ACIT, CHENNAI vs. TAMIL NADU SMALL INDUSTRIES CORPORATION LTD., CHENNAI

आयकर अपील"य अ"धकरण, “सी” "यायपीठ, चे"नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI "ी चं" पूजार", लेखा सद"य एवं "ी धु"वु" आर.एल रे"डी, "या"यक सद"य के सम" Before Shri Chandra Poojari, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member I.T.A. Nos. 307, 413, 414 and 415 /Mds/2017 Assessment Years:2009-10, 10-11, 11-12 & 2012-13 Tamilnadu Small Industries Corporation The Assistant Commissioner of Limited, Thiru-Vi-Ka Industrial Estate Vs. Income Tax, Corporate Circle III(1), Guindy, Chennai 600 032. Chennai. [PAN: AAACT1239K] (अपीलाथ" /Appellant) (""यथ"/Respondent) I.T.A. Nos. 334, 606 and 607 /Mds/2017 Assessment Years:2009-10, 10-11 & 2011-12 The Assistant Commissioner of Tamilnadu Small Industries Corporation Income Tax, Corporate Circle 3(1), Limited, Thiru-Vi-Ka Industrial Estate Vs. Chennai. Guindy, Chennai 600 032. (अपीलाथ" /Appellant) (""यथ"/Respondent) अपीलाथ" क" ओर से / Appellant by : Shri G. Seetharaman, C.A. ""यथ" क" ओर से/Respondent by : Shri U. Anjaneyalu, CIT सुनवाई क" तार"ख/ Date of hearing : 24.05.2017 घोषणा क" तार"ख /Date of Pronouncement : 09.06.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: These cross appeals filed by the assessee as well as Revenue are directed against different orders of the ld. Commissioner of Income Tax (Appeals) 13, Chennai dated 29.11.2016 and 05.12.2016 relevant to the 2 I.T.A. No.307/M/17 & Ors

assessment years 2009-10, 2010-11 and 2011-12. The assessee has also filed an appeal against the order of the ld. CIT(A) 13, Chennai dated 05.12.2016 for the assessment year 2012-13. Since all the appeals are pertaining to same assessee and some common grounds have been raised, all the appeals were heard together and being disposed of by this common order for the sake of brevity.

3.1 In the assessment order, the Assessing Officer has noticed from the Notes to accounts filed by the assessee that the assessee has created a provision towards arrears of salary consequent to the implementation of the VI pay commission recommendation as per the G.O. No. 2234 [pay cell]

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dated 06.06.2009 and GOMs. No. 250 Finance (BPE) Department dated 17.06.2009 amounting to ₹.259.16 lakhs during the period 01.01.2007 to 31.03.2009 in the account for the year 2008-09. The Assessing Officer was of the opinion that a provision cannot be created without debiting the profit and loss account and since the same being in the nature of provision, the same is not allowed as deduction and therefore, the amount of ₹.259.16 lakhs debited to the profit and loss account was disallowed and brought to tax.

3.2 The assessee carried the matter in appeal before the ld. CIT(A) and submitted that during the year, the assessee has created a provision of ₹.4,50,00,000/- for the arrears of salary payable based on the estimated liability on implementation of VI pay commission recommendations. It is a normal business practice to create a provision for an ascertained liability and is an allowable expenditure as per the provisions of the Act. It was further submitted before the ld. CIT(A) that the provision for expenditure is a liability that can be measured only by using a substantial degree of estimation. A provision is recognized when an enterprise has a present obligation resulting from a past event. It may require outflow of resources to settle the obligation and a reliable estimate may be made of the amount of the obligation. If these parameters are not satisfied, no provision for expenditure is to be allowed as deduction under section 37 of the Act. By relying on various case law, the 4 I.T.A. No.307/M/17 & Ors

AR of the assessee has pleaded before the ld. CIT(A) to delete the disallowance made by the Assessing Officer.

3.3 After considering the submissions of the assessee as well as facts of the case, the ld. CIT(A) has observed that the liability towards arrears of salary was accrued to the assessee only on passing of the GO counted only after the closure of the financial year and hence not allowable as deduction in the profit and loss account and accordingly dismissed the ground raised by the assessee.

3.4 On being aggrieved, the assessee is in appeal before the Tribunal and by reiterating the submissions as made before the lower authority, the ld. Counsel for the assessee has pleaded that the disallowance made should be deleted. On the other hand, the ld. DR strongly supported the orders of the authorities below.

