2011 (7) TMI 391 - AT - Income Tax

Addition - Investments written off - clause (b) of rule 5 it has been made clear that neither the loss on account of diminution in the value of investment shall be allowed as deduction nor any income on investment shall be subjected to tax - Both the items of loss and income from the investments are to be considered as neither deductible nor includible in the total income of the assessee - The assessee had initially debited Rs. 16.43 crore in its profit and loss account and credited Rs. 17.29 crore in the profit and loss account. However while computing the total income the said amounts of Rs. 16.43 crore and Rs. 17.29 crore were accordingly reversed, leading to the result that in the ultimate analysis neither there was any deduction on account of loss nor increment on account of income from investments - Decided against the assessee. Pension and Gratuity - the claim for gratuity are mutatis mutandis similar to that of the pension - The assessee debited a sum of Rs. 101.33 crore in its profit and loss account but claimed deduction for Rs. 110 crore - This course of action is not permissible within the scope of rule 5 - Therefore, partly approve the view taken by the learned CIT by holding that the deduction on account of pension is admissible for a sum of Rs. 365.08 crore and towards gratuity for a sum of Rs. 101.33 crore. Leave Encashment - The assessee admittedly paid a sum of Rs. 27.91 crore as relating to the instant year thereby leaving the unpaid amount at Rs. 27.83 crore which was voluntarily added back to its income in the computation of the total income - It is held that the course of action adopted by the assessee is perfectly in order inasmuch as it claimed deduction of Rs. 55.74 crore representing the amount debited to the profit and loss account and also disallowed the amount unpaid under section 43B as per clause (a) of rule 5 - The learned CIT has directed to disallow the entire sum of Rs. 55.74 which is not correct for the reason that the amount debited to the profit and loss account is required to be deducted to the extent it is actually paid on or before the due date under section 139(1) - By the action of the learned CIT the assessee has been denied the deduction for the amount debited to the Profit and Loss account and also paid as well before the due date - Decided in favour of assessee. Interest and incomes relating to earlier year - The first item is the premium income of Rs. 14,92,844 which as per the assessee was taxed in the preceding year but accounted for in the income of the current year. It is observed that the said sum of Rs. 14.92 lakh was included by the assessee in its Profit and loss account as per the provisions of Insurance Act - Similar is the position about other three items which were included by the assessee in its Profit and loss account for the current year - The contention that these amounts were offered for taxation in the earlier year and hence the same should not be charged to tax in the current year, is devoid of any merit in the context of section 44 read with rule 5 of the First Schedule - Held that - Once a particular sum is included to the credit of Profit and loss account, the same will continue to find its place in the total income as per rule 5 unless it is covered under clause (c) of rule 5 - Decided against the assessee.

Issues Involved:
1. Investments written off
2. Pension and Gratuity
3. Leave Encashment
4. Interest and incomes relating to earlier year
5. General compliance with IRDA Regulations
6. Computation under section 115JB

Detailed Analysis:

I. Investments written off:
The assessee initially debited Rs. 16.43 crore to its Profit and Loss Account for investments written off and credited Rs. 17.29 crore for the reversal of the provision for diminution of investments. The CIT noted that the net reduction of Rs. 86.17 lakh was not allowable under Rule 5(a). The Tribunal found that with the omission of clause (b) of Rule 5, neither the loss on account of diminution in the value of investment nor the income from investments should be considered for tax purposes. The assessee correctly reversed these amounts, leading to no net deduction or increment. The CIT's view on this issue was not justified.

II. Pension and Gratuity:
The assessee debited Rs. 365.08 crore for pension and Rs. 101.33 crore for gratuity in its Profit and Loss Account but claimed higher deductions of Rs. 404 crore and Rs. 110 crore, respectively, as actually paid. The CIT held that the excess amounts paid but not debited to the Profit and Loss Account could not be allowed as deductions under Rule 5(a), which only permits additions for disallowances under sections 30 to 43B. The Tribunal agreed with the CIT, allowing deductions only for the amounts debited to the Profit and Loss Account.

III. Leave Encashment:
The assessee debited Rs. 55.74 crore for leave encashment but paid Rs. 32.36 crore during the year, including Rs. 4.45 crore from the preceding year. The unpaid amount of Rs. 27.83 crore was disallowed under section 43B. The CIT incorrectly directed the disallowance of the entire Rs. 55.74 crore. The Tribunal held that the assessee correctly disallowed only the unpaid portion, and the CIT's view was not approved.

IV. Interest and incomes relating to earlier year:
The assessee included certain incomes and expenditures from earlier years in the current year's Profit and Loss Account and made corresponding adjustments in the computation of income. The CIT held that these adjustments were not permissible under sections 30 to 43B. The Tribunal agreed, stating that once these items were included in the Profit and Loss Account, they must remain unless specifically adjusted under Rule 5(c). The CIT's view was justified.

V. General compliance with IRDA Regulations:
The CIT noted auditor qualifications regarding non-compliance with IRDA Regulations but did not demonstrate how this affected the taxable income. The Tribunal found no merit in this general observation, as the qualifications did not impact the working results of the company.

VI. Computation under section 115JB:
The CIT commented on the computation under section 115JB, but the Assessing Officer had already disregarded it as inapplicable due to higher tax under normal provisions. The Tribunal did not accept the CIT's view on this issue.

Conclusion:
The Tribunal partly approved the CIT's order, agreeing with the revisions on pension, gratuity, and earlier year incomes but rejecting the CIT's views on investments written off, leave encashment, general IRDA compliance, and section 115JB computation. The CIT's sweeping directive to re-examine the entire assessment was also not upheld. The appeal was partly allowed.

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