Provision for Future Expenses Allowable under Matching Principle: ITAT Quashes Reassessment due to Lack of New Material [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal ( ITAT ) quashed the reassessment initiated under Section 147/148 and deleted the disallowance of provision for future expenses, holding that the Assessing Officer (AO) had reopened the assessment without any new material and that the provision was allowable under the matching principle consistently followed by the assessee.

The assessee, Wheatons Design Private Limited, engaged in the business of garment export, filed its return of income for the relevant assessment year, which was initially processed under Section 143(1).

Later, the AO issued a notice under Section 148, alleging that the provision for future expenses claimed by the assessee was not allowable and that income had escaped assessment. The reassessment was completed under Section 147/143(3) by disallowing the provision and adding it to the income.

Before the Commissioner of Income Tax (Appeals) (CIT(A)), the assessee explained that the provision represented expenses relating to the year under consideration that were to be incurred in future as part of contractual export obligations.

The assessee submitted that the provision was created on a consistent basis in accordance with the mercantile system of accounting and the matching principle, and had been accepted by the Department in earlier years. The CIT(A), however, upheld both the reassessment and the disallowance.

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Before the Tribunal, the assessee challenged the validity of reopening and the disallowance. It argued that the AO had reopened the case without any fresh tangible material, merely reviewing what was already on record, which amounted to a change of opinion. It was further submitted that all primary facts had been disclosed in the return and accounts, and thus the reopening was invalid.

The assessee reiterated that the provision was made on a scientific and consistent basis and matched the corresponding export revenue, making it allowable under the matching principle.

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The Bench comprising Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) found that the AO had not brought any new information or material to justify reopening.

The Tribunal observed that the AO acted solely on the basis of suspicion and re-appreciation of the same material already available, which could not form the basis of a valid reassessment. Therefore, the notice under Section 148 was held to be invalid.

Also Read:Reassessment Notice issued After April 1, 2021 Barred by Limitation: ITAT quashes Notice u/s of 148 Income Tax Act [Read Order]

The Tribunal held that the provision was allowable since it represented expenditure accrued during the year and was created in accordance with the accounting method regularly followed by the assessee.

Accordingly, the ITAT quashed the reassessment order, allowed the provision for future expenses, and deleted the addition, allowing the appeal.

The assessee was represented by P.C. Parwal, while Anita Rinesh appeared for the Revenue.

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