'S LAW DIC TIONARY VLTH EDITION 'TO ESTIMATE AND DETERMINE; TO CLEAR OF DOUBT OR OBSCURITY. TO ENSURE AS A CERTAINTY'. THOUGH THIS WORD IS CAPAB LE OF TWO MEANINGS - ONE A STRICT AND ANOTHER A POPULAR MEANIN G. IN THE FIRST IT MAY MEAN 'TO MAKE CERTAIN' WHILE IN THE LAT TER 'TO GET TO KNOW'. ONCE A MATTER WAS ASCERTAINED IT WOULD BE ASCE RTAINED. SUBJECT OR LIABILITY IN THE PRESENT CASE AN ADMITTED DO CUMENT WAS THE COMPROMISE DEED UNDER WHICH THE ASSESSEE HA D SHOWN HIS LIABILITY FOR THE PREVIOUS YEARS AND WHICH WAS AC CEPTED AS A RESULT OF DEFAULT OR DELAY. THE LIABILITY UNDER THE TE RMS AND CONDITIONS OF COMPROMISE CANNOT BE WIPED OUT. IT WAS N OT A UNILATERAL ON THE PART OF THE ASSESSEE BUT WAS A BI LATERAL CONSENTED ACTION ON BEHALF OF THE PARTIES WHICH WAS OF BINDING NATURE IN THE TERMS OF AGREEMENT. AS SUCH IT CANNOT B E TERMED AS AN UNASCERTAINED LIABILITY '. RELIANCE IS ALSO PLACED ON THE DECISION OF THE PRIVY COUNCIL OF NEW ZEALAND IN THE CASE OF COMMISSIONER OF INLAND RE VENUE VS. MITSUBISHI MOTORS NEW ZEALAND LTD. (222 ITR 697), CIT VS. HONDA SIEL POWER PRODUCTS LTD. (300 ITR 56) (DEL) AND C IT VS. VINITEC CORPORATION P. LTD. (278 ITR 337) (DEL.). THE HON'BLE DELHI HIGH COURT IN A RECENT DECISION IN T HE CASE OF CIT VS. INSILCO LTD. (179 TAXMAN 55) HAS HELD AS FOLLOWS- 'THERE WAS NO MERIT IN THE SUBMISSION OF THE REVENUE THAT THE LIABILITY OF THE ASSESSEE UNDER THE LONG SERVICE AWARD SCHEME WAS CONTINGENT AS THE PAYMENT UNDER THE SAID SCHEME WAS DEPENDENT ON THE DISCRETION OF THE MANAGEMENT. IT IS W ELL SETTLED THAT IF A LIABILITY ARISES WITHIN THE ACCOUNTING PERIO D, THE DEDUCTION SHOULD BE ALLOWED THOUGH IT MAY BE QUANTIFI ED AND DISCHARGED AT A FUTURE DATE. THEREFORE, THE PROVISION FOR A LIABILITY IS AMENABLE TO DEDUCTION, IF THERE IS AN ELEMENT OF CERTAINTY THAT IT SHALL BE INCURRED AND IT IS POSSIBLE TO ESTIMATE LIAB ILITY WITH REASONABLE CERTAINTY EVEN THOUGH ACTUAL QUANTIFICATI ON MAY NOT BE POSSIBLE, AS SUCH A LIABILITY IS NOT OF A CONTINGENT NATURE ' 13 THUS, IN VIEW OF THE FACTUAL AND LEGAL SUBMISSIONS MADE ABOVE, THE PROVISION ON ACCOUNT OF TRADE SCHEME EXPENSES I S WHOLLY ALLOWABLE AS BUSINESS EXPENDITURE. 21. CONSIDERING THE CONTENTIONS, THE ASSESSING OFFI CER OBSERVED AS UNDER : THOUGH THE ASSESSEE WAS SPECIFICALLY ASKED DURING T HE COURSE OF ASSTT PROCEEDINGS TO PROVIDE THE BASIS ON WHICH THE PROVISIONS WERE CREATED, BUT NO SUCH SCIENTIFIC METHOD FOR WORK ING OF PROVISIONS WAS SUBMITTED DURING THE COURSE OF THE AS STT PROCEEDINGS. THE VARIOUS TRADE SCHEMES LIKE FESTIVE, QTL TURNOVER, MONTHLY TURNOVER AND ADDITIONAL & SPECIAL SCHEMES APPLICABLE TO THE DISTRIBUTORS/DEALERS IS KNOWN TO THE ASSESSEE COMPA NY BEFORE HAND. THE AMOUNT OF SALES' MADE BY THE