2017 (11) TMI 1745 - HC - Income Tax

Contingent liability - provision and a contingent liability - quantum claim by the EPC contractors being highly excessive, and unreasonable - Held that - Assessee has pointed out the agreement of MOU which has been entered between the company assessee and the original company. He has specifically taken us to the agreement which was part of paper book dated 1st March, 2002 and referred Clause-2 and incorporation was done on 1st April, 2002 which is part of record and the MOU which was entered between GVK Express Pvt. Ltd. and between the NOVOPAN Industreis Ltd. and invited our attention to Clause-1. He has also referred the concession agreement which was entered between the NHAI and the assessee and he has taken us to the different clauses which we have gone through but we are not reproducing the same for the sake of brevity. Taking into consideration the volume of work which was required to be done by the assessee and the dispute regarding excess claim by the other contractor, the matter was referred to the arbitrator and the claim was made for enhancement which was accepted by the CIT(A). Where contingent liability was made in view of the revised return filed by the assessee, the Tribunal has seriously committed an error in rejecting the claim of the present assessee. Thus, the issue no. 1 is answered in favour of assessee against the department. Liability to charge of interest u/s 234B and 234C - Held that - Tribunal has not committed an error.In that view of the matter, the issue is answered in favour of the department against the assessee. Rejection of claim under Section 80G - Held that - The payment was made on 31st March, 2006 and if the payment was taken to be made on 31st March, 2006 the person was having clear intention of paying through cheque nonetheless in the books of accounts entry was not made by the appellant, same was not reflected in Bank Account. In that view of the matter, merely because the provision/liability was shown, rejection of claim under Section 80G, in our considered opinion, is contrary to decision referred by counsel for the assessee. In that view of the matter, the issue no. 3 is required to be answered in favour of the assessee Deduction of the benefit of 40a(ia) - Held that - Disallowance pertains during the year under appeal and while considering the submissions made by Mr. Ranka senior counsel and Mr. Jain, it will not be out of place to mention that where the deduction or the benefit of 40a(ia), 35% of the same was payable to the respondent and the TDS was deducted on the claim made by the assessee and the same issue is required to be answered in favour of the assessee against the department. Leave encashment as a contingent liability is not liability. Even this Court while deciding the matter has taken leave encashment as liability. In that view of the matter, the issue is answered in favour of the assessee against the department. Disallowing expenditure on police stations - Held that - the expenses which was done for protection of the employees and the other threat from the truck owners and having other instructions which has been construed liable expenses. In that view of the matter, disallowance of expenses of ₹ 5,45,264/- for the police stations is required to be answered in favour of the assessee against the department. Hence, the 6th issue is answered in favour of the assessee. Assessment order being annulled the issue is answered in favour of the assessee against the department. The assessment is not required to be cancelled on the behest of department as held in our earlier decision which has been referred hereinabove. Amount paid by the assessee for taking over the company - Held that - Expenses which was done by the earlier company which has given it as a capital for this assessment year, the department could not have assessed such amount which has taken the whole amount against the capital gain but this company is entitled for the capital expenses as contended by counsel for the department. This could not have been allowed under the law if the assessee claim as revenue expenses but nonetheless since he has paid amount for taking over the management of the company, this would be a capital gain for the other company. The Tribunal has not committed any error in allowing the expenses. Hence, the issue is answered in favour of assessee Claim of capitalization of expenditure towards tree cutting, tampling removal of debris and everything, while considering the matter, the Tribunal has considered the expenses prior to commencement of this company has taken the management and construction activity from the previous company on the basis of MOU, all expenses done was given a capital which was shown as an expenses by the previous company. Regarding removal of debris and everything that work which was required to be done on the war footing and the time consumed therefore, the expenses which was done by the contractor employees which can be done on Jaipur road but no doubt it has to be done on war footing therefore, expenses are bound to be more than normal which has been done. In that view of the matter, the Tribunal has not committed an error in allowing their expenses regarding removal of trees tampling or removal or debris and other expenses. Hence, the issue is also answered in favour of the assessee against the department. Depreciation @ 60% on EDP Equipments treating the same as the computer equipments allowed as in our considered opinion the optical fibers which are used exclusively for the computer configuration and it is mandatory for the operation. It is part of computer system. Claim of depreciation on public roads treating the same as building to be allowed.