3.5 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. Against the orders of the Government of Tamil Nadu, the assessee has made provision for payment of VI pay commission arrears. It was the contention of the assessee that it is an ascertained liability and therefore, it is an allowable expenditure. It was the contention of the Revenue that the GO in question was issued beyond the end of the financial year, and there is no liability that has accrued and 5 I.T.A. No.307/M/17 & Ors

become payable by the assessee. On perusal of the submissions made before the authorities below, the assessee has not furnished complete details with regard to the payment of arrears during the relevant financial year for which the provision was created. Under these circumstances, we direct the assessee to file complete details with regard to payment of arrears actually paid in the relevant financial year and other details as may be required for verification before the Assessing Officer and the Assessing Officer is directed to verify the same and decide the issue afresh in accordance with law after allowing sufficient opportunity of hearing to the assessee. This ground of appeal is allowed for statistical purposes.

3.6 In the result, the appeal in I.T.A. No. 307/Mds/2017 is partly allowed for statistical purposes.

4.1 The assessee has debited an amount of ₹.24,75 crores towards nomination charges. Against the query raised by the Assessing Officer, by filing copy of order of the Government in G.O. No. 33 dated 13.03.2009 and filing copy of the voucher dated 11.08.2010 for the said amount evidencing

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payment made by the assessee, the assessee has submitted that the entire nomination charges provided has been discharged before 30.09.2010 and pleaded that the nomination charges paid by the assessee should be allowed. After considering the submissions of the assessee and by following various case, the Assessing Officer has observed that the nomination charges paid by the assessee to the State Government is an application of its income and cannot be allowed as deduction under section 37(1) of the Act and accordingly, disallowed the same and brought to tax.

4.2 On appeal, the ld. CIT(A) confirmed the disallowance of nomination charges made by the Assessing Officer after considering the submissions of the assessee.

4.3 Aggrieved, the assessee is in appeal before the Tribunal. The Revenue also preferred an appeal for the deleting the disallowance of nomination charges for the assessment year 2009-10. 4.4 We have heard rival contentions. The point at issue is whether the nomination charges paid to the Government of Tamil Nadu is an allowable deduction under section 37 of the Act or not. By following the decisions in the case of Tamilnadu State Marketing Corporation Ltd. v. ACIT in I.T.A. No. 1367/Mds/2012 others vide order dated 30.10.2012 as well as in the case of Tamil Nadu medicinal Plant Farms Herbal Medicine Corporation Ltd. v. ACIT

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dated 18.03.2016 and also by following various decisions of the High Courts, the ld. CIT(A) has held that the nomination charges paid by the assessee is an allowable expenses and the issue is squarely covered in favour of the assessee vide his order dated 29.11.2016 for the assessment year 2009-10, against which the Revenue is in appeal before the Tribunal. In the recent decision in the case of Tamil Nadu medicinal Plant Farms Herbal Medicine Corporation Ltd. v. ACIT, the Coordinate Benches of the Tribunal has observed and held as under: “7. We have heard the rival submissions and carefully perused the materials available on record. It is an undisputed fact that the assessee company was incorporated in the year 1983 as a wholly owned enterprise of the Government of Tamilnadu. The main object of the Government undertaking is development of medicinal plants and manufacturing siddha, aurvedha and unani medicines and supplying the same to the institutions under the control of the Director of Indian Medicines and Homeopathy. The major clients of the assessee are only Government departments, organizations under the control of the Director of Indian Medicines and Homeopathy. In this scenario the Government of Tamilnadu has nominated the assessee as its sole procurement agency for procuring various Indian medicines to the Govt., institutions under the control of the Director of Indian Medicines Homeopathy department. In such situation, the Government had decided to levy nomination charges @ 10% on the total supplies made by the assessee to the Government District Siddha Medical Offices / Government Medical Institutions. Accordingly, the assessee company has paid during the relevant assessment year Rs.66,70,475/- as nomination charges to the Government of Tamilnadu and claimed it as deduction while computing its income. The Revenue is of the view that such expenses cannot be allowed as deduction under section 37(1) of the Act. We do not subscribe to this view of the Revenue. Though the assessee Government Undertaking has to function with an element of profit as its motive, it cannot be said that the assessees fundamental motive is to make profit. The assessee company is vested with various responsibilities confined by its promoters being Government of Tamilnadu and has to necessarily supplement to the activities of the Government for benefiting the public at large. In such endeavor, it is assigned with the responsibility of developing medicinal plants and manufacturing siddha, aayurvedha and unani medicines and supplying the same to the institutions under the control of Director of Indian Medicines and 8 I.T.A. No.307/M/17 & Ors

