Case Law Details
UP Rajya Nirman Sahkari Sangh Ltd Vs DCIT (ITAT Lucknow)
In UP Rajya Nirman Sahkari Sangh Ltd vs DCIT, the Lucknow Bench of the Income Tax Appellate Tribunal (ITAT) dealt with the disallowance of audit fee provisions and delayed EPF contributions for Assessment Year 2013–14. The assessee, a registered co-operative society, had its audit fee provision of ₹40,00,000 disallowed by the Assessing Officer, citing that the liability had not crystallized during the relevant year. The CIT(A), NFAC upheld the disallowance, asserting that the assessee did not provide sufficient evidence to prove accrual of liability in the concerned financial year. The assessee, maintaining its books under the mercantile system, argued that such provisions had been consistently recorded in the past, and audit services pertain to the year in question.
The ITAT considered both sides and concluded that while audit fees are generally allowable, such claims must be based on accrued liabilities. Since the audit for the financial year is conducted post year-end, no liability legally arises until services are rendered. Thus, the Tribunal held that the audit fee provision remains a contingent liability until it crystallizes and cannot be claimed on an estimated or historical basis alone. However, it acknowledged that audit fees related to prior years, if paid in the year under consideration and properly accounted for, may be claimed as prior period expenses, subject to re-casting of accounts. Accordingly, the Tribunal partly allowed the appeal on this issue.
Regarding the disallowance of ₹68,44,058 under Section 36(1)(va) related to delayed EPF deposits, the assessee contested both the applicability of the law and the accuracy of the disallowed amount. The Tribunal noted the assessee’s claim that the actual delayed contribution amounted to ₹48,42,418 and directed the Assessing Officer to verify the correct amount. Depending on the findings, the disallowance may be restricted to the actual delayed payment. Thus, the matter on EPF contributions was remanded back for verification. Overall, the appeal was partly allowed for statistical purposes.
KEY PRECEDENTS & PRINCIPLES APPLIED:
- Mercantile Accounting Principle: Even under accrual accounting, only ascertained liabilities can be deducted.
- Statutory Obligation Not Equal to Accrued Liability: A statutory duty to audit doesn’t mean audit expenses automatically accrue unless conditions like services rendered or agreements signed are met.
- Consistency in Accounting: While past practice is relevant, it cannot override substantive legal principles about accrual & crystallization of liability.
ITAT emphasised that:
- Audit fee provisions are not allowable unless they meet the test of accrual & crystallization.
- Prior period payments can be allowed, but only if reflected clearly in the books.
- This ruling reinforces that consistency in accounting methods must also align with law & documentation.
IS AUDIT FEE PAYABLE IS A PROVISION OR CONTINGENT LIABILITY ?
This takes us to the moot question as to whether the Tribunal erred in deciding so or the relevant provisions of the law & decisions were not brought to the notice of the Tribunal.
PROVISION VS. CONTINGENT LIABILITY
In income tax law, not all provisions are disallowed, & not all are allowable. The treatment depends on the nature & timing of the liability.
Provision: A present obligation from a past event, reliably estimated, though timing/amount may be uncertain.
Contingent Liability: A possible obligation depending on uncertain future events; not deductible unless crystallized.
AS-29 / Ind AS 37 requires a provision to be recognized when:
– There is a present obligation from a past event
– Outflow of resources is probable
– A reliable estimate can be made
WHEN IS PROVISION FOR AUDIT FEES ALLOWED?
Provision for audit fees is generally allowable u/s37(1) if:
– Statutory audit is mandated
– Entity follows mercantile accounting
– Audit relates to the financial year just ended
– Amount is reasonably estimable- Audit engagement or statutory appointment is in place
– TDS u/s194J is properly deducted
LANDMARK JUDGMENTS SUPPORTING ALLOWABILITY
CIT v. Rotork Controls India (P) Ltd. (2009) 314 ITR 62 (SC):
Provision for warranty claims allowed as there was:
– A present obligation
– Arising from past events
– A reliable estimate of cost
The relevant paragraphs from the SC judgement :
“A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; & (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.”
“Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”
“A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation.”
CIT v. Bharat Earth Movers (2000) 245 ITR 428 (SC):
“If a business liability has definitely arisen in the accounting year, the deduction should be allowed even if the liability may have to be discharged at a future date.”
