Provision for losses in ordinary business course on scientific basis is allowable

Brief of the case:

The ITAT Delhi in the case of Seagram Distilleries Pvt. Ltd concluded that the provision for losses in the ordinary course of business can be allowed if the provisions are made on scientific basis. Thus, the provision in respect of breakage losses is allowable as the same have been measured scientifically taking into account the past business experience.

Facts of the case:

• The assessee company is engaged in the business of manufacturing and sale of grain neutral spirit. It claimed deduction of provision for transit breakage representing the expected losses during transportation of goods from factory to destinations.
• The provision was made on month to month basis. However, once the goods reach their destination the provision was reversed and only actual breakage was debited to the profit and loss account.
• The Assessing Officer considered such provision as provision for contingent liability which may or may not arise and accordingly disallowed the same.
• The assessee claimed that the provision was made on the basis of past experience of its sister concern engaged in the same line of business, as such the basis adopted was scientific. Therefore, the provision should be allowed as deduction.
• The order of AO was confirmed by the CIT (A) , by holding that there is significant gap between the losses provided and actually incurred due to breakage , thus, the basis of arriving of the same by the assessee doesn’t seem to be scientific.
• Aggrieved by the CIT (A)’s order, assessee is now in appeal before the ITAT.
  

Contention of the Assessee:

• The provision was made on scientific basis taking into account the experience of sister concern which was in the same line of business for pretty long time. The reliance was place on the decision of Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT, 245 ITR 428 wherein the court allowed the provision made on a scientific basis based on the experience of the assessee.
• Further, the provision was made only in respect of goods which are dispatched at the year end, in respect of other goods the actual breakage/transit loss is debited to P&L A/c. The excess provision, if any made, was reversed in the next year. Thus, the assessee has not claimed any undeserving benefit in the garb of provision.

Contention of Revenue

• The assessee is new in the business, therefore, does not have any its own experience of breakage losses. Thus, the basis adopted cannot be termed as scientific which is also evident by. This is evident by the fact that the asses the fact that it itself has reversed too much excess provision on the first day of next year.
• Further, the contention of the assessee that the provision was made on the basis of past experience of sister concern engaged in same line of business for pretty long time is also not acceptable because of the huge variance in the actuals and provided year by year.
  

Decision of the Tribunal:

• It is undisputed that the provision was made based on the dispatch of goods to various destinations on the basis of past experience of sister concern engaged in the same line of business.
• The ITAT relied on the decision of the Hon’ble Delhi HC in the case of CIT Vs. Hewlett Packard India (P) Ltd. [2008] 314 ITR 55 wherein the court concluded that if the provision is made on scientific basis and can be estimated such provision can be allowed as a deduction.
• Applying the ratio of the above ruling, in the present case also the provision is made on some basis which is past experience of assessee’s sister concern which is quite fair a scientific basis and not only an ad-hoc estimation of future contingencies.
• Thus, the provision so made is allowable as deduction. The appeal filed by the assessee is allowed.