June 2009
Business expenditure : Deduction u/s. 37(1) of I. T. Act, 1961 : A. Y. 2000-01 : Provision for liability is deductible if there is an element of certainty that it shall be incurred : Provision for ‘long service award’ is allowable as deduction.
By K. B. Bhujle, Advocate
Reading Time 2 mins
New Page 1
Reported :
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Business expenditure : Deduction u/s. 37(1) of I. T.
Act, 1961 : A. Y. 2000-01 : Provision for liability is deductible if there is
an element of certainty that it shall be incurred : Provision for ‘long
service award’ is allowable as deduction.
[CIT vs. Insilco Ltd.; 179 Taxman 55 (Del)].
The assessee company had evolved a scheme whereby,
employees who rendered long period of service to the assessee, were made
entitled to monetary awards at various stages of their employment equivalent
to a defined period of time. On the basis of actuarial calculation the
assessee made provision for ‘long service award’ payable to its employees
under the scheme and claimed deduction of the same. The Assessing Officer
disallowed the claim on the ground that the grant of award was at the
discretion of the management and therefore, it could not be said to be a
provision towards ascertained liability. The Tribunal allowed the assessee’s
claim.
On appeal by Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :
“i) There was no merit in the submission of the revenue
that the liability of the assessee under the long service award scheme was
contingent as the payment under the said scheme was dependent on the
discretion of the management. It is well-settled that if the liability
arises within the accounting period, the deduction should be allowed though
it may be quantified and discharged at a future date. Therefore, the
provision for a liability is amenable to a deduction, if there is an element
of certainty that it shall be incurred and it is possible to estimate
liability with reasonable certainty even though actual quantification may
not be possible, such a liability is not of a contingent nature.
ii) In the instant case, since the provision for ‘long
service award’ was estimated based on actuarial calculations, the deduction
claimed by the assessee had to be allowed.”