HIPL India Pvt. Ltd. v. ACIT (ITAT Bangalore): Allowed audit fee provision where business had commenced & expenses were incurred wholly for business purposes.
OTHER DISALLOWANCE CASES FOR AUDIT FEES
Citadel Fine Pharmaceuticals v. ACIT (ITAT Chennai): Disallowed due to non-deduction of TDS u/s194J—invoking Section 40(a)(ia).
Bain & Company India Pvt. Ltd. v. DCIT (ITAT Delhi): Disallowed due to inconsistent accounting & lack of evidence substantiating the liability.
SUMMARY TABLE: ALLOWABLE VS. DISALLOWED SCENARIOS
Scenario: Statutory audit required & financial year ended – Allowed
Scenario: Reasonable estimate based on contract/past trend – Allowed
Scenario: No audit done & no legal obligation yet – Disallowed
Scenario: TDS not deducted on provision – Disallowed u/s40(a)(ia)
Scenario: Prior year audit fee paid this year, properly booked – Allowed as prior period expense
CERTAIN PROVISIONS IN THE INCOME TAX ACT,
1. Provision for Bad & Doubtful Debts
- Disallowed unless actually written off.
- Only the actual bad debts written off are allowed as deduction u/s36(1)(vii).
- Just making a provision (without writing off) is not deductible.
Exception: Banks & certain financial institutions are allowed to make provisions u/s36(1)(viia) (subject to limits).
2. Provision for Gratuity
Disallowed unless the provision is made towards an approved gratuity fund.
Governed by Section 40A(7).
Unapproved provisions for gratuity are not allowed as deduction.
3. Provision for Leave Encashment
- Disallowed u/s43B(f).
- Even if liability is ascertained, it is only allowed on actual payment basis, not merely on accrual or provisioning.
4. Provision for Income Tax
- Not allowed as a deduction under the Act.
- Tax is not a business expenditure — it is an appropriation of profits.
5. Provision for Contingent Liabilities
- Generally disallowed.
- Unless the liability is ascertained or has crystallized, such provisions are not deductible.
- Based on judicial principles (e.g., Rotork Controls, Bharat Earth Movers).
6. Provision without TDS Deduction
- Disallowed u/s40(a)(ia) if TDS is not deducted or not deposited in time.
- Commonly seen with audit fees, consultancy, professional services, etc.
EXPRESSIO UNIUS EST EXCLUSIO ALTERIUS
This Latin maxim means:
“The express mention of one thing implies the exclusion of others.”
When a statute specifically disallows certain types of expenses (e.g., u/s40, 40A, or 43B), it is assumed that:
- All other expenses, if they meet the general deductibility conditions (e.g., u/s37(1)), are allowable,
- Unless they are hit by some other disqualifying condition (e.g., being capital in nature, personal, not incurred wholly for business, etc.)
If the Income Tax Act specifically lists what is not allowed, it implies that everything else that meets general conditions is allowed, even if not explicitly mentioned — but subject to tests of accrual, purpose, & legality
GENERAL RULE:
Business expenditure is allowable under the Income Tax Act if it is not specifically disallowed & satisfies the general conditions laid out in Section 37(1).
SECTION 37(1) – THE CATCH-ALL PROVISION
This section allows deduction of any business expenditure that is:
- Not covered under Sections 30 to 36 (which cover specific expenses like rent, depreciation, etc.),
- Laid out wholly & exclusively for the purpose of business or profession,
- Not capital expenditure,
- Not personal in nature, &
- Not an offence or prohibited by law.
If an expense is not specifically disallowed, & it meets these conditions, it can be allowed.
BUT HERE’S THE CAVEAT:
Just because an expense isn’t specifically disallowed doesn’t mean it’s automatically allowed. It must still:
- Accrue or crystallize during the year,
- Be backed by proper documentation,
- Be real & not a contingent liability, &
- Comply with general accounting standards (e.g., AS-29 or Ind AS 37 for provisions).
TAKEAWAY FOR TAXPAYERS
When booking provisions for audit or professional fees:
– Maintain clear audit engagement letters or statutory appointment records
– Ensure TDS is deducted as required
– Make sure books of accounts reflect prior period adjustments correctly
– Provision is only allowable if liability is ascertained & has accrued, not merely anticipated
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
Provision For Audit Fees Under Income Tax Law: Accrual, Allowability & Contingencies -Recent Tribunal Ruling: Disallowance of Audit Fee Provision
This appeal, by the assessee, is directed against the order of the Learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 20.02.2023 pertaining to the assessment year 2013-14. The assessee has raised the following grounds of appeal: –
“1. BECAUSE the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Center, (NFAC), Delhi has erred in law and on facts in confirming the addition of Rs. 40,00,000/- on account of disallowance of provision for audit fees.
