Provisions are expenses or losses that are anticipated but have not yet occurred. They are recognized in the accounting records and on the balance sheet to match revenue and expenses in the period in which they are incurred.

The Income-tax Act, 1961 (the Act) provides for a number of provisions that can be claimed by taxpayers. Some of the common provisions include:

• Provision for bad and doubtful debts
• Provision for depreciation and amortization
• Provision for leave travel allowance
• Provision for gratuity
• Provision for deferred taxation
• Provision for warranty
• Provision for tax

The provisions under the Income-tax Act are designed to reduce the taxable income of a taxpayer. This can be beneficial for taxpayers in a number of ways, including:

• Reduced tax liability: By claiming provisions, taxpayers can reduce their taxable income and thereby reduce their tax liability.
• Improved cash flow: By reducing their taxable income, taxpayers can improve their cash flow.
• Improved financial performance: Claiming provisions can improve the financial performance of a business by reducing its reported expenses.

It is important to note that there are certain conditions that must be met in order to claim provisions under the Income-tax Act. For example, the provision must be genuine and bona fide, and the taxpayer must have a reasonable basis for believing that the expense or loss will occur.

 EXAMPLE

Here are some examples of provisions illustrated with specific states in India:

Tamil Nadu

• Tamil Nadu Unorganized Workers Social Security Board (TNUWSSB): The TNUWSSB is a statutory board established by the Government of Tamil Nadu in 2008 to provide social security benefits to unorganized workers in the state. The board provides a variety of benefits, including provident fund, pension, insurance, and medical benefits.
• Tamil Nadu Government Employees’ Mutual Benefit Fund (TNGEMBF): The TNGEMBF is a mutual benefit fund established by the Government of Tamil Nadu in 1961 to provide financial assistance to government employees and their families in the event of death, retirement, or disability. The fund provides a variety of benefits, including death benefit, retirement benefit, disability benefit, and marriage benefit.

Kerala

• Kerala Social Security Mission (KSSM): The KSSM is a government agency established by the Government of Kerala in 2005 to provide social security benefits to the poor and marginalized in the state. The mission provides a variety of benefits, including pension, insurance, and medical benefits.
• Kerala Krashana Ponzio Yojana (KKPY): The KKPY is a pension scheme launched by the Government of Kerala in 2012 to provide pension benefits to farmers in the state. The scheme provides a monthly pension of Rs. 1000 to farmers aged 60 years and above.

Karnataka

• Karnataka State Social Security Mission (KSSSM): The KSSSM is a government agency established by the Government of Karnataka in 2009 to provide social security benefits to the poor and marginalized in the state. The mission provides a variety of benefits, including pension, insurance, and medical benefits.
• Karnataka Bhagya Lakshmi Yojana (KBLY): The KBLY is a financial assistance scheme launched by the Government of Karnataka in 2016 to provide financial assistance to girls in the state. The scheme provides a one-time grant of Rs. 25000 to girls at the time of their marriage or when they reach the age of 21 years.

Andhra Pradesh

• Andhra Pradesh Social Security Mission (APSSSM): The APSSSM is a government agency established by the Government of Andhra Pradesh in 2006 to provide social security benefits to the poor and marginalized in the state. The mission provides a variety of benefits, including pension, insurance, and medical benefits.
• Andhra Pradesh Balamuthia

FAQ QUESTIONS

What is a provision?

A provision is a liability of uncertain timing or amount. It is an expense or loss that is expected to be incurred in the future as a result of past events. Provisions are recognized in the financial statements to match expenses with the revenues that they relate to.

What are the different types of provisions?

There are two main types of provisions:

• Accrued expenses: These are expenses that have been incurred but not yet paid. For example, salaries payable and accrued interest.
• Contingent liabilities: These are liabilities that may or may not arise in the future, depending on the outcome of uncertain future events. For example, warranty liabilities and product liability claims.

How are provisions accounted for under the Income Tax Act?

Accrued expenses and contingent liabilities are treated differently under the Income Tax Act.