Homeopathy. All the clients of the assessee are only govt. departments, organizations and institutions. Further only by the grace of the government, the assessee is able to generate income by supplying the medicines to the Govt. organizations. In the process, the Govt., also incurs expenditure for promoting the assessee Government Undertakings interest due to which it has levied 10% as nomination charges from the turnover of the assessee which is quit nominal. This levy of 10% cannot be considered to be abnormal to justify the theory of colourable device. In these circumstances, it is apparent that unless the assessee pays 10% nomination charges to the Government, it will not be in a position to earn the income. Moreover, it is pertinent to mention that the Government has got ample powers to reduce the procurement price of the medicines supplied by the assessee to the Government institutions which will yet bring down the profit of the assessee. Considering these facts, it is evident that the principles of diversion of income by overriding title will be applicable in the case of the assessee and accordingly, the 10% of nomination fee has to be necessarily excluded from the revenue earned by the assessee. For the above stated reasons, we decide the issue in favour of the assessee.” 4.5 By following the above decision of the Tribunal, the ld. CIT(A) has rightly observed that the issue is squarely covered in favour of the assessee and held that the nomination charges paid by the assessee is an allowable expenses under section 37 of the Act. The ld. DR could not controvert the above findings of the Tribunal. Thus, we find no infirmity in the order passed by the ld. CIT(A) and accordingly, the common ground raised by the assessee in its appeal for the assessment years 2010-11, 2011-12 and 2012-13 is allowed and the only ground raised by the Revenue in its appeal for the assessment year 2009-10 is dismissed.

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5.1 During the course of assessment proceedings, the assessee was asked to reconcile the TDS claimed with the interest receipts. On perusal of the details, the Assessing Officer has noticed that the assessee has received a gross receipts of ₹.8,09,61,959/- against which it has claimed an amount of ₹.2,14,36,182/-. Vide notice dated 22.03.2013, the assessee was informed to justify the claim for debiting ₹.2,14,36,182/- against the net interest receipt of ₹.5,95,25,277/-. The assessee has submitted that out of ₹.2,14,36,182/-, ₹.20,32,225/- [10,66,823+56,017+9,09,385] refers the withdrawals of wrong credit made withdrawn and the balance of ₹.1,93,91,429/- relates to the previous year (OSR of 2008-09) wrongly classified in 2009-10 interest account withdrawn. Further, the assessee has submitted that the amount of ₹.2,14,36,182/- is not relevant to the year under consideration and hence is reduced from the receipts for the year under consideration. However, the Assessing Officer has observed that the assessee has not submitted any detailed reasoning/evidence to justify its action of reducing its taxable receipts. Further, the assessee has also not supplied with the evidence that the said debit constituted any Balance Sheet entry and the fact that the receipt which is otherwise the taxable receipt, was offered for taxation in any earlier year and thus, an adjustment entry was passed in the current year. The receipts on account of interest on which TDS was deducted and credited for which the assessee has claimed in the year under consideration and details below are totalled, it shall show that the 10 I.T.A. No.307/M/17 & Ors

assessee has received during the year under consideration receipts amounting to ₹.10,79,10,239/- and has claimed TDS amounting to ₹.62,67,646/-. It can be safely said that all the receipts on which the credit for TDS of ₹.62,67,646/- has been claimed pertain to the period 01.04.2009 to 31.03.2010 and hence the said receipts have accrued and received to the assessee during the year under consideration. Therefore, in view of the provisions of the section 199 of the Act, an amount of ₹.10,79,10,239/- was required to be brought to tax. However, since the assessee has already credited its profit and loss account by ₹.8,09,61,959/-, the Assessing Officer has disallowed the balance amounting to ₹.2,69,48,280/- [₹.10,79,10,239 – ₹.8,09,61,959] and brought to tax.

