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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI PAWAN SINGH, JM
3088/Mum/2014 आदेश / O R D E R Per Shamim Yahya, A. M.: These are two appeals filed by the assessee for the assessment years 2008-09 and 2009-10 respectively. Since the issues are common and the appeals have been heard together these are being consolidated and disposed of by way of this common order.
The grounds raised by the assessee read as under: Aggrieved by the order passed by the learned Assessing Officer ('learned AO'), in pursuance of the directions of the Honorable Dispute Resolution Panel - I ('the Honorable DRP'), under section 143(3) read with section 144C(13) and section 144C(5) of the Income-tax Act, 1961 ('the Act'), and based on the facts and circumstances of the case, the Appellant respectfully submits that the learned AO and the Honorable DRP have erred on the following grounds each of which are without prejudice to one another: 1. in disallowing the provision for leave encashment of Rs.43,32,598 as expenditure for the purposes of business of the Appellant, without any cognizant and sufficient reasons. 2. in holding that the Appellant will not be eligible to claim depreciation on Rs 45,779,802 paid to M/s Federal Express International, Inc capitalized as capital work-in progress in the books of accounts on the premise that the Appellant has not complied with the provisions of Chapter XVII-B of the Act and in reducing the capital work in progress to be carried forward in the subsequent years from Rs 52,827,359 to Rs.7,047,557 on which the Appellant will be eligible to claim depreciation. in not granting credit of taxes deducted at source on payments made to the Appellant during the AY 2008-09. 4. in wrongly computing interest under Section 234B of the Act without giving appropriate credit for taxes deducted at source on payments made to the Appellant during AY 2008-09. 5. in wrongly computing interest under Section 234C of the Act without giving appropriate credit for taxes deducted at source on payments made to the Appellant during AY 2008-09.
Apropos ground no. 1:
Brief facts on this issue are as under:
3088/Mum/2014 During assessment year 2008-09 the assessee created a provision of Rs.4,332,598/- for leave encashment towards unutilized leave of its employees. The same was claimed as expenditure. The assessee relied upon the decision of the Calcutta High Court in the case of Exide Industries Limited v UOI (292 ITR 470). The assessee adopted the position that the unpaid provision of leave encashment of Rs.4,332,598/- was neither a contingent nor a statutory liability but expenditure incurred for the purposes of its business and allowable as a deduction in arriving at its taxable income in the year in which the provision was made. However, the assessee deposited taxes on the unpaid provision of leave encashment in the form of self assessment tax. As the assessee has not paid the leave encashment before the due date of filing the return of income for the AY under consideration, the Assessing Officer is of the view that the same cannot be allowed as a deduction in computing the taxable income of the assessee in accordance with the provisions of section 43B(f) of the Act. The Assessing Officer has also pointed out that appeal has been filed by the Department before the Supreme Court against the decision of the Calucutta High Court in the case of Exide Industries Limited & Anr. (supra).
Upon the assessee's objection, the learned Dispute Resolution Panel gave following direction:
5.3.1 We have also seen that the assessee has followed the decision of the Calcutta High Court in the case of Exide Industries Ltd & Anr (supra) and adopted the position that provision for unpaid leave encashment of Rs 4,332,598 was neither a contingent nor a statutory liability but expenditure incurred for the purposes of its business and allowable as a deduction in arriving at its taxable income in the year in which the provision was made. In this regard the AO has pointed out that the Department has filed a Special Leave Petition before the Hon'ble Supreme Court against the decision of the Calcutta High Court in the case
3088/Mum/2014 of Exide Industries Ltd & Anr (supra). Thus it is clear that the issue has not attained finality.
5.3.2 In light of the above, we uphold the decision of the AO.
Against this order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. We find that this issue is covered against the assessee by several case laws including that in the assessee’s group case in in the case of Federal Express (India) Ltd. vs. ACIT vide order dated 20.03.2013. In this case, the Tribunal has held as under:
4. We have perused the records and considered matter carefully. The dispute raised is regarding allowability of deduction on account of leave encashment on the basis of provisions made in the accounts. The AO, disallowed the claim on the ground that leave encashment has to be allowed on payment basis u/s 43 B (f). The assessee has argued that Hon’ble High Court of Kolkata in case of Exide Industries (Supra) have struck down the provisions of section 43 B (f) and therefore, the said provisions is not applicable and claim has to be allowed. However, we note that the judgment of Hon’ble High Court had been challenged by the revenue before the Supreme Court which had stayed the operation of judgment and has held that during the pendency of the appeal, the assessee has to pay tax as if section 43B(f) was on statute book. Therefore, claim of the assessee could not be allowed on the basis of judgment of Kolkata High Court in case of Exide Industries Ltd. (Supra). In view of the judgment the Supreme Court (Supra) the provisions of section 43B(f) have to be taken as part of the statute while considering the claim of deduction on account of leave encashment. We therefore see no infirmity in the order of CIT(A) confirming the disallowance made by AO and the same is therefore, upheld.
Respectfully following the precedent as above, we do not find any infirmity in the order of the assessing officer. Accordingly, we uphold the same.
Apropos ground no. 2:
Brief facts on this issue are as under:
3088/Mum/2014 During assessment year 2008-09, the Assessee paid an amount of Rs.4,57,79,802/- to Federal Express International, Inc (USA) and reflected the same in its financials as capital work-in-progress. It was observed by the Assessing Officer that the assessee has failed to comply with the provisions of Chapter XVII-B of the Act by not withholding taxes on payments of Rs.4,57,79,802/- made to M/s Federal Express International, Inc.
