Provision for discount allowed as expenses as it was discharged in subsequent Year

Provision for discount allowed as expenses as it had been discharged fully in the subsequent Assessment Year.

In a recent judgment, the Karnataka High Court upheld the allowance of provision for discount following the matching principle as it had been discharged fully in the subsequent Assessment Year.

ABCAUS Case Law Citation:
4743 (2025) (09) abcaus.in HC

In the instant case, the Income Tax Department had challenged the order passed by the ITAT in allowing the provision for discount as allowable expenses.

The respondent assessee was a Company in the business of Software Development, Consultancies etc. It’s case was selected for scrutiny.

During the relevant Assessment Year, the assessee had debited a sum of Rs. 29.00 crores towards provision for discount, which had not been added back to the income in the computation by the assessee.

The assessee explained that the said discount had been discharged in the immediately following Assessment Year. However, the Assessment Officer observed that the department had not accepted that decision in preceding assessment years and had appealed to the High Court on the issue.

Therefore, the AO 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 CIT(A) allowed the appeal of the assessee considering the decision of ITAT on this issue in appellant’s own case on identical facts.

The Tribunal noted that in the assesee’s own case the Co-ordinate Bench had accepted the claim of the assessee that provision for discount was an allowable expense. In that proceeding, the departmental 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.

The submission of the assessee was that it 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.

The Tribunal further noted 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.

The Tribunal opined that following the matching principle, expenses relating to discount accruing during the year had to be provided for in the relevant financial year itself.

As a result, the Tribunal upheld that finding of the CIT (A).

The Hon’ble High Court observed that the ITAT for one preceding Assessment Year 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, but, the issue relating to provision for discount was not assailed in that appeal before the High Court.    

The Hon’ble High Court observed that provision for discount was accepted by the revenue as an allowable expense in a subsequent Assessment Year. It was also not the case of the revenue that the provision for discount had not been discharged fully in the year subsequent to Assessment Year. Therefore, the stand of the revenue was inexplicable and contrary to the own stand of the revenue as it had already allowed the discount in one subsequent year.

Accordingly, the Hon’ble High Court dismissed the appeal holding that no substantial question of law had arisen.

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