Reversal of previously taxed bonus provisions and accrued

Reversal of previously taxed bonus provisions and accrued year-end brokerage liabilities are deductible business expenses.

Issue

Whether an income-tax deduction is permissible for the reversal of a bonus provision that had already been subjected to tax in preceding years under section 43B upon its subsequent cessation of liability.
Whether a year-end provision for brokerage and commission expenses calculated on identifiable transactions constitutes an accrued liability under the mercantile system of accounting or a non-deductible contingent liability.
Whether an income-tax deduction under section 80G can be denied to an assessee solely on the ground that the qualifying donation also forms a part of its mandatory Corporate Social Responsibility (CSR) compliance under the Companies Act, 2013.

Facts

Issue I (Bonus Reversal): During the assessment year 2016-17, the assessee reversed a provision for bonus in its books of account due to the cessation of liability. This provision had already been disallowed and subjected to tax under section 43B in earlier assessment years. The assessee claimed a deduction for this reversal amount to avoid double taxation.
Issue II (Brokerage Provision): The assessee-company created a year-end provision for brokerage and commission expenses based on business generated by sub-brokers under contractual rate structures. The Assessing Officer (AO) disallowed the deduction, treating it as a speculative or contingent liability since the final calculations carried over past the year’s end.
Issue III (CSR & 80G): The assessee incurred Corporate Social Responsibility (CSR) expenses as mandated by section 135 of the Companies Act, 2013. In its tax return, the assessee voluntarily added back this expenditure under section 37(1) but claimed a deduction under section 80G for the portion of the CSR outlay that was paid as a donation to an approved charitable institution.

Decision

Held, yes (Issue I): The court ruled in favor of the assessee. The reversal cannot be ignored while computing the current year’s income, as ignoring it would result in taxing the same real income twice without any actual accrual. The claim is a consequential adjustment, not a double deduction.
Held, yes (Issue II): The court ruled in favor of the assessee. The liability arose from completed business transactions during the relevant year. Under the mercantile system, an accrued liability does not become contingent merely because its exact final figure requires mathematical estimation at the close of the year.
Held, yes (Issue III): The court ruled in favor of the assessee. Explanation 2 to section 37(1), which bars CSR spending as a regular business expense, does not extend an embargo onto Chapter VI-A deductions. Since the donation met all specific statutory conditions of section 80G, the deduction cannot be denied.

Key Takeaways

Prevention of Double Taxation: If a provisions-based liability is taxed in year A due to statutory payment defaults (like section 43B), its accounting reversal in year B upon expiration must be allowed as a tax adjustment to keep the focus on “real income.”
Accrued vs. Contingent Liabilities: Under the mercantile system, expenses incurred to generate the current year’s revenue must be recognized in the same period. The necessity of a year-end estimate does not strip an accrued contractual liability of its deductibility.
Dual-Character Disbursals: CSR compliance and section 80G tax deductions are not mutually exclusive. An expenditure barred from being treated as a routine commercial business expense under section 37(1) can still independently qualify for an incentive deduction under section 80G if it goes to an approved charitable fund.

IN THE ITAT MUMBAI BENCH ‘C’

ICICI Securities Ltd.

Deputy Commissioner of Income-tax

Amit Shukla, Judicial Member
and ARUN KHODPIA, Accountant Member

IT APPEAL No. 9184 (Mum) OF 2025
[Assessment year 2016-17]

JUNE 16, 2026

Ms. Krupa Gandhi, Ms. Labodhi Kothari and Nitin Jain for the Appellant. Virabhadra S. Mahajan, SR. DR for the Respondent.

ORDER

Amit Shukla, Judicial Member.- The aforesaid appeal has been filed by the assessee, ICICI Securities Limited, against the order dated 16.10.2025 passed by the National Faceless Appeal Centre, Delhi, in relation to the reassessment order passed under section 147 read with section 144B of the Income Tax Act, 1961 for the Assessment Year 2016-17.

2. The assessee has raised various grounds challenging the additions and disallowances sustained by the learned CIT(A). The principal issues which fall for our consideration are, firstly, whether the learned CIT(A) was justified in confirming the disallowance of deduction claimed on reversal of bonus provision amounting to Rs.7,59,50,808/-; secondly, whether the disallowance relating to brokerage and commission expenditure, including the year-end provision of Rs.7,82,01,556/-, has been rightly sustained by treating it as contingent liability and/or by invoking the provisions relating to tax deduction at source; and thirdly, whether the assessee is entitled to deduction under section 80G in respect of donations, notwithstanding that the payments also formed part of its Corporate Social Responsibility obligations, especially when the CSR expenditure itself had been suo motu disallowed in the computation of income.

