2012 (9) TMI 515 - HC - Income Tax

Contingent liability - Disallowance claim of deduction for wage revision - ITAT allowed it - Held that - Relying on the decision of Bharat Earth Movers Versus Commissioner of Income-Tax 2000 (8) TMI 4 - SUPREME COURT in this case, the Tribunal had noticed that there was no dispute as regards the terms of employment of the workers and officers & that provision for wage revision was based on past experience, interim Pay Commission of government employees, previous Pay Commission s reports 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 is a time lag when another fresh wage revision agreement is negotiated and entered. The deduction claimed for that period cannot be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer, thus liability could not be characterized as contingent but was in fact ascertained the quantification, however, had not happened - in favour of assessee Denial of benefit claimed u/s 10 (15) (iv) (h) - interest earned on tax free bonds between the date of their application by the assessee and the date of their allotment - Held that - Interest payable on bonds or deposits referred to Section 10(15)(1)(iv)(fa) would mean interest earned by such amount or deposit. On the other hand, interest paid in respect of such bonds, as is the case with tax free interest bonds under sub-section 15(1)(iv)(h), connotes an entirely different intention. The expression in respect of, unlike the term on, has a wider connotation and would embrace a larger subject matter. On the other hand, interest on the bond or deposit would mean what is actually yielded by the bonds and nothing else. The Tribunal noticed correctly that interest would include hedging transaction charges payable on account of currency fluctuation. Such being the amplitude of the provision, the fact that interest was paid for a brief period of about six days in the present case would not make it any less an amount of interest payable in respect of the bonds in question - the conclusion by the AO might have been justified but this case, the time lag is extremely small less than a week - in favour of assessee. Disallowance of donations claimed as business expenses u/s 37 (1) - assessee had claimed expenditure on account of donations under section 80G of the Act in its returns - Held that - Parliament having chosen one method of dealing with donations i.e. as in the case of section 80G, the adoption of another route as business expenditure would not be permissible - against assessee. Disallowance of set of loss of one project eligible for deduction u/s 80 HHB against the profits of other projects - Held that - the deduction is allowable to the assessee in regard to each project. - the deduction u/s 80HHB is to be computed in regard to each project separately - loss from another unit cannot be reduced from the profit of eligible unit - following the decision in Commissioner of Income-Tax, (Central) Madras Versus Canara Workshops Pvt. Limited 1986 (7) TMI 5 - SUPREME COURT decided in favour of assessee.

Issues Involved:
1. Deduction for wage revision provisions.
2. Interest earned on tax-free bonds between application and allotment.
3. Donations claimed as business expenses under Section 37(1).
4. Setting off losses of one project against profits of other projects under Section 80HHB.

Detailed Analysis:

1. Deduction for Wage Revision Provisions
The primary issue was whether the Tribunal was justified in allowing the deduction for wage revision provisions claimed by the assessee. The assessee, a public sector unit, had made provisions for wage revision based on past experience, interim pay commissions, union demands, and other relevant factors. The Assessing Officer (AO) disallowed the claim, stating that the liability was unascertainable. However, the Tribunal allowed the claim, relying on the Supreme Court's decision in CIT vs. Bharat Earth Movers, which held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed even if the liability is to be discharged at a future date. The Court upheld the Tribunal's reasoning, stating that the liability was certain and not contingent, and therefore, the deduction was permissible.

2. Interest Earned on Tax-Free Bonds Between Application and Allotment
The second issue was whether the interest earned on tax-free bonds between the date of application and the date of allotment could be given the benefit claimed under Section 10(15)(iv)(h). The AO and the Appellate Commissioner had disallowed the claim, stating that the interest for the period before allotment was different in character. However, the Tribunal allowed the claim, reasoning that the expression "interest payable in respect of such bonds" has a wider connotation and includes interest paid for the period before allotment. The Court agreed with the Tribunal, noting that the time lag was extremely small and the statute intended to generally exempt such income.

3. Donations Claimed as Business Expenses Under Section 37(1)
The third issue was whether the donations made by the assessee and claimed as business expenses under Section 37(1) were justified. The assessee had claimed these donations as business expenses, arguing that they were made for promoting education in remote areas where the assessee operated. The AO and the CIT disallowed the claim due to lack of documentary evidence. The Tribunal allowed the claim, but the Court disagreed, stating that the assessee failed to provide necessary evidence to show that the donations were laid out exclusively for business purposes. The Court held that such donations could not be deemed necessary or expedient to promote the assessee's business and therefore, the amounts claimed as business expenditure were to be added back and brought to tax.

4. Setting Off Losses of One Project Against Profits of Other Projects Under Section 80HHB
The fourth issue was whether the Tribunal erred in holding that losses of one project eligible for deduction under Section 80HHB could not be set off against the profits of other projects under the same provision. The AO had set off the losses of one unit against the profits of another, but the Tribunal held that the deduction under Section 80HHB should be computed separately for each project. The Court upheld the Tribunal's decision, stating that the object of Section 80HHB was to extend incentives to export of project business and that each project should be considered on its own for the purpose of deduction.

Conclusion:
- Question 1: Deduction for wage revision provisions was justified and allowed.
- Question 2: Interest earned on tax-free bonds between application and allotment was eligible for the claimed benefit.
- Question 3: Donations claimed as business expenses under Section 37(1) were not justified and were to be added back.
- Question 4: Losses of one project could not be set off against profits of other projects under Section 80HHB.

The appeals were disposed of accordingly, with Questions 1, 2, and 4 answered in favor of the assessee, and Question 3 in favor of the revenue.

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