ACIT, CIRCLE-18(2), NEW DELHI vs. NTPC VIDYUT VYAPAR NIGAM LTD., NEW DELHI

out of the separate orders dated 23.04.2019 for these AYs, passed by CIT(A)-6, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) arising out of appeals before it against the order dated 26.12.2016 & 23/12/2017 respectively passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle-18(2), New Delhi (hereinafter referred as the Ld. AO). The grounds of appeal for of AY 2015-16 is covered in appeal for AY 2013-14, so facts of AY 2013-14 are taken up for discussion on merits.

2.1 The reply of the assessee was considered but was not found to be acceptable by the Ld. AO and he observed that that the assessee had entered into Power Purchase Agreements with the Solar Power Developers and since the contracts were made by the assessee, who itself forfeited bank guarantee and offered it to income in the previous years. Ld. AO also held that the assessee was rightly booking the income from forfeiture of bank guarantees in relation to such projects since the income was accruing to the assessee company and not to any other entity. Ld. AO noted that the shift in the policy and cessation of declaring the income arising from the forfeiture of bank guarantees was triggered by the letter of the Ministry containing the directions that such income was not to be considered as income of the assessee company. He further noted that no accounting taxing event happened to necessitate such change and it was a mere change of opinion on the part of the superior of the assessee company be binding on the assessee by reasons of hierarchy. Hence, the amount of Rs. 138,17,87,106/- (reversal amount +current year undisclosed amount+ interest income) was added to the income of the assessee.

2.2 Further, by note sheet entry dated 21/12/2016 the Ld. AO asked the assessee to explain why Rs. 1.34 crores under employee benefit expenses towards superannuation benefits pertaining to earlier years, i.e., 01/01/2007 to 31/03/2012 be not disallowed as being prior period expense. It was submitted that a government audit was conducted and it was observed that the appellant has to follow the DPE guidelines for superannuation fund in respect of employees deputed on secondment. It was guided that the accounting for superannuation fund and other benefits should be reviewed and considering this the appellant reviewed and revised to shift from the existing method to contribution on fixed percentage basis as per DPE guidelines. Further, the said contribution was to be paid by the assessee to NTPC and - NTPC obtains actuarial valuation of report in respect of all its employees. The contention of the assessee was not found to be acceptable. The AO observed that the assessee had calculated the amount of provision on the basis of percentage which was at best an estimate and was neither scientific nor based on any act to a real valuation. It was also observed that no actuarial valuation had been attempted nor any such valuation report had been provided by the assessee. In absence of any scientific basis for evaluating the quantum , of liability, the provision for impugned reliability was held to be in the nature of an unascertained liability and, therefore, inadmissible. The AO also noted that the assessee is required to maintain its books of account on mercantile basis and the stated claim of leave, superannuation and other benefits pertaining to prior period have arisen because of change in accounting policy effected during the year. It was held that prior period expenses are not admissible because the assessee is following mercantile system of accounting and the contention of the assessee that the employees were with the company on secondment basis and hence the liability crystallized for the assessee company during the year upon being intimated about such liability by the parent ’company was also found to be not acceptable. Since the liability was of prior period and the event of intimation does not alter the assessment year to which such liability pertained and hence the amount of Rs. 1,34,00,970/- was disallowed and added back to the income.

2.3 Further, the assessee was also asked to explain why the amount of Rs. 11,75,593/- spent as community development expenses be not disallowed in response it was submitted that as per the guidelines issued by the Department of Public Enterprises, Government of India every Central public sector enterprises is obligated to spend a share of its net profit for the project serving the interests of society under the concept of corporate social responsibility. Being a government enterprise, the assessee spend the amount on various projects for the interest of the society. The reply of the assessee was considered but was not found to be acceptable. It was noted that the assessee company is engaged the business of production of thermal power and as per section 37(1), for being allowable as deduction, the expenditure should have been laid out wholly and exclusively for the purpose of business. It was also noted that the nexus between the expenditure in the business in connection with which the expenditure has been incurred has to be established before the assessee becomes entitled to deduction under section 37(1). Since the assessee failed to discharge the said onus, the expenditure of Rs. 11,75,593/- claimed in the P&L account was disallowed and added back to the income.

