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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
2 | P a g e ITAs No.3383 & 3136/MUM/2014 आदेश / O R D E R महावीर ससुंह, न्याययक सदस्य/ PER MAHAVIR SINGH, JM:
These cross appeals are arising out of the order of the Commissioner of Income Tax (Appeals)]-9, Mumbai [in short CIT(A)], in appeal No. CIT(A)-9/Addl.cit-5(1)/464/2011-12 vide dated 17.02.2014. The Assessment was framed by the Addl. Commissioner of Income Tax, Range-5(1), Range-5(1), Mumbai (in short ACIT/ITO/ AO) for the A.Y. 2009-10 vide order dated 28.12.2011 under section 143(3) of the Income- tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the claim of expenditure debited on account of immigration fine levied by foreign airports. For this assessee has raised the following ground No. 1: -
1. On the facts and circumstances of the case, and in law the learned CIT(A) erred in confirming disallowance made by the assessing officer (AO) of immigration fine for Rs. 47,72,826/- paid by the appellant in the course of carrying its business activities."
3. This issue is covered by the decision of assessee’s own case for AY 2008-09 in vide order dated 19.07.2019, wherein the Tribunal adjudicate the issue vide Paras 10 to 17 as under: - “10. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that penalty or fine paid at the 3 | P a g e ITAs No.3383 & 3136/MUM/2014 foreign airport is ordinarily an amount paid in settlement of charges in respect of offence/guilt on the part of the passenger which is neither accepted nor proved. Consideration for payment of such penalty or fine is in respect of any offence/guilt which is neither proved nor accepted and is in the nature damages paid for settlement of disputes to avoid bad reputation and safeguard business interest. In AY.1993-94 such disallowance was considered by CIT(A). However, unfortunately the CIT(A) erroneously considered the activity of the assessee as illegal and disallowed the same. In para 22, the CIT(A) has observed as under: disallowance was considered by CIT(A). However, unfortunately the CIT(A) erroneously considered the activity of the assessee as illegal and disallowed the same. In para 22, the CIT(A) has observed as under:
We noted that as such activity of the assessee is neither illegal nor illegitimate. The assessee's activity in the International Air Transport is carried on with due authority and licensed by the Govt. of India and also the respective countries to which it operates its flights. Penalty or fines are paid in foreign 4 | P a g e ITAs No.3383 & 3136/MUM/2014 country by the assessee for default or mistake of the passengers and not on account of any violation or infraction of law by the assessee. However, under the International Air Transport laws, it is the obligation of the Airlines to bear such penalty/fines which arise in the ordinary course of carrying on its business. As stated above, the penalty/fine which is incurred by the assessee should be considered in the context of nature of business carried on by the assessee. In this case, the assessee's business is fully authorized and carried on legally. However, the assessee incurs the liability for payment of penalty/fine as the documents are misplaced or lost by the passengers for which the assessee cannot be held liable and over which the assessee has no control. The assessee had not made any contravention of law but inspite of the assessee exercising all care as explained above, the liability arises which is incidental and arises ordinarily in the course of international Air Transportation business and the fine/penalty is paid on account of default/non-compliance of laws by the passengers and not by the assessee. We further note the following:
(a) As submitted above the fine/penalty which is paid by the assessee is not for any infraction of law by the assessee but assessee becomes liable for payment of such fines/penalties either on account of 5 | P a g e ITAs No.3383 & 3136/MUM/2014 the passengers carried by the assessee- aircraft not possessing proper or sufficient documents for enabling them entry in the foreign country or because of the Immigration Authorities in foreign countries being not satisfied with the documents of the passengers.
(b) The documents carried by the passengers are duly checked by the assessee's staff at the time of departure from Indian Airport and also checked by the Immigration Authorities of the Govt. of India at the Airport of departure.
From the above it will be obvious that the assessee has neither carried on any illegal activity nor committed any breach of law. However, in accordance with the International Air Transport laws the assessee becomes liable to pay such penalties/fines to the Immigration Authority of foreign countries and such penalty or fines in the nature of expenses incurred wholly and exclusively for the purpose of business of the assessee and in the course of ordinarily carrying out its business activity.
