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Income Tax Appellate Tribunal, DELHI BENCH “F” NEW DELHI
Before: SHRI S.V. MEHROTRA : & SHRI C.M. GARG :
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “F” NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER Asstt. Yrs: 2007-08 PEC Ltd., Vs. Addl. CIT,Range-14, Hansalaya, 9th Floor, New Delhi. New Delhi-110001. AND & 3739/Del/2013 Asstt. Yrs: 2008-09 & 2009-10 Addl. CIT,Range-14, Vs. PEC Ltd., Hansalaya, 9th Floor, New Delhi. New Delhi-110001. ( Appellant ) (Respondent) Assessee by : Shri Sanjay Agrawal CA Department by : Ms. Kesang Y. Sherpa Sr. DR Date of hearing : 03/05/2016. Date of order : 10/05/2016. O R D E R PER S.V. MEHROTRA, A.M:
The assessee is in appeal assailing the order dated 20.9.2011 of the ld. CIT(A)-XVII, New Delhi in appeal no. 119/CIT(A)XVII/Del/10-11 relating to AY 2007-08. The department has preferred appeals against CIT(A)’s orders in relation to AY 2008-09 and 2009-10. All these appeals were heard together and are being disposed of by a consolidated order for the sake of convenience. Assessee’s appeal - (AY: 2007-08): 2. Brief facts of the case are that the assessee, a Government of India enterprise, in the relevant assessment year, was engaged in the business of export and import of stores, agricultural commodities, industrial raw material etc. The assessee company had filed its return declaring total income at Rs. 47,91,88,024/-. The assessment was completed at a total income of Rs. 49,05,45,523/-, inter alia, making additions on following counts: (i) Provision for productivity linked reward (PLR) Rs. 55,00,000/- (ii) Prior period expenses Rs. 49,53,168/- 3. The assessee preferred appeal before ld. CIT(A), who, while partly allowing the asessee’s appeal, confirmed the aforementioned two disallowances. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal:
1) That the order of the learned Commissioner of Income Tax (Appeals)-XVII, New Delhi (hereinafter referred to as CIT (A)) dated 27-06-2010 is bad in law and wrong on facts. 2) That on the facts and in the circumstances of the case, the learned CIT (A) has erred in not allowing the deduction of Rs.
55 lakhs on account of provision made for the liability relating to Productivity Linked Reward for the employees. 3) Without prejudice to the contention of the appellant in ground No.2 above, the learned CIT(A) has further erred in not giving directions to the Assessing Officer to allow the provision for Productivity Linked Reward in the year in which payment has been made i.e. assessment year 2008-09. 4) That on the facts and in the circumstances of the case, the learned CIT (A) has erred in confirming the disallowance of Rs. 49,53,168/- on account of legal expenses holding them to be prior period expenditure even though the judgment of the Court in respect of Rs. 38,79,013/- was delivered on 05-05-2006 which related to the assessment year under appeal and the balance of Rs. 10,72,024/- crystallized during the year on acceptance of the judgment of the Court. 5) Without prejudice to the contention of the appellant in ground No.4 above, the learned CIT(A) has further erred in not giving directions to the Assessing Officer to allow the alleged prior period expenses in the year to which it relates according to him. 6) That the Appellant craves leave to reserve to itself the right to add, alter and/or vary any ground(s) at or before the time of hearing.
Ground nos. 1 & 6 are general and do not require any adjudication.
Ground nos. 2 & 3: Brief facts apropos these two grounds are that assessee had debited Rs. 55 lacs towards productivity linked reward scheme.
The AO noticed that note 19 to the notes on account reads as under:
“Administrative Overheads – In the line with Government directions, a productivity linked award scheme had been designed which has been approved by the Board and also by the Government. An amount of Rs. 55 lakh (previous year Rs. 55 lakh ) has been charged to the accounts for the current year on the basis of existing scheme which is under review. A study by National Productivity Council is under progress.”
The AO was of the opinion that the amount seemed to be a lump sum provision and, therefore, required the assessee to specify whether the amount was debited for creation of provisions or was actually paid. The assessee vide its reply dated 12.10.2009 submitted as under:
“As per Department of Public Enterprises, Ministry of Heavy Industries, Govt. of India guidelines, PSU can distribute upto 5% of the distributable profit of the company as PLR to the employees with the approval of the Board of directors. The PLR scheme was designed by the National Productivity Council and approved by the Board of Directors for 3 years i.e, upto F.Y200S-0B. However, the PLR amount paid to an employee should normally within 50% of the basic pay. The amount of Rs. 55 lskhs was provided as per existing scheme because the study by NPC was in progress. As per revised PLR scheme, PLR amount due to employees worked out to Rs.123.90 lakhs which is 5% of the distributable profit of Rs.24.79 crores.".
