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Income Tax Appellate Tribunal, DELHI BENCH “B”, NEW DELHI
Before: SHRI. AMIT SHUKLA & SHRI WASEEM AHMED
PER AMIT SHUKLA, J.M.: The aforesaid appeal has been filed by the assessee against impugned order dated 21/1/2013, passed by the ld. CIT (Appeals)-XIII, New Delhi for the quantum of assessment passed u/s. 143(3) of the Income Tax Act, 1961 for assessment year 2008-09. The grounds raised by the Revenue in the grounds of appeal are as under:-
The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the action of the learned Assessing Officer in disallowing Late Delivery Charges amounting to Rs.25,00,000/- allegedly on the ground that the liability for late delivery charges is Contingent Liability and provision for contingent liability is not entitled for deduction .
The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in granting partial relief and upholding the learned Assessing Officer's action in disallowing expenses amounting to Rs. 157,566/- u/s 14A in addition to Rs.50,000/- disallowed by the appellant company in its return of income by wrongly applying Rule 8D and thereby not following decision of jurisdictional High Court in Maxopp Investment Ltd 203 Taxman 364. 2. The brief facts qua the first issue are that the assessee- company is engaged in the business of manufacturing and trading of Electronic/Electric Equipments. During the course of assessment proceedings, the Assessing Officer noted that the assessee has claimed expenditure of Rs.25 lakhs under the head “late delivery charges”, no such expense was claimed under this head in the preceding year. The Assessing Officer in the absence of any proper reply treated the delivery charges in the nature of penalty and not related to the functioning of the business and also looking to the fact that it was not claimed in the earlier years, therefore, he disallowed the same and added to the income of the assessee.
Before the ld. CIT(A), assessee submitted that assessee has declared total income of Rs.90,87,79,580/- from the business of manufacturing and trading of electronic/electrical equipments and has procured major purchase order from Reliance Telecom Ltd. for a total value of Rs.10,65,03,936/-. As per the said purchase order, timely delivery was the essence of the purchase order and as per the agreement, there was a specific clause (clause No.18) wherein it was mentioned that if the seller (assessee-company) fails to deliver within the stipulated period i.e. 5/11/2007, the purchaser shall be entitled to recover from the assessee-company a sum equivalent to one percent of the basic value of invoice for any delayed portion for each week of delay or part thereof subject to a maximum of 10% for the delayed period. It was in terms of this clause that the assessee had made a provision for late delivery charges amounting to Rs.25 lakhs during the previous year. It was also brought on record that the actual expenditure incurred thereof on account of late delivery was Rs.19,46,519/- and in support of which copy of sale invoice and consignment notes, in respect of which late delivery charges, were paid were also furnished along with copy of ledger account of Reliance Telecom Ltd. It was also stated that the balance amount of the provision made amounting to Rs.5,53,481/- (Rs.25 lakhs (-) Rs.19,46,519) has been written back as part of liability no longer required and was accounted as “other income” in the next financial year relevant to assessment year 2009-10. In support audited accounts and details regarding writing back of the amount with regard to the excess provision of late delivery charges was also filed.
The ld. CIT(A), though observed that it is not in the nature of penalty, but he held that this liability was not an ascertained liability and, therefore, the provision made for unascertained liability cannot be allowed as expenditure. Further, there is no accuracy about the said liability and is merely on the basis of presumption or estimate. The late payment charge was an anticipated liability which was determined during the year. Therefore, being contingent in nature, the same cannot be allowed. In support of his reasoning, the ld. CIT(A) has also referred to the judgment of the Hon'ble Supreme Court in the case of Indian Smelting and Refining Company Ltd. Vs. CIT [2001] 248 ITR 004 (SC).
