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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
For the Appellant : Shri B.Syam, FCA For the Respondent : Shri Rajat Kumar Kureel, JCIT, Sr.DR Date of Hearing : 27.03.2017. Date of Pronouncement : 05.04.2017. ORDER Per N.V.Vasudevan, JM
ITA.No.863/Kol/2013 is an appeal by the Assessee against the order dated 01.02..2013 of C.I.T.(A)-XX, Kolkata relating to A.Y.2005-06. This appeal arises out of an order of assessment passed for A.Y.2005-06 u/s 143(3) of the Income Tax Act, 1961 (Act). is also an appeal by the Assessee against the order dated 01.02..2013 of C.I.T.(A)-XX, Kolkata relating to A.Y.2005-06. This appeal arises out of an order of assessment passed for A.Y.2005-06 u/s 144 r.w.s. 147 of the Act.
Grounds of appeal raised by the assessee read as follows :- “ 1) For that the Ld. CIT (A), was not justified in rejecting the claim of Rs.2,24,743/- for payments made by the appellant to staff welfare club to run subsidized canteen within the office premises of the corporation. As claimed by 2) As pointed out during regular hearing and also in written representation that there was a difference of Rs. 43, 11,116/- in considering opening balance of business profits in the assessment order passed by AO. AO has considered profit of Rs. 2,83,74,022/- in his order whereas Profit as per Audited Accounts were 2,40,62,906/-. So this arise a difference of Rs.43,11,116 in considering business income. CIT(A) in his order has failed to address the ground raised by appellant to the issue.
3) For that the Ld CIT(A) was not justified in action to restrain from directing AO to acknowledge claims made by appellant to allow benefits of carry forward business losses of earlier years.
4) For that the appellant craves leave to alter, modify or amend any of the above ground/s and to add further ground/s on or before the final hearing of this appeal.
The Assessee is a company. It is engaged in the business of purchase and sale of jute. For A.Y.2005-06 the assessee filed return of income disclosing the total income of Rs.2,21,49,328/-. In the course of assessment proceedings the AO noticed that the assessee while computing income from business has claimed deduction of a sum of Rs.3,14,39,281/- under the head ‘ Prior Period Expenses’. According to the AO since the Assessee was following mercantile system of accounting and the Prior Period Expenses did not pertain to the previous year relating to A.Y.2005-06, they cannot be allowed as deduction while computing the income. The plea of the assessee was that the aforesaid expenses though titled as prior period expenses accrued and arose only during the previous year and therefore the claim of the assessee for deduction should be accepted. According to the AO the assessee could not produce any documents or evidence or supporting papers in respect to the claim of those expenses accrued or arose only during the previous year. The AO accordingly added the prior period expenses to the total income of the assessee.
3 The Jute Corporation of India Ltd. A.Yr.2005-06 4. Before CIT(A) the assessee explained the various items of prior period expenses. In this appeal we are concerned with only two items out of the total prior period expenses of Rs. 3,14,39,281/- namely payment made to staff welfare club of Rs.2,24,743/- and difference in reported profit and profit taken in the assessment order of Rs.43,11,116/-. The assessee explained these two items before CIT(A) with supporting evidence as follows :- Sl.No. Item of Expenses Amount of Details of Supporting disallowed Prior Period Expenditure Attach Expenses (Rs.) 1. Payment made to staff 2,24,743/- This comprises This monthly welfare club Canteen contribution is subsidy of for running a Rs.1,89,000/- staff canteen and matching (subsidized) Grant thereon and matching Rs.35,743 grant thereon details of payment vouchers Annexure-4 2. Difference in Reported Profit as per AO has Already profit and Profit taken in Assessment considered submitted Assessment order order wrong amount Audited Rs;.43,11,116 rs.2,83,74,022 while Accounts for (profit as per computing 2003-04 profit & Loss Assessed Account Income Rs.2,4062,906) without taken into consideration Audited Accounts A perusal of the order of CIT(A) shows that he has not examined the claim of assessee as made before him as aforesaid on the aforesaid two items of “Prior Period Expenses. Aggrieved by the order of CIT(A) the assessee has preferred the present appeal before the Tribunal raising the grounds of appeal set out in the earlier part of this order. 3
4 The Jute Corporation of India Ltd. A.Yr.2005-06 5. We have considered the rival submissions. It is clear from a perusal of the order of CIT(A) that both the aforesaid claims made by the assessee with supporting evidence before CIT(A) has not been examined by CIT(A). In these circumstances it would be just and proper to direct the CIT(A) to examine the claim of assessee in this regard. Accordingly order of CIT(A) is set aside to the limited extent of the aforesaid two items of “Prior Period Expenses”, with a direction to CIT(A) to decide the claim of assessee afresh after affording opportunity of being heard to the assessee. For statistical purposes the appeal of the assessee is treated as allowed.