The AO treated this as an unascertained liability by observing as under:
From the above submission, the following points emerges: b. the amount of PLR has been worked out on the basis of old scheme which was approved upto F.Y.2005-06. Thus, the provision created for this year was not under the approved scheme. c. The amount has been created by way of provisions on estimation basis. The actual amount worked out to be Rs.123.0 1akhs which has got no correlation with the provisions ofRs.55lakhs As these where the provisions on estimation basis, the issue was further examined and the assessee was asked to provide the actual payment of such amount during the year. The assessee provided the details and it was found that the payment was made next year during the period from June 2007 to January 2008. From the above discussion, it can very well be seen that the provision for PLR amounting to Rs.55 lakhs was created without ascertaining the actual amount. The provision was created merely on estimation basis.
Ld. CIT(A) confirmed the AO’s action, inter alia, observing that AO was justified in disallowing the expenses as not admissible during the year under consideration as there was no approved scheme. He was of the opinion that the provision had been made on ad hoc basis.
Ld. counsel for the assessee submitted that the provision has been made on past history basis. He referred to the reply filed by assessee before the AO which has been reproduced above.
We have considered the rival submissions and perused the record of the case. From the reply filed by the assessee before the AO it is evident that PSU were entitled to distribute up to 5% of the distributable profit of the company as PLR to the employees with the approval of the Board of Directors. Admittedly, the provision is within 5% limit fixed by the Government of India and duly approved by Board. It is not disputed that in earlier years also the provision had been allowed to assessee.
In the case of CIT Vs. BHEL (2013) 352 ITR 88 (Del.), the assessee, during the assessment years 1988-89 and 1998-99 claimed addition of its liability on account of wage revision. It submitted that even though the wage revision proposals had been submitted to the competent bodies or authorities, the liability was certain and ascertained on the basis of its past experience and after taking into consideration the previous Pay Commission’s report, union demands and the ability of the employer to bear the additional burden. The claim was disallowed by the Assessing Officer but allowed by the Tribunal.
The Hon’ble Delhi High Court held the liability as deductible ascertained liability by observing as under:
“That the Tribunal held that the provision for wage revision was based on past experience, interim Pay Commission of Government employees, previous pay Commission's report of public sector employees, union demands and other relevant factors. The Tribunal also held that with the expiry of one wage settlement or agreement, invariably, there was a time lag when another fresh wage revision agreement was negotiated and entered into. The deduction claimed for that period could not be termed contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer. Thus, the liability could not be characterized as contingent but was in fact ascertained and was deductible.
The assessee clearly stated that the amount had been charged on the basis of existing scheme which was under review. That merely because this scheme was under review did not make the liability per se as unascertained and, therefore, the conclusion drawn by lower authorities that the conclusion was based on estimation basis was not justified, particularly in view of the guidelines of Government of India available at that time. We are of the considered opinion that the provision had been made for ascertained liability. Ground is allowed.
Ground nos. 4 & 5: Brief facts apropos ground nos. 4 & 5 are that from schedule 19 to the annual account the AO noticed that there were details of prior period adjustments, which included legal expenses to the tune of Rs. 49,53,158/-. On being asked the assessee filed reply dated 26.10.2009 and stated as under:
"With regard to legal expenses of Rs. 49,53,168/- there were two payments - Rs.10,72,024/- and Rs. 38,79, 013/-. Payment of Rs. 10,72,024/- was made in compliance with the orders of City Civil Court, Ahemdabad in the case of Bank of India Vs STC/PEC/Indequip & others: Suit No. 1827/1981. Copy of Extract from the Minutes approving such payment by Board of Directors is enclosed as Annexure-8. Payment of Rs. 38,79,013/- was in compliance with the orders of Hon'ble Delhi High Court in the case of Texmaco Limited Vs. PEC-Yugoslav Wagon Contract 1971.
