The Income Tax Appellate Tribunal (ITAT), Mumbai allowed tax neutral disallowance thereby granting relief to M/s. Novartis India Limited. The issue is in relation to the adjustment of excess and short year-end provision.
The assessee, M/s. Novartis India Limited makes provisions in its books of accounts based on various services or benefits received by it. Thus, in reality there is no excess provision except for the normal under or over accrual. During the AY 2007-08, total provisions of Rupees twenty-one crores have been created for expenses which inter-alia include employee related payables, Central Sales Tax/ VAT expenses, Annual Awards Function, etc.
Payments against the provisions during the Assessment Year amount to Rupees eighteen crores. From the balance, excess provision for Central Sales Tax or VAT expenses, provident fund contribution and bonus amounting to Rupees one crore have been suo-moto disallowed by the assessee. The remaining excess provision (representing meagre 7.33% of the total provisions) has been disallowed by the Assessing Officer during the assessment proceedings.
The Assessing Officer has failed to appreciate that the adjustments made in relation to the year-end provision are tax neutral since disallowance or allowance for the first year is allowed or disallowed in the second.
The Counsel for the assessee, submitted that the provisions made on best estimate basis should allowed as deduction for the year under consideration and further, the disallowance of excess and short year end provisions in current year and allowing the same in subsequent year, is revenue-neutral (on account of fact that tax rates are common), accordingly disallowance same in one year and allowing the same in next year will have no tax impact and hence, no addition on account of the same is warranted.
Allowing the appeal, a Bench consisting of Amit Shukla, Judicial Member and Rifaur Rahman, Accountant Member held that “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 is applicable.”
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