ASSESSEE TO T HE VARIOUS DISTRIBUTORS/DEALERS FOR THE YEAR UNDER CONSIDERATIO N IS KNOWN TO THE ASSESSEE COMPANY. HENCE, THE AMOUNT OF DISCOUNT/COMMISSION/CREDIT AVAILABLE TO THE DISTRIBU TORS/DEALERS CAN EASILY BE WORKED OUT BY THE ASSESSEE COMPANY ON ACCOUNT OF THE VARIOUS TRADE SCHEMES. THUS, THE ASSESSEE COULD H AVE EASILY WORKED OUT THE AMOUNT OF TRADE DISCOUNT AVAILABLE TO THE DISTRIBUTORS/DEALERS FOR THE YEAR UNDER CONSIDERATI ON AND COULD HAVE CREDITED THE SAME TO THE ACCOUNTS OF THE DISTRIBUT ORS/DEALERS. EVEN IF THE CONTENTION OF THE ASSESSEE COMPANY IS AC CEPTED THAT THE CREDIT TO THE PARTY (DISTRIBUTOR/DEALER) IS GIVEN ONLY ON THE RECEIPT OF THE VERIFIED CLAIMS BY THE SALES OFFICER S, THE PROVISION MADE IN THE BOOKS OF ACCOUNT SHOULD HAVE BEEN CRYST ALLIZED ON THE BASIS OF SALES TURNOVER MADE TO THE DISTRIBUTOR/DEAL ER AND THE TRADE SCHEME APPLICABLE TO THAT DISTRIBUTOR/DEALER. THE ASSESSEE COMPANY IS ALSO WELL AWARE ABOUT THE TRADE SCHEMES AV AILABLE TO A DISTRIBUTOR/DEALER ON THE BASIS OF THE PARAMETERS LAID DOWN BY THE ASSESSEE COMPANY FOR A PARTICULAR SCHEME. SINCE , THE VOLUME OF THE TRADE AND TRADE SCHEMES APPLICABLE TO A DISTR IBUTOR/DEALER IS ALREADY KNOWN IN ADVANCE, THE PROVISION SHOULD HAVE BEEN 14 CRYSTALLIZED BY THE ASSESSEE. IT IS ONLY THE ASCERTAI NED AND CRYSTALLIZED LIABILITIES WORKED OUT ON SCIENTIFIC AND LOGICAL BASIS WHICH ARE ALLOWABLE UNDER THE INCOME TAX ACT, 1961. IF THE PROVISIONS ARE MADE WITHOUT ANY REASONABLE AND SCIEN TIFIC ESTIMATION, THEN IT CANNOT FALL IN THE CATEGORY OF ASCE RTAINED LIABILITY AND IS NOT ALLOWABLE UNDER THE I.T. ACT, 1961. IT IS A COMMON PRACTICE THAT THE EXPENSES FOR THE YE AR UNDER CONSIDERATION ARE GENERALLY CLAIMED ON ACTUAL BASIS A ND ONLY PROVISIONS ARE MADE FOR THE MONTH OF MARCH. THE REAS ON FOR THIS IS THAT IN THE MONTH OF MARCH THE LIABILITIES FOR INCURRI NG THE EXPENSE ARISE A PERUSAL OF THE TRADE SCHEME ACCOUNT REVEALS T HAT THE PROVISION HAS BEEN MADE FOR ALL THE MONTHS FROM APRI L 2006 TO MARCH 2007. A SUBSTANTIAL AMOUNT OF PROVISION MADE DURING THE YE AR IS STILL PENDING AND HAS NOT BEEN PAID TO THE DISTRIBUTOR/DE ALERS. THE ASSESSEE HAS NOT BEEN ABLE TO GIVE ANY COGENT REPLY AS TO WHY THE TRADE SCHEME PROVISION OF APRIL, 2006 HAS NOT BEEN P AID TO THE RESPECTIVE DEALERS TILL 31.3.2007. THE TRADE SCHEME PROVI SION IS PENDING NOT ONLY FOR ONE MONTH, BUT HUGE AMOUNTS ARE SHOWN AS PAYABLE FOR THE MONTHS STARTING FROM APRIL 2006 TO FE BRUARY 2007. THE NET RESULT OF THE CREATION OF MONTHLY PROVISIONS IS THAT A HUGE AMOUNT OF RS. 2.30 CRORE HAS ACCUMULATED IN THE TRAD E SCHEME PROVISION ACCOUNT. THE ASSESSEE HAS DURING THE YEAR UNDER CONSIDERATION DEBITED AN AMOUNT OF RS. 10,65,46,942/- AS TRADE SCHEME