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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P BOAZ
Per N.V. Vasudevan, Vice President This is an appeal by the assessee against the order dated 29/1/2014 of CIT-III, Bengaluru passed u/s 263 of the Income-tax Act 1961 (‘the Act’) relating to the asst. year 2009-10.
The assessee is a Government of Karnataka undertaking engaged in extractions of Minerals such as bauxite and lime stone etc. For asst. year 2009-10, assess filed a return of income declaring total income of Rs.193.30 crores. An order of asst. u/s 143(3) of the Act was passed on 30/12/2011 by the AO determining the total income of the assessee at Rs.211.86 crores.
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The CIT-3, Bengaluru in exercise of his power u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the Revenue for the following reasons as set out in show cause notice issued u/s 263 of the Act.
i) That the Assessee made donation to DC, Bellary towards contribution to social work in relation to construction of Ring Road around Bellary to the tune of 10,00,00,000/- was claimed as business expenditure and allowed by the AO. The action of the AO in allowing the said claim as business expenditure was incorrect.
ii) The assessee had made cash payments in contravention of section 40A(3) to the tune of Rs.79,33,710/- which was also not considered for disallowance while computing the business income resulting in under assessment of the same.
iii) The assessee while claiming expenses under Personnel expenses- salaries, wages and bonus had debited an amount of Rs. 2,38,88,552/- being provisions for group incentive to staff, which ought to have been disallowed and added to the total income while concluding the assessment Since the said sum was a provision made in P & L account is not an allowable expenditure under the IT Act.
iv The assessee debited an amount of Rs 1,63,86,153/- as Prior Period adjustments. The assessee company was following mercantile system of accounting. The A.O failed to verify the allowability of prior period adjustments debited in the previous year resulting in short assessment.”
In response to the aforesaid show cause notice, the assessee submitted as follows:-
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i) The company has paid a sum of Rs.10.00 crores to Bellary DC towards Corporate Social Responsibility for formation of Ring Road around Be1lary. The road is used for transportation of ores from their mines. This is a business expenditure being in nature of expenditure laid out or expended wholly and exclusively for the purposes of the business. ii) With regard to cash payment to the tune of Rs. 79,33,710/-, the assessee stated that the cash payments are made at various mines located village area where no banking facility is available and most of items related to payment of statutory dues like royalty, vehicle tax and other government levies.
iii) Personnel expenses - Salaries, wages and bonus debited to Profit and Loss Account also include Group incentive to staff amounting to Rs.2,38,88,552/-. The provisions made for group incentive for the F.Y 2008-09 are on the basis of concept of accrual, in compliance with the Companies Act provisions and as per Accounting Standard issued by ICAI. Also, the provisions made for group incentive is as per Accounting Policy consistently followed by the company. The provision of section 43B of the Income Tax Act, 1961 does not apply to such provisions made for group incentive.
iv) Prior Period adjustments - Rs.1,63,86,153/- - The asseessee while computing the income under the head business income is after prior period adjustment - debits of Rs. 1,63,86.153/-. Prior period adjustment consists of the following :
1) Sales Tax Rs. 8,59,545/-. 2) Sales Rs. 1,20,30,131/- 3) Travelling Rs. 74,754/-
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4) Bonus Rs 43,86,864/- 5) Stores & spares Rs 1.90.383/- Roqware Project 6) Vehicle maintenance Rs. 1,04.361/- 7) Loading charges Rs. 78,000/- The Assessee explained that all liabilities crystallized during the relevant previous year. Sales tax liability crystallized during the year and about sales of Rs.1,20,30,131/-, credit note was issued during the year. It was further explained that the bonus of Rs. 43,86,864/- was paid for the year 2006- 07 during the year which is an actual expenditure. Bonus provision made during earlier years was added back u/s 43B.
The CIT(A) however was of the view - 1) That the sum of Rs. 10 crores paid by the assessee to Bellary DC was in the nature of donation and, therefore, cannot be regarded as business expenditure. 2) Cash payment made in violation of sec. 40A(3) of the Act which were claimed by the assesee to be statutory dues and hence outside the purview of sec. 40A(3) of the Act were not proved to be payments made towards statutory liabilities and paid in areas where there were no banking facilities. The CIT, therefore held that an examination is required to be made by the AO in this regard. 3) As far as the provision debited to profit and loss account is concerned, the CIT(A) was of the view that provision made in the books of account cannot be construed as actual of liability under mercantile system of accounting and therefore, the provisions debited in the profit and loss account on account of personal expenses like salary wages and bonus is not an allowable expenditure.