3.1 In regard to the expenses pertaining to superannuation benefits Ld. CIT(A) observes that it is the contention of the appellant that liability to pay the expense crystallised during the year and is not in the nature of a prior period expense. It is also the contention of the appellant that during the FY 2012-13 government audit was conducted and based on an observation as a result of the audit it has been inferred that the appellant has to follow the DPE guidelines for superannuation fund in respect of employees deputed on secondment. However, from the submissions made it is seen that the only basis on which the expense has been booked and the methodology revised is based on a communication from NTPC Ltd., whose employees are deputed on secondment with the appellant. Ld. CIT(A) concluded that the appellant has failed to demonstrate the changes made in the methodology for computation of the benefits in view of the DPE guidelines. No details regarding the period for which the methodology needed to be revised and comparatives showing expenditure booked before and after the change in the methodology have been furnished. Even otherwise also it is noted that the impact of the change has also not been demonstrated along with the merit of the expense. In absence of any justification regarding the incurring of the expenditure, the issue of allowability of the same does not arise. Hence, the addition made was upheld.

“4.4.2 I have considered the assessment order and the submissions of the appellant. Deduction for expenditure incurred is allowed under section 37 if the expenditure is incurred wholly and exclusively for the purpose of business of the assessee. It has been held in the case of CIT vs. Delhi Safe Deposit Go. Ltd. ((1982) 133 FIR 756 (SC)] that the true test of an expenditure laid out wholly and exclusively for the purpose of business is that it is incurred by the assessee as incidental to its trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. In the case under consideration the appellant is engaged in the business of trading in electric power and trading of ash/fly ash related products. There seems to be no nexus in the business of the assessee with distribution of sewing machines, installation of borewells and pumps at Khalgaon, submersible pumps at VKaurali, Faridabad etc.” 4.4.3 Since there appears to be no nexus between the business of the assessee and the expenditure incurred does not appear to be in any way incidental to the business of the assessee, the same cannot be allowed as deduction. Therefore, the disallowance made is upheld. Ground of appeal

No. 5 is dismissed.”

5. The department has filed two appeals raising similar grounds as reproduced below :

5743.Del.2019, A.Y. 2013-14 “1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.

137,17,87,106/- on account of retention of bank guarantee encashment ? 2. That the appellant craves leave to add, amend, alter or forgo any ground/(s) of appeal either before or at the time of hearing.”

5744.Del.2019, A.Y. 2015-16 “1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 37,30,24,001/- on account of retention of bank guarantee encashment? 2. That the appellant craves leave to add, amend, alter or forgo any ground/(s) of appeal either before or at the time of hearing.”

The Assessee is in appeal before the Tribunal raising following grounds :- “On the facts and circumstances of the case the order

.”

7.2 The Bench is of considered opinion that Ld. CIT(A) was not in error in giving the finding that appellant is merely custodian of the money received from encashment of bank guarantee and that the assessee has rightly treated the amount receive on encashment of bank guarantee during financial year as a liability along with the interest is liability. However, he failed to appreciate that the directions of the ministry being clarificatory in nature and also carrying a mandate of compliance by the assessee cannot be prospective only. The administrative directions in financial matter of Government entities have 10 to be taken to be retrospective to time to which controversy relates unless specifically directed to be prospective. Accordingly, Ld. CIT(A) erred in disallowing the reversal of amount received as bank guarantees and interest for earlier years to the extent of Rs. 1,15,82,16,659/-. Accordingly, the issue in the Revenue’s appeals are decided against the Revenue and the issue no. 1 in the appeal of assessee is decided in favour of the assessee.