EXPENSE U NDER THE HEAD 'SELLING EXPENSES' IN THE PROFIT AND LOSS A CCOUNT. OUT OF THIS TOTAL AMOUNT OF RS. 10,65,46,942/-, AN AMOUNT OF R S. 2,30,51,031/- IS THE AMOUNT ON ACCOUNT OF PROVISION A ND THE BALANCE RS. 8,34,95,911/- IS THE ACTUAL AMOUNT PAID TO DISTRIBUTORS/DEALERS ON ACCOUNT OF TRADE SCHEMES. A SSUMING THAT THE TRADE SCHEME EXPENSE IS UNIFORMLY SPREAD OVER T HE ENTIRE YEAR, THE MONTHLY EXPENSE ON ACCOUNT OF TRADE SCHEME COMES OUT TO AROUND RS. 69 LACS. THUS, THE PROVISIONS ON ACCOUNT OF MONTH OF MARCH, 2007 SHOULD HAVE BEEN IN THE RANGE OF RS. 69 LA CS ONLY. ON 15 THE CONTRARY, THE ACTUAL PROVISION CLAIMED BY THE ASS ESSEE IS TO THE TUNE OF RS. 2,30,51,031/-. THE ASSESSEE HAS DEBITED A HUGE FIGURE OF RS. 1,33,44,0 00/- ON 30.6.2006 AND THE NARRATION GIVEN IS 'SPECIAL PROVIS ION'. SIMILARLY, AS ON 31.3.2007, THE ASSESSEE HAS PASSED A LARGE NUMBE R OF ENTRIES TOTALING TO RS. 1,01,58,198/-. THESE ENTRIES BEI NG OF VERY HIGH VALUE CLEARLY FIGURES OUT IN THE PROVISION ACCO UNT AND FOR THESE ENTRIES NO SUPPORTING DOCUMENTS HAVE BEEN FUR NISHED BY THE ASSESSEE COMPANY. THE FIGURE OF PROVISIONS HAS BEEN INFLATED BY THE AS SESSEE COMPANY ONLY TO AVOID PAYMENT OF DUE TAXES FOR THE YEAR UNDER CONSIDERATION. THE BOOKS OF ACCOUNT DULY SUPPORT THI S VIEW POINT, AS THE SUBSTANTIAL AMOUNT OF TRADE SCHEME EXPENSE WHI CH SHOULD HAVE BEEN PAID DURING THE YEAR TO THE ' DISTRIBUTOR/ DEALERS IS STILL OUTSTANDING. THE ASSESSEE HAS NOT EVEN CREDITED THE A CCOUNT OF DISTRIBUTORS/DEALERS IN RESPECT OF THE TRADE SCHEME S FOR THE MONTH OF APRIL 2006 AND THE AMOUNTS ARE PENDING IN THE TRA DE SCHEME PROVISION ACCOUNT. THIS CLEARLY SHOWS THAT THE AMOU NTS ARE ACTUALLY NOT PAYABLE TO THE DISTRIBUTORS/DEALERS AN D THE ASSESSEE HAS INFLATED THE AMOUNT UNDER THE HEAD PROVISION SO AS TO REDUCE ITS TAXABLE INCOME. 21(A) THE ASSESSING OFFICER DISTINGUISHED THE JUDG EMENTS RELIED ON BY ASSESSEE AND ADDED BACK RS.2,30,51,031/- AS UNASCERTAINED LIABILITY CLAIMED AS PROVISION. 22. THE ASSESSEE CHALLENGED THE ABOVE ADDITION BEFO RE LD. CIT(APPEALS) AND REITERATED THE SAME SUBMISSIONS MA DE AT THE ASSESSMENT STAGE. IT WAS SUBMITTED THAT ASSESSEE M AINTAINED ITS ACCOUNTS ON MERCANTILE SYSTEM OF ACCOUNTING AND THE PROVISIONS OF VARIOUS TRADE SCHEMES WERE PROVIDED F OR THE YEAR ENDING 31.03.2007 IN THE BOOKS OF ACCOUNT. THESE P ROVISIONS WERE UTILIZED ON FIFO BASIS DURING THE SUBSEQUENT M ONTH, DURING FINANCIAL YEAR ON CREDIT TO DISTRIBUTOR/DEAL ER. AS AND 16 WHEN THE CLAIM IS MADE BY THE DISTRIBUTOR ON ACCOUN T OF THE TRADE SCHEME, THE LIABILITY IS DISCHARGED FROM THE SAID PROVISION. FOR PENDING SCHEMES, PROVISION IS CREATED IN THE BO OKS OF ACCOUNT AND UTILIZED AS AND WHEN CLAIM IS RECEIVED FROM THE DISTRIBUTOR. THE ASSESSEE SUBMITTED ALL THE DETAIL S BEFORE THE ASSESSING OFFICER. 