We also noted the fact that the penalties/fines arise not on account of any infraction of law/non-compliance of the 6 | P a g e ITAs No.3383 & 3136/MUM/2014 requirements of the Immigration Authorities by the assessee but the passengers and such penalties/fines borne by the assessee can also be considered in the nature of business loss allowable to the assessee u/s 28 of the Act itself while computing assessee's income from business.
It is further noted that infraction of law as such and that too not by the assessee but by the passengers carried by the assessee should not however be presumed for disallowance of such expenses which are normally incurred for carrying out the business of the assessee. In this connection, we invite attention to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. P.C.Tangal (184 1TR 88). In this case penalty was imposed by the Customs Authority on the ground that the assessee had under invoiced certain imports and thereby imported more goods than were authorized by the Import License. The penalty was reduced by the appellate authorities and the Hon'ble Bombay High Court held that such penalty was allowable as deduction u/s.37(1) of the Act as it could not be determined that the assessee has himself committed an infraction of law.
In the case under consideration, it is observed that the assesses had not committed any infraction of law but the assessee is 7 | P a g e ITAs No.3383 & 3136/MUM/2014 required to bear the amount of such penalty/fine levied at foreign airports for certain deficiencies in the records/passports/visa of the passengers carried by the assessee and in accordance with International Air Transportation Laws and/or for commercial expediency and such penalties or fines are borne by the assessee though the assessee itself has not made any infraction of law. At this juncture, a distinction is justified between the case of a deliberate violation of law and one which is innocent and unintended. Where a trader has not been at fault and has not been carrying on his business unlawfully or in contravention of the rules but discovering that the goods purchased by him are liable to be confiscated as unauthorisedly imported, saves them from being confiscated by paying a penalty and such penalty may be viewed as part of the purchase price of the goods as laid down by the Hon'ble Bombay High Court in the case of C1T Vs. Pannalal Narottamdas & Co. (1968) (67 1TR 667) and allowable as deduction. Applying the ratio of above case, it will be obvious that the case of the assessee for allowance of payment of penalty/fines is on a very strong footing as in the assessee's case the assessee had neither committed any violation of law nor any breach or infraction of the law. As noted earlier the expenses incurred by the assessee on fines/penalties at foreign airport is also in the 8 | P a g e ITAs No.3383 & 3136/MUM/2014 nature of loss incurred in the carrying on assessee's business and it is incidental to carrying on of such business of International Air transportation of passengers.
From the above stated facts, it will be obvious that the penalty/fine paid by the assessee has been incurred on carrying out an operation of the assessee's business and it is incidental to the business operations. Reliance in this case is placed on the decision of CIT Vs. Howrah & Co. Pvt. Ltd. (1989) 44 Taxman 409 (Cal).
Further in the case of Ramchand Shrinarayan Vs. CIT (1978) [111 ITR 263] It was held by the Hon'ble Supreme Court that if there is a direct and proximate nexus between the business operations and the Loss and it is incidental to its business operation and doing all that is incidental for profit earning, such losses would be allowable as a business loss u/s.28 of the Act. We noted that on the above mentioned facts in the assessee's case the penalty/fine paid at the foreign airports has a direct and proximate nexus between the business operations and the loss (penalty or fine) and such penalty or fine is incidental to the carrying on of the assessee's business in ordinary course of business and hence it is allowable to 9 | P a g e ITAs No.3383 & 3136/MUM/2014 the assessee as a ‘business loss’ also. We order accordingly.
Respectfully following the decision in assessee’s own case (supra), we delete the disallowance in this year also.
The next issue in this appeal of assessee is as regards to the order of CIT(A), confirming the action of the AO in holding that the provisions of section 14A of the Act are applicable to the dividend income received by the assessee. For this assessee has raised the following grounds: - “2(i) On the facts and circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO that provisions of sec. 14A were applicable to dividends received by the appellant on “Trade Investments”.
(ii) Without Prejudice to Above on the facts and circumstances of the case and in law the learned CIT(A) erred in directing the learned AO that disallowance under section 14A may be reworked on dividend received from Indian Companies of ₹ 66,68,609/-.
(iii) On the facts and circumstances of the case and in law, the learned AO be directed to delete disallowance under section 14A of ₹ 4,40,85,201/-.”
