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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
The captioned appeals filed by the Revenue are directed against the order of the Commissioner of Income Tax (Appeals)-9, Mumbai [in short ‘CIT(A)’] and arise out of the assessment passed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience.
M/s First Flight Couriers Pvt. Ltd. 2 & 5398/Mum/2016 Assessment Year: 2011-12 2. The 1st ground of appeal
Whether on the facts and in law, the CIT(A) was justified in deleting the addition of Rs.63,83,793/- being provision of inventory written off.
3. The assessee filed its return of income for the assessment year (AY) 2011-12 on 24.11.2011 declaring total loss of Rs.24,13,86,864/-. It was in the business of courier (express) services, tour and travels agency services. The Assessing Officer (AO) noticed during the course of assessment proceedings, that the assessee had written off stock of stores and spares amounting to Rs.63,83,793/-. The same was mentioned in the ‘Note to Accounts No. 15: Inventories of the Financial Statements’. It was submitted before the AO that the assessee had grounded aircraft operations in the Financial Year (FY) 2007-08. However, the AO recorded that no explanation was furnished for carrying forward the inventory till the year under consideration. Further the assessee had accepted the valuation given by a third party for reducing the value of inventory in the books of account, but did not decide to dispose off the said inventory as per its claim that it was making efforts to dispose off the stock and had received the said quotation in response thereof. The AO thus concluded that on the basis of the third party quotation, the stock of Rs.1,13,33,793/- is valued at Rs. Nil by the assessee over a period of two years and the whole stock had been written off during FY 2010-11 of Rs.63,83,793/- and balance value of Rs.49,50,000/- in FY 2011-12. Also the assessee had not even valued scrap value of the said stock originally of Rs.1,13,33,793/- in the subsequent year, even though it had placed reliance on the M/s First Flight Couriers Pvt. Ltd. 3 ITA No. 5399 & 5398/Mum/2016 quotation from the third party. The AO observed that no documentary evidence was produced before him by the assessee, except mentioning in the profit and loss account on the basis of quotation from the third party. Further, the above stock of stores and spares has not been discarded or sold by the assessee. Relying on the Accounting Standard (AS-2) on valuation of inventories, the AO concluded that mere re- valuation of stores and spares based on a third party quotation without taking into consideration other factors like wear and tear, obsolescence, usages and life of spares etc. is not justifiable. Therefore, the AO made an addition of Rs.63,83,793/-.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) held that the assessee duly followed AS-2 on valuation inventory and valued the stores on the basis of cost or net realisable value, whichever is lower. Further, the Ld. CIT(A) held : “I further find merit in the contentions of the AR that by valuing the inventory at Rs.49,50,000/- assessee has not reduced any tax liability during the year under consideration and agreed with valuation of inventory at Rs.49,50,000/- as at 31st March 2011 taken by the appellant, which is based on the quotation received from the third party of net realizable value of Rs.49,50,000/-. The issue of valuation remains open and also subject to change. The AO will have all the right to examine this issue and take a decision in the relevant year of actual sale of the relevant assets/stocks. Therefore, the AO is directed to delete the addition of Rs.63,83,793/-. Accordingly, this ground no. 1 is Allowed.”
5. Before us, the Ld. DR submits that the assessee failed to file any documentary evidence before the AO to substantiate its claim M/s First Flight Couriers Pvt. Ltd. 4 & 5398/Mum/2016 regarding provision of inventory written off amounting to Rs.63,83,793/-. Thus the Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel of the assessee relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. It is found that the assessee had taken three ATP- Air Crafts in FY 2005-06 and it grounded the Air Craft Operation in the FY 2007-08. However, some spares remained unused and kept in the stock. The opening value of the stock as on 01.04.2010 was Rs.1,13,33,793/- and during the year the assessee had made efforts to dispose off the stocks and in response received quotation from third party of USD 100,000 (Rs.49,50,000/-). Based on AS-2, the assessee has valued the stores on the basis of cost or net realisable value, whichever is lower. Therefore, the assessee has written down the value of stocks to Rs.49,50,000/-. We find that the assessee has to value inventory as per AS-2 and on that basis it has valued the cost of spare parts which has become obsolete and non-moving. In view of the above facts, we uphold the order of the Ld. CIT(A) and dismiss the 1st ground of appeal
7. The 2nd ground of appeal Whether on the facts and in law the CIT(A) was justified in deleting the addition of Rs.67,97,382/- which was employee’s contribution to PF and ESIC and it was paid after due date of payment and was not allowable as per section 36(1)(va) r.w.s. 2 (24)(x).