23. THE LD. CIT(APPEALS), HOWEVER DISMISSED THE APP EAL OF THE ASSESSEE ON THIS GROUND AND CONFIRMED THE ADDITION. HIS FINDINGS IN THE IMPUGNED ORDER IN PARAS 8 TO 12 ARE REPRODUCED AS UNDER : 8. I HAVE CONSIDERED RIVAL CONTENTIONS AND MATERIAL ON RECORD. I FIND THAT THE OBJECTIVE OF AS-29 IS TO ENSURE THAT AP PROPRIATE RECOGNITION CRITERIA AND MEASUREMENT BASES ARE APPLIED TO PROVISIONS AND CONTINGENT LIABILITIES AND THAT SUFFICI ENT INFORMATION IS DISCLOSED IN THE NOTES TO THE FINANC IAL STATEMENTS TO ENABLE USERS TO UNDERSTAND THEIR NATURE, TIMING AND AMOUNT. 9 A PROVISION IS A LIABILITY WHICH CAN BE MEASURED BY U SING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION SHOULD BE RECOGNIZED WHEN:- (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RE SULT OF A PAST EVENT. (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES EMBODYING ECO NOMIC BENEFITS WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OB LIGATION. IF THESE CONDITIONS ARE NOT MET NO PROVISIONS SHOULD B E RECOGNIZED. THUS, BEFORE MAKING ANY PROVISION THE ABOVE CONDITION S ARE REQUIRED TO BE FULFILLED. 10. IN THE CASE UNDER APPEAL, NO EVIDENCE HAS BEEN PROVIDED TO PROVE THAT THE APPLICANT HAD ANY PRESENT OBLIGATION AS A RESULT OF PAST EVENT SINCE BY SELLING ITS PRODUCTS NO STATUTOR Y OBLIGATION HAS BEEN CAST ON THE APPLICANT TO REIMBURSE THE AMOUNT. THERE MAY BE POSSIBILITY THAT INSTEAD OF GIVING ANY ECONOMIC BENEFIT THE APPELLANT MAY SETTLE THE REIMBURSED AMOUN T WITH THE CREDIT NOTE BY REDUCING THE AMOUNT FROM THE FUTURE S ALE BILL I.E IF ANY BENEFIT IS REQUIRED TO BE GIVEN TO DISTRIBUTORS , IT CAN BE ADJUSTED IN THE FUTURE SALE BILL BY REDUCING THE BIL LING AMOUNT VALUE OF DISCOUNT OR REIMBURSEMENT REQUIRED TO BE PR OVIDED BY THE APPELLANT. 17 DURING THE ASSESSMENT AS WELL AS APPELLATE PROCEEDIN GS NO EVIDENCE FOR OUT THE PROVISIONS, WHICH COULD BE TREAT ED AS RELIABLE WAS PRODUCED. THE VARIOUS CASES CITED BY THE APPELLANT IN SUPPORT O F ITS CONTENTION ARE RELATED TO THE LIABILITY I.E CONTINGENT LIABILITY. A CONTINGENT LIABILITY IS A POSSIBLE OBLIGATION THAT ARISES FROM PAST EVENTS AND THE EXISTENCE OF WHICH WILL BE CONFIRMED ONLY BY THE OCCURRENCE OR NON OCCURRENCE OF ONE OR MORE UNCERTAIN FUTURE EVENTS NOT WHOLLY WITHIN THE CONTROL OF THE ENTERPRISE; O R 11 A PRESENT OBLIGATION THAT ARISES FROM PAST EVENTS BUT IS NOT RECOGNIZED BECAUSE: (I) IT IS NOT PROBABLE THAT AN OUTFLOW OF RESOURCES E MBODYING ECONOMIC BENEFITS WILL BE REQUIRED TO SETTLE THE OBLIG ATION; OR (II) A RELIABLE ESTIMATE OF THE AMOUNT OF THE OBLIGAT ION CANNOT BE MADE. THUS, LIABILITY IN STRICT SENSE MEANS ANY COMPULSORY OB LIGATION CAST ON ANY ENTERPRISE, WHICH MAY BE ASCERTAINABLE O R UNASCERTAINABLE BUT REQUIRED TO BE PAID. 12 ON THE OTHER HAND, PROVISIONS FOR PAYMENT OF I NCENTIVES TO ITS DISTRIBUTORS OR DEALERS, DEPENDING ON ITS TOTAL DISCRE TION CAN IN NO WAY BE CONSIDERED A CONTINGENT LIABILITY. AS SUCH, I AGREE WITH THE LD. ASSESSING OFFICER AND C ONFIRM THE ADDITION SO MADE. 24. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED WRITTEN SYNOPSIS IN WHICH IT WAS BRIEFLY EXPLAINED THAT ASSESSEE IS ENG AGED IN THE BUSINESS OF MANUFACTURE AND SALE OF INDIAN MADE FOR EIGN LIQUOR. THE ASSESSEE SUBMITTED VARIOUS TRADE SCHEMES FROM T IME TO TIME FOR PROMOTION OF ITS BUSINESS AND PRODUCTS. UNDER THE SCHEMES, VARIOUS DISCOUNTS ARE OFFERED TO THE DISTRIBUTORS/D EALERS ON BUYING GOODS FROM THE ASSESSEE COMPANY. THESE SCHE MES RELATE TO THE VOLUME OF CASES SOLD MONTHLY/PERIODICALLY/QU ARTERLY BASIS AND DETAILS OF SOME EXPENSES ARE FILED AT PB-82, MO VEMENT OF PROVISION IS AT PAGE 83 OF THE PAPER BOOK. SCHEMES ALSO INCLUDE DISTRIBUTION OF PROMOTIONAL ITEMS FOR PROMOTING THE ASSESSEE'S 18 PRODUCT. THE ASSESSEE EXPLAINED THE BASIS OF CREAT ION OF THE PROVISION OF RS. 2.30 CR AS WAS EXPLAINED BEFORE AS SESSING OFFICER. IT WAS SUBMITTED THAT PROVISIONS ARE CREA TED SCIENTIFICALLY ON MONTHLY BASIS ON THE QUANTUM OF SALES/DISPATCHES MADE TO THE DISTRIBUTORS AND DEPEN DING ON THE SCHEMES WHICH ARE IN FORCE DURING THE RELEVANT PERI OD. IT WAS ALSO EXPLAINED THAT CLAIMS MADE UNDER EACH SCHEME A RE ON SALES EFFECTED BY THE DISTRIBUTOR/RETAIL OUTLETS. THE ASS ESSEE ON RECEIPT OF VERIFICATION ADVICES, ISSUES INDIVIDUAL CREDIT N OTES FROM THE ASSESSEE'S SALES PERSONS IN FIELD. HENCE, IF THE P ROVISION IS CREATED, CREDIT TO THE PARTY IS GIVEN ON THE RECEIP T OF THE VERIFIED CLAIMS BY THE SALES OFFICER OF THE ASSESSEE IN FIEL D. IT WAS EXPLAINED THAT ON CREATION OF THE PROVISIONS, THE A MOUNT IS CREDITED TO THE PROVISION ACCOUNT AND ON RECEIPT OF THE CLAIMS/CREDIT NOTES, AMOUNT IS CREDITED TO THE PART YS ACCOUNT. IN THE YEAR UNDER CONSIDERATION, ASSESSEE MADE PROV ISION OF RS. 7,25,24,408/-, DETAIL OF WHICH IS FILED AT PAGE 131 OF THE PAPER BOOK. THE PROVISION WAS MADE ON THE BASIS OF ADVIC E RECEIVED FROM THE FIELD STAFF AND PROVISION WAS MADE FROM TH E MONTH OF APRIL,2006 TO MARCH,2007. THE SAMPLE COPIES OF THE ADVICES ARE FILED AT PAGES 132 TO 136 OF THE PAPER BOOK. FURTH ER DETAILS ARE ALSO FILED IN THE PAPER BOOK AT PAGES 137 TO 149. THE ASSESSEE RECONCILED ALL THE ACCOUNTS. IT WAS SUBMITTED THAT THE PROVISION WAS ASCERTAINED LIABILITY OF THE ASSESSEE AND WAS A LLOWABLE DEDUCTION AND RELIED UPON DECISION OF THE HON'BLE S UPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS CIT 112 TAXMAN 61 ( 245 ITR 428 ). IN FURTHER CLARIFICATION