3. The brief facts, as borne out from the record, are that the assessee filed its return of income for Assessment Year 201617 on 29.11.2016 declaring total income of Rs.418,65,47,830/-. The return was processed under section 143(1) and thereafter assessment under section 143(3) was completed on 22.12.2018 assessing the total income at the returned figure. Subsequently, the case was reopened under section 147. An order under section 148A(d) was passed on 30.07.2022 and notice under section 148 was also issued on the same date. The reassessment was ultimately completed under section 147 read with section 144B vide order dated 29.05.2023.

4. The genesis of the reassessment proceedings lies in the Revenue Audit objections. The audit party had raised, broadly, three objections. The first objection was that the assessee had claimed deduction of Rs.7,59,50,808/- on account of reversal of bonus provision pertaining to earlier years, which according to the Revenue had not been offered as income. The second objection was that the assessee had incurred CSR expenditure of Rs.4.70 crores and had also claimed deduction under section 80G in respect of donations amounting to Rs.2,09,65,963/-. The third objection related to brokerage and commission expenditure debited in the profit and loss account, wherein the audit party alleged that tax had not been deducted on certain payments and, therefore, disallowance under section 40(a)(ia) was called for.

5. In response to the proceedings initiated under section 148A(b) and during reassessment proceedings, the assessee filed detailed submissions explaining each of the aforesaid issues. In respect of reversal of bonus provision, the assessee submitted that the provision had already been disallowed and subjected to tax in the earlier years under section 43B and, therefore, when the same was reversed in the books during the year under consideration, deduction was claimed only to prevent taxation of the same amount twice. The assessee furnished reconciliation showing that the aggregate provision of Rs.8.11 crores had already entered the tax computation in preceding years.

6. On the issue of brokerage and commission, the assessee furnished detailed party-wise and nature-wise break-up. It was explained that payments aggregating to Rs.3,53,80,472/-though grouped under the broad head of brokerage and commission in the profit and loss account, were in the nature of professional and technical services on which tax had already been deducted under section 194J. The assessee also explained that payments aggregating to Rs.14,92,67,802/-were made to brokers and sub-brokers in relation to solicitation, mobilisation and distribution of securities, including bonds, mutual funds, IPOs, OFS, NCDs, commercial papers and preference shares, and therefore such payments were covered by the exclusion contained in Explanation (i) to section 194H. The balance amount represented year-end provision for brokerage and commission expenses, net of reversals, which according to the assessee had accrued during the year on the basis of business already procured through brokers and sub-brokers.

7. In respect of deduction under section 80G, the assessee submitted that CSR expenditure of Rs.4,70,00,001/- had been suo motu added back in the computation of income and, therefore, no deduction had been claimed as business expenditure in respect of the said amount. It was submitted that deduction under section 80G was claimed separately under Chapter VI-A in respect of donations made to eligible institutions, supported by donation receipts and certificates. The assessee thus submitted that there was neither any double deduction nor any statutory bar against claiming deduction under section 80G where the donation otherwise satisfied the conditions of that section.

8. The Assessing Officer, however, did not accept the assessee’s claim in full. In respect of reversal of bonus provision, he held that deduction of Rs.7,59,50,808/- was not allowable. On the issue of brokerage and commission, the Assessing Officer accepted the assessee’s explanation in respect of certain actual payments where tax had either been deducted or where the provisions of TDS were held to be not applicable; however, he disallowed the year-end provision of Rs.7,82,01,556/- by holding that the same was based on estimates and represented contingent liability. With regard to deduction under section 80G, the Assessing Officer did not grant full deduction as claimed by the assessee.

9. The learned CIT(A) substantially upheld the action of the Assessing Officer. On the issue of reversal of bonus provision, the addition was confirmed. On the issue of brokerage and commission provision, the learned CIT(A) observed that the provision was worked out proportionately with reference to investments mobilised by sub-brokers and contractual brokerage rates; however, he still held that the same was contingent in nature and confirmed the disallowance. As regards deduction under section 80G, the learned CIT(A) observed that the assessee had filed the relevant documents and certificates, but directed the Assessing Officer to verify the same and grant deduction accordingly. The assessee is in further appeal before us.

