Disallowance of Liability Towards Expenditure on Discontinuance of Seven Clinics of 'Kaya Skin': ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT), disallowed the claim of liability towards expenditure on discontinuance of seven clinics of  ‘Kaya skin’ and held that mere passing of the Board Resolution would not create a liability unless the Board Resolution is put into action.

The assessee in this case is Kaya Ltd. , the Board of Directors of the company vide Board Resolution decided to discontinue to seven clinics under “Kaya Skin” segment & operations under “ Kaya Life” segment . The Assessing  Officer(AO) disallowed the said provision created by the assessee.

Aggrieved by the order the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] and contended against disallowance of provision made towards expenditure on discontinuance of business, but CIT(A) confirmed the disallowance of the provisions for expenses of Rs. 2.82 crores  and Rs. 0.90 crores made by the appellant on account of closure of certain Kaya life and Kaya skin clinics on the ground that the liability did not crystallize in the Financial Year 2009-10.

The assessee filed an appeal before ITAT. Nitesh Joshi appearing on behalf of the assessee submited that since in principle the assessee had decided to discontinue some of its clinics/centres, the liability towards payment of lease termination cost, customers refund, employees termination cost etc. are ascertained, therefore, the provision created to meet ascertained liability is allowable.

The Departmental Representative Anne Varghese, submitted that the assessee is claiming provision in respect of liability that has not crystallized yet and contended that even though the Board Resolution was passed on 22/03/2023 the lessors of the premises, the customers and the employees were communicated the decision of closure of the clinics in the next financial year. Hence, till the time the decision of Board of Directors is acted upon the liability towards expenditure on discontinuation of centres/clinics is not crystallized.

The Bench comprising of Vikas Awasthy, Judicial Member and Amarjit Singh, Accountant Member observed that merely passing of the Board Resolution would not create a liability unless the Board Resolution is put into action and stated the liability to pay cost on termination of employees and termination of lease would arise only when notice is served on them expressing termination of services/lease agreements.

Further the bench observed that the liability would have arised when the assessee communicated the decision of discontinuation of business and resultant termination of services/lease agreement.

Thus, the assessee’s claim of provision in respect of expenditure towards discontinuation of business in the impugned assessment year has been rightly rejected by the Assessing Officer.

To Read the full text of the Order CLICK HERE

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