We noted that this issue is also covered by the Tribunals decision in assessee’s own case for AY 2008-09. The Tribunal has decided this issue in favour of assessee vide Para 24 to 25, which read as under: - 10 | P a g e ITAs No.3383 & 3136/MUM/2014 “24. We noted that this issue is also covered by the Tribunal’s decision in assessee’s own case for AY.2007-08. Ld. Counsel for the assessee before us stated that total dividend received by assessee is as under:
(e) Total Dividend Received NACIL (I) Foreign Dividend 27,96,151.39 NACIL (A) Foreign Dividend 2,11,18,743.39 -------------------- Total Rs.2,39,14,898.63 --------------------
He stated that this foreign dividend is not exempt and assessee has not claimed any exemption u/s.14A of the Act. Hence, he stated that once there is no exempt income, the issue is covered by the decision of the Hon'ble Bombay High Court in the case of Pr.CIT Vs. Ballarpur Industries Limited in Income Tax Appeal No.51 of 2016, wherein this issue has been considered following the judgment of Hon’ble Delhi High Court in the case of Chem invest Limited vs. CIT (2015) 378 ITR 33 (Delhi) held as under: - “On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the 11 | P a g e ITAs No.3383 & 3136/MUM/2014 Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.”
12 | P a g e ITAs No.3383 & 3136/MUM/2014 Hence, this issue is decided in favour of assessee.”
As the issue is squarely covered on identical facts by the assessee’s own case in earlier year as reproduced above, we decide this issue in favour of assessee and direct the AO to follow the Tribunal direction in earlier year.
The next issue in this appeal of assessee is against the order of CIT(A), confirming the action of the AO in disallowing the provision made in respect of accounts of Frequent Flier Programme. For this assessee has raised the following ground No. 4: -
3. On the facts and circumstances of the case and in law the learned CIT(A) erred in confirming disallowance of ₹ 70,00,000/- made in the accounts in respect of Frequent Flier Programme:”
We find that this issue is also covered by Tribunal decision in assessee’s own case for AY 2008-09, wherein the Tribunal has dealt with identical issue vide Para 27 & 28 as under: - “27. Brief facts are that the AO noticed that the assessee-company has made provision under Frequent Flyer Programme of ₹118.1 Million. The AO required the assessee to justify as to how such provision is deductible and also to furnish the working of such claim. The assessee explained vide letter dated 25-10-2010 and noted that the assessee in a view to encourage the passengers to prefer travelling by the same 13 | P a g e ITAs No.3383 & 3136/MUM/2014 air-line over flights of other air-lines, introduced the reward programme styled as ‘Mileage Accumulation Programme/Frequent Flyer Scheme’ over the customers. Accordingly, a provision was made for Frequent Flyer Programme of ₹115.90 Million as outstanding in the Balance Sheet as on 31-03-2008. Ld. Counsel for the assessee explained that the AO inferred that out of the provisions of Frequent Flyer Programme, a sum of ₹118.1 Million, the assessee actually incurred expenses of ₹2.2 Million only during the FY.2007-08 relevant to AY.2008-09. According to the AO, the excess provision has been made on this account of ₹115.90 Million. Ld. Counsel for the assessee stated that such excess provision of ₹115.90 Million was contingent in nature and this view was taken in earlier assessment years also and since the excess provision was contingent liability, the same was disallowed. Assessee filed the complete details of Frequent Flyer Programme in assessee’s Paper Book at Pages 43 to 48 and reconciled the entire provision made of ₹11,81,12,010/-. Ld. Counsel for the assessee stated that this issue is squarely covered in favour of assessee by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for AY.2007-08 in dt.01-04-2016, vide para 6, as under:
14 | P a g e ITAs No.3383 & 3136/MUM/2014 6. The last ground pertains to deleting the disallowance of Rs.455.28 lakhs made on account of frequent flier program (FFP). The ld. DR defended the disallowance made by the Assessing Officer, whereas, the ld. Counsel for the assessee contended that the impugned issue is covered by the decision of the Tribunal in the case of Jet Airways Ltd. (ITA No.3201/Mum/2003 and 6084/Mum/2003) order dated 30/05/2006. This factual matrix was not controverted by the ld. DR. 6.1. We have considered the rival submissions and perused the material available on record. There is uncontroverted finding that the liability in respect of FFP miles accrues simultaneously with a passenger undertaking travel on a fare paying ticket, therefore, it cannot be a contingent liability. Following the aforesaid decision of the Tribunal dated 30/05/2006 and further in the absence of any contrary facts/decision and the case laws relied upon in para 7.5 of the impugned order, we find no infirmity in the conclusion of the Commissioner of Income Tax (Appeal).