Before us, the ld. counsel for the assessee while explaining the relevant facts submitted that the assessee had entered into a contract with Reliance Telecom Ltd. on 23/8/2007 which specifically provided for late delivery charges consequent to not adhering to the scheduled delivery date. The liquidated damages ranges from 1 to 10% of the basic value and it also provided performance bank guarantee of 10% of the basic purchase order valid for warranty period. The assessee has worked out this liability approximately at 2% of the total contract sale of Rs.12.79 crores and in fact there was an actual delay in delivery of such sales and assessee did pay liability on this account at Rs.19.47 lakhs and the differential amount has been written back. He also drew our attention to the details of late delivery charges and also bills which are appearing in the paper book from pages 32 onwards and he also drew our attention to the working of the provision for various items, copy of which is appearing at page 15 of the paper book. Thus, he submitted that estimate made by the assessee was not only proper but also quite approximate looking to the fact that assessee had to pay Rs.19.47 lakhs towards late delivery charges.
On the other hand, the ld. D.R. strongly relied upon the order of the ld. CIT(A) that since it was an unascertained liability, provision for the same cannot be allowed.
We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as the material referred to before us. The issue before us is, whether provision of Rs.25 lakhs made by the assessee under the head “late delivery charges” is allowable in this year or not? The assessee had entered into an agreement for sale of certain electronic equipments with Reliance Telecom Ltd. vide purchase order dated 23/8/2007. The said purchase order contained a clause under the head “Penalties” which stipulates that in case of late delivery, a sum equivalent to 1% of the basic value of delayed portion for each week of delay or part thereof subject to a maximum of 10% for the undelivered portion shall be paid. This has given in clause 18 which, for the sake of ready reference, is reproduced hereunder:-
“18. Penalties: (a) delivery time as mentioned above is the essence of this order. However a grace period of one week shall be given to the SELLER for the purpose of Late Delivery. If the SELLER fails to effect deliveries within the stipulated period, the OWNER shall be entitled to recover from the SELLER by way of penalties and not by way of liquidated damages a sum equivalent to one percent of the basic value of any delayed portion for each week of delay or part thereof subject to a maximum of ten percent of the undelivered portion.
(b) in case of continued delay beyond fifteen days of the stipulated delivery period, OWNER may procure the ordered material which have not been delivered by the SELLER, from any other source at the cost and risk of the SELLER, in addition to the penalty applicable.”
Thus, liquidated damages ranges from 1% to 10%. The assessee has worked out percentage of late delivery deduction @ 2% of the total purchase order which worked out to Rs.24.95 lakhs and accordingly a provision of Rs.25 lakhs was made under this head. Making of such a provision has also been justified by occurring of actual events thereby assessee actually had to pay Rs.19,46,519/- towards late delivery charges and the excess provision of Rs.5,53,481/- has been written back and offered as other income in the subsequent assessment year 2009- 10. It is trite law laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT reported in [2000] 245 ITR 428 (SC) that 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 is the incurring of the liability and 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. In the present case, provision has been recognized by the assessee on the basis of obligation stipulated in the contract which ranges from 1 to 10% and assessee has given a detailed working for making the provision @ 2% which also gets ratified by the actual payments in the subsequent year. Here the obligation of the assessee is a result of an event which is probably outflow of resources required to settle the obligation and based on this, a reasonable estimate has been made. Thus, it cannot be held that provision made by the assessee is not proper and it is some kind of unascertained liability. In any case, actual event happening in the subsequent year that assessee did incur expenditure of approximately Rs.19.47 lakhs and also offered the income of excess provision of Rs.5.54 lakhs, such disallowance of provision is uncalled for. Accordingly, the ground raised by the assessee is allowed.
Regarding disallowance under section 14A of Rs.1,57,566/-, the brief facts are that the assessee has earned dividend income of Rs.30,66,500/- and for earning of such dividend income, assessee had apportioned Rs.50,000/- of expenses under the head “indirect expenditure” which according to the assessee was reasonable attributable expenditure for earning of such dividend income. This attribution of Rs.50,000/- was based on employee cost looking after the investment made during the year. It was further submitted that only three investments were made during the year and, therefore, not much activity has been done in this year. The Assessing Officer held that it is not possible for assessee to maintain these investments without incurring expenditure under other heads like, transport, telephone & administrative expenses and accordingly disallowance under section 14A has to be made in accordance to Rule 8D. After detailed reasoning, he worked out the disallowance as per rule 8D at Rs.5,59,892/-, though wrongly mentioned in the assessment order while making addition. The assessee made a detailed submission in this regard justifying the disallowance of Rs.50,000/- and also objected to the manner in which the Assessing Officer has proceeded to make disallowance under Rule 8D. Without prejudice, it was submitted that there was a certain investments which yielded taxable capital gains and if such investments of Rs.83.06 crores is removed, then in accordance to Rule 8D(2)(iii), disallowance should be Rs.2,07,666/- and if sum of Rs.50,000/- already offered by the assessee is set off, then addition if at all would come down to Rs.1,57,666/-. Besides, various judicial pronouncements and citations were also relied on by the assessee. The ld. CIT(A), confirmed the addition of Rs.1,57,666/- as worked out by the assessee after removing the investment which did not fall within the category of yielding exempt income.