8. The AO made a disallowance of Rs.67,97,382/- being Employees’ contribution to PF and ESIC even though paid before the due date of M/s First Flight Couriers Pvt. Ltd. 5 & 5398/Mum/2016 filing the return of income. The AO held that Employees’ contribution deposited by an employer is not allowable as business deduction u/s 36(1)(va) of the Act if it is deposited beyond the ‘due date’ specified under the PF laws.
9. In appeal, the Ld. CIT(A) directed the AO to allow the claim of the assessee, after verification of facts, in respect of payments of Employees’ contribution of Provident Fund amounting to Rs.25,60,045/- and ESIC of Rs.42,37,337/- which were delayed as per the due date of the respective Act but paid before the due date of filing the return of income.
10. Before us, the Ld. DR relies on the order of the AO, whereas the Ld. counsel of the assessee relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. It is found that the Ld. CIT(A) in assessee’s own case for AY 2010-11 had allowed the deduction of delay in payment of Employees’ contribution to ESIC and PF. The Revenue filed appeal before the ITAT against the said order of the Ld. CIT(A). The Tribunal upheld the order of the Ld. CIT(A), following the decision in CIT v. M/s Alom Etrusions Ltd. (2009) 319 ITR 306 (SC) and CIT v. M/s Hindustan Organics Chemicals Ltd. 366 ITR 1 (Bom). Facts being identical, we follow the said order of the Co-ordinate Bench in assessee’s own case for the AY 2011-12 and uphold the order of the Ld. CIT(A). Thus the 2nd ground of appeal
is dismissed.
12. In the result, the appeal filed for the A.Y. 2011-12 is dismissed.
M/s First Flight Couriers Pvt. Ltd. 6 & 5398/Mum/2016 ITA No. 5398/Mum/2016 Assessment Year: 2012-13 13. The 1st ground of appeal
Whether on the facts and in law, the CIT(A) was justified in deleting the addition of Rs.49,50,000/- being provision of inventory written off.
14. We find that the above ground of appeal is same as the 1st ground of appeal for AY 2011-12. Facts being identical, our decision at para 6 hereinbefore applies equally to the above ground of appeal. Accordingly, we uphold the order of the Ld. CIT(A) and dismiss the 1st ground of appeal.
15. The 2nd ground of appeal Whether on the facts and in law, the CIT(A) has erred in treating the provision for earlier termination of lease in the same ground along the line of unrealized Foreign Loss.
16. The AO has disallowed the unrealized foreign exchange loss of Rs.2,61,260/- being loss due to foreign exchange fluctuation on the last date of the accounting year on account of reinstating the amount payable/receivable as on 31.03.2012 in foreign currency and foreign exchange loss of Rs.1,50,00,000/- on account of valuation of liability of compensation payable due to early termination of lease in foreign currency as on 31.03.2012.
17. In appeal, the Ld. CIT(A) held : “Similar issue was also there in the case of the appellant in AY 2011-12 which was decided in favour of the appellant vide para 6.3 of my appellate order dated 10.06.2016. Therefore, following the reasoning given in the same and also keeping in view of the decision of Hon’ble Supreme Court in M/s First Flight Couriers Pvt. Ltd. 7 ITA No. 5399 & 5398/Mum/2016 the case of Woodward Governor 312 ITR 254 (SC) as well as decision of jurisdictional ITAT, Mumbai Special Bench judgment in the case of DCIT v. Bank of Bahrain and Kuwait (2010) 132 TTJ (Mumbai) (SB) 505, similar decision is being taken in this AY also. The AO is directed to delete the disallowance of Rs.1,50,00,000/- & Rs.2,61,260/- disallowed by AO in the Assessment order in para 7 & para 10 respectively.”
