2015 (9) TMI 222 - AT - Income Tax

Disallowance of provision for gratuity and other benefits since they are contingent in nature while computing book profit u/s 115JB - Held that - The Tribunal for assessment year 2002-03 order 2010 (10) TMI 1022 - ITAT DELHI has considered an identical issue and had decided the matter in favour of the assessee wherein AO is directed to compute the book profit without making any addition for aforesaid provisions. - Decided in favour of assessee. Depreciation on land amortized while calculating book profits under section 115JB - Held that - Amortization of lease hold land has been made as per accounting standard 10 of ICAI and amortization of land unclassified as per Accounting Standard 6 of ICAI and in view of CAG, which has been done to meet the requirement of companies Act and amortization of land is permitted u/s 115JB. The identical issue was also involved in the case of appellant for A.Y.2008-09 and as per the detailed discussion, this issue has been decided in favour of the appellant. Since the issue is already covered by the decision for earlier year, the addition made by the AO for the purpose of computing book profit u/s 115JB of the Act is directed to be deleted - Decided in favour of assessee. Disallowance under section 14A - CIT(A) deleted the disallowance - Held that - We find that the assessee has earned exempt income to the tune of ₹ 51,75,50,800/- and has suo motu disallowed ₹ 13.78 crores under section 14A of the Act. We find that the AO has invoked Rule 8D without spelling out the reason for not being satisfied with the computation made by the assessee in respect to expenditure incurred for earning the exempt income. Without recording the objective satisfaction as required under sub-section (2) to section 14A that he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in respect to exempt income, the AO cannot invoke Rule 8D to compute the disallowance under the said Rule. See CIT vs. Taikisha Engineering India Limited 2014 (12) TMI 482 - DELHI HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Claim of provision for gratuity and other benefits as contingent liabilities under section 115JB.
2. Depreciation on land amortized while calculating book profits under section 115JB.
3. Disallowance under section 14A of the Income-tax Act.

Detailed Analysis:

1. Claim of Provision for Gratuity and Other Benefits:
The primary issue was whether provisions for gratuity, leave encashment, EPF matching contribution on leave encashment, retired employee health scheme, leave travel concession, and baggage allowance on superannuation are contingent liabilities and thus not allowable while computing book profit under section 115JB. The Assessing Officer (AO) added Rs. 82,57,10,238 to the book profit, considering these provisions as contingent liabilities. The Commissioner of Income-tax (Appeals) [CIT(A)] deleted this addition, referencing past decisions in favor of the assessee and judicial rulings that considered such provisions as ascertained liabilities when based on actuarial valuation. The Tribunal upheld the CIT(A)'s decision, confirming that the issue had been consistently decided in favor of the assessee in previous years.

2. Depreciation on Land Amortized:
The AO disallowed Rs. 1,80,79,857 claimed as depreciation on unclassified and leasehold land, arguing that depreciation on land is not prescribed under the Companies Act or the Income-tax Act. The CIT(A) allowed the claim, stating that amortization was done per accounting standards and previous appellate decisions. The Tribunal confirmed the CIT(A)'s order, noting that the issue was covered by the Tribunal's decisions in earlier assessment years in favor of the assessee.

3. Disallowance under Section 14A:
The AO applied Rule 8D to compute the disallowance at Rs. 29.75 crores but made an addition of Rs. 5.08 crores under section 14A, arguing that the assessee's disallowance of Rs. 13.78 crores was unsatisfactory. The CIT(A) deleted the addition, noting that the AO did not provide reasons for finding the assessee's disallowance unsatisfactory and that the investment in NHDC was made from interest-free funds provided by the government. The Tribunal upheld the CIT(A)'s decision, emphasizing the necessity for the AO to record an objective satisfaction before invoking Rule 8D, which was not done in this case. The Tribunal also referenced the jurisdictional High Court's ruling in Taikisha Engineering India Ltd., confirming that without such satisfaction, the AO cannot apply Rule 8D.

Conclusion:
The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s decisions on all grounds, thereby favoring the assessee on the issues of provisions for gratuity and other benefits, depreciation on land, and disallowance under section 14A.