Provision for discount once accepted by Income Tax Dept as an allowable expense cannot be changed later: Karnataka HC rules in favour of LTI Mindtree Ltd. [Read Order]
The provision for discount had been discharged fully in the subsequent years which showed that the assessee was making the provision (for discount) on a scientific and specific method
Income Tax Dept
Income Tax Dept
In a ruling in favour of LTI Mindtree Ltd, the Karnataka High Court observed that the provision for discount had been discharged fully in the subsequent years which showed that the assessee was making the provision (for discount) on a scientific and specific method. Further held that provision for discount once accepted by Income Tax Dept. as an allowable expense cannot be changed later as it amounts to contary to stand taken by revenue.
The Income-Tax Appeal has been filed under Section 260-A of the Income Tax Act, 1961 seeking to challenge the order of the Income Tax Appellate Tribunal (ITAT). The Assessee-Respondent, LTI Mindtree Ltd. is said to be a Company in the business of Software Development, Consultancies etc. For Assessment Year 2014-15, the Return of Income was filed on 27.11.2014 declaring income of Rs.33,22,30,58,230/- under the provisions of the Income-tax Act and Rs.5,63,74,68,310/- under Section 115JB of the Act.
The case was selected for scrutiny and notice under Section 143(2) of the Act was issued on 01.09.2015. The assessment was concluded under Section 143(3) by making certain additions/disallowances to the total income.
On conclusion of the assessment, the claim of depreciation of Rs.28,67,245/- on goodwill was denied; the claim of allowances towards provisions of discounts of Rs.29,00,00,000/- without considering the enhanced income for deduction under Section 10AA of the Act was denied; Insurance Charges of Rs.2,53,00,297/- from export turn-over in computing under Section 10AA of the Act was excluded; and the Telecommunication Charges of Rs.7,98,45,983/- from export turnover in computing deductions under Section 10AA of the Act, was excluded.
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The respondent-assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by order dated 28.09.2022, partly allowed the appeal. Aggrieved by the same, the petitioners filed appeal before the ITAT and the assessee filed cross-objection. The ITAT dismissed the appeal filed by the petitioners by relying on the assessee's-respondent's own case for Assessment Year2004-05 and 2009-10. The cross-objection filed by the assessee-respondent was allowed.
The submission on behalf of the petitioner is that the ITAT erred in holding that provision for discount is an allowable expense in the current year. It is stated that the Tribunal erred in holding that provision for discount is allowable when the same is contingent in nature.
The point to be considered is whether the provision for discount, for the Assessment Year 2014 - 2015 return of income is allowable expense.
The assessment order for the Assessment Year 2014 - 2015 reflects the consideration of the Assessing Officer on the issue of provisions for discount. It was noted that during the year, the assessee had debited a sum of Rs.29.00 crores towards provision for discount, which had not been added back by the assessee.
After being given the opportunity to explain the same, on behalf of the favourable order for the Assessment Years 2004-2005 to 2007-2008 on that issue, the Assessment Officer observed that the department had not accepted that decision and had appealed to the High Court on the issue. Therefore, it was held that to maintain consistency with the earlier Assessment Years, the expenditure was considered to be contingent in nature and was disallowed and added back to total income. Penalty proceedings were also directed to be initiated.
The assessee challenged the aforesaid assessment order by means of an appeal before CIT (A) After noting the submission made on behalf of the appellant as far as the issue of disallowing discount for the Assessment Year 2014-2015, it was noted that on identical facts for Assessment Year 2004-2005 the appeal of the appellant was allowed by CIT (A) and the appeal of the revenue on this issue was dismissed by the ITAT by the order of 31.10.2012. Considering the above, the decision of ITAT on this issue in appellant's own case on identical facts, the disallowance made by the Assessment Officer was directed to be deleted and the appeal on this issue was allowed.
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The ITAT noted that on identical facts, the Bengaluru Bench of the ITAT in the assessee's own case for the Assessment Year 2004-2005 had accepted the claim of the assessee that provision for discount is an allowable expense. In that proceeding, the departmental representative had submitted that the assessee was following the mercantile system of account and there was no scientific or systematic method followed by the assessee for making the provision for discount and therefore the same cannot be allowed.
The submission was that no such expenditure was incurred by the assessee during the year under consideration and
therefore, the provision created was a contingent liability which was not allowable under the Act. On behalf of the assessee the submission was that the assessee gave discount to the customers based upon the volume of the sale and after reaching a specified target.
The assessee had to make a provision for discount to be paid to the customer after the target was achieved. Since the revenue was earned during the relevant assessment year, but, the discount was paid often after the target was achieved, in some cases after the end of the financial year, provision was made for discount by the assessee.
It was noted by the ITAT that the provision for discount had been discharged fully in the subsequent years which showed that the assessee was making the provision (for discount) on a scientific and specific method. It was argued on behalf of the assessee. The contention on behalf of the assessee pertaining to Assessment Year 2004-2005 was agreed to by the ITAT that following the matching principle, expenses relating to discount accruing during the year had to be provided for in the relevant financial year itself.
The provision for discount had been fully discharged in subsequent years as observed by the CIT (A) which showed that the method adopted by the assessee for making the provision was scientific and based on the material. It was further noted that the Assessing Officer had himself allowed such provision for discount in subsequent assessment years and thus the finding of the CIT (A) was upheld.
The ITAT for the Assessment Year 2009-2010, had accepted the claim of the assessee for the provision of discount as an allowable expenditure against which the department had filed an appeal before the jurisdictional High Court in Income Tax Appeal No.55/2017, but, the issue relating to provision for discount was not assailed in that appeal before the High Court.
A division bench of Justice Jayant Banerji and Justice S.G.Pandit viewed that it is the case of the assessee that provision for discount was accepted by the revenue as an allowable expense for the period even after the Assessment Year 2004-05. It is not the case of the revenue that the provision for discount had not been discharged fully in the year subsequent to Assessment Year 2014-2015. The stand of the revenue before the Court is inexplicable and contrary to the own stand of the revenue in the Assessment Year 2004-05 and thereafter.
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