2012 (11) TMI 97 - AT - Income Tax

Disallowance of payments made to IIT Chennai - assessee is a company in the business of software development - assessee had made donations to IIT, Chennai - assessee submitted that the assessee indeed derived benefit on revenue account as is evident from the MOU entered by the assessee with IIT, Chennai Held that - Association of assessee with IIT, Chennai was for conducting research and creating technology that would bring benefits of Information and computing technologies to the populations of countries with developing economies and developing markets - expenditure incurred by the assessee is not of enduring nature but of revenue nature and the same has been incurred due to commercial expediency of the assessee s business - AO directed to allow the claim of the assessee being payment made to IIT, Chennai In favor of assessee Disallowance of provision for employee loyalty bonus - assessee had a scheme for its employees under which an employee is entitled to claim certain sums from the company upon completion of three years of service Held that - Liability to pay loyalty bonus to the employees, for whom provision has been made by the assessee in the accounts, is the liability in praesenti though it will be discharged at a future date. Thus it is not a contingent liability and is an ascertained liability. Once it is an ascertained liability and provision has been made in the accounts of the assessee who follows the mercantile system of accounting, the claim of the assessee has to be allowed - in favour of the assessee Addition - taxability of amount received - income had arisen to the assessee on account of the compensation of Rs.12,20,00,000/- received by assessee for recruiting certain employees by way of transfer from another company M/s.Verifone - CIT(A) obtained a remand report from the AO and upon consideration of the same concluded that the AO was justified in treating such receipt as income from other sources Held that - Issue results in huge addition of around 12 crores. We find from the record that for confirming such huge addition, the CIT(A) has not passed a speaking order though he concurred with the AO - appellate order that the CIT(A) has simply mentioned that the assessee has relied on case-laws, the facts of which are different from the instant case - appellate authority ought to have discussed about the caselaws relied upon and given his reasons as to how they are not applicable to the present facts and circumstances. This is most required for the reason that the next appellate authority has to see whether the first appellate authority has applied his mind properly or not matter remanded to the file of the CIT(A)

Summary

Issues Involved:
1. Disallowance of payments made to IIT Chennai.
2. Disallowance of provision for employee loyalty bonus.
3. Taxability of amount received by the assessee from M/s. Verifone India Pvt. Ltd.

Issue-wise Detailed Analysis:

I. Disallowance of Payments Made to IIT Chennai:

The assessee, engaged in software development, claimed a deduction of Rs. 20,27,678/- under section 37(1) of the Income-tax Act, 1961, for payments made to IIT Chennai. The AO disallowed the claim, stating that the expenditure did not derive any benefit for the assessee. The CIT(A) upheld the disallowance, noting that the amount was spent on constructing a building and purchasing computers for IIT Chennai, thus not qualifying as either a donation or a revenue expenditure.

The assessee argued that the expenditure was for commercial expediency, citing the MOU and FAA with IIT Chennai, which facilitated joint research beneficial to the assessee's business. The AR relied on various judicial precedents, including the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT, asserting that the expenditure did not result in an enduring benefit in the capital field and should be allowed as a deduction.

The Tribunal found that the expenditure was indeed for commercial expediency, allowing the assessee's claim. It concluded that the payment facilitated the assessee's business operations, aligning with the principle laid down in S.A. Builders vs. CIT(A) and Empire Jute Co. Ltd. vs. CIT, where expenditures that facilitate business operations or improve efficiency are considered revenue expenditures.

II. Disallowance of Provision for Employee Loyalty Bonus:

The assessee had a scheme where employees received a loyalty bonus upon completing three years of service. The AO disallowed the provision of Rs. 30,77,954/- for this scheme, treating it as a mere provision and not an ascertained liability. The CIT(A) upheld this disallowance.

The AR argued that the liability accrued upon employees completing three years of service, and the provision was made accordingly, following the mercantile system of accounting. The AR cited the Supreme Court's decision in Bharat Earth Movers v. CIT, which held that a business liability incurred in the present but discharged in the future is deductible in the year it crystallizes.

The Tribunal agreed with the assessee, stating that the liability to pay the loyalty bonus was an ascertained liability and not contingent. Therefore, the provision should be allowed as a deduction, following the mercantile system of accounting and the principles established in Bharat Earth Movers v. CIT.

III. Taxability of Amount Received from M/s. Verifone India Pvt. Ltd.:

The assessee received Rs. 12,20,00,000/- as compensation from M/s. Verifone India Pvt. Ltd. for recruiting certain employees. Initially, the assessee offered Rs. 10,42,17,030/- as income from other sources after deducting recruitment costs. However, in a revised return, the assessee did not offer this amount for tax, arguing it was not income but a windfall gain. The AO and CIT(A) treated the receipt as income from other sources.

The AR contended that the receipt was not income, relying on judicial precedents, including Parimisetti Seetharamamma vs. CIT, which held that not all receipts are taxable as income. The AR also argued that the revised return supersedes the original return, citing decisions of the Karnataka High Court.

The Tribunal observed that the CIT(A) did not provide a detailed reasoning for upholding the AO's decision. Therefore, the Tribunal remanded the issue back to the CIT(A) for a detailed examination and a speaking order, ensuring the assessee is given an opportunity to present its case.

In conclusion, the appeal was partly allowed for statistical purposes, with specific directions to the CIT(A) to re-examine the taxability of the amount received from M/s. Verifone India Pvt. Ltd.