The AO rejected the assessee’s claim observing as under: “In order to verify the' nature of payments, the assessee was asked to provide the copy of above orders. As far as the payment to Bank of India is concerned, the payment was made in view of order of court passed on 27.10.2005. The company was guarantor of transaction entered between Indequip Engineering Ltd. and General Organization of Industrialization, Cairo. Because of default on the part of Indequip Engineering Ltd. the court ordered payment by the guarantor. On seeing the above decision, it is seen that the liability is on account of payment as guarantor, which cannot be considered as trade liability. For claiming prior period expenditure the assessee must establish that the expenditure was genuine business expenditure and were crystallized during the previous year. In the above case none of the above condition is fulfilled. The expenditure was crystallized in financial year 2005-06 as the order of Hon'ble court was delivered on 27.10.2005 and secondly, it is not genuine business expenditure. As regard the payment of RE. 38,79,013/- is concerned, on examining the court order it is seen that above case arises as the award granted by arbitrator between State Trading Corporation of India and Texmaco Ltd. was challenged before the High Court of Delhi. There was dispute between the two companies regarding amount payable on account of defective and delay in supply of wagons. The above expenditure including interest component for delay in payment looks penal in nature, therefore cannot be regarded as genuine business expenditure. In the submission assessee has simply submitted that all the assets and liability of STC related to export of textile and machinery was transferred to it on its incorporation. No explanation regarding nature of expenditures was submitted. Considering this, such expenses cannot be allowed as prior period expenses.
Ld. CIT(A) confirmed the AO’s action mainly on the ground that liability did not pertain to the year under consideration, inter alia, observing as under:
“Thus, it can be seen that in both the cases the judgments of the Court were available during the assessment year 2006-07. It is not the case of the appellant that they were not aware of the liability on account of judgment of the Court. On the contrary . the appellant admitted that they were very well aware of the judgments. However, the Board of Directors accepted the liability in the assessment year 2007-08. It is a settled law that the liability can be allowed only in that year to which it pertains or in the year in which the same has been crystallized. In the instant case, the liability has neither arisen in the year under consideration nor it pertains to this year. In view of the above facts, I am of the view that the AO was fully justified in disallowing the same. Therefore, the order of the AO is confirmed on this issue. This ground of appeal is rejected.”
17. As regards the sum of Rs. 10,72,024/-, ld. counsel for the assessee pointed out that the judgment was delivered on 27.10.2005 and then assessee took legal opinion on the issue which was given to it on 16.2.2006.
Thereafter, on 24.7.2006, Board had taken decision not to pursue the matter.
Therefore, the liability accrued during the year under consideration. He further submitted that since it was a trading liability therefore the same should be allowed either in the year under consideration or in earlier year, in which, as per AO, the same accrued. He submitted that since there was no change in rate of taxation, therefore, allowability of this amount can be considered in the year under consideration also.
As regards AO’s objection that this was not a trading business expenditure, ld. counsel referred to the submission made before ld. CIT(A) to the effect that in the first case STC (Projects Division) secured a contract for supply of machinery, equipment and spares to General Organization for Industrialization (GOFI), Cairo, Egypt for Rs. 2.87 crores. The division entered into a contract with M/s Indequip Engineering Ltd. for supply of some of the machineries for Rs. 42,00,362/-. There was a reduction in the price by Rs. 2,50,000/- and the final price was Rs. 39,55,682/- . M/s Indequip took finance from Bank of India and the division of STC undertook to pay directly to bank in 10 instalments with interest. The division deducted Rs. 2,50,000/-, on account of substandard supplies. The Bank filed a suit of recovery. Meanwhile, the division dealing with the case was vested with the appellant when it was incorporated and STC was restructured. The Ahmedabad High Court ruled in favour of Bank on 27-10-2005.
In that background Board of Directors approved the abandonment/ settlement of legal proceeding on 24.7.2006.
Ld. counsel further referred to the audited accounts (page 18) and pointed out that assessee had earned commission (trade) amounting to Rs. 2,15,37,682/-. Thus, he submitted that the entire liability was a trading liability.