Finally, the appeal of the assessee is allowed and that of the Revenue is dismissed”.
15 | P a g e ITAs No.3383 & 3136/MUM/2014 28. As the issue is covered in favour of assessee, respectfully following the decision of the Co-ordinate Bench decision, we allow this issue of assessee.”
This issue is covered in favour of assessee in assessee’s own case (supra), respectfully following Tribunal decision in this year also, we allow this issue of assessee.
11. The next issue in this appeal of assessee is prior period expenses of ₹ 33,44,64,578/-. For this assessee has raised the following ground No. 5:-
5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming addition made of Prior Period Expenses of ₹ 33,44,64,578/-
12. This issue is also covered by the decision of assessee’s own case for AY 2007-08, wherein Tribunal vide Para 3 read as under: -
The next ground raised pertains to confirmation of disallowance of prior period expenses of Rs.337.10 (millions). The crux of argument on behalf of the assessee that in earlier assessment years, no such disallowance was made and in the present assessment year, the facts are identical. The crystallization was claimed to be made during the year itself. The ld. Counsel filed a chart of prior period adjustment of financial year ending on 31/03/2007, which is summarized as under:-
16 | P a g e ITAs No.3383 & 3136/MUM/2014 3.4. The aforesaid figures even has been mentioned in para 5.3 of the impugned order. The relief was denied to the assessee on the plea (para 5.5 of the impugned order) that the assessee could not produce the evidence with respect to these liabilities whether crystallize during the year. However, the assessee drew our attention to page 24 of the paper book with respect to rejections/refunds and we found the explanation of the assessee to be correct.
Considering the facts and the explanation of the assessee, this ground is allowed. The appeal of the assessee, is, therefore, allowed.
13. Respectfully following the earlier year decision in assessee’s own case i.e. AY 2007-08, we allow this issue of assessee’s appeal.
14. The only issue in Revenue’s appeal is as regards the order of CIT(A), confirming the addition made by the AO on account of excess provision for obsolescence or write back the provisions, amounting to ₹34,75,00,000/-. For this, Revenue has raised following Ground Nos. 1 & 2:
17 | P a g e ITAs No.3383 & 3136/MUM/2014 “1. Whether on the facts and in the circumstances and in law, the Ld.CIT(A) erred in directing the Assessing Officer to delete the addition of Rs.34,75,000/- made by the AO on account of excess provisions for obsolescence without appreciating the fact that the provision made is contingent liability and was not incurred by the Assessee?
2. Whether on the facts and in the circumstances and in law, the Ld.CIT(A) erred in directing the Assessing Officer to delete the addition of Rs.34,75,000/- without appreciating the fact that the provision was written back and credited to the P/L A/c. and was further reduced from the total income in the computation of income made by the AO on account of excess provision of obsolescence without appreciating the fact that the provision made is contingent liability and was not actually incurred by the assessee?”
15. We find that this issue is covered by the Tribunal’s decision in assessee’s own case for AY 2008-09, where vide para 34 to 36 read as under:
At the outset, Ld. Counsel for the assessee stated that this issue has been adjudicated by the CIT(A) in AY.2007-08 and the Department has accepted the decision and not filed any appeal in any higher forums 18 | P a g e ITAs No.3383 & 3136/MUM/2014 regarding the disallowance of exclusion of provisions for obsolescence transfer to credit of Profit and Loss A/c while computing business income. When this fact was pointed out, Ld. Counsel for the assessee stated that the Tribunal can take a view. The assessee has filed complete details for AYs.2004-05, 2005-06 and 2006-07, wherein excess provision for obsolescence transferred amount to the credit of Profit and Loss A/c and exclusion by assessee while computing business income was not added by the AO. The relevant details are as under:
Account Year: 31.03.2008 Asst. Year: 2008-09 Excess Provision for Obsolescence transferred to the credit of Profit & Loss A/c and excluded in the computing Business Income.