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4) In the prior period adjustment, the CIT held that since the assesee was following mercantile system of accounting only expenses which have accrued or arisen to the assesee during the relevant previous year should be allowed as deduction. He also held with reference to sales tax and bonus liability there was an exception, otherwise all other expenses can be allowed on accrual basis. The CIT directed the AO to verify actual accrual of the liability and allow deduction on the basis of actual accrual of liability.
After giving his conclusions as above, the CIT set aside the order of asst. dated 30/12/2011 as erroneous and prejudicial to the interest of Revenue and cancelled the said order. He however did not direct addition of various sums referred to above but directed the AO to make an order denovo after considering the above mentioned issues afresh after providing opportunity of being heard to the assessee.
Aggrieved by the aforesaid order of the CIT assessee is in appeal before the Tribunal.
The ld counsel for the assessee submitted before us that while concluding the original assessment all these aspects were examined by the AO. With regard to the contribution of 10 crores for ring road around Bellalry , the assessee in one of the letters dated 27/12/2011 field before the AO clearly mentioning that the same was contribution to enable easy movement of iron ore extracted from the mines of the assessee and was, therefore, business expenditure. The ld counsel for the assesee also pointed out another reply dated 10/12/2011 field before the AO. The assessee has explained regarding provision of Rs.2,38,88,552/- by pointing
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out that the incentives to staff was made on the basis of detailed computation for the year ended 31/3/2009 and enclosure No.6 to the said letter gave the basis of computation. It was submitted by the ld counsel for the assessee that it was an actual liability and not a provision as presumed by the CIT in the impugned order. The ld counsel for the assessee also drew our attention to the prior period adjustment and gave ledger extract of the expenditure relating to previous years and explained as to how the actual liability had accrued during the previous year. The ledger extract was given as annexure -12 to the letter dated 10/11/2011 of the assessee to the AO in the course of assessment proceedings. The ld counsel therefore submitted that AO before concluding the assessment has duly considered all the aspects and has not made any addition and, therefore, the CIT ought not to have invoked his powers u/s 263 of the Act. He placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT VS. Sunbeam Auto Ltd., Ltd. 332 ITR 167, wherein Hon’ble Delhi High Court held that there is a difference between ‘lack of enquiry’ and ‘no enquiry’ the Hon’ble Court held that jurisdiction u/s 263 of the Act can be invoked only in the case of ‘no enquiry’ made by the AO and not in case where the enquiries were made by the AO but the CIT construes them to be in adequate. The ld counsel for the assessee also placed reliance on the decision of Hon’ble Karnataka High Court in the case of CIT Vs. Saravana Developers in ITA 68/2014 judgment dated 21/1/2016 wherein the Hon’ble Court held that the Explanation to sec. 263 of the Act which was introduced by the Finance Act of 2015 w.e.f 1/6/2015 was prospective and cannot be applied to an earlier assessment year prior to the aforesaid amendment coming into force. Explanation - 2 so introduced sets out instances where order of the AO can be considered as prejudicial to the interest of the Revenue and erroneous. The Explanation says a case of the lack of enquiry also is an instance of the order of the AO being
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regarded as erroneous and prejudicial to the Revenue. The ld counsel for the assessee submitted that this amendment cannot apply to the case of the assessee which is for asst. year 2009-10 prior to the insertion of Explanation - 2 as laid down in paragraph 22 of the judgment of Karnataka High Court in the case of M/s Sarvana Developers (Supra).