2. BECAUSE the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Center, (NFAC), Delhi is not correct in confirming the addition of Rs. 40,00,000/- on account of provision for audit fee by taking an erroneous view that the assessee should have claimed it in the year in which the liability got crystallized and that the assessee had not been able to provide any evidence to prove that the liability for payment of audit fees crystalized in the relevant previous year.
3. BECAUSE the authorities below have failed to appreciate that the assessee has been maintaining its accounts on accrual basis and as such the provision for audit fees was allowable on the basis of provision made in the books of account respective of facts whether the payment of the same has been made within the due date of filing of return of income or not.
4. BECAUSE the view taken by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Center, (NFAC), Delhi in confirming the disallowance of provision for audit fee is fully misconceived, against the facts of the se and contrary to the provisions of law.
5. BECAUSE the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Center, (NFAC), Delhi was not correct in confirming the addition of Rs.68,44,058/- made by the Assessing Officer u/s 36(1)(va) on account ‘of alleged late deposit of EPF contributions received from the employees.
6. BECAUSE the allowability of employees’ contribution to EPF amounting to Rs. 68,44,058/- u/s 36(1)(va) of the .T. Act, 1961 was duly covered in favour of the assessee by the judgment of the Hon’ble Jurisdictional High Court in the case of Sagun Foundry Private Limited Vs. CIT reported in 78 com 47 and reliance by the Ld. CIT(A), NFAC on the decision of Apex Court in Checkmate Services Pvt. Ltd. vs. CIT is wholly misplaced.
7. BECAUSE the order appealed against is contrary to facts, law and principles of natural justice.
8. BECAUSE the appellant craves leave to alter, amend or withdraw all or any of the grounds of appeal on or before the hearing of appeal.”
2. The assessee has also taken an additional ground that reads as under: –
“Ground no. 9 Because, without prejudice to the grounds hereinfore, the authorities below have grossly erred in computing/confirming the quantum of dis-allowance u/s 36(1)(va) of the Income-Tax Act, 1961 at Rs.68,44,058/-, whereas, on a correct computation, the amount of disallowance could not have exceeded Rs.48,42,418/- and consequently the disallowance deserves to be restricted to Rs.48,42,418/-.”
3. The facts giving rise to the present appeal are that in this case the assessee is a co-operative society duly registered under the U.P. Co-operative Societies Act, 1965, vide certificate dated 25.11.1974. The assessee filed its return of income on 30.09.2013, declaring a total income of Rs.36,34,97,880/-. Thereafter, the case was selected for scrutiny through Computer Assisted Scrutiny Selection (CASS) and a statutory notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued.
In response to the statutory notices, the Ld. Authorized Representative of the assessee on behalf of the assessee attended the assessment proceedings. While framing the assessment, the Assessing Officer made various disallowances namely provisions for audit fee of Rs.40,00,000/-, payment of liability of trade tax u/s 43B of the Act amounting to Rs.17,15,259/-, the Employee’s Gratuity Fund Scheme of Rs.22,66,340/- and further disallowance u/s 36(1)(va) of the Act related to EPF of Rs.68,44,058/- and out of the other expenses a sum of Rs.1,01,164/- was disallowed and added back to the income of the assessee. Thus, the Assessing Officer computed and assessed the total income of assessee at Rs.37,84,24,701/- against the returned income in sum of Rs.36,34,97,880/-. Aggrieved against this, the assessee preferred an appeal before the Ld. CIT(A) who after considering the material available on record and submissions of the assessee partly allowed the appeal of the assessee. Thereby, he deleted the addition of Rs.1,01,164/- made on account of the disallowance of miscellaneous expenses and a sum of Rs.22,66,340/- as made towards gratuity fund scheme. However, the expenses claimed in respect of the provisions for audit fee and the EPF expenses was sustained and other liability of Rs.17,15,259/- was also deleted. Aggrieved against this, the assessee is in appeal before this Tribunal.