Ground No. 1 : Deduction claimed on reversal of bonus provision amounting to Rs.7,59,50,808/-

10. We have carefully considered the rival submissions, perused the assessment order, the appellate order and the material placed before us. The issue arising for adjudication is whether the assessee was justified in claiming deduction of Rs.7,59,50,808/- representing reversal of bonus provision pertaining to earlier years. The record reveals that the original provision for bonus had already been subjected to the rigours of section 43B in the preceding years and the corresponding amount stood offered to tax in the earlier assessment years. During the year under consideration, upon cessation of the liability, the provision was reversed in the books of account and the assessee claimed deduction of the amount which had already suffered tax in the earlier years. The assessee furnished before the Assessing Officer a detailed reconciliation showing that the aggregate provision of Rs.8.11 crores had either been disallowed in the preceding years or offered to tax in earlier returns and, therefore, the reversal could not once again enter the computation of taxable income.

11. Neither in the assessment order nor in the appellate order has any defect been pointed out in the reconciliation furnished by the assessee. The authorities below have also not disputed the factual position that the corresponding provision had already been subjected to tax treatment in the preceding years. Once an amount has already entered the tax computation in an earlier year and is subsequently reversed on account of cessation of liability, the reversal cannot be ignored while computing the income of the year under consideration, as otherwise it would result in taxation of the same amount twice over without any corresponding accrual of real income. The material placed before us demonstrates that the claim made by the assessee is merely a consequential adjustment flowing from the earlier tax treatment accorded to the provision and does not result in any fresh deduction or double benefit.

12. In the absence of any material brought on record by the Revenue to rebut the reconciliation furnished by the assessee, we find that the claim of deduction of Rs.7,59,50,808/- is fully supported by the factual matrix emerging from the record. We, therefore, direct the Assessing Officer to delete the addition. Accordingly, Ground No. 1 raised by the assessee is allowed.

Ground No. 2 : Brokerage and commission expenditure

13. We shall now deal with the disallowance relating to brokerage and commission expenditure. The reassessment proceedings on this issue originated from the audit objection alleging non-deduction of tax at source on certain brokerage and commission payments. During the course of reassessment proceedings, the assessee furnished exhaustive details explaining the nature of each category of payment, the provisions under which tax had already been deducted wherever applicable and the reasons why certain payments did not attract deduction of tax at source.

14. From the material available on record, it is seen that a sum of Rs.3,53,80,472/- represented payments in the nature of professional and technical services rendered by entities such as NSE, BSE, GCA Savvian India Private Limited and ICICI Bank Limited, on which tax had already been deducted under section 194J and corresponding challans evidencing deposit of tax were furnished before the Assessing Officer. Likewise, in respect of payments aggregating to Rs.14,92,67,802/-, the assessee demonstrated that such payments were made to brokers and sub-brokers in relation to mobilisation and distribution of securities including bonds, mutual funds, IPOs, OFS, NCDs, commercial papers and preference shares. The assessee supported its claim by furnishing party-wise details, invoices, agreements and sample documentation and explained that such payments were covered by the exclusion contained in Explanation (i) to section 194H relating to transactions in securities. The Assessing Officer, after examining these details, ultimately did not make any separate disallowance in respect of these actual payments.

15. The surviving addition pertains to year-end provision for brokerage and commission expenses amounting to Rs.7,82,01,556/-, which has been disallowed on the ground that it represents a contingent liability. The facts on record, however, reveal that the assessee had empanelled various sub-brokers for procuring investors and business in relation to securities products marketed by it. The corresponding brokerage liability arose upon mobilisation of investments and generation of business by such brokers. The provision was created on the basis of identifiable transactions, product wise mobilisation and contractual brokerage structures after considering reversals of earlier provisions. The liability, therefore, emanated from services already rendered during the relevant previous year and was not dependent upon the occurrence of any uncertain future event.

16. Significantly, even the learned CIT(A), while upholding the addition, has recorded that the provision was worked out proportionately with reference to investments attributable to individual sub-brokers and in accordance with contractual brokerage rates. These findings themselves establish that the provision was linked to completed business transactions and represented a liability which had already accrued during the year. Merely because the exact amount payable required estimation at the close of the year would not convert an accrued liability into a contingent liability. Under the mercantile system of accounting followed by the assessee, expenditure incurred for earning the revenue of the year has necessarily to be recognised in the same period in which the corresponding income is accounted for.

