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Income Tax Appellate Tribunal, ‘SMC’ ‘D’ BENCH, CHENNAI
Before: Shri A. Mohan Alankamony
आदेश / O R D E R
These appeals by the Revenue are directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-1, Chennai both dated 01.12.2016 in & ITA No.414/CIT(A)-1/2015-16 for the assessment years 2012-13 & 2013-14 respectively, passed U/s.250(6) r.w.s.143(3) of the Act.
The Revenue has raised the following identical grounds in both the appeals:-
i. The Ld.CIT(A) has erred in deleting the disallowance of software usage expenses while computing the book profit U/s.115JB of the Act, amounting to Rs.36,15,750/- &
Rs.38,26,021/- for the assessment years 2012-13 & 2013-14 respectively. ii. The Ld.CIT(A) has erred in deleting the disallowance towards provision of gratuity while computing the book profit U/s.115JB of the Act, amounting to Rs.24,49,918/- & Rs.19,49,770/- for the assessment years 2012-13 & 2013-14 respectively.
The brief facts of the case are that the assessee is a private limited company engaged in the business of Technical Publication Services, Engineering Design Services & IT enabled services, filed its return of income for the assessment years 2012-13 & 2013-14 on 26.09.2012 & 29.10.2013 admitting total income of Rs.19,06,230/- & Rs.22,47,410/- respectively. Initially the return was processed U/s.143(1) of the Act and subsequently the case was selected for scrutiny under CASS and final assessment orders were passed U/s.143(3) of the Act for both the assessment years on 05.02.2016, wherein the Ld.AO disallowed the provision of gratuity and software usage debited in profit and loss account while computing the book profit U/s 115JB of the Act.
In the course of scrutiny assessment proceedings, it was observed by the Ld.AO, that the assessee has debited in its P&L account, provision for gratuity and provision for software. The claim of the assessee was that both the provisions were not contingent in nature but was actually payable by the assessee. The Ld.AO rejected the claim of the assessee and disallowed the expenditure for computing book profit under Section 115JB of the Act. On appeal, the Ld.CIT(A) granted relief to the assessee by observing as under:- “9. Provision for Gratuity: I have carefully perused the facts in issue, submissions made by the appellant and material on record. The liability to pay gratuity is a statutory liability and the same has also been ascertained on an actuarial basis. The Hon'ble Bombay High Court in the case of Echjay Forgings Pvt. Ltd (2001) 251 ITR 15 (Bom) has held that where the assessee has made the provision for gratuity on the basis of actuarial calculations, the same cannot be said to be a provision for other than an ascertained liability as provided for under Explanation-1 to sec 115JB(2). In the appellant's case also" the provision has been made based on actuarial valuation. Therefore, the same cannot be disallowed in computing the book profit u/s 115JB. Further, by virtue of the decisions of the Hon'ble Apex Court in the case Bharat Earth Movers (supra) and the decisions of several High Courts directly relating to the issue on hand, it is now settled that provision for gratuity made on the basis of actuarial valuation cannot be considered as an unascertained liability so as to add it back to book profits under section 115JB. The action of the AO in adding back provision for gratuity to book profits while making computation under section 115JB is therefore not sustainable. Accordingly, this ground of appeal is allowed.
Provision for software usage : I have carefully perused the facts in issue, submissions made by the appellant and material on record. Based on facts and documents submitted, it is evident that out of total software usage costs of INR 36,15,750 incurred in the subject AY, the appellant has received actual invoices amounting to I NR 20,83,150 and the balance amount of INR 15,32,600 has been accrued based on the pattern of costs incurred in the previous months. The fact is that the entire cost of INR 36,15,750 has been allowed as expenditure under section 37 while computing income under the normal provisions of the Act. Therefore the entire software cost of INR 36,15,750 cannot be considered as unascertained or contingent provision for the purpose of computation of book profits under section 115JB. Thus the action of the AO in treating the software usage costs amounting to INR 36,15,750 as contingent in nature is not in line with the facts on hand and accordingly the AO is directed to delete such addition made to book profits. This ground of appeal is allowed.” Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before this bench of the Tribunal.
5. At the outset, the Ld.AR submitted that the issue with respect to provision made for gratuity is covered by the decision of the Hon’ble Bombay High Court which was followed by the Ld.CIT(A). It was therefore argued that no interference is required in the decision of the Ld.CIT(A). Further it was submitted that the Ld.AO had allowed the software usage cost of Rs.36,15,750/- as deduction in the normal computation of profit. Therefore, the same treatment has to be given while computing the book profit U/s.115JB of the Act.
Hence, it was argued that the order of the Ld.CIT(A) is appropriate and therefore no interference is required in his decision on the issue. The Ld.DR on the other hand argued in support of the orders of the Ld.AO and pleaded to sustain the same.
I have heard the rival submissions and carefully perused the material available on record. Provision for gratuity is an expenditure that has to be incurred by the assessee at the time of retirement of its employees or discontinuance of service. This expenditure is inevitable to the assessee. Further, though the payment of gratuity is made at the time of discontinuance of service of the employee or his retirement, it relates to the entire period of the service of the employee. Therefore, taking in to account of the matching concept the expenses has to be spread over the period of the employment of the assessee’s employee. Hence, actuarial valuation is a scientific and appropriate method to value the expenditure attributable to the employee during the relevant previous year, though it is paid only at the time of discontinuance / retirement of the employee. The Hon’ble Bombay High Court in the case cited by the Ld.CIT(A) has also recognized these aspects and held that provision made for gratuity on the basis actuarial calculations has to be treated as an expenditure attributable for the relevant previous year and not simply as contingent liability. The Ld.CIT(A) has only followed the decision of the Bombay High Court on this issue. Therefore I do not find it necessary to interfere with his order. On the issue with respect to the software usage cost, the Ld.AO has allowed it as expenditure while computing the profit of the assessee under the normal provisions of the Act. Therefore, I also do not find any reason as to why the same treatment should not be given while computing the profit of the assessee U/s.115JB of the Act. The Ld.DR has also not brought to my notice any provisions U/s.115JB of the Act, wherein such expenses is disallowed while computing the book profit of the assessee Under the Act. Further, there is no finding in the order of the Ld.AO that expenses incurred on software usage are contingent in nature or it is a provision made in the books of accounts. Therefore I do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue also.
In the result, both the appeals of the Revenue are dismissed.
Order pronounced on the 22nd August, 2017 at Chennai.