In the result is allowed for statistical purposes.
ITA No.864/Kol/2013 (A.Y.2005-06):
Grounds of appeal raised by the assessee read as follows :- “ 1) For that the Ld. CI.T (A), was not justified in rejecting the claim of Rs.17,79,489/- for provision made towards leave encashment expenses payable to employees of the corporation. As claimed by appellant that such was a genuine business expenditure conducted for regular operation.
2) For that the Ld. CIT (A), was not justified in partly allowing claim of Rs.2,14,03,080 /- out of total claim of Rs.2,31,13,710/- provided by the appellant on account of anticipated claims from its customers due to weight loss and moisture loss on raw jute delivered to customers in the ordinary course of its business. As has been represented during hearing that considering the nature of trade such losses is inevitable and should be allowed in full as provision has been made on reasonable and logical basis and been followed on consistent basis over the years.
3) For that the appellant craves leave to alter, modify or amend any of the above ground/s and to add further ground/s on or before the final hearing of this appeal”.
As far as ground no.1 is concerned the issue is with regard to allowing deduction on account of provision made for leave encashment. The assessee had debited a sum of 4
5 The Jute Corporation of India Ltd. A.Yr.2005-06 Rs.17,79,489/- in the profit and loss account on account of leave encashment which was outstanding on 31.03.2005. Under the provision of section 43B(f) of the Act any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed as deduction in computing the total income only in the year in which the sum is actually paid by him. In other words, the deduction on account of expenditure in the form of leave encashment paid by an employer to the employee cannot be allowed on the basis of the provision made in the books of account or on the basis of accrual under the mercantile system of accounting and will be allowed only to the extent the leave encashment is actually paid to the employee by the employer. The AO and CIT(A) therefore denied the claim of the Assessee for deduction of the aforesaid sum.
The plea of the assessee was that since section 43B(f) of the Act was declared unconstitutional by the Hon’ble Calcutta High Court in the case of Exide Industries Limited vs UOI 292 ITR 470 (Cal) provision for leave encashment thus based on proper estimate is a certain liability and should be allowed as deduction. Against the decision of the Hon’ble Calcutta High Court, the Revenue has preferred appeal before the Hon’ble Supreme Court and the said appeal has been admitted for adjudication, and the operation of the order of the Hon’ble High Court of Calcutta has been stayed by the Hon’ble Supreme Court. The learned DR relied on the circumstance that the Hon’ble Calcutta High Court decision has been stayed by the Hon’ble Supreme Court.
We have considered the rival submissions. We are of the view that in view of the pendency of the constitutional validity of section 43B(f) of the Act before the Hon’ble Supreme Court, it would be just and proper to direct the AO to follow the ultimate decision that might be taken in the said proceedings and decide the grievance projected by the assessee in this appeal. Thus the appeal filed by the assessee is treated as allowed for statistical purposes. 5 6 The Jute Corporation of India Ltd. A.Yr.2005-06 11. As far as ground no.2 raised by the assessee is concerned in the course of assessment proceedings the AO noticed that the assessee had deducted from the gross sales figure 2.5% of the gross sales and only the remaining sales was alone credited to the profit and loss account. The claim of the assessee before AO was that 2.5% of the gross sales was an estimate on future claims by the customers from the assessee for short quantity or inferior quality of the jute sold. The AO also noticed that the sum so deducted was transferred to a provision account and that the Provision account was shown in the balance sheet without any utilization. It was the claim of the assessee that the amount deducted from the gross sales figure was an anticipated future liability of the assessee and was to be allowed as a deduction. The assessee pointed out that the provision for claims account stood at Rs.231.13 lakhs as on 31.03.2005. During the previous year the major portion was paid and the balance in its account was only a sum of Rs.14.42 lakhs. The assessee also produced a list of claims payable as on 31.03.2005, 31.03.2006 and 31.03.2007 and the name of the customers etc.