5.2 The assessee carried the matter in appeal before the ld. CIT(A). The actual claim of the assessee is with regard to the total enhancement in the income on account of disallowance of reduction income claimed by the assessee and interest income brought to tax was ₹.4,83,84,462/- [₹.2,69,48,280 + 2,14,36,182]. Before the ld. CIT(A), the assessee has submitted that during the year under consideration, the assessee has received interest of ₹.2,14,36,182/- relating to earlier assessment years. This interest was already shown as income in the respective assessment years on accrual basis and kept in the “Outstanding interest receivable account”. On receipt of this interest, the assessee has wrongly credited to the current

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year “interest received account” instead of “Outstanding interest receivable account”. By filing copy of the ledger account, the assessee has submitted before the ld. CIT(A) that after noticing the mistake in the year end, the assessee has rectified the mistake by debiting the interest received account by ₹.2,14,36,182/- and credited the same to the “Outstanding interest receivable account”. It was also the submission of the assessee that the Assessing Officer has added ₹.2,69,48,280/- to the interest income being the difference between the interest receipts as per the 26AS statement and the books. It was also submitted that in the 26AS statement verified by the Assessing Officer t the time of assessment, the persons who had deducted TDS had made various mistake and all these mistakes were rectified by them and as per the new 26AS statement the total interest received was only ₹.6,73,04,729/- against the interest receipt of ₹.6,52,84,462/- shown in the books. Thus, the only difference of ₹.20,20,267/- was due to deduction of TDS on payment basis instead of accrual basis and pleaded that the disallowance made on this account should be deleted.

5.3 After considering the submissions of the assessee, the ld. CIT(A) has observed as under: “The assessee has reduced amount of Rs.2,14,36,182/ - from the interest receipt. The AO has added this amount as during the assessment proceedings, the assessee has not submitted any detailed reasoning / evidence to justify his action of reducing his taxable receipts. During the appeal proceedings, the appellant contended before the appellate authority that the assessee has received interest of Rs.2,14,36,182/- relating to earlier AY. This interest was 12 I.T.A. No.307/M/17 & Ors

already shown as income in respective assessment years on accrual basis and kept in 'outstanding interest receivable account'. On receipt of this interest the appellant had wrongly credited this interest to interest received account instead of outstanding interest receivable account. In the year end, it has noticed the mistake and rectified the same by transferring the same to the outstanding interest receivable account. However, the appellant has not produced any evidence that the said debit constituted any balance sheet entry and the fact that the receipt which is otherwise a taxable receipt was offered for taxation in any earlier year. Accordingly, the contention submitted by way of written submission as above is nothing but mere adjustment entry. Hence, the contention of the appellant is rejected and the AO bringing to tax an amount of Rs.2,14,36,182/- is confirmed.” 5.4 On being aggrieved, the assessee is in appeal before the Tribunal and reiterated the submissions as made before the authorities below. On the other hand, the ld. DR supported the orders of authorities below.

5.5 We have considered the rival submissions. Against the disallowance of ₹.4,83,84,462/-, with regard to the interest income of ₹.2,14,36,182/-, it was the submissions of the assessee that out of ₹.2,14,36,182/-, ₹.20,32,225/- [10,66,823+56,017+9,09,385] refers the withdrawals of wrong credit made withdrawn and the balance of ₹.1,93,91,429/- relates to the previous year (OSR of 2008-09) wrongly classified in 2009-10 interest account withdrawn. Further, the assessee has submitted that the amount of ₹.2,14,36,182/- is not pertaining to the year under consideration and hence the same was reduced from the receipts for the year under consideration. However, the assessee has not submitted any detailed reasoning/evidence to justify its action of reducing its taxable receipts. Further, the assessee has also not supplied with the evidence that the said debit constituted any 13 I.T.A. No.307/M/17 & Ors

Balance Sheet entry and the fact that the receipt which is otherwise the taxable receipt, was offered for taxation in any earlier year and thus, merely submitted that an adjustment entry was passed in the current year. Further, the assessee has received receipts amounting to ₹.10,79,10,239/- and has claimed TDS amounting to ₹.62,67,646/-. All the receipts on which the credit for TDS of ₹.62,67,646/- has been claimed pertain to the period 01.04.2009 to 31.03.2010 and hence the said receipts have accrued and received by the assessee during the year under consideration. Therefore, in view of the provisions of the section 199 of the Act, an amount of ₹.10,79,10,239/- was required to be brought to tax. However, since the assessee has already credited its profit and loss account by ₹.8,09,61,959/-, the Assessing Officer has disallowed the balance amounting to ₹.2,69,48,280/- [₹.10,79,10,239 – ₹.8,09,61,959] and brought to tax the difference between the books and as per AS26. Since the assessee has not produced any evidence that the said debit constituted any balance sheet entry and the fact that the receipt which is otherwise a taxable receipt liable for taxation, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer. We find that before the Assessing Officer the assessee has not furnished any details with suitable explanation for reducing the taxable interest receipts or filed any evidence that the interest acquired pertaining to earlier assessment years and wrongly credited in the current year account. Under these facts and circumstances, we direct the assessee to file complete details with proper justifications

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along with reconciliation of its accounts as per AS26 before the Assessing Officer and the Assessing Officer is also directed to verify and decide the issue in accordance with law after allowing sufficient opportunities of being heard to the assessee. Thus, the ground raised by the assessee is allowed for statistical purposes.

