2019 (3) TMI 1826 - AT - Income Tax

Disallowance of provision for leave encashment u/s 43B - HELD THAT - This issue was dealt with by us in the case of Karur Vysya Bank Ltd. 2019 (3) TMI 1002 - ITAT CHENNAI The clause (f) to s. 43B of the Act enacts that no expenditure shall be allowed on account of any leave salary unless, the expenditure is actually paid. Thus, provision is intended to overcome the decision in the case of Bharat Earth Movers v. CIT 2000 (8) TMI 4 - SUPREME COURT . The case laws relied upon by the ld. Counsel cannot come to the rescue of the assessee-bank. Thus as long as Section 43B(f) is on Statute, the said disallowance is justified. The arguments of the ld. Counsel that the payment made towards the LIC group leave encashment scheme should be allowed as a deduction on the payment basis cannot be accepted for two reasons 1) No evidence was filed before us showing that during the year under consideration the assessee company made any payment towards LIC group leave encashment scheme 2) The decision of Hon ble High Court of Kerala in the case of Hindustan Latex Ltd. 2012 (6) TMI 713 - KERALA HIGH COURT cannot come to the rescue of the assessee company, as in the said decision, the Hon'ble Kerala High Court had not laid down any law that the payment made towards the group leave encashment policy is allowable as a deduction. It merely held that the issue is a debatable and therefore, it cannot be subject matter of the revision u/s. 263 - Decided against assessee. Disallowance of amount paid to M/s. Indocoserve invoking the provisions of s. 40(a)(ia) - HELD THAT - This issue was elaborately dealt by us in the assessee s own appeal for the AY 2007-08 wherein for the reasons mentioned therein, the issue was remitted to the file of Assessing Officer for the purpose of carrying out the verification whether the benefit of second proviso to s. 40(a)(ia) of the Act can be granted to the assessee. Similarly, in the present AY also, we remit the issue to the file of Assessing Officer on similar directions. Disallowance u/s 14A under clause (iii) of Rule 8 D - HELD THAT - On perusal of the ld. CIT(A), it is clear that what is disallowed u/s. 14A of the Act is under clause (iii) of Rule 8D of the Rules. The decision of the ld. CIT(A) is in line with the settled preposition of the law that the provision of rule 8D of the Rules are mandatory is in nature. The assessee does not challenges the correctness of the calculation under clause (iii) of Rule 8D of the Rules. Therefore, ground of appeal No.4 filed by the assessee is dismissed. Disallowance on the payments made to CMWSSB for non deduction of tax at source - As submitted that CMWSSB was formed by the MRL as registered co-operative society under Tamil Nadu Co-operative Society Act, 1951 and is formed by MRL for the benefit of contract workmen with the object of providing sustainable livelihood and at the same time avoid the exploitation by the contractor. The workmen were enrolled by these members - CIT(A) also confirmed the addition on the ground that the certificate of Nil TDS issued by the Income tax Department was not produced before him - HELD THAT - We remit the issue to the file of AO for the purpose of verification whether the recipient had offered this sum as income in the hands of payee and made necessary arrangements for payment of tax in order to extend the benefit of second proviso to s. 40(a)(ia) of the Act. Deduction u/s 80IB - profits derived from Refinery-III - AO had disallowed the claim on the ground that it is only an expansion of the existing business and it does not amount to setting up of a new undertaking relying on on the approval granted by Ministry of Petroleum and Natural Gas, Government of India - HELD THAT - AO himself allowed the deduction in the subsequent year. But, from the perusal of the assessment order, there is nothing to show that the Assessing Officer examined the aspect of whether the assessee set up a new undertaking or not. The fact that the Assessing Officer allowed the deduction in the subsequent year cannot be bar to examine the eligibility/conditions in the every year of claim as held in the case of DCIT v. Ace Multi Axes Systems Ltd. 2017 (12) TMI 372 - SUPREME COURT - The decision of the ld. CIT(A) is based on the reasoning that expansion of the existing unit also amounts to new undertaking as observed by us supra this meaning cannot be adopted in the context of provisions of s. 80IB(9) - In the interest of justice, we are of the considered opinion that the matter should be remitted to the file of AO for fresh adjudication . Provision for service awards and gift cheques - accrual of the liability on account of grant of service awards and gift cheques to the employees - AO has allowed only to the extent of actual expenses incurred during the year under consideration - HELD THAT - The difficulty in estimation of value cannot convert the accrued liability into a contingent one. In this regard reference can be on the decision of Hon ble Supreme court in the case of Calcutta Co. Ltd. 1959 (5) TMI 3 - SUPREME COURT . Further, in the mercantile system of accounting a liability already accrued though to be discharged at a future date would be allowed as a deduction while computing the profits and gains of business. In this regard reference can be on the decision of Hon ble Supreme court in the case of Metal Box Co. of India