Infosys BPM Ltd. Vs DCIT (ITAT Bangalore)
Conclusion: Provision for software expenses could not be disallowed by considering it as contingent liability as assessee was required to make provision for all known liabilities and losses as per accounting standards prescribed by ICAI and also by the Central Government under the Income Tax Act even though the amount could not be determined with certainty.
Held: Assessee had claimed deduction of Rs.24.97 crores as expenses incurred towards software purchases which included provision for software expenses amounting to Rs.3.89 crores. AO disallowed the provision for software expenses by observing that it was only provision in nature and was a contingent liability. It was held that there was no dispute with regard to the fact that assessee was following mercantile system of accounting. Assessee being a company, it was required to follow accounting standards prescribed by ICAI and also by the Central Government under the Income Tax Act. As per accounting standard-1 prescribed by the Central Government, assessee was required to make provision for all known liabilities and losses even though the amount could not be determined with certainty. Thus, assessee had explained the basis for creating the provision for expenses. Accounts of assessee had been audited by the statutory auditors and there was no fault with the quantum of provision for software expenses created by assessee. Accordingly, the provision for software expenses created by assessee could not be considered as contingent liability.
