Reversal of Provision for MSMED Interest: ITAT Mumbai Directs Verification of Deduction Claims

In a significant ruling concerning the tax treatment of accounting provisions, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has adjudicated on the taxability of reversed interest provisions made under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The Tribunal, in the case of Siemens Limited Vs ADIT, remanded the matter back to the assessing authority for factual verification, establishing that if a provision was never claimed as a deduction, its subsequent reversal cannot be treated as taxable income.

Factual Matrix

The present dispute arose from the assessment proceedings for the Assessment Year (A.Y.) 2020-21. The appellant, Siemens Limited (hereinafter referred to as the "assessee"), is a resident corporate entity.

During the course of processing the return of income submitted by the assessee under Section 143(1) of the Income Tax Act 1961, the Centralized Processing Centre (CPC) identified a discrepancy. The CPC proceeded to make an upward adjustment amounting to Rs. 6,62,28,591/-. This addition was attributed to the reversal of interest that had been originally provided for under the mandates of the MSMED Act.

The Controversy

The core issue revolves around the accounting entries passed by the assessee in compliance with Section 23 of the MSMED Act, 2006. This section mandates that enterprises must pay interest to suppliers if there is a delay in payment for goods or services supplied by micro, small, and medium enterprises.