M/S KENNAMETAL INDIA LTD,,BANGALORE vs. CIT, BANGALORE

This appeal by the assessee is against the order dated 25.01.2016 of the Commissioner of Income-tax [CIT], LTU, Bangalore passed u/s. 263 of the Income-tax Act, 1961 ["the Act"] in relation to assessment year 2010-11.

The assessee is a company engaged in the business of manufacture of hard metal and hard metal products. An order of assessment u/s. 143(3) r.w.s. 144C of the Act dated 25.01.2014 was passed by the DCIT, LTU, Bangalore for the assessment year under consideration.

The CIT, LTU, Bangalore in exercise of his powers u/s. 263 of the Act was of the view that the aforesaid order of Assessing Officer (AO) was erroneous and prejudicial to the interests of revenue for the reason that a sum of Rs.99,34,777 towards overtime allowance was certified by auditors as unascertained liability in the audit report in Form 3CD. Since the aforesaid liability was unascertained, it was contingent in nature and ought not to have been allowed as a deduction while determining income from business. The AO having allowed the deduction in the assessment order, according to the CIT, it was erroneous and prejudicial to the interests of the revenue. On this basis, a show cause notice was issued u/s. 263 of the Act dated 04.01.2016 to the assessee.

In reply, the assessee submitted that the Dept. of Factories, Boiler, Industry Safety of Govt. of Karnataka carried out an inspection in the assessee’s factory premises on 23.12.2009 and issued a show cause notice on 08.01.2010 pointing out that the Over Time Allowance [“OTA”] ought to have been paid on the gross salary including allowances like HRA, Special Conveyance Allowance, etc., whereas the assessee was making payment of OTA only on the basis of basic wages and DA. The assessee submitted that it is because of the inspection by the Department of Factories, and show cause notice was issued by them, the Over Time wages payable by the assessee was calculated at Rs.99,34,777 and this was an ascertained liability.

The CIT, however, found that the assessee had filed a Writ Petition against the order of the Director of Factories dated 20.04.2012 taking a stand that OTA has to be paid on gross salary+special allowances. The CIT was therefore of the view that since the assessee had disputed the OTA liability, it was contingent and therefore could not be allowed as a deduction. The CIT also held that the liability was not a present liability, which had to be discharged in future. With these observations, the CIT in para 5 of the impugned order set aside the order of AO on a different ground viz., failure of the AO to make enquiries on this issue while concluding the assessment. Para 5 of the impugned order is as follows:-

Aggrieved by the order of CIT, the assessee has filed the present appeal before the Tribunal.

The ld. Counsel for the assessee reiterated the stand of the assessee as contained in the reply to the show cause notice issued u/s. 263 of the Act. It was further contended that the liability was a statutory liability and had to be allowed as a deduction. It was also contended that the fact that a Writ Petition has been filed challenging the order of Director of Factories cannot be the basis to say that the liability was not an ascertained liability.

The ld. DR relied on the order of CIT.

We have given a careful consideration to the rival submissions. Admittedly the AO before concluding the assessment proceedings did not make any enquiries with regard to the liability on account of OTA wages as to, whether it is ascertained or unascertained liability. The ld. Counsel for the assessee could not substantiate before us as to how the AO made enquiries on this issue before concluding the assessment. The law is well settled that if there is a failure on the part of AO to make an enquiry on the issue which calls for an enquiry, that by itself will render the order of assessment erroneous and prejudicial to the interests of the revenue. It has been so held by the Hon’ble Delhi High Court in the case of Gee Vee Enterprises Vs. DCIT 99 ITR 375 & 386(Delhi). Since there was a failure on the part of AO to make necessary enquiry, we are of the view that the CIT invoking his jurisdiction u/s. 263 of the Act was justified in the facts and circumstances of the present case. We, however, make it clear that the observations of the CIT in para 5 of the impugned order with regard to liability of the assessee being an unascertained liability should not influence the mind of the AO or the first appellate authority in deciding this issue in the set aside proceedings.

With the above observations, the appeal of the assessee is dismissed.