A Provision not backed by any Actual Expenditure can’t be allowed as Deduction: ITAT [Read Order]

While hearing the case of Dia Vikas Capital Pvt. Ltd, the Delhi bench of Income Tax Appellate Tribunal (ITAT) recently ruled that if there is only a provision not backed by any actual expenditure, then such a provision cannot be allowed as deduction.

The assessee in the present case M/s Dia Vikas Capital Pvt. Ltd engaged in the business of investments has duly filed its return of income for the relevant assessment year.

During the course of assessment proceedings, it was noted by the Assessing Officer (AO) that the Assessee has made provisions amounting to Rs. 80,00,000 and Rs. 84,50,000 against consultancy fee and the Assessee Company claimed the deduction on such provision also. However, the AO disallowed the claim of the Assessee while completing the assessment.

On appeal, the CIT(A) accepted the submissions of the Assessee and allowed the appeal filed by the Assessee and accordingly allowed the claim of the Assessee towards the provision of consultancy fee. Aggrieved by the order of the authority, the Revenue carried the matter before the Tribunal by appeal.

After considering the rival submissions of both the parties the Tribunal bench comprising of Vice President R.S. Syal and Judicial Member Suchitra Kamble observed that Assessee in the present case has made a provision of Rs. 1,64,50,000  (Rs. 80,00,000 plus 84,50,000). “There can be no doubt about the allowing of deduction in respect of expenses actually incurred for due diligence. If there is only a provision not backed by any actual expenditure, then such a provision cannot be allowed as deduction. If on the other hand, the services are actually received and utilized but because of the non-availability of the invoice value, a provision is created for the reasonable amount of such expenditure, then such a provision has to be allowed”.

While concluding the issue the division bench further held that since necessary details regarding the provisions are not available on record the Tribunal set aside the impugned order and directed the AO to examine the details of the provisions and then consider the deductibility.