7.3 Ground no. 2 in the appeal of assessee : The Bench is of the considered view that the settled provisions of law is that if any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability have been actually claimed and paid in the latter previous years it cannot be disallowed as deduction nearly on the basis that the accounts are maintained on mercantile basis and that it can relate to transactions of the previous years. Reliance can be placed on the judgement of Hon’ble Gujrat High Court in Saurashtra Cement and Chemical Industries Ltd Versus CIT 1994(10) TMI 30 for same. It can be observed that Ld. AO has not doubted the expenses on account of superannuation benefits and that same were revenue in nature. The orders of Ld. CIT(A) show that he found there was no justification regarding the incurring expenditure but the Ld. Tax Authorities have failed to appreciate is that based upon the Government audit objections and as per the guidelines from the Department of Public Enterprises the assessee had reviewed and revised the method of contribution on fixed percentage basis. The deposit amount was debited to the P & L account of the current year. The calculation have been placed on record at page no. 91 to 93 of the paper book as were before the Ld. Tax Authorities below. Since the change and accounting and computation is outcome of binding nature of department of Public Enterprises Guidelines, the assessee had no option but to comply and accordingly the liability is to be considered to be crystallized during the year under consideration. The binding nature of instructions on assessee to make provision as per the instructions in itself is justification for making debit in the accounts, which Ld. CIT(A) failed to appreciate. Even otherwise the business of assessee is ongoing and rates of taxes have not change, thus, making disallowance revenue neutral. Accordingly, ground no. 2 in is decided in favour of assessee.

8. Ground no. 3 in the appeal of assessee. It can be appreciated that the assessee is supposed to follow the guidelines of department of Public Enterprises. The CSR expenses have been incurred by the assessee voluntarily taking as responsibility under the mandate of CSR guidelines of the DPE. Ld. CIT(A) has fallen in error to apply strict principles of Act that expenditure should be wholly and exclusively for the purpose of business to the assesee which is a public enterprises. The nexus theory with the objectives of CSR expenditure qua the objectives have to be considered in case of public enterprises on different footing as they also have wider horizon of benefit of society than their objectives alone and Ld. CIT(A) has failed to appreciate same.

“9. We have heard the rival submissions and perused the material on record. The assessee is a Government of India Undertaking, working under the Ministry of Health and Family Welfare. The Government of India had issued certain Guidelines dated 09.04.2010 to all Central Public Sector Enterprises on CSR. The Guidelines issued by the Central Government dated 09.04.2010, is placed at pages 9 to 27 of the paper book filed by the assessee. As per the Guidelines as indicated under "5. Funding", all PSUs should mandatorily spend a percentage of net profit for CSR activities. The CSR expenses that has been incurred by the assessee is based on the specific directions of the Government of India and the A.O. in the assessment order passed u/s 143(3) dated 19.03.2015 had allowed the CSR expenditure. 9.5 The CSR expenses has been incurred as per the directions of Government of India. The Hon'ble Kerala High Court in the case of Travancore Titanium Products Ltd. (supra) had held that a Government Undertaking is duty bound 12 to comply with Governmental orders. The relevant findings of the Hon'ble jurisdictional High Court reads as follows :-

"Being a company under the control of the Government, it is bound to comply with all the Government orders and the Board of Directors itself is constituted with the Government secretaries and other nominees as members. Therefore, the claim of deduction has to be considered with reference to the peculiar circumstances of the company which has no discretion in regard to the payment of the service charges to the government as it is bound to comply with the government orders. So much so, we are of the view that the parameters applicable in the case of a private company that too with respect to the claim for business expenditure, are exactly not applicable in the case of Public Sector Company whether it is under the control of the State Government or Central Government.

In fact, many public sector companies are not formed just to make profit alone but are supposed to achieve larger objectives for the society and the State.

By making payment of service charge, the respondent company has discharged only the obligation under Government orders. It cannot carryon business by violating Government orders and remain as a defaulter to the Government.

9.8 Since, the assessee had incurred CSR expenses to comply with the directions of Govt. of India, following the above observations made by High Court of Kerala and ITAT, Mumbai Bench, the expenditure incurred is incidental to the assessee's business and ought to be allowed as deduction u/s 37 of the I.T.Act”.