17. The Revenue has not brought any material on record to demonstrate that the provision was excessive, arbitrary, fictitious or unsupported by business records. On the contrary, the assessee has furnished detailed workings explaining the basis of computation. Viewed thus, the provision represents an accrued business liability and not a contingent obligation. We accordingly direct the Assessing Officer to delete the addition of Rs.7,82,01,556/-. Ground No. 2 raised by the assessee is allowed.

Ground No. 3 : Short grant of deduction under section 80G amounting to Rs.1,49,26,115/

18. The next issue relates to short grant of deduction under section 80G amounting to Rs.1,49,26,115/-. The reassessment proceedings on this issue were initiated on the premise that the assessee had incurred Corporate Social Responsibility expenditure amounting to Rs.4.70 crores and had simultaneously claimed deduction under section 80G in respect of donations aggregating to Rs.2,09,65,963/-. According to the Revenue, such claim required further verification and could not be allowed without examining whether the assessee was, in effect, claiming a benefit in relation to CSR expenditure.

19. Upon perusal of the material available on record, we find that the assessee had categorically demonstrated that the CSR expenditure debited to the profit and loss account had been suo motu added back while computing its taxable income. Thus, no deduction whatsoever was claimed in respect of CSR expenditure as business expenditure. The deduction claimed under section 80G was in respect of donations made to eligible institutions and was claimed independently under Chapter VI-A on the strength of donation receipts and supporting certificates. The assessee had furnished the relevant certificates before the authorities below and even the learned CIT(A), after examining the record, recorded a finding that the claim under section 80G had been considered during the original assessment proceedings and that the supporting documents had been filed.

20. The issue, therefore, has to be examined in the correct statutory perspective. Explanation 2 to section 37(1) provides that expenditure incurred by an assessee on activities relating to Corporate Social Responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be expenditure incurred for the purpose of business or profession. The consequence of the said provision is that CSR expenditure cannot be allowed as business expenditure under section 37(1). However, the said Explanation does not, either expressly or by necessary implication, place any embargo on deduction otherwise allowable under Chapter VI-A, including section 80G, where the payment independently satisfies the conditions prescribed therein. Section 80G operates in its own field and grants deduction in respect of donations made to eligible funds or institutions, subject to fulfilment of statutory conditions. Thus, once the assessee has already added back the CSR expenditure and has not claimed it as business expenditure, the apprehension of double deduction ceases to have any factual or legal foundation.

21. In our considered opinion, the deduction claimed under section 80G cannot be denied merely because the donation may also qualify as part of the assessee’s CSR obligation, provided the donation is made to an approved institution and all statutory conditions of section 80G are satisfied. This view is also consistent with the reasoning adopted by this Tribunal in similar matters, wherein it has been held that disallowance of CSR expenditure under section 37(1) does not ipso facto obliterate or restrict an assessee’s independent claim under section 80G. The legislative restriction is confined to allowance of CSR expenditure as business expenditure; it does not travel beyond section 37 so as to neutralise a specific deduction available under Chapter VI-A. If Parliament intended to prohibit deduction under section 80G for all CSR donations, an express stipulation to that effect would have been provided in section 80G itself. In the absence of such prohibition, the claim has to be tested only on the touchstone of section 80G.

22. The learned CIT(A), while dealing with the issue, observed that there was paucity of time to verify certain certificates and, therefore, directed the Assessing Officer to grant the deduction after verification. However, the record before us shows that the assessee has already furnished the requisite donation receipts and certificates and no specific defect therein has been pointed out either by the Assessing Officer or by the learned CIT(A). The authorities below have not disputed the genuineness of the donations, nor has it been brought on record that the recipient institutions were not eligible or approved under section 80G. In such circumstances, relegating the matter to another round of verification, in the absence of any identified infirmity, would serve no meaningful purpose. Once the foundational facts stand established from the material already available on record, the assessee becomes entitled to deduction in accordance with law.

23. We accordingly direct the Assessing Officer to grant deduction under section 80G in respect of the amount claimed by the assessee, subject only to the arithmetical computation of eligible deduction as per the statutory limits prescribed under section 80G. Consequently, Ground No. 3 raised by the assessee is allowed.

24. Since we have allowed the grounds on merits, the other grounds challenging the validity of reassessment proceedings are rendered academic and do not require separate adjudication in the present appeal.

25. In the result, the appeal filed by the assessee is allowed.