Accordingly, he has held that the payment requires to be disallowed under the provisions of Section 40(a)(i) of the Act. It was submitted by the assessee that in computing the taxable income for AY 2008-09, the Assessee neither claimed depreciation on the capital work in progress, nor did it claimed a deduction of this amount. The Assessing Officer has held that the assessee will not be eligible to claim depreciation on this sum, and he has reduced the capital work in progress to be carried forward in the subsequent years from Rs.5,28,27,359/- to Rs.70,47,557/- on which the assessee will be eligible to claim depreciation.
Upon the assessee's objection, the dispute resolution panel held as under:
6.3 Discussion and decision:- We have gone through the order of the AO and submission of the assessee. We have seen that the Assessee has made a payment to M/s Federal Express International Inc ('FEU'), a company having its office at Sint Goeldeleplein, 14, 1000, Brussels. There is no dispute that these payments were made to a non resident. In view of this, the payments made to a non residents will governed by the provisions of section 195 of the Act. In terms of the provisions of section 195 any person responsible for paying to a non resident, shall at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. The Assessee had made the payment of Rs. Rs 45,779,802 to FEII, and failed to deduct income tax on the said payment made to FEII. Therefore, the Assessee has violated the provisions of section 195. The AO has rightly adjusted the work in progress of the assessee. The accounting
3088/Mum/2014 treatment given to this payment and non claim of deduction in the return has no relevance for compliance under section 195 of the Act. Section 40 of the Act deals with "amounts not deductible" and accordingly, assessee's claim that no deduction has been claimed is pot material. The violation of the provisions of Sec.195 of the Act has rendered the assessee subject to Section 40 of the Act and a future depreciation claim will tantamount to be an "amount" in terms of Section 40 of the Act. In this, we do not find any reason to interfere with the disallowance.
Against this order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The learned counsel of the assessee submitted that provisions of section 40(a)(ia) are not at all attracted in this case, as the said amount has not been claimed as revenue expenditure. Hence, he submitted that there is no question of disallowing deprecation claimed on the capital item so acquired. For this proposition, he placed reliance upon following case laws:
Sr. Decisions Citation No. 1 CIT vs. Mark Auto Industries Ltd. [358ITR 43(P&HHQ] 2. SAB Miller India Ltd. vs. ACIT [155 1TD 1093 (Mumbai Trib.)] 3 Sonic Biochem Extractions (P.) Ltd. vs. ITO [23 1TR(T) 447 (Mumbai Trib.)] 4 SKOL Breweries Ltd. vs. ACIT [28 ITR (T) 465 (Mumbai Trib.)] 5 Kawasaki Microelectronics Inc. vs. DDIT(IT) [60 taxmann.com 259(Bang. Trib.)] 6. Jaguar Enterprises vs. DCIT [33 ITR(T) 483 (Delhi Trib.)]
Upon careful consideration, we find that in the above case laws it has duly been held that when the payment is in the realm of capital expenditure and expenditure is not claimed as revenue expenditure, the provisions of section 4o(a)(ia) are not applicable. In this regard, we may gainfully refer to the decision of Hon’ble Punjab and Haryana High Court in the case of CIT vs. Mark Auto Industries Ltd. (supra). In this case the question considered by the honourable High Court was as under:
(ii) Whether on the facts and in the circumstances of the case Ld. ITAT is right in law in upholding the order of Ld. CIT(A), that the provision of Section 40(a)(i) of Income Tax Act, 1961 are not applicable to payments of Technical know-how, simply because only part of it is written off by the assessee, each year by way of depreciation u/s 32 of Income Tax Act, 1961? 13. The Hon’ble High Court answered the above question as under:
6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know-how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee.
Similar proposition was also held by the respective decisions of tribunal as above.
Following the above said precedents, we are of the considered opinion that adverse inference drawn for lack of deduction of TDS in this case is not sustainable, inasmuch as the payment was made in respect of capital expenditure. Hence, following the above said precedents, we hold that assessee’s claim for deprecation was justified.
The other grounds of the appeal are consequential and have been accepted as such by both the ld. Counsels for the parties.
In the result, this appeal filed by the assessee stands allowed.
The grounds of appeal
in this appeal are as under:
1. Disallowance under Section 43B of the Act amounting to Rs 47,42,656 The learned CIT(A) erred in confirming the disallowance under Section 43B of the Act ' being the provision for leave encashment of Rs 47,42,656 as expenditure for the 3088/Mum/2014 purposes of business of the Appellant, although the validity of the said provision has been struck down by the Calcutta High Court in the case of Exide Industries Ltd & Anr (supra) and same is pending before Supreme Court.
2. Disallowance under Section 40fa)fia) of the Act amounting to Rs 2.76,10,893 The learned CIT(A) erred in confirming the disallowance of depreciation amounting to Rs 2,76,10,893 claimed by the Appellant on computer software on account of failure to comply with the provisions of Section 40(a)(ia) of the Act and in disregarding the binding decisions of the jurisdictional ITAT covering the said issue. 2.2 The learned CIT(A) further erred in not directing the Respondent to allow the above claim of depreciation in the year of payment of taxes deducted at source ie AY 2013-14
18. The grounds raised above are similar to the one dealt with by us in above. Following the same reasoning, we uphold the order’s of the authorities below on ground no. 1 relating to claim of leave encashment and on the ground no. 2 relating to claim of depreciation, we set aside the orders of the authorities below and direct that the depreciation is to be allowed.
In the result, both these appeals are partly allowed.
Order pronounced in the open court on 01.06.2018