18. Before us, the Ld. DR relies on the order of the AO. On the other hand, the Ld. counsel of the assessee relies on the order of the Ld. CIT(A) and also the order of the ITAT ‘F’ Bench Mumbai in the case of the assessee for the AY 2010-11.
We have heard the rival submissions and perused the relevant materials on record. We find that the same issue arose before the ITAT ‘F’ Bench Mumbai in assessee’s own case for the AY 2010-11 in ITA No. 3436/Mum/2014. The Tribunal held : “9. After analyzing the order of the learned CIT (A) we are of the considered view that the AO as well as the learned CIT (A) has fallen in certain errors while coming to the conclusion that the appellant assessee could not bring anything on record to show as to whether it has further challenged the decision passed by the High Court of Justice, UK. It was also wrongly held by the learned CIT (A) that since elements of facts have not been discussed by the assessee, it could not be said that with certainty that liability was crystallized. The learned CIT (A) has wrongly upheld the order of the AO wherein the AO held the liability of Rs.20,50,00,000/- as contingent liability. In this respect, we are of the considered view that once assessee’s claim for expenses of Rs.20,50,00,000/- on account of compensation payable by the assessee has been crystallized in view of the order dated 14-5-2010 of the Queen’s Bench Division of the High Court of Justice, UK. Based on the above Court Order, the assessee has provided further a sum of Rs.6,00,00,000/- debited to the profit & loss account as an exception item. Once as per the M/s First Flight Couriers Pvt. Ltd. 8 & 5398/Mum/2016 decision of the Queen’s Bench Division of the High Court of Justice, UK the matter has been finally settled and in this respect the learned AR drew our attention to page 25 and 27 of the paper book it has been pointed out that the entire amount has already been paid by the assessee to the Lessor and in this respect a compromise was entered into between the parties before the Indian Court and the entire decree passed by the UK Court was satisfied. It is important to mention here that it was the decree of the Queen’s Bench Division of the High Court of Justice, UK which was fully satisfied from which it can be gathered that the liability of the assessee was crystallized in view of the order dated 14-05-2010 of the High Court of Justice, UK which was ultimately satisfied by the assessee by making payment to the lessor. Therefore, once the liability for making payment was crystallized by the High Court Order, then question of contingent liability does not arise. Therefore, both the AO and the learned CIT (A) was wrong in treating the liability as contingent liability of the assessee. Our this stand is fortified by the following decisions:- (i) R. C. Gupta Vs CIT, Delhi-VIII, 298 ITR 161 (2008) wherein the Hon’ble Delhi High Court in Para 9 of the order has held as under:- “The liability in the instant case was capable on being estimated with reasonable certainty when a recovery suit was filed by Hindustan Steel Limited against the assessee on 18-8-1978. Merely because the liability was not a statutory one it could not be said that the liability that was not an ascertained one but a contingent one. In view of the settled law and in the facts of the present case, we are of the view that the claim of the assessee for deduction of RS.50,761 towards disputed liability should be allowed in the assessment year 1979-80. Accordingly, the question referred for our opinion is answered in the negative that is favour of the assessee and against the revenue. Reference stands disposed of. (ii) Rampur Engg. Co. Ltd. Vs CIT 203 Taxman 177 (Delhi) wherein the Hon’ble Delhi High Court has held as under:-
M/s First Flight Couriers Pvt. Ltd. 9 & 5398/Mum/2016 “Merely because proceedings could not be initiated by the PSEB against assessee for enforcing the decree by way of execution for want of consent of the BIFR as required under section 22 of SICA, it would not mean that the liability had not accrued when assessee was following mercantile system of accounting”. (iii) Bharat Earth Movers Vs CIT 162 CTR 325 (2000) 112:- The appellant company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave – In the assessment year 1978-79 an amount of Rs.62,25,483 was set apart in a separate account as provision for encashment of accrued leave and it was claimed as a deduction – In the opinion of the Tribunal the assessee was entitled to such deduction but the High Court has formed a different opinion and held that the provision for accrued leave salary was a contingent liability and, therefore, was not a permissible deduction – Not justified –Provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability, the liability is not a contingent liability”. Keeping in view the facts and circumstances of the case as well as the aforementioned legal propositions we set aside the order of the learned CIT (A) and direct the AO to allow the claim of expenses for Rs.20,50,00,000/- by treating the same as crystallized in the year under consideration.” 19.1 Facts being identical, we follow the above order of the Co- ordinate Bench and uphold the order of the Ld. CIT(A). Thus the 2nd ground of appeal filed is dismissed.
