Provision Made in Respect of Payment to be Made to Employees Based on Co’s Financial Performance is to be Allowed | HC

Case Details: CGI Information Systems and Management Consultants (P.) Ltd. v. Income-tax Officer - [2023] 153 taxmann.com 527 (Karnataka)

Judiciary and Counsel Details

• • P.S. Dinesh Kumar & G. Basavaraja, JJ.
  • K. Surayanaraya, Sr. Adv. & Smt Tanmayee Rajkumar, Adv. for the Appellant.
  • E.I. Sanmathi, Sr. Standing Counsel for the Respondent.

Facts of the Case

During the year under consideration, the assessee made a provision in respect of payment to be made to the employees. Such payment was made based on the employee’s performance. The assessee paid 80% of the performance pay as an incentive, and the remaining 20% is paid based on the company’s financial performance.

Considering such payment as a contingent liability, the Assessing Officer (AO) disallowed the provision made by the assessee in respect of payment to be made to employees. Assessee argued that it was a liability which the company would know at the time of closure of books of account, i.e., on 31st March of the relevant financial year. Thus, the disallowance of the provision was incorrect.

The matter then reached the Karnataka High Court.

High Court Held

The High Court held that the objection raised by the AO that there are possibilities of employees leaving the company and not getting paid was untenable. The percentage of the employees leaving their employment will be minimal, and in such an event, the assessee was duty bound to reverse the entry in the following year.

Since the provisions made were ascertained figures, the disallowance made by the AO and confirmed by the two authorities was perverse and unsustainable.

List of Cases Reviewed

• • Wipro Ltd v. Dy. CIT [2015] 62 taxmann.com 26/[2016] 236 Taxman 209/382 ITR 179 (Kar.) (para 20) followed.
  • Order of ITAT BANGALORE BENCH IN IT Appeal No. 415/2011, dated 30/06/2016 (para 21) reversed.
  • CIT v. Toyota Kirloskar Motor (P.) Ltd. [2013] 30 taxmann.com 294/213 Taxman 49 (Mag.)/[2012] 349 ITR 65 (Kar.) (para 9).

List of Cases Referred to

• • CGI Information Systems & Management Consultants (P.) Ltd. [IT Appeal No. 608 of 2016, dated 31-10-2022] (para 3)
  • CIT v. Toyota Kirloskar Motor (P.) Ltd. [2013] 30 taxmann.com 294/213 Taxman 49 (Mag.)/[2012] 349 ITR 65 (Kar.) (para 5)
  • Wipro Ltd v. Dy. CIT [2015] 62 taxmann.com 26/[2016] 236 Taxman 209/382 ITR 179 (Kar.) (para 20).