The ld DR on the other hand placed reliance on the decision of Hon’ble Karnataka High Court in the case of CIT Vs. Infosys Technology Ltd., Judgment dated 4.1.2012 in ITA No.588 of 2006 wherein the Hon’ble Karnataka High Court while answering the following question of law: “1. Whether the Tribunal was correct in holding that the commissioner exercising Jurisdiction under Section 263 of the Act by holding that the Assessing Officer should rework the credit in respect of Canadian and Thailand Tax claimed under Double Taxation Avoidance Agreement (DTAA) without specifying the error in the original order sought to be revised and how it was erroneous and prejudicial to the interest of the revenue. 2. Whether the Tribunal committed an error in failing to appreciate that in accordance with the DTAA Clause 23 entered into by the Indian Government with the Canadian Government as well as the Thailand Government the income which fall part of total turnover and the consequential TDS claimed in Canada and Thailand cannot be allowed in India when computing the total deduction. 3. Whether the Tribunal committed an error in holding that the judgment of the Hon’ble Supreme Court in the case of Hind Wire Industrial Ltd cannot be made applicable when jurisdiction under Section 263 of the Act is invoked.” Held as follows: “26. We are also not in a position to accept the submission that the materials had been placed before the assessing authority and therefore there should be a conclusion that the authority has applied his mind to the same and there was no question of the commissioner interfering by taking a different view etc. 27. Assessing authority performs a quasi-judicial function and the reasons for his conclusions and findings should be forthcoming in the assessment order. Though it is urged on behalf of the assessee by its learned counsel that reasons should be spelt out only in a situation where the assessing authority passes an order against the assessee or adverse to the interest of the assessee and no need for the assessing authority to spell out reasons when the order is accepting the claim of the assessee and the learned counsel submit that this is the legal position on authority, we are afraid that to accept a submission of this nature would be to give a free hand to the assessing authority, just to
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pass orders without reasoning and to spell out reasons only in a situation where the finding is to be against the assessee or any claim put forth by the assessee is denied. 28. We are of the clear opinion that there cannot be any dichotomy of this nature, as every conclusion and finding by the assessing authority should be supported by reasons, however brief it may be, and in a situation where it is only a question of computation in accordance with relevant articles of a double taxation avoidance agreements and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority had failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the revenue and therefore while the commissioner was justified in exercising the jurisdiction under Section 263 of the Act, the tribunal was definitely not justified in interfering with this order of the commissioner in its appellate jurisdiction. 29. Therefore, we answer the question posed for our answer in the negative and against the assessee. Both appeal are allowed. Parties to bear their respective cost.”
In short the Hon’ble Karnataka High Court took the view that if the order of the AO does not discloses the basis of his conclusion then jurisdiction u/s 263 of the Act can be ignored. The ld DR also submitted that in the present case, the AO has exercised jurisdiction u/s 263 of the Act not on the ground of ‘no enquiry’ made by the AO while concluding the assessment but has brought out clearly in the impugned order that the action of the AO in allowing claim of the assessee for deduction was incorrect even on merits.
The ld counsel for the assesee in his rejoinder placed reliance on the decision of the Hon’ble Supreme Court in the case of Lakshmiji Sugar Mills Co. Pvt. Ltd., Vs. CIT 82 ITR 376 (SC), wherein it was held that contribution made to keep development fund set up by state Govt. for development of roads between various sugar cane producing center and sugar mills was an expenditure incurred for reasons of commercial expediency are admissible deduction.
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We have given a careful consideration to the rival submissions. At the outset we agree with the submissions made by the ld DR that in the present case, the CIT has not exercised jurisdiction u/s 263 of the Act on the ground of ‘no enquiry’ made by the AO or ‘lack of enquiry’ made by the AO. The CIT has held that conclusions drawn by the AO in allowing expenditure set out in the show cause u/s 263 of the Act ought not to have been allowed as deduction. We, therefore, hold that the jurisdiction u/s 263 of the Act was validly invoked by the CIT.
As far as the individual items taken up for consideration by the CIT is concerned, the contribution to Bellary DC for formation of ring road of Rs.10 crores even though it was shown as donation in the profits and loss account can be considered as contribution for formation of roads and has to be held as ‘revenue expenditure’ allowable as a deduction keeping in mind commercial expediency. The assesses’s plea is that the development of roads would help transportation of iron ore from mine by the assesse. Keeping in mind the decision of the Hon’ble Supreme Court in the case of Lakshmiji Sugar Mills Co. Pvt. Ltd., (Supra), we are of the view that this expenditure was rightly allowed by the AO while concluding the assessment and exercise of jurisdiction u/s 263 of the Act which is not justified as far as this sum is concerned.
With regard to the other items of expenditure for which jurisdiction u/s 263 of the Act is invoked, we do not find any material which can justify the action of the AO in allowing these items of expenditure as deduction. Therefore, the CIT was justified in directing the AO to examine the allowability of these items of expenditure. The assessee is always at liberty to show as to how items of expenditure made in cash were not hit by the
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provision of sec. 40A(3) of the Act and as to how the personal expenses of salary wages and bonus amounting to Rs.2,38,88,552/- is not in the nature of provision. The assesee is also at liberty to show as how the prior period expenses of Rs.1,63,86,153/- is in fact liability which crystallized only during the relevant previous year. In the given circumstances of the case, we are of the view that the order u/s 263 of the Act in so far as aforesaid 3 items of expenditure are concerned is valid and deserves to be sustained. We may also mention though the AO was directed to do denovo assessment, the same can be only be in respect of item set out in the order u/s 263 of the Act. We accordingly modify the order u/s 263 of the Act by restricting the enquiry in respect of items other than the expenditure incurred for payment of Rs.10 cores for formation of road.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 25th January, 2019.
Sd/- Sd/-
( JASON P BOAZ) ( N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated, 25th January, 2019. / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.