According to the AO once a sale bill was drawn on a customer and the customer recognizes it, sale is complete and revenue is required to be recognized on the whole bill value as total sale value as per accounting standard and that no part of the sale can be set apart for discharging any liability and such practice is not permissible in accountancy and in law. The AO also gave the following findings :- “ The impugned provision figures as shown by the assessee need separate attention. It is said in earlier para that these part of sale taken out for future expenditure but remained unspent at the end of the year. Unspent/unutilized amount as on 31.03.2005 Related to Financial year 2001-02 Rs. 547861/- Related to Financial year 2002-03 Rs.4938266/- Related to Financial year 2003-04 Rs.2700425/- Related to Financial year 2005-06 Rs.23113710/-
It is seen that such unutilized amounts at the end of the year are not written back and no reverse entry is passed in the books. It indicates that a part of the sale remained uncharged to tax in each and every year. There is no basis disclosed by the assessee by which this so called provision is calculated. There is no rationale 6
7 The Jute Corporation of India Ltd. A.Yr.2005-06 found behind its healthy increment year after year. The claim having no scientific and reliable basis is not acceptable. It is simply understatement of sale in the disguise of certain unforeseen liability.
It is also to be considered that when there was no obligation cast on the assessee on the date of sale and in absence of any comparison to make a provision for an uncrystallized or uncertain liability, the assessee was not entitled to the benefit of deduction. It is impressed on the fact that the contingent liability, by its very nature, cannot have a provision for purpose of deduction. In the absence of certainty of the liability and certainty of an event to incur the liability, a provision can not go for deduction. Liability for expenditure may accrue or arise in the hands of the assessee in future when a claim for customer is recognized and such an event may depend upon various contingent factors. Moreover, assessee has not submitted any detail as regards previous pattern of expenditure on account of such liability to maintain a provision. The right to incur expenditure at the point of sale does not arise in assessee's case. With these observations, the claim is disallowed and Rs. 2,31 ,13,710/· is added to the income of the assessee.”
Before CIT(A) the assessee reiterated its claim as were made before AO. The CIT(A) allowed the claim of the assessee to the extent of Rs.2,14,03,080/- which was the actual payment made by the assessee to its customers. In other words, CIT(A) allowed the claim of the assessee for deduction from the sale value to the extent the provision for future claims was discharged by the assessee by actual refund to the customers. The following are the observations of CIT(A) in this regard :- “ 5-2 I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the appellant made provision to meet future claim, if any, from customers for short weight and quality claims. I agree with the decision of the A.O. that when there was no obligation cast on the appellant on the date of sale or during the year under consideration, making any provision or claiming any expenditure which is yet to be crystallized is not correct. Before me, though the appellant mentioned the amounts and percentage of such claims from 2001-02 onwards, however, they could not give the complete details of actual amount ascertained year to year basis with regard to claim of the appellant and actual claims received from the customers for short weight and quality. In view of the facts and circumstances of the case as discussed above, a claim of contingent or unascertained liability is not found to be allowable. However, the. similar issue in the appellant's own case was decided by the CIT(A)-XXIV, Kolkata vide his appeal no. 1150/CIT(A)-XXIV/C-1/12-13 dated 31.12.2012 for the A.Y. 2009-10 7
8 The Jute Corporation of India Ltd. A.Yr.2005-06 in which he allowed the actual payment made by the appellant on this issue hut disallowed the claim of provision. I agree with the view taken by the CIT(A)- XXIV, Kolkata, therefore, the appeal on this ground is partly allowed by which the A.O. is directed to allow the actual payment made by the appellant of Rs.2,14,03,080/- Against their liability and disallow the provision made by them of Rs.2,31,13,710/-.”
Aggrieved by the order of CIT(A) the assessee has raised ground no.2 before the Tribunal. The ld. Counsel for the assessee reiterated the submissions as were made before AO and CIT(A). We are of the view that order of CIT(A) on this issue does not call for any interference. The genuineness of the expenditure is not relevant at this point of time . The question for consideration is as to whether the liability of the assessee to refund to its customers owing to loss of weight or quality was a contingent liability. In our view such liability was definitely contingent and it was dependent on the claim being made by the customer for improper weight and improper quality of the product. The factual position is that the assessee could not substantiate as to how the amounts disallowed crystallized as liability during the previous year by the customers making a claim by the assessee. In such circumstances we are of the view that no fault could be found in the order of CIT(A) on this issue. Accordingly ground no.2 raised by the assessee is dismissed.
In the result is partly allowed for statistical purposes. 16. In the result ITA No.864/Kol/2013 is partly allowed for statistical purposes.
Order pronounced in the Court on 05.04.2017.