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2013 (1) TMI 782 - AT - Income TaxDisallowance of provision for post retirement medical as unascertained liability - Held that - Contingent liabilities can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation - Due to the change in the Accounting Standard in respect of the accounting of post retirement benefits the assessee got done the actuarial valuation - . A liability which has already accrued though discharged on a future date would be entitled for deduction - Decided in favor of assessee Can interest paid in respect of capital borrowed allowed for deduction u/s 36(1)(iii) - Held that - any amount of the interest paid towards or in respect of capital borrowed for acquisition of an asset or for expansion of the existing business regardless of its capitalization in the books or otherwise would not qualify as deduction - there is no finding regarding the source of the margin money whether it was from the borrowed fund borrowed for the purpose of expansion or from the other borrowings for which the assessee has claimed the interest paid as the revenue expenditure - the issue to the file of the AO - Remanded back for statistical purposes
Issues Involved:
1. Disallowance of provision for post-retirement medical benefits. 2. Netting off interest before determining business profit. Detailed Analysis: 1. Disallowance of Provision for Post-Retirement Medical Benefits: The primary issue in both appeals was the disallowance of Rs. 74,03,000/- for post-retirement medical benefits, which the Assessing Officer (AO) treated as an unascertained liability. The CIT (A) upheld this addition, stating that the assessee did not provide adequate details to substantiate the liability's nature and computation. The assessee argued that the liability was definite and determined, as it was based on actuarial valuation in compliance with Accounting Standard (AS)-15. The company provided for these benefits due to a change in accounting standards, which required recognition of such liabilities. The assessee cited precedents from the Hon'ble Supreme Court in Metal Box (73 ITR 53) and Bharat Earth Movers Ltd. (235 ITR 428), asserting that such provisions are allowable if they are based on scientific and actuarial calculations. The Tribunal examined the facts and the precedents cited. It noted that the liability for post-retirement medical benefits, though not immediately payable, was a known and determined liability. The Tribunal found merit in the assessee's argument that the provision was made on a scientific basis and was consistent with the mercantile system of accounting. Consequently, the Tribunal upheld the CIT (A)'s decision in ITA No.149/Del/2012, allowing the deduction, and reversed the CIT (A)'s order in ITA No.4921/Del/2010, thereby allowing the assessee's appeal. 2. Netting Off Interest Before Determining Business Profit: The second issue concerned the netting off of interest income against interest expenses incurred during the expansion of the assessee's business. The assessee had raised additional capital and borrowed funds for expansion, incurring interest expenses of Rs. 9,47,91,000/-. It also earned interest income of Rs. 25,45,000/- on deposits related to the expansion project. The CIT (A) allowed the netting off of interest, but the revenue contested this decision. The revenue argued that the proviso to section 36(1)(iii) of the Income-tax Act, 1961, inserted w.e.f. 1.4.2004, did not permit such netting off. The DR emphasized that the interest income earned on margin money should be taxed under section 56, and the interest expenses could not be claimed under section 57 as they were not inter-dependent. The Tribunal noted the proviso to section 36(1)(iii) and the need to establish a direct nexus between the borrowed funds and the margin money. Since the CIT (A) did not provide a clear finding on whether the margin money was from the borrowed funds for expansion, the Tribunal found it necessary to remand the issue back to the AO for a fresh examination. The AO was directed to ascertain the source of the margin money and decide the issue de novo. Conclusion: - The appeal of the assessee (ITA No.4921/Del/2010) was allowed, recognizing the provision for post-retirement medical benefits as a deductible liability. - The appeal of the revenue (ITA No.149/Del/2012) was partly allowed for statistical purposes, with the issue of netting off interest remanded back to the AO for a fresh decision. Order Pronouncement: The order was pronounced in open court on January 24, 2013.
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