Before us, the ld. counsel for the assessee submitted that looking to the fact that assessee has made only three investments in this year and, therefore, disallowance offered by the assessee at Rs.50,000/- of proportionate employee cost was quite reasonable and appropriate and the Assessing Officer without examining the nature of accounts and expenses debited in the profit & loss account has proceeded to apply rule 8D(2)(iii) which is not correct as per provisions of section 14A(2). He also referred to various judgments and finally relied upon the judgment of the Hon'ble Delhi High Court in the case of H.T. Media Limited vs. Pr. CIT in & 549/2015 dated 23/8/2017 wherein the Hon'ble High Court has held that failure of the Assessing Officer to record satisfaction with regard to the correctness of the assessee’s claim cannot trigger disallowance under section 14A. Therefore, no disallowance can be made.
On the other hand, the ld. D.R. strongly relied upon the order of the ld. CIT(A) and submitted that the ld. CIT(A) himself has scaled down the disallowance to Rs.1,57,666/-.
We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as the material referred to before us. From the perusal of assessment order, it is seen that once assessee had offered disallowance of Rs.50,000/- and also given basis on which it has offered the disallowance which was proportionate employee cost looking after the investment and also explained that only three investments were made during the year and thus such allocation of expenditure was quite reasonable. The Assessing Officer, without examining the accounts maintained by the assessee and also nature of expenditure debited, held that employee who is looking after the investment must have incurred transport, telephone and other administrative expenses and, therefore, he justified application of Rule 8D. Here the only dispute is with regard to the indirect expenditure under Rule 8D(2)(iii). Section 14A(2) read with Rule 8D(1)(a) requires that the Assessing Officer before invoking the provision of Rule 8D having regard to the account of the assessee about correctness of the claim of expenditure made by the assessee has to record his satisfaction that such a claim made by the assessee is not correct and such a satisfaction can only be discernible once he has examined the nature of accounts and expenditure debited qua earning of exempt income. If the Assessing Officer does not apply with the mandatory requirement of section 14A(2) and Rule 8D(1), then disallowance under section 14A cannot be triggered and thereby proceed with disallowance in accordance with formula laid down in Rule 8D(2). The mandatory requirement of proceedings under section 8D(2) has to rout through provisions enshrined in rule 8D(1) and section 14A(2). Once that is not so, then he cannot proceed with the disallowance. This proposition of law has been upheld by the jurisdictional High Court in the case of H.T. Media Limited vs. Pr. CIT (supra) wherein the Hon'ble High Court after detailed analysis of provisions of rule 8D and section 14A and also various judgments, concluded in the following manner:-
“39. Turning now to the order of the ITAT, in para 33, it recorded the submission of the AR that the AO did not record any satisfaction about the Assessee not properly offering expenditure incurred in relation to the exempt income at Rs. 3 lakhs. The ITAT reproduced the contents of para 3.3.1 of the assessment order, which has been extracted by this Court hereinbefore, which contains general observations regarding earning of exempt income. This cannot be accepted as a recording by the AO of satisfaction regarding the claim of the Assessee after examining its accounts. Again, in para 34 of its order, the ITAT simply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was “satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses.”
Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly.”
The ratio laid down by the Hon'ble jurisdictional High Court is clearly applicable on the facts of the present case and, therefore, we hold that no disallowance over and above offered by the assessee under section 14A can be made and accordingly addition of Rs.1,57,666/- is directed to be deleted. Ground No.2 is also allowed.
In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 13th November, 2017.