M/s First Flight Couriers Pvt. Ltd. 10 & 5398/Mum/2016
The 3rd ground of appeal
Whether on the facts and in law the CIT(A) was justified in deleting the addition of Rs.29,67,993/- which was employees’ contribution to PF and ESIC and it was paid after due date of payment and was not allowable as per section 36(1)(va) r.w.s. 24(x).
21. The above ground of appeal is similar to the 2nd ground of appeal for the AY 2011-12. Facts being identical, our decision at para 11 hereinbefore applies equally to the above ground of appeal. Thus the 3rd ground of appeal is dismissed.
22. The 4th ground of appeal Whether on the fact and in law the CIT(A) was justified in deleting the adjustment made u/s 115JB to the tune of Rs.3,74,59,683/-.
23. The AO completed the assessment u/s 143(3) on 08.02.2013 determining Nil income as per the normal provisions of the Act and book profit of Rs.1,81,99,126/- u/s 115JB. The following adjustments were made by the AO while arriving at book profit u/s 115JB Particulars Amount (Rs.) Provision of earlier termination of 1,50,000,00 leases Disallowance u/s 14A 1875 Provision for Inventory written off 49,50,000 Provision for Foreign Exchange 2,61,260 Loss Provision for Gratuity (Net) 1,72,46,548 Gross Total 3,74,59,683 M/s First Flight Couriers Pvt. Ltd. 11 & 5398/Mum/2016
24. In appeal, the Ld. CIT(A) held : “8.3 I have considered the stand of the AO as well as the submissions of the appellant. In view of the Landmark decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. v. Commissioner of Income Tax, 255 ITR 273 SC it is settled position of law that Assessing Officer has limited power to make any adjustment in the book profit other than prescribed in the explanation to section 115JB of the Act. I have also gone through the various judgment of High Court and ITAT including decisions of Hon’ble HC, Mumbai in the case of Commissioner of Income Tax v. Echjay Forgings (P) Ltd. (supra) as submitted by AR. On analysis of these decisions and present situations of law, the action of the AO cannot be upheld because such provision are all the ascertained liability and hence the same was outside the scope of clause (c) of Explanation 1 of section 115JB warranting any addition to book profit. In view of that the AO is directed to delete the adjustment of Rs.3,74,59,683/- made by him in computing the book profit u/s 115JB of the Act.”
25. Before us, the Ld. DR relies on the order of the AO whereas the Ld. counsel of the assessee relies on the order of the Ld. CIT(A). 26. We have heard the rival submissions and perused the relevant materials on record. We find that the above adjustments were made by the AO without any discussion in the assessment order. In Apollo Tyres Ltd. (supra), it has been held that where the profit and loss account has been prepared in accordance with Part II and III of Schedule VI to the Companies Act and which has been scrutinized and certified by the statutory auditor and relevant authorities, the Assessing Officer has no power to scrutinize net profit in profit and loss account except to the extent provided in Explanation to 115J.