Summary

Issues Involved:
1. Provision and contingent liability for EPC contractors.
2. Liability to charge interest under Sections 234B and 234C.
3. Deduction under Section 80G for a donation.
4. Disallowance under Section 40(a)(ia).
5. Leave encashment as a contingent liability.
6. Expenditure on police stations.
7. Refund of recovery from the bank account.
8. Exemplary costs under Section 254(2)(b).
9. Annulment of the assessment order.
10. Capitalization of pre-incorporation expenditure.
11. Capitalization of expenditure towards tree cutting and debris removal.
12. Depreciation on EDP equipment.
13. Depreciation on public roads.

Issue-wise Detailed Analysis:

1. Provision and Contingent Liability for EPC Contractors:
The Tribunal erred in holding the amount of ?57,07,62,552 as a 'provision and a contingent liability'. The liability arose by 31.3.2005 and should have been considered for capitalization on 1.4.2005. The Tribunal failed to appreciate that the amount was an ascertained liability and was mentioned in the statutory audit report dated 26th June 2006. The Delhi High Court's decision in Jagdish Prasad Gupta vs. Commissioner of Income Tax supports the view that an accrued liability should be considered even if the exact quantification is pending.

2. Liability to Charge Interest Under Sections 234B and 234C:
The Tribunal was correct in holding that there is a liability to charge interest under Sections 234B and 234C of the Act. The assessee had suffered a loss, and the interest was chargeable as per the provisions of the Act.

3. Deduction Under Section 80G for Donation:
The Tribunal erred in disallowing the deduction under Section 80G for a donation of ?14 lacs. The cheque was given on 31.3.2006 and the receipt was issued on the same date, even though the cheque was cleared after 1.4.2006. The Supreme Court in K. Saraswathy Alias K. Kalpana vs. P.S.S. Somasundaram Chettiar held that the payment by cheque relates back to the date of delivery of the cheque.

4. Disallowance Under Section 40(a)(ia):
The Tribunal's interpretation of Section 40(a)(ia) was incorrect. The amount of ?13,50,000/- was disallowed due to delayed payment of TDS. However, as per the decision in Commissioner of Income Tax vs. Ansal Land Mark Township P. Ltd., the second proviso to Section 40(a)(ia) is declaratory and curative and has retrospective effect from 1st April 2005. Therefore, the disallowance should not apply.

5. Leave Encashment as a Contingent Liability:
The Tribunal erred in holding the sum of ?6,33,803/- on account of leave encashment as a contingent liability. The Supreme Court in Bharat Earth Movers vs. Commissioner of Income Tax held that provision for leave encashment is not a contingent liability but an accrued liability.

6. Expenditure on Police Stations:
The Tribunal erred in not allowing the expenditure of ?5,45,264/- on police stations. The expenditure was incurred for the protection of employees and was necessary for business operations. The Tribunal should have allowed this as a business expense under Section 37(1).

7. Refund of Recovery from Bank Account:
The Tribunal erred in not adjudicating the grievance for a refund of ?1,72,60,505.03 recovered by the bank. The recovery/payment of tax is always subject to the finality of the orders from the appellate authorities.

8. Exemplary Costs Under Section 254(2)(b):
The Tribunal should have awarded exemplary costs under Section 254(2)(b) due to the arbitrary actions of the assessing officer, which caused undue hardship to the assessee. A cost of ?11,000/- was imposed to check arbitrary actions by officers.

9. Annulment of the Assessment Order:
The assessment order was not annulled. The Tribunal's decision to uphold the assessment was correct, but the assessment should be revisited considering the errors identified in other issues.

10. Capitalization of Pre-Incorporation Expenditure:
The Tribunal correctly allowed the capitalization of expenditure incurred before the incorporation of the business. The expenses were necessary for the commencement of business operations and were rightly capitalized.

11. Capitalization of Expenditure Towards Tree Cutting and Debris Removal:
The Tribunal correctly allowed the capitalization of expenditure towards tree cutting, tampling, and removal of debris. These expenses were necessary for the project and were justified.

12. Depreciation on EDP Equipment:
The Tribunal correctly allowed depreciation at 60% on EDP equipment, treating them as computer equipment. The equipment was integral to the computer system and should be classified under the head Plant and Machinery.

13. Depreciation on Public Roads:
The Tribunal correctly allowed depreciation on public roads, treating them as buildings. The roads were part of the infrastructure necessary for the business and should be depreciated accordingly.

Conclusion:
The Tribunal's judgment had several errors in interpreting the provisions of the Income Tax Act. The High Court corrected these errors, providing relief to the assessee on most issues, except for the liability to charge interest under Sections 234B and 234C. The High Court also imposed a cost of ?11,000/- on the department for arbitrary actions by the assessing officer.