IN WRITI NG, IT IS EXPLAINED THAT TOTAL TRADE SCHEME EXPENSES DEBITED BY THE 19 ASSESSEE IN ITS BOOKS OF ACCOUNT IS RS. 10,65,46,94 2/- WHEREAS THE DETAIL OF PROVISION ACCOUNT SHOWS PROVISION FOR TRADE SCHEME MADE DURING THE YEAR AT RS. 7,25,24,408/-. THE DIF FERENCE IS DUE TO THE FACT THAT DURING THE YEAR, SOME TRADE SC HEME EXPENSES WERE DIRECTLY BOOKED AS EXPENSES IN THE PR OFIT & LOSS ACCOUNT AND CREATED TO THE RESPECTIVE CUSTOMER ACCO UNT INSTEAD OF CREDITING IT TO PROVISION ACCOUNT. 25. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT NO BASIS OF MA KING PROVISION FOR TRADE SCHEME EXPENSES WAS FILED AND S AME WAS NOT SUPPORTED BY ANY EVIDENCE. THEREFORE, EXPENSES ARE MERELY BOOKED IN THE NAME OF PROVISION TO REDUCE THE TAX L IABILITY. THE LD. DR, THEREFORE, SUBMITTED THAT IT WAS NOT ASCERT AINED LIABILITY AND AUTHORITIES BELOW ARE JUSTIFIED IN CONFIRMING T HE ADDITION. 26. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERI AL AVAILABLE ON RECORD. THE ASSESSING OFFICER HAS SPE CIFICALLY NOTED THAT ASSESSEE WAS ASKED TO PROVIDE THE BASIS ON WHI CH PROVISIONS WERE CREATED BUT NO SUCH SCIENTIFIC METH OD FOR WORKING OF PROVISIONS WAS SUBMITTED DURING THE COUR SE OF ASSESSMENT PROCEEDINGS. IT WAS ALSO NOTED THAT ALL THE TRADE SCHEMES WERE KNOWN TO THE ASSESSEE BUT STILL, NO WO RKING WAS MADE TO ALLOW ANY DISCOUNT/COMMISSION/CREDIT TO THE DISTRIBUTORS/DEALERS. WHY ASSESSEE HAS NOT CREDITE D THE AMOUNT OF PROVISION TO THE ACCOUNTS OF THE DISTRIBUTOR/DEA LER WAS ALSO NOT EXPLAINED. IT WAS ALSO FOUND THAT PROVISION MA DE IN THE BOOKS OF ACCOUNT WAS NOT CRYSTALLIZED EVEN ON THE B ASIS OF THE SALES TURNOVER. THEREFORE, ACCORDING TO FINDINGS O F THE AUTHORITIES BELOW, THE PROVISIONS ARE MADE WITHOUT ANY 20 REASONABLE AND SCIENTIFIC ESTIMATION. THEREFORE, I T WOULD NOT FALL WITHIN THE CATEGORY OF ASCERTAINED LIABILITY. THE ASSESSING OFFICER ALSO FOUND THAT GENERALLY PROVISIONS ARE MA DE AT THE END OF THE FINANCIAL YEAR BUT IN THE CASE OF THE ASSESS EE, THE PROVISION IS MADE THROUGH OUT THE YEAR BEING ALL TH E MONTHS FROM APRIL,2006 TO MARCH,2007 AND THE SUBSTANTIAL A MOUNT OF PROVISION WAS PENDING EVEN ON CLOSE OF THE ACCOUNTI NG YEAR. IT WAS NOT EXPLAINED WHY PROVISION WAS MADE THROUGH OU T THE YEAR AND EVEN IF THE LIABILITY WAS ASCERTAINED, WHY IT W AS NOT CREDITED TO THE PARTYS ACCOUNTS IN BOOKS OF ACCOUNTS. 