6.1 On appeal, by following the decision in the case of Exide Industries Ltd. v. UOI 292 ITR 470 (Cal), the ld. CIT(A) directed the Assessing Officer to allow the provision for leave salary and allowed the ground raised by the assessee for both the assessment years.

6.2

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v. CIT 45 taxmann.com 428 (Kerala) as it was the only decision after the stay granted by the Hon’ble Supreme Court on the decision of the Hon’ble Calcutta High Court in the case of M/s. Exide Industries Ltd. 292 ITR 470) (pending in SLA(Civil) No. C.C. 12060), wherein the Hon’ble Calcutta High Court has questioned the constitutional validity of section 43B(f) of the Act and therefore, pleaded that the order of the ld. CIT(A) on this issue should be reversed. On the other hand, the ld. Counsel for the assessee strongly supported the order passed by the ld. CIT(A).

6.3 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. With effect from 01.04.2002, clause (f) has been added in section 43B of The Income Tax Act, which provides that deduction of provision of earned leave of employees made by the assessee shall not be allowed as deduction in computing the business income of the assessee provided such sum is actually paid. If same is not paid in the year of provisioning, same shall be allowed subsequently in the year of payment. The Hon’ble Calcutta High Court in Exide Industries Ltd. vs. Union of India, 292 ITR 470 has struck down the section 43B(f) of the Act being arbitrary, unconscionable and de hors the facts Apex Court decision in the case of Bharat Earth Movers 245 ITR 428. However, the Revenue has preferred an appeal against the order of Hon’ble

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Calcutta High Court and the Hon’ble Supreme Court has stayed it vide its order dated 08/05/2009 as under :- “Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns.” 6.4 As per the stay granted by the Hon’ble Supreme Court, the correct position of law is that we should read the statute as if those provisions are there on the statute book. This Tribunal being a quasi-judicial authority as to decide the appeal only based on the provisions of section 43B (f) of the Act. In other words, the provisions of section 43B(f) cannot be ignored since the judgment of the Calcutta High Court in the case of Exide Industries Ltd. was stayed by the Hon’ble Apex Court. Therefore, the claim of the assessee could be allowed only if it is actually paid on the due date for filing the return of income. It is not the case of the assessee that the amount claimed as leave encashment was paid before the due date for filing the return of income. Our view is further strengthened by decision of the Hon’ble Kerala High Court wherein, it was held while considering identical facts and circumstances in case of South Indian bank limited V CIT 45 taxmann.com 428 (Kerala) as under: “6. Then coming to the second issue, it pertains to the provision made for leave encashment and the disallowance claimed was under Section 43B (f). As already stated above, the opinion of the CIT (Appeals) was set aside by the 17 I.T.A. No.307/M/17 & Ors

Tribunal in the light of the stay order of the judgment of the High Court of Calcutta in Excide Industries case (supra) and the SLP stated above is still pending. Therefore, the opinion of the Tribunal so far as disallowance claimed in respect of leave encashment under Section 43B(f) of the Act, as on today, the provision seems to be in force in the light of the stay order granted by the Apex Court in the SLP. Therefore, as long as Section 43B (f) is on Statute, the said disallowance is justified.” 6.5 Since the provisions made by assessee of leave encashment remains to be paid, we are of the considered opinion that the ld. CIT(A) was incorrect to direct the Assessing Officer to allow the provision for leave salary. Thus, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer and allow the ground raised by the Revenue for both the assessment years.

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आदेश क" ""त"ल"प अ"े"षत/Copy to: 1. अपीलाथ"/Appellant, 2.""यथ"/ Respondent, 3. आयकर आयु"त (अपील)/CIT(A), 4. आयकर आयु"त/CIT, 5. "वभागीय ""त"न"ध/DR & 6. गाड" फाईल/GF.