2009 (6) TMI 630 - AT - Income Tax

Addition - on account of understatement of profits on coal in transit - the impugned reversal entries pertained to sale which had been recognized in subsequent earlier year on the basis of railway receipts and if the action of the AO was to be confirmed then the sale entries recorded in subsequent year were to be deleted therefrom - once the impugned entries have to be recognized as sales of the year under consideration hence the same are required to be deleted from the next year - Appeal is dismissed Regarding disallowance of ascertained liability of 3, 128.07 lakhs on account of the provisions made for incremental wages under National Coal Wage Agreement (NCWA) - it is also noted that the assessee is following mercantile system of accounting which it is required to follow mandatorily being a company hence as a matter of prudence and taking into consideration the provisions of AS-4 also it is obliged to make such provision - if the assessee does not make such provision then in the subsequent year the AO may take a view that it is a case of prior period expenses which would also result into litigation and may disturb the finality of concluded assessment - It is also pertinent to note that such provision may be less or more and depending upon the criteria on the basis of which such provision is made however the excess expenditure provided can be written back in subsequent year and may be offered as income under s. 41(1) of the Act or the short provision can be claimed as expenditure in that year - It is also noted that making of such provision is also in consonance with the principle of matching of cost with the revenue - Appeal is allowed Regarding disallowance in respect of overloading charges underloading charges and credit notes issued by the assessee to its customers for stones shells etc. contained in the consignment sent to them at various points of time - As far as underloading charges and credit notes are concerned these expenses have been incurred by the assessee as a consequence of agreement with its customers and these have not been paid to railways like overloading charges hence at the very outset these are not covered within the ambit of Explanation to s. 37(1) of the Act - Appeals are allowed Revision u/s 263 - It is noted that during the course of assessment proceedings the AO has made specific inquiries regarding this issue and the assessee has submitted detailed reply along with the documentary evidences to support its claim - hence it was a case of lack of inquiry with which we are not in agreement for the reason that generally positive findings are not given in the assessment order on numerous inquiries made by the AO and rather in the present case the reproduction of such reply and acceptance of the claim thereafter clearly indicates the mind frame of the AO - it is neither a case of lack of inquiry nor a case of a view taken by the AO which is not possible in law hence the order cannot be termed as erroneous as well as prejudicial to the interests of Revenue - Appeal is allowed

Issues Involved:
1. Addition on account of understatement of profits on coal in transit.
2. Disallowance of ascertained liability for incremental wages under National Coal Wage Agreement (NCWA).
3. Disallowance of liability for wages in the subsequent year.
4. Disallowance of overloading charges, underloading charges, and credit notes.
5. Addition on account of rebate receipt from railway.
6. Charging of interest under sections 234A, 234B, and 234C.
7. Revision of assessment order under section 263 regarding provisions for wages under NCWA-VII.

Detailed Analysis:

1. Addition on Account of Understatement of Profits on Coal in Transit:
The assessee contested the addition of Rs. 26.67 lakhs made by the AO for understatement of profits on coal in transit. The learned counsel for the assessee argued that the sales were recognized in the subsequent year based on railway receipts, and if the AO's action was confirmed, the subsequent year's sales entries should be deleted. The Tribunal directed the AO to delete the entries from the subsequent year, dismissing the ground subject to these directions.

2. Disallowance of Ascertained Liability for Incremental Wages under NCWA:
The assessee, a subsidiary of Coal India Ltd., made a provision for incremental wages based on directions from the holding company. The AO disallowed the provision, deeming it contingent as the agreement was not finalized. The CIT(A) upheld this view. The Tribunal, however, accepted the assessee's argument that the liability accrued from the date of expiry of the preceding NCWA and was allowable based on the matching principle. The Tribunal directed that the provision was allowable as an expenditure in the year under consideration.

3. Disallowance of Liability for Wages in the Subsequent Year:
Similar to the previous issue, the Tribunal accepted the assessee's claim for the provision of wages for executives, which was made in consultation with administrative ministries and accepted by Coal India Ltd. The Tribunal found the provision to be for an ascertained liability and allowable in the year under consideration.

4. Disallowance of Overloading Charges, Underloading Charges, and Credit Notes:
The AO disallowed these charges, treating them as penal. The CIT(A) confirmed this view. The Tribunal differentiated between the nature of these charges:
- Underloading Charges and Credit Notes: Found to be business expenses incurred due to agreements with customers and not penal in nature. These were allowed as business expenses.
- Overloading Charges: The Tribunal noted that these were commercial charges paid to the railways and not penal. They were incurred in the normal course of business and allowed as business expenses.

5. Addition on Account of Rebate Receipt from Railway:
The assessee did not press this ground due to the smallness of the amount. The Tribunal dismissed this ground as not pressed.

6. Charging of Interest under Sections 234A, 234B, and 234C:
The Tribunal noted that the charging of interest under these sections was consequential. The AO was directed to charge interest after giving effect to the Tribunal's order.

7. Revision of Assessment Order under Section 263 Regarding Provisions for Wages under NCWA-VII:
The CIT revised the assessment order, disallowing the provision for wages under NCWA-VII, considering it contingent. The Tribunal found that the AO had made specific inquiries and accepted the assessee's claim based on detailed submissions and the decision of the Supreme Court in Bharat Earth Movers. The Tribunal held that the provision was made in accordance with established accounting norms and commercial prudence. The Tribunal quashed the order passed under section 263, allowing the assessee's appeal.

Conclusion:
The Tribunal partly allowed the appeal for the assessment year 2002-03, fully allowed the appeal for the assessment year 2003-04, and quashed the revision order under section 263 for the assessment year 2003-04.

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