4.0 Grounds No. 1 to 4 are against sustaining an addition of Rs.40,00,000/- being claimed as provisions for audit fee. Grounds no. 5, 6 and 9 are against sustaining an addition in respect of EPF contributions amounting to Rs.68,44,058/-. Rest of the grounds namely i.e. 7 & 8 are general in nature and require no separate adjudication. Apropos to the grounds no. 1 to 4, Ld Authorized Representative of the assessee reiterated the submissions as made before the Ld. CIT(A) and submitted that the Ld. CIT(A) failed to appreciate the facts of the case in right perspective. The assessee has been adopting the same method and practice with regard to the audit fee. He further submitted that such expenses are allowable and has been claimed having considered the past history of the expenditure. Thus, he prayed that the impugned additions may be deleted. On the other hand, the Ld. Sr. DR opposed the submissions of the Ld. Counsel for the assessee and reiterated the submissions as made in the written submissions. The crux of arguments of the Revenue is that the amount was not paid during the year and no service was rendered during the relevant period. Hence, no liability for payment accrued during the assessment year under consideration. It is merely a contingent liability would be crystallized when the audit is actually conducted.
5. We have heard the rival contentions and perused the material available on record. The Ld. Counsel for the assessee vehemently argued that the expenditure is allowable as the assessee has been making such provision for audit fee in past as well. He contended that during the year, the assessee has paid a sum of Rs.34,23,563/- audit fee related to earlier year. And same method has been adopted in the earlier years as well. Thus, the AO erred in making addition. The revenue has opposed the claim of the assessee stating that the liability though pertaining to the previous year is said to be accrued when it actually crystallized and is ascertainable would legally be enforceable. The assessee is following Mercantile System of Accounting and therefore the assessee should have claimed the same in the year it crystallized.
The assessee has not been able to furnish any evidence regarding the fact that it crystallized during the relevant year. During the course of hearing, the Ld. Counsel for the assessee conceded the fact that the services were not rendered in the year under consideration. In fact the audit is related to the year under consideration. Therefore, looking to the past history such provision has been made and is allowable. Undisputedly, such practice the assessee making provision for audit fee has been made and earlier year also such provision was disallowed. The audit fee related to earlier year has been paid during the year under consideration amounting to Rs.34,23,563/-. There is no quarrel that the audit fee is an allowable expenditure. The assessee is under statutory obligation to get its account audited for the relevant assessment year and such audited would be made only after completion of the financial year. Therefore, the audit otherwise relating to the financial year is carried out in subsequent year. It is admitted position that without conducting of audit no liability would accrue. Hence, until that time such liability would be contingent in nature. Such contingent liability would be allowable only in the year when it is crystallized. It is well settled law if any expenditure is allowable, the assessee should not be denied the benefit. In the case in hand, it appears that the assessee failed to cast its account properly, thereby it has caused confusion on this issue. In our view, the assessee ought to have re-casted its accounts accordingly. The expenditure for conducting audit fee is an allowable expenditure but without accrual of liability no provision can be allowed as it would remain merely a contingent liability, we hold accordingly. So far allowability of expenditure prior period during this year would be allowable subject to assessee recast its accounts. The assessee needs to recast its account accordingly. The AO would allow the claim of the assessee treating the same as prior period expenses. The ground is partly allowed.
6. Grounds no. 5, 6 & 9 are related to disallowance of belated EPF contribution the Ld. Counsel for the assessee, at the outset, contended that the lower authorities have failed to verify the correct figure and made disallowance without considering it in right perspective. He drew our attention to the EPF contributions deposit details which is enclosed with paper books for the financial year 2012-13, relevant to assessment year under consideration. As per this, the total delayed amount is stated to be Rs.48,42,418/- only.
7. On the other hand, the Ld. Departmental Representative (“DR”) has no objection, if, the matter is restored to the Assessing Officer with regard to the verifying the correct figure and decide the issue accordingly.
8. We have heard the rival submissions and perused the material available on record. In view of the submissions made by the Ld. Authorized Representative of the parties, we deem it fit and proper and to sub-serve the interest of principles of natural justice and restore this issue to the file of the Assessing Officer to verify the correct figure of the contributions which was paid within the period of limitation and if it is found that the contention of the assessee is correct that the belated payments of EPF are not in excess of Rs.48,42,418/-, he would restrict the addition to that extent. Grounds raised in this appeal are partly allowed for statistical purpose
9. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 03/04/2025.
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