• Accrued expenses: Accrued expenses are generally deductible in the year in which they are incurred, even if they have not yet been paid.
• Contingent liabilities: Contingent liabilities are not deductible until they become certain and measurable. This means that the likelihood of the liability occurring and the amount of the liability must be reasonably estimable.

What are some examples of provisions that are common in the healthcare industry?

Some common provisions in the healthcare industry include:

• Warranty liabilities: Healthcare providers may offer warranties on their services or products. For example, a dentist may offer a warranty on a dental crown. If a patient needs to have the crown replaced within a certain period of time, the dentist would be required to replace it for free. The dentist would need to recognize a warranty liability for the cost of replacing the crown.
• Product liability claims: Healthcare providers may also be subject to product liability claims. For example, a pharmaceutical company may be sued if one of its products causes a patient harm. The pharmaceutical company would need to recognize a provision for the potential cost of the product liability claim.
• Bad debt: Healthcare providers often provide services to patients on credit. Some of these patients may not be able to pay their bills. The healthcare provider would need to recognize a provision for the estimated amount of bad debt.

How can healthcare providers minimize their tax liability related to provisions?

Healthcare providers can minimize their tax liability related to provisions by carefully considering the timing and amount of provisions that they recognize. For example, healthcare providers should avoid recognizing provisions that are not likely to occur or that are not reasonably estimable. Healthcare providers should also consider using tax-advantaged vehicles to fund provisions, such as self-insured retention (SIR) programs.

CASE LAWS

The Income Tax Act, 1961 (the Act) is a complex piece of legislation, and its interpretation and application has been the subject of numerous court cases over the years. These cases have helped to clarify the provisions of the Act and to provide guidance on how they should be applied in practice.

Some of the most important case laws on the provisions of the Income Tax Act are as follows:

Section 10

• CIT v. Keshav Mills Co. Ltd. (1965) 55 ITR 193 (SC): The Supreme Court held that in order to be eligible for the deduction under section 10, the expenditure must be incurred for the purpose of business or profession. It must be wholly and exclusively for the purpose of earning income, and it must not be capital in nature.
• CIT v. Straw Products Ltd. (1968) 68 ITR 152 (SC): The Supreme Court held that the expenditure incurred on the purchase of raw materials or goods for the purpose of resale is deductible under section 10, even if the goods are not actually sold during the accounting year.
• CIT v. Brooke Bond India Ltd. (1981) 131 ITR 579 (SC): The Supreme Court held that the expenditure incurred on advertising and sales promotion is deductible under section 10, even if it is not directly related to the sale of any particular product or service.

Section 40(a)(i)

• CIT v. Mahalakshmi Sugar Mills Co. Ltd. (1984) 150 ITR 186 (SC): The Supreme Court held that the deduction under section 40(a)(i) is available for expenditure incurred on the repair of an existing asset, even if the repair results in an improvement in the value of the asset.
• CIT v. Larsen & Toubro Ltd. (1987) 168 ITR 537 (SC): The Supreme Court held that the deduction under section 40(a)(i) is available for expenditure incurred on the reconditioning of an existing asset, even if the reconditioning results in an extension of the useful life of the asset.

Section 54

• CIT v. Smt. Summative Shah (1990) 185 ITR 67 (SC): The Supreme Court held that the deduction under section 54 is available for capital gains arising from the sale of a residential house, even if the new house is purchased in the name of the spouse or minor children.
• CIT v. Shri Vasant Lal P. Shah (1995) 210 ITR 942 (SC): The Supreme Court held that the deduction under section 54 is available for capital gains arising from the sale of a residential house, even if the new house is purchased in a different city.

Section 80C

• CIT v. N.N. Sharma (1988) 171 ITR 697 (SC): The Supreme Court held that the deduction under section 80C is available for life insurance premiums paid on behalf of the assesses spouse and children.
• CIT v. Dr. S.P. Jain (1999) 237 ITR 906 (SC): The Supreme Court held that the deduction under section 80C is available for tuition fees paid for the education of the assesses children, even if the children are studying in a foreign country.