As regards the payment of Rs. 38,79,013/- ld. counsel pointed out that the STC (prior to transfer of certain business division to PEC) entered into a contract with Yugoslav Railways Community to supply wagons in October, 1970. The contract was modified from time to time and finally on 10-05- 1976, the State Bank of India furnished a performance guarantee on behalf of assessee. Texmaco was one of the suppliers of wagons. The wagons supplied were defective and the Community invoked the performance bank guarantee. The matters were settled only after invoking arbitration agreement which were lodged with International Chamber of Commerce, Paris. The appellant faulted the suppliers and invoked performance bank guarantee of Texmaco and received Rs. 19,79,7251-. Texmaco went for arbitration wherein it was held that only two wagons were defective and the total compensation would have been Rs. 10,47,701/- and, therefore, excess compensation was claimed for Rs. 9,32,024/-. Texmaco initiated legal proceedings and was awarded the sum of Rs. 38,79,013/- vide order dated 05-05-2006.
Ld. counsel pointed out that since the judgment was delivered on 5.5.2006 and the management decided to make the payment during this year only, therefore, the liability crystalized during the year.
Ld. DR relied on the order of ld. CIT(A).
We have considered the rival submissions and have perused the record of the case. As far as the expenditure of Rs. 10,72,024/- is concerned, it is not disputed that assessee was procuring goods from outside and supplying it within the country. In the process it was earning a commission income. (The assessee became the guarantor in course of these business transactions).
The assessee had entered into contract with M/s Indequip Engineering Ltd. for supply of goods. Bank of India had financed M/s Indequip Engineering Ltd. Assessee furnished guarantee to Bank of India which were the financers of the transactions and agreed to pay Bank of India in ten instalments with interest. However, subsequently, assessee made deduction of rs. 2,50,000/- on account of substandard supplies. Bank filed suit for recovery and the same was allowed calling upon assessee to make the payment of Rs. 10,72,024/-. Therefore, it cannot be said that the liability, which accrued to assessee, as a guarantor was not in course of business. As far as crystallization of liability during the year under consideration is concerned, we find that the Board of Directors approved the abandonment/ settlement of legal proceedings on 24.7.2006. Therefore, the liability accrued during the year under consideration. Therefore, this amount was to be allowed in the year under consideration. Moreover, we find considerable force in the argument of ld. counsel that since there was no difference in tax rates in the two years viz. assessment year 2006-07 and 2007-08, therefore, the whole exercise was revenue neutral.
As far as the second sum of Rs. 38,79,013/- is concerned, since the judgment was delivered on 5.5.2006, which is evident from page 77 of the PB, therefore, it is wrong to conclude that the liability crystallized prior to the said date. Therefore, this amount was rightly claimed by assessee in AY 2007-08. Further, this amount was also paid by assessee in course of settlement of its business transaction on account of excess compensation of Rs. 9,32,024/- received by it, as is evident from the submissions of ld. counsel for the assessee, noted by us. We, therefore, allow the claim of the assessee. Ground is allowed.
In the result, assessee’s appeal is allowed.
Department’s appeal - (AY 2008-09):
Sole effective ground raised in this appeal is as under:
“Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition to the extent of Rs. 1,15,45,360/- out of Rs. 1,51,45,341/- on account of provision made for post retirement benefit.”
Brief facts of the case are that during the year under consideration the assessee had debited an amount of Rs. 1,51,45,341/- in its P&L a/c under the head Post Retirement Medical Benefits. The AO required the assessee to explain as to how this liability was paid. In response, the assessee, vide reply dated 24.12.2010, submitted as under:
“A copy of actuarial valuation report for valuation of liability for post retirement medical benefit scheme as on 31.03.2008 is enclosed as proof of the fact that the said liability was an ascertained liability. The same liability is allowed to us in previous year also.”
The AO rejected the assessee’s claim, inter alia, observing that assessee had not given any reason in respect of allowability of its claim except that it was based on actuarial valuation. The provision made in the books of a/c was an unascertained liability, not allowable under the Income- tax Act.
In appeal, the ld. CIT(A) allowed the assessee’s claim by observing as under:
“The main issue to be decided in this appeal is whether the provision of Rs.1,15,45,360/- is an ascertained liability or contingent liability. "Since the appellant had already filed a copy of actuarial valuation as on 31.03.2008 before the AO on 24.12.2010, the AO's stand that this is not an ascertained liability is not correct. The Supreme Court decision mentioned above in the case of M/s Bharat Earthmovers is clearly applicable to the facts of this case, while the case laws mentioned by the AO are clearly distinguishable. It was also pointed out by the appellant's AR in his letter dated 15.09.2011 that the AO had allowed in this assessment year itself similar liabilities based on actuarial valuation on gratuity and leave encashment provision s: Further it was pointed out that on the principle of consistency this provision needs to be allowed as similar provision for post retirement medical benefits was allowed in scrutiny assessments for A.Y. 2006-07 and 2007-08. Therefore, this provision of Rs.1,15,45,360/- towards post retirement medical benefits is also an allowable deduction u/s 37(1) of the I.T. Act, 1961 and hence is allowed and thus the ground No.2 is fully allowed.”
