2013 (9) TMI 38 - AT - Income Tax

Method of accounting - Routing of provisions through P & L A/c - Transfer of excess provision made earlier years directly to Statutory reserve - CIT deleted addition made by AO holding that as per Act, there is no restriction that the provisions should always be routed through P & L A/c - Held that - The intention of the assessee is that the amounts which have now been transferred from provisions to reserve funds were added back in earlier year. However, the amount credited to reserve from the provisions has not been identified in respect of the provisions credited for a particular assessment year. The carried forward provision has been debited and reserve fund has been credited. In case the amounts which have now been transferred from provision to reserve has been added back in the year in which such provision was credited then the same cannot be taxed now in the assessment year when the same is being transferred from provision to reserve. There must be some correspondence to show as to why provisions is being transferred to reserve as it is not required for meeting the liability. We are not aware as to how the assessees is crediting amount under reserve and provisions by the assessee. Since the accounts are being audited and are being prepared as per Reserve Bank of India guidelines therefore, we feel that the reserve and surplus are made by the assessee as understood in commercial parlance - Following decision of CIT Vs. State Bank of Patiala 1996 (3) TMI 128 - SUPREME Court - Sufficient details not available - matter remanded back to AO to re adjudicate the issue. PACS (Primary Agricultural Cooperative Society) Manager salary - contingent liability or statutory liability - diversion of income by overriding title - Held that - The Hon ble Apex Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT, 1996 (10) TMI 2 - SUPREME Court has stated that it is to be seen as to whether the payment is compulsory for the assessee to make or not but whether it was expended out of consideration of commercial expediency. Any contribution made by the assessee to a fund which directly connected or related to carrying on assessee s business or which results in benefit to the assessee s business has to be regarded as deduction allowable u/s 37 of the Act. The decision of Hon ble Apex Court in the case of Associated Power Co. Ltd. Vs. CIT, (1995 (11) TMI 5 - SUPREME Court) is not applicable. Application of the doctrine of diversion of income by reason of overriding title is not applicable in that case as the reserve is out of the revenues of the undertaking and reach the electricity company and is not diverted away from it. However, in the instant case, the amount is to be contributed to a fund and the fund is not being managed by the assessee. The assessee may be trustee of that fund but it cannot apply the fund as per his own will. The interest, if any, earned on this fund is also to be credited to that fund. It is therefore, clear that funds stand diverted at the source and therefore, this cannot be considered as an appropriation of income but it is an expenditure. - Decided against the revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,18,99,651/- related to excess provisions not routed through P & L A/c.
2. Deletion of addition of Rs. 1,00,21,000/- related to PACS Manager salary considered as statutory liability.

Detailed Analysis:

1. Deletion of Addition of Rs. 1,18,99,651/- Related to Excess Provisions Not Routed Through P & L A/c

Background:
The Revenue challenged the deletion of an addition amounting to Rs. 1,18,99,651/- by the CIT(A), arguing that the provisions should have been routed through the Profit & Loss Account (P & L A/c) in line with the consistency principle under Section 145(1) of the Income Tax Act.

Assessee's Argument:
The assessee, following a mercantile system of accounting, argued that these provisions were made in earlier years when the income was exempt under Section 80P(2). Hence, reversing these provisions in the current year should not be considered as income. The assessee maintained that there is no legal requirement to route excess provisions through the P & L A/c.

CIT(A)'s Decision:
The CIT(A) agreed with the assessee, noting that there is no restriction mandating that provisions must be routed through the P & L A/c. The CIT(A) observed that even if excess provisions were credited to the P & L A/c, it would not affect the computation of income for the current year as income from earlier years must be excluded.

Tribunal's Analysis:
The Tribunal noted that the assessee's method of accounting had been consistent in earlier years. However, it emphasized that book entries are not conclusive for taxability, which must be determined based on the provisions of the Income Tax Act. The Tribunal restored the issue to the Assessing Officer (AO) to ascertain the nature of the provisions and whether such provisions were added back in the year they were initially credited. If the provisions were claimed as expenses in the earlier year, the amount written back would be considered income.

Conclusion:
The issue was remanded to the AO for further verification of the nature of the provisions and their treatment in earlier years.

2. Deletion of Addition of Rs. 1,00,21,000/- Related to PACS Manager Salary Considered as Statutory Liability

Background:
The Revenue contested the deletion of an addition of Rs. 1,00,21,000/- by the CIT(A), arguing that the PACS Manager salary was a contingent liability and not a statutory one.

Assessee's Argument:
The assessee contended that the contribution for PACS Manager salary was a statutory liability under the Primary Agricultural Cooperative Society Managers, selection, appointment, and service condition rules, 2003. The contribution, calculated as 0.15% of the average outstanding loans, was compulsory and managed by the Apex Bank on behalf of the Registrar of Cooperative Societies.

CIT(A)'s Decision:
The CIT(A) accepted the assessee's argument, stating that the liability crystallized at the end of each year and was not contingent. The contribution was deemed a statutory liability payable as demanded by the Registrar of Cooperative Society.

Tribunal's Analysis:
The Tribunal referred to the Supreme Court's decision in Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. CIT, which emphasized that payments made for commercial expediency should be allowable under Section 37 of the Act. The Tribunal noted that the fund was not managed by the assessee and any interest earned on the fund would also be credited to it. Therefore, the contribution was considered an expenditure and not an appropriation of income.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the contribution for PACS Manager salary was a statutory liability and allowable as an expenditure.

Final Decision:
The appeal of the Revenue was partly allowed, with the first issue remanded to the AO for further verification and the second issue decided in favor of the assessee. The order was pronounced in the open Court on 22-07-2011.