27. IT WAS ALSO FOUND THAT THE HUGE PROVISION OF RS .2.30 CR HAS ACCUMULATED IN THE TRADE SCHEME PROVISION ACCOUNT I N THE YEAR UNDER CONSIDERATION. IT IS ADMITTED FACT THAT DURI NG THE YEAR, ASSESSEE HAS DEBITED AN AMOUNT OF RS. 10,65,46,942/ - AS TRADE EXPENSES UNDER THE HEAD SELLING EXPENSES IN THE P ROFIT & LOSS ACCOUNT. OUT OF THIS AMOUNT, AN AMOUNT OF RS. 2,30 ,61,031/- IS THE AMOUNT ON ACCOUNT OF PROVISION AND THE BALANCE RS. 8,34,95,911/- IS THE ACTUAL AMOUNT PAID TO THE DISTRIBUTORS/DEALERS ON ACCOUNT OF TRADE SCHEME. T HE ASSESSEE'S COUNSEL ALSO EXPLAINED THAT THERE WAS A DIFFERENCE IN THE ACTUAL AMOUNT BOOKED IN THE PROFIT & LOSS ACCOUNT AND PROV ISION MADE DURING THE YEAR AND THE DIFFERENCE WAS DUE TO THE F ACT THAT DURING THE YEAR, SAME TRADE SCHEME EXPENSES WAS DIR ECTLY BOOKED AS EXPENSES IN THE PROFIT & LOSS ACCOUNT AND CREDITED TO THE RESPECTIVE CUSTOMER ACCOUNT INSTEAD OF CREDITIN G IT TO THE PROVISION ACCOUNT. THE ASSESSEE, HOWEVER FAILED T O EXPLAIN WHY THE TWO DIFFERENT METHODS HAVE BEEN ADOPTED FOR CLA IMING PART AMOUNT IN THE PROFIT & LOSS ACCOUNT AND PART MAKING PROVISION 21 ON THE BASIS OF THE SAME FACTS AND MATERIAL ON RECO RD. THIS SUBMISSION, ITSELF WILL PROVE THAT ASSESSEE FAILED TO EXPLAIN HOW THE LIABILITY WAS SETTLED IN THE YEAR UNDER CONSIDE RATION. THE ASSESSEE'S COUNSEL ALSO EXPLAINED THAT ON CREATION OF THE PROVISIONS, THE AMOUNT IS CREDITED TO THE PROVISION ACCOUNT AND ON RECEIPT OF CLAIMS/CREDIT NOTES, THE AMOUNT IS CR EDITED TO THE PARTYS ACCOUNT. THESE SUBMISSIONS OF THE ASSESSEE WHOLLY SUPPORT THE FINDINGS OF THE AUTHORITIES BELOW THAT IT WAS NOT AN ASCERTAINED LIABILITY OF THE ASSESSEE FOR THE PURPO SE OF CLAIMING DEDUCTION UNDER INCOME TAX ACT. IT IS WELL SETTLED THAT PROVISION OF AN ACCRUED ASCERTAINED LIABILITY IS ALLOWABLE DE DUCTION UNDER THE ACT. HOWEVER, IN THE CASE OF THE ASSESSEE, NO C ERTAINTY HAS BEEN BROUGHT ON RECORD IN ASSESSING THE ACTUAL PROV ISION FOR TRADE SCHEME EXPENSES. IT WAS NOT A KNOWN LIABILIT Y OF THE ASSESSEE AS PER SUBMISSIONS OF THE ASSESSEE BECAUSE IT MAY DEPEND UPON DISCRETION OF THE ASSESSEE'S FIELD STAF F AND WAS NOT EVEN KNOWN TO THE DISTRIBUTOR/DEALERS BECAUSE THEY SUBMIT CREDIT NOTE/CLAIM LATER ON. IF THE DISCOUNT IS TO BE GIVEN TO THE CONCERNED PARTIES FOR PROMOTING THE SALES OF ASSESS EE, DISCOUNT COULD BE REDUCED FROM THE SALE BILLS OR THE AMOUNT CAN BE CREDITED TO THE PARTYS ACCOUNT SIMULTANEOUSLY BUT NOTHING WAS DONE BY THE ASSESSEE. ACCORDING TO THE SUBMISSION OF THE ASSESSEE, INITIALLY THE PROVISION IS CREATED AND AF TER THAT, WHEN CLAIMS/CREDIT NOTES ARE RECEIVED FROM THE CONCERNED PARTY, THE AMOUNT IS CREDITED LATER ON. IT WOULD CLEARLY PROVE THAT THE PROVISION FOR TRADE SCHEME EXPENSES WAS A MERE HYPO THETICAL EXERCISE OF THE ASSESSEE DEPEND UPON DISCRETION OF THE FIELD STAFF WITHOUT HAVING ANY SCIENTIFIC OR ACTUAL BASIS TO MA KE PROVISION 22 OF THE EXPENSES. THE ASSESSEE ADMITTEDLY BOOKED SO ME TRADE EXPENSES DIRECTLY IN THE PROFIT & LOSS ACCOUNT AND FOR THE BALANCE, PROVISION WAS CREATED BUT IT IS NOT EXPLAI NED WHY THE TWO DIFFERENT TREATMENTS HAVE BEEN GIVEN BY THE ASS ESSEE FOR CREATING PROVISION IN THE BOOKS OF ACCOUNT WHEN THE SAME COULD BE DIRECTLY DEBITED TO THE PROFIT & LOSS ACCOUNT. THEREFORE, THESE FACTS WOULD CLEARLY SUPPORT THE FINDINGS OF T HE LD. CIT(APPEALS) THAT THERE WERE NO ASCERTAINED LIABILI TY OF THE ASSESSEE IN PRESENT TO MAKE PROVISION OF TRADE SCHE ME EXPENSES. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS WHEELS INDIA LTD. 368 ITR 554 HELD, BUSINESS EXPENDITURE MERCANTILE SYSTEM OF ACCOUNTING LEAVE ENCASHMENT, ESTIMATION WITHOUT REASONABLE CERTAINTY NOT DEDUCTIBLE. 28. THE LD. CIT(APPEALS) SPECIFICALLY NOTED THAT NO EVIDENCE HAS BEEN PROVIDED TO PROVE THAT ASSESSEE HAD ANY OBLIGA TION AS A RESULT OF PAST EVENT SINCE BY SELLING ITS PRODUCT, NO STATUTORY OBLIGATION HAS BEEN CAST ON THE ASSESSEE TO REIMBUR SE THE AMOUNTS IN QUESTION. THEREFORE, THERE MAY BE A POS SIBILITY TO INFLATE EXPENSES AS PER THE DISCRETION OF THE ASSES SEE. EVEN BEFORE US, NO ASCERTAINED BASIS OR SCIENTIFIC METHO D HAVE BEEN PROVIDED TO PROVE THAT IT WAS AN ASCERTAINED LIABIL ITY OF THE ASSESSEE IN PRESENT TO MAKE PROVISION FOR TRADE SCH EME EXPENSES. THE AUTHORITIES BELOW WERE, THEREFORE, J USTIFIED IN HOLDING THAT THE FIGURE OF PROVISIONS HAVE BEEN INF LATED BY THE ASSESSEE COMPANY ONLY TO AVOID PAYMENT OF DUE TAX F OR THE YEAR UNDER CONSIDERATION. THE FINDING OF FACT RECORDED BY THE LD. CIT(APPEALS) HAVE NOT BEEN ASSAILED THROUGH ANY REL IABLE OR COGENT EVIDENCE. IN THE CASE OF BHARAT EARTH MOVER S (SUPRA), IT 23 WAS FOUND THAT THE PROVISION MADE BY THE ASSESSEE C OMPANY FOR MEETING THE LIABILITY INCURRED BY IT UNDER THE LEAV E ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES OF THE COMPANY, INCLUSIVE OF ALL THE OFFI CERS AND THE STAFF, SUBJECT TO THE CEILING ON ACCUMULATION AS AP PLICABLE ON THE RELEVANT DATE AND WAS ENTITLED TO DEDUCTION, THEREF ORE, HELD TO BE THE LIABILITY WAS NOT A CONTINGENT LIABILITY. THE F ACTS OF THIS CASE ARE CLEARLY DISTINGUISHABLE FROM THE FACTS OF THE C ASE OF THE ASSESSEE AND WOULD NOT SUPPORT THE CASE OF THE ASSE SSEE. 29. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCU MSTANCES, IN THE LIGHT OF THE FINDING OF FACTS RECORDED BY THE A UTHORITIES BELOW, WE DO NOT FIND ANY JUSTIFICATION TO INTERFER E WITH THE ORDERS OF AUTHORITIES BELOW IN MAKING AND CONFIRMIN G THE ADDITION. THE APPEAL OF THE ASSESSEE HAS THUS, NO MERIT AND IS ACCORDINGLY DISMISSED. 30. IN THE RESULT, ASSESSEE'S APPEAL IS DISMISSED. 31. IN VIEW OF THE ABOVE, BOTH THE CROSS APPEALS AR E DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH DECEMBER,2014. SD/- SD/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: .DECEMBER,2014. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT CHANDIGARH