The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has directed a fresh examination of disallowances totalling approximately ₹39.11 lakh after assessee contended that the disputed provisions were liabilities acquired through slump sale transactions and had never been claimed as deductions in its own tax computation.

The bench of Beena Pillai (Judicial Member) and Prabhash Shankar (Accountant Member) observed that these submissions differed from the arguments presented before the lower tax authorities. It therefore remitted both issues to the Commissioner of Income Tax (Appeals) for examination of the facts and a decision in accordance with law.

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The proceedings related to assessment year 2017–18. The company initially filed its income tax return declaring total income of ₹1,48,45,440 and subsequently submitted a revised return declaring ₹1,61,48,170.

During scrutiny assessment under Section 143(3) of the Income Tax Act, 1961, the Assessing Officer disallowed ₹9,04,020 towards the decommissioning provision and ₹30,06,674 towards the retention bonus provision under Section 37. These additions increased the assessed income to ₹2,00,58,864.

The company challenged the disallowances before the Commissioner (Appeals) and subsequently approached the Tribunal.

The decommissioning provision arose from an obligation said to relate to restoring leased premises when they were vacated.

Before the Assessing Officer, the company explained that it had estimated the expenditure that would be incurred if the premises were vacated on March 31, 2017. It stated that the estimate was reviewed annually and provisions were made for incremental costs.

The Assessing Officer rejected the deduction on the ground that the expenditure was merely a provision and the liability had not crystallised.

Before the Commissioner (Appeals), the company maintained that the lease imposed an obligation to restore the premises and that the provision had been computed scientifically under mercantile accounting principles.

However, the Commissioner examined the lease terms and found that the relevant clause permitted installation and removal of air conditioners, UPS equipment and other fittings, subject to making good structural damage caused by their removal, except normal wear and tear.

The Commissioner considered that the contractual liability was restricted to damage arising from removal of fixtures. He also noted that the ₹9.04 lakh provision represented nearly 12% of the annual rent of ₹70,76,424 and that the company had not furnished substantive justification for the estimate. The disallowance was consequently upheld.

Before the Tribunal, the company advanced a different factual explanation.

It submitted that Siemens Limited had entered into the lease agreement with Ozone Properties Private Limited on March 19, 2015, and had originally created and debited the decommissioning provision in its own profit and loss account.

According to the company, Siemens Limited subsequently transferred a business undertaking to it through a slump sale in December 2016. The provision was among the liabilities transferred with that undertaking.

The company argued that it had neither debited the provision to its own profit and loss account nor claimed it as a deduction while computing income for the disputed assessment year. Consequently, it contended, there was no deduction in its hands that could be disallowed under Section 37.

In support, it relied on decisions in Calibre Personnel Services Private Limited and Nobel and Hewitt India Private Limited, concerning disallowances under Section 43B where the amounts had not been claimed as deductions.

As an alternative argument, the company maintained that the lease created an ascertainable contractual obligation. It also submitted that the provision had been reversed and offered to tax in assessment year 2020–21, and that retaining the earlier disallowance would result in double taxation.

The Tribunal noted that the submissions before the lower authorities had centred on whether the decommissioning provision represented an ascertained liability.

The contention that the provision originated with another entity and had not been debited to the company’s profit and loss account had not been advanced before those authorities.

For proper appreciation of these fresh arguments, the Tribunal sent the issue back to the Commissioner (Appeals), directing that the company receive an adequate opportunity of hearing.

The second dispute concerned the ₹30,06,674 provision for retention bonus.

Before the lower authorities, the company explained that uncertainty associated with a merger had prompted a provision to retain key employees. It stated that the provision was subsequently reversed when the risk of employee attrition became insignificant and that the reversal was offered to tax in assessment year 2018–19.

The Commissioner (Appeals) found insufficient evidence establishing the basis of the provision or a present obligation. He also observed that no bonus payment had been made from the provision and that Section 43B applied to actual payment, rather than reversal of a provision.

Nevertheless, recognising the company’s plea concerning taxation of the reversal in the following year, the Commissioner directed the Assessing Officer to verify the claim and allow appropriate relief in assessment year 2018–19 in accordance with law.

Before the Tribunal, the company submitted that the retention bonus provision had actually been created by Siemens Technology and Services Private Limited and transferred to it as part of another slump sale transaction.

It again argued that the liability had neither been debited to its own profit and loss account nor claimed as a deduction for the year under consideration.

The company also referred to a retention bonus proposal dated December 18, 2015, contemplating aggregate payments of ₹60 lakh to 24 identified employees in two equal tranches, payable on March 31, 2018, and September 30, 2019.

The Tribunal found that the retention bonus arguments also presented a materially different factual position from the version placed before the lower authorities. It therefore remitted this issue to the Commissioner (Appeals) to examine all the company’s contentions and decide the matter after providing an adequate hearing.

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