CIT FARIDABAD vs. M/S NATIONAL HYDRO ELECTRIC POWER CORP. LTD.

The revenue by way of present appeal under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 21.11.2008 passed by the Income Tax Appellate Tribunal, Delhi Bench 'G', Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 1105 (Del) of 2006 for the assessment year 2002-03 has claimed the following substantial question of law:- “Whether, on the facts and in the circumstances of the case, the Ld. ITAT was right in law in setting aside the order of the Ld. CIT (A) and directing the Assessing Officer to allow the claim of the assessee in respect of provision for gratuity of -2- Rs.15,49,59,191/-, provision for leave encashment of Rs.6,32,25,125/- and provision for post retirement medical benefit of Rs.86,41,476/- while computing the book profit u/s 115 JB of the Income Tax Act, 1961 even though these were mere provisions and were not ascertained liabilities?”

Briefly stated, the facts are that the assessee company, a Government of India Undertaking engaged in the construction of Hydro Electric Power Projects, generation and distribution of electricity filed its return on 30.10.2002 declaring nil income after claiming brought forward depreciation against current year profit of Rs.3,22,83,73,786/-. The assessment was completed under Section 143 (3) of the Act on 30.3.2005 at Rs.1,44,22,885/- and under Section 115JB of the Act at Rs.54,14,04,007/-. The Assessing Officer held that provisions for gratuity of Rs.15,49,59,191/-, provision for leave encashment of Rs.6,32,25,125/- and provision for post retirement medical benefit of Rs.86,41,476/- could not be allowed while determining the book profit under Section 115JB of the Act. The assessee preferred an appeal before the CIT (A) against the order dated 30.3.2005 passed by the Assessing Officer, who partly allowed the appeal vide order dated 2.3.2006 but affirmed that since these were the provisions and were not ascertained liabilities, the claim of the assessee that no addition could be made was not acceptable. On further appeal by the assessee, the Tribunal vide order dated 21.11.2008 set aside the orders of the Assessing Officer as well as of the CIT (A) and directed the Assessing Officer to allow the claim of the assessee in respect of provision for -3- gratuity, leave encashment and post retirement medical benefit while computing book profit under Section 115 JB of the Act by placing reliance upon the judgments of the Hon'ble Supreme Court in Bharat Earth Movers v. Commissioner of Income Tax, [2000] 245 ITR 428; Delhi High Court in Commissioner of Income Tax v. Vinitec Corp. P. Ltd. 278 ITR 337 (Del) and Bombay High Court in Commissioner of Income Tax v. Echjay Forgings P. Ltd. 116 Taxman 322. 3. We have heard the learned counsel for the revenue.

The issue in the present case is – whether in the facts and circumstances, addition on account of the provisions for gratuity, leave encashment and post retirement medical benefit could be made while computing the book profit under Section 115JB of the Act?

Learned counsel for the revenue submitted that since the liability had not matured in praesenti and, therefore, the same could not have been excluded from determining the book profits of the assessee under Section 115JB of the Act.

We have given our thoughtful consideration to the submission of the learned counsel for the appellant and do not find any merit in the same.

Section 115 JB of the Act was inserted by the Finance Act, 2000 with effect from Ist April, 2001. Under the provisions of this Section, where an assessee is a company, it is required to pay at least 7½% of its book profits as income tax. However, where the tax liability of the company under regular provisions is more than this amount, the company shall pay income tax according to the regular scheme. “Book profits” has been defined by the Explanation added to this Section -4- whereunder it provides that net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956 shall be increased by amounts specified in Clauses (a) to (g), if any amount referred therein is debited to the profit and loss account and reduced by the amount mentioned in clauses (i) to (viii) therein.

Clause (c) of the Explanation reads thus:- “the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities.”

According to the assessee, it had made provisions for gratuity, leave encashment and post retirement medical benefit on actuarial valuation. It is not disputed that the assessee-respondent is following mercantile system of accounting. The claim of the assessee is that these provisions have been made on actuarial valuation and cannot be added for determining book profits under Section 115 JB of the Act as it is business liability in praesenti which has arisen during the accounting year and it is only the quantification and discharge of which is to take place at a future date.

The Apex Court in Bharat Earth Mover's case (supra) while pronouncing principles regarding difference between accrued and contingent liabilities, enunciated as under:- “If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain -5- is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”

The Bombay High Court in Echjay Forging P. Ltd's case (supra) where the assessee had made a provision for gratuity on the basis of actuarial valuation, had held it to be ascertained liability. Delhi High Court in Vinitec Corp. P. Ltd's case (supra) while analyzing whether provision for future liability under warranty was a contingent or ascertained liability, had observed as follows:- “The ratio decidendi of the above cases is squarely applicable to the facts of the present case. It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is deferred to a future date. Once an assessee is maintaining his accounts on the mercantile system, a liability accrued, though to be discharged at a future date, would be a proper -6- deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy.”

The Tribunal while considering the issue in hand had specifically recorded that the provision for gratuity, leave encashment and post retirement medical benefit had been estimated on actuarial basis and was a liability which was created in praesenti though it was to be discharged at a future date. It was further recorded that the provisions which were created in respect of gratuity, leave encashment and post retirement medical benefit on actuarial basis had been estimated with reasonable certainty and, therefore, such an estimate cannot be treated to be contingent one. It was also observed that the provision made by the assessee in respect of gratuity, leave encashment and post retirement medical benefit on actuarial basis cannot be said to be provisions of unascertained liabilities so as to fall under clause (c) of the Explanation to Section 115JB (2) of the Act.

In view of the above, no substantial question as claimed arises for consideration of this Court. Consequently, finding no merit in this appeal, the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE July 06, 2010 (ADARSH KUMAR GOEL) gbs JUDGE