We noted that the CIT(A) has considered this issue and following the findings of CIT(A) in AY.2007-08, deleted the addition by observing in para 5.3, as under:
19 | P a g e ITAs No.3383 & 3136/MUM/2014 “5.3 Ground of appeal No. 3 :
5.3.1 This issue has been discussed by my Ld. Predecessor in appellant's own case in assessment year 2007-08 vide appeal No. CIT(A)-9/AC 5(1)/252/2009-10 dated 28.03.2011 vide para No.3. The LAO as well as the LAR have argued that the facts are identical in assessment year 2007-08 and 2008-09 with reference to this particular disputed issue. Since the facts are identical, hence the decision of my Ld. Predecessor is reproduced from the appellate order for Assessment year 07-08 as under:
"In ground No.2, the appellant has challenged the action of the assessing officer against addition of Rs.42,87,36,908/- credited to the P&L Account for the year ended 31st March 2007 in respect of transfer from provision for obsolescence.
3.1 The facts are that the appellant is engaged in the business of international air transport of passengers and cargo, in accordance with the consistently followed accounting practice based on the method advised by International Air Transport Association has provided for 'Provision for Obsolescence' of air-craft related stores 0nd spare parts. This matter is disclosed in the significant accounting policies in the 20 | P a g e ITAs No.3383 & 3136/MUM/2014 Audited Accounts, It is further stated by the Counsel of the assessee that the appellant has regularly made provision was always disallowed by the appellant in Computation of Income submitted with Return of Income of determine "Business Income" as per I.T. Act, 1961. 3.2 It is further submitted that if it is observed at the close of the year that the final balance for provision for obsolescence is in excess, such excess amount was transferred to the credit of P&L Account such allowance credited to Profit and Loss Account was excluded from income to compute taxable income of respective years. The appellant has also submitted a statement showing treatment of provisions for obsolescence in earlier years from assessment years 2002-03 to 2006-07. 3.3 In the appellate hearings, the appellant has also submitted copies of Computation of Income and Assessment orders for Assessment Years 2002-03 to 2006-07 in support of the submissions that such provisions debited to the P & L Account was excluded while computing taxable income of the appellant. It is finally submitted that the provisions for obsolescence debited to P & L Account has never been claimed for computing taxable income of the appellant and never been allowed in the income tax assessments of the appellant.
21 | P a g e ITAs No.3383 & 3136/MUM/2014 3.4 1 have considered the submissions of the appellant and considering the fact that such provisions was never allowed as deduction in earlier years, any amount transferred to the credit of P & L Account from such "Provisions for Obsolescence" could not be added to the income of the appellant and accordingly the Assessing Officer is directed to delete the addition of Rs.42,87,36,908/- made in respect of Provisions for Obsolescence'.
5.3.2 Respectfully following The decision of my Ld.Predecessor and keeping in view that the facts are absolutely identical in nature for assessment year 2007-08 and the assessment year 2008-09 on this 3.2 It is further submitted that if it is observed at the close of the year that the final balance for provision for obsolescence is in excess, such excess amount was transferred to the credit of P&L Account such allowance credited to Profit and Loss Account was excluded from income to compute taxable income of respective years. The appellant has also submitted a statement showing treatment of provisions for obsolescence in earlier years from assessment years 2002-03 to 2006-07. 3.3 In the appellate hearings, the appellant has also submitted copies of Computation of Income and Assessment orders for Assessment Years 2002-03 to 2006-07 in support of the 22 | P a g e ITAs No.3383 & 3136/MUM/2014 submissions that such provisions debited to the P & L Account was excluded while computing taxable income of the appellant. It is finally submitted that the provisions for obsolescence debited to P & L Account has never been claimed for computing taxable income of the appellant and never been allowed in the income tax assessments of the appellant.
3.4 1 have considered the submissions of the appellant and considering the fact that such provisions was never allowed as deduction in earlier years, any amount transferred to the credit of P & L Account from such "Provisions for Obsolescence" could not be added to the income of the appellant and accordingly the Assessing Officer is directed to delete the addition of Rs.42,87,36,908/- made in respect of Provisions for Obsolescence'.
5.3.2 Respectfully following The decision of my Ld. Predecessor and keeping in view that the facts are absolutely identical in nature for assessment year 2007-08 and the assessment year 2008-09 on this particular issue, the addition made by the LAO is deleted. Ground of appeal No.3 is allowed”.
36. As the issue is no longer res integra we confirm the order of CIT(A) deleting the addition.