Liability to pay ‘sales incentive’ crystalizes on achieving sales target; provision deductible under Sec. 37(1): HC

Case Details: CIT v. Maharashtra Hybrid Seeds Co. Ltd. - [2021] 133 taxmann.com 43 (Bombay)

Judiciary and Counsel Details

• • K.R. Shriram and Amit B. Borkar, JJ.
  • Suresh Kumar for the Appellant. 
  • Hiro Rai and Subhash Shetty for the Respondent.

Facts of the Case

Respondent had a wide dealer network throughout the country. Assessee had devised a scheme whereby the distributors/dealers would be eligible to travel to foreign country at the expense of assessee. This was announced as a sort of incentive to the dealers/distributors who had achieved a particular turnover in the last three years.

On the basis of these details, a provision was made in the books of account, and the same was claimed as a liability deductible in the computation of business income. However, the Assessing Officer (AO) had disallowed the sum contending that liability had not crystallized and was only contingent. CIT(A) reversed the order of AO, which the Tribunal later confirmed. AO filed the instant appeal before the Bombay High Court.

High Court Held

The Bombay High Court held that the assessee was following the mercantile accounting system. It was well-settled principle of accountancy that where the mercantile system is followed, an expense would be deductible in the year it is incurred though not paid.
Under no circumstances, the travel provision can be considered a contingent expenditure because assessee was bound by its announcement, which is like a contract. Accordingly, an obligation, which, in the perception or the bonafide estimate of the organization has already been incurred or accepted, cannot be regarded as a contingency from the standpoint of the organization

Further, the amount had been spent in the subsequent years and the same had not been claimed again as an expenditure. Thus, the amount which had to be incurred by the assessee, under the scheme announced to incentivize its dealers and distributors, was an accrued liability eligible for deduction.