Expenses cannot be disallowed solely due to Non-Receipt of Invoices: ITAT grants Relief to L'Oreal [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai has granted relief to L’Oreal India Private Limited and held that expenses cannot be disallowed solely due to non-receipt of invoices.

The appellant, L’Oreal India Private Limited is a wholly-owned subsidiary of L’Oreal S.A., France. It has entered into a license agreement with L’Oreal France, which awarded the exclusive right to the assessee to import, manufacture by itself or through another L’Oreal affiliate, market, distribute and sell branded products of the L’Oreal group.

During the assessment year, the assessee had made a “Provision for outstanding expenses” to the tune of Rs.96,28,68,265/- as per the requirement of the mercantile system of accounting and claimed the same as a deduction. Later the assessee voluntarily disallowed 30% of the above said claim u/s 40(a)(ia) of the Act Since it had not deducted tax at source from the above said provision. The Assessing Officer does not allow the deduction by treating it as an unascertained liability.

The AO noticed that a sum of Rs.68,04,24,906/- has been included in the transfer pricing adjustment. Accordingly, the AO deducted Rs.68.04 crores from the claim of Rs.96.28 crores, and from the balance so arrived, he allowed a further deduction of 30% (voluntarily disallowed u/s 40(a)(ia) of the Act) and accordingly disallowed net balance of Rs.19,77,10,351/-. The DRP confirmed the deduction.

The counsel for the appellant submitted that the assessee has made provision for expenses for the services availed by it by the year-end, for which bills have not yet been received. The counsel for the revenue submitted that the “liability to pay” the expense shall arise only when the bills are received by the assessee. Since the bills have not been received, there was no liability to pay the expenses. Accordingly, the provision for expenses so created by the assessee shall fall under the category of “unascertained liability” and accordingly not allowable as a deduction.

The Tribunal observed it is imperative for concern, following the mercantile system of accounting, to provide for all known expenses and losses as of the year-end, even if the relevant bills have not been received. The accrued liability is an ascertained liability, but the liability to pay it has not arisen. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to the assessee.

The Coram of Mr. B.R. Baskaran (AM) and Mr. Rahul Chaudhary (JM) has held that “we are of the view that the tax authorities are not justified in holding that the Provision for expenses is an unascertained liability. As per the accounting principles discussed above, it is an ascertained liability and the same is eligible for deduction while computing total income. Accordingly, we direct the AO to delete the disallowance of Provision for expenses.”.

Mr. Niraj Sheth and Mr. Dr. Yogesh Kamat appeared for the appellant and the respondent respectively.

To Read the full text of the Order CLICK HERE

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