By TIOL News Service

ERNAKULAM, JULY 02, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether provisions created in books of account for meeting liabilities should not be disallowed, untill its nature being either contingent or ascertained, is examined. YES IS THE ANSWER.

Facts of the case:

The AO during the course of assessment proceedings, found that the provisions created by assessee in its books for guarantee repairs of Rs.18,50,000/- and liquidated damages of Rs.31,68,187/-, were to be added back as provided under Explanation 1(c) of Section 115JB(2), which reads as "the amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities". On appeal, the Tribunal went on the premise that the liquidated damages were an ascertained liability, the same being a contractual liability. Insofar as the provision for guarantee repairs, it was held that that the same too was an ascertained liability, and hence disallowances were deleted.

High Court held that,

++ it is found that factually there has not been examination of the nature of the liabilities by any of the authorities. The AO has merely added back the provisions assuming that it is not an ascertained liability. In such circumstances, necessarily, facts would have to be gone into and each of the provisions made would have to be examined by the AO. It needs also to be verified as to the payments made subsequently and whether the same tallies with the provision. If it does not, definitely there can be no claim made in the subject year and the expenses can be claimed only in the relevant year in which the payment was effected. Therefore, the issue has to be remanded to the AO leaving the questions of law open.

(See 2018-TIOL-1218-HC-KERALA-IT)