Merely because word “provision” is used it cannot be said that same is a provision

Merely because word “provision” is used it cannot be said that the same is a provision – ITAT

In a recent judgment, the ITAT Cuttack has held that merely because word “provision” is used while making the entry in the books of accounts, it cannot be said that the same is a provision more particularly when the assessee has maintained the books on mercantile basis.

ABCAUS Case Law Citation:
ABCAUS 4074 (2024) (06) ITAT

In the instant case, the assessee had challenged the order passed by CIT(A), National Faceless Appeal Centre (NFAC) confirming disallowance of the advertisement expenses.

The assessee was a HUF and engaged in the business of trading and manufacturing of spices and groceries etc. During the relevant Assessment Year, it was converted into company and all the assets and liabilities were taken over by the new company as a going concern. Therefore, the business of the assessee was existed for two months only during the previous year.

The AO by observing that in the profit and loss account the assessee had debited a sum towards advertisement and from perusal of the ledger account submitted by the assessee. The reply of the assessee was sought for and after considering the same, the AO disallowed the expenses by holding that the same is a provision which cannot be allowed u/s 37 of the Act.

In first appeal, CIT(A) concurred with the findings of the AO and confirmed the disallowance so made by the AO.

Before the Tribunal, the assessee submitted that the he had not made any provisions but had claimed expenses incurred during the business operations carried out in two months when the firm was existed under the proprietorship of the assessee HUF.

It was submitted that the AO by wrongly appreciating the journal entries made in the ledger account with regard to advertisement expenses accounted for on the basis of bills received in the last month for which the payments were due, had concluded that the same are provisions.

The Tribunal observed that the audited final accounts filed by the assessee, show that the assessee had claimed expenses under the head advertisement and publicity expenses and in support of the same a copy of ledger account of advertisement and publicity account as appearing in its books of account was also filed. In the said account, there were journal entries made on account of bills issued by the respective parties pertaining to various dates during the last month of the firm.

The Tribunal observed that as per the assessee, the services were rendered during the period of business of the assessee and those bills were pertaining to that period only.

The Tribunal stated that merely for the reason that the amount were outstanding, therefore, a journal entry was made in the account where inadvertently the word “provision” was used while making the entry. These expenses were incurred during the period of business operation of the firm of the assessee, and, therefore, are allowable expenditure. Merely for the reason that the word “provision” is used while making the entry in the books of accounts, it cannot be said that the same is a provision more particularly when the assessee has maintained the books on mercantile basis.

The Tribunal observed that the assessee also filed copy of the advertisement and publicity account for subsequent period where these amounts were taken at the credit side and the payments made subsequently were debited as a result these amounts were not claimed as expenditure in subsequent period by the newly formed company.

In view of these facts, the Tribunal opined that the expenditure claimed by the assessee on account of advertisement and publicity relating to the two months of the business operation of the proprietorship firm of the assessee are allowable expenditures.

Accordingly, the disallowance as made by the AO and upheld by the CIT(A) was deleted. 

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