After hearing both the parties, keeping in view the decision of Hon’ble Supreme Court in the case of Bharat Earthmovers and the provision being made on actuarial valuation, we do not find any reason to interfere in the finding of ld. CIT(A) on the issue in question and uphold the same. In the result, revenue’s appeal is dismissed.
ITA no. 3739/Del/2013 (AY 2009-10):
Effective grounds raised in this appeal are as under:
“1. The Ld. CIT(A) has erred in law and on facts of the case in deleting the addition of Rs. 1,01,74,937/- on account of disallowance of post retirement benefit for the employees without appreciating the fact that provision made in the books of account is not an allowable expense under the Income Tax Act. ”
1.1. The Ld. CIT(A) has erred in law and on facts of the case in deleting the above disallowances relying upon the decision of his predecessor in earlier years on the similar issues ignoring the fact that the matter is sub judice before the Hon’ble ITAT and has not come to its finality.
The Ld. CIT(A) has erred in law and on facts of the case in deleting the addition of Rs. 18,20,000/- on account of expenditure incurred in increase in authorized share capital without appreciating the fact that the expenditure incurred being of capital nature.”
Ground no. 1: On identical ground in AY 2008-09, we have upheld the order of ld. CIT(A), deleting the addition made by the AO on account of post retirement benefit for the employees. There being no change in facts for the assessment year in question, for the same reasons as in AY 2008-09 the order of ld. CIT(A) on the issue in question is upheld. Ground is dismissed.
Ground no. 2: Brief facts apropos ground no. 2 are that during the assessment proceedings it was noticed that assessee had claimed expenses of Rs. 14 lacs in respect of fee paid to Registrar of Companies for increase in authorized capital and Rs. 4,20,000/- as stamp duty. The assessee explained as under:
“Authorized share capital was increased to issue bonus shares to the Government of India and its expenses were debited to profit and loss account as revenue expenditure. There is no increase in the funds of the business since the amount was capitalized out of the reserves of the company. Therefore, the same is revenue expenditure and not capital expenditure.”
The AO disallowed this amount treating the same as capital in nature.
Ld. CIT(A) following the decision of Hon’ble Supreme Court in the case of M/s Dalmia Investments 52 ITR 567, allowed the assessee’s claim by observing as under:
“Ground no. 3 is regarding the disallowance of Rs. 18,20,000/- on account of expenditure incurred in connection with increase in authorized share capital of the company for issuance of bonus shares. From the submission of the appellant mentioned in the assessment order, it is clear that this expense was incurred for increasing the authorized share capital for issue of bonus shares. During the appellate proceedings, the appellant's AR relied on the Hon'ble Supreme Court's decision in the case of General Insurance Corporation reported in (2006) 156 Taxman 96 (SC) dated 25.09.2006. The relevant portion of the above order is as follows: "Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed; the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocation of company's fund. If that be so, then it cannot be held that the company has acquired a benefit or advantage of enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company. Issue of bonus shares does not result in the expansion of capital base of company.”
5.1. In the above case, the Hon'ble Supreme Court had distinguished between the issue of fresh shares leading to inflow of fresh funds to the company and the issue of bonus shares 'in which there is no fresh inflow of capital. It was held that the issue of bonus shares 'is revenue expenditure following the earlier Hon'ble Supreme Court's decision in the case of MIs Dalmia Investments (52 ITR 567), where it was held that there. is no change in the capital structure. Respectfully following the above decision, the addition of Rs.18,20,000/- made by the AO as capital expenditure is deleted and this ground no. 3 allowed .
After hearing both the parties, we do not find any reason to interfere in the finding of ld. CIT(A) on the issue in question in view of the decision of Hon’ble Supreme Court in thecae of General Insurance Corporation (supra), and we uphold the same. Ground is dismissed. 37. In the result, assessee’s appeal is allowed and the revenue’s appeals are dismissed. Order pronouncement in open court on 10/05/2016.