Provision for discount created using a scientific method and fully discharged in subsequent years is allowable business expenditure.

Provision for discount created using a scientific method and fully discharged in subsequent years is allowable business expenditure.

• Assessee, engaged in software development and consultancy services, debited Rs. 29 crores towards provision for discount in its return of income for AY 2014-15.
• The Assessing Officer disallowed the claim, treating the provision for discount as a contingent liability.
• The Commissioner (Appeals) and the Income Tax Appellate Tribunal (ITAT) allowed the assessee’s claim, relying on favorable precedent in the assessee’s own case for AYs 2004-05 and 2009-10.
• The Revenue appealed, but the High Court observed that the provision was estimated using a scientific and specific method, and was fully discharged in subsequent years.
• Finding no substantial question of law, the High Court dismissed the Revenue’s appeal, leading the Revenue to file a Special Leave Petition (SLP) before the Supreme Court.

• Decided in favor of the assessee.
• The Supreme Court held that no grounds for interference were made out against the High Court’s order and accordingly dismissed the Revenue’s SLP.

• Provision vs. Contingency: A provision for discount is not a mere contingent liability if it is calculated using a reasonable, scientific, and specific estimation methodology.
• Subsequent Discharge as Evidence: Complete discharge and settlement of the provision in subsequent financial years serves as conclusive proof of its genuineness and scientific basis.
• Rule of Consistency: Consistent treatment of identical allowable provisions in an assessee’s own prior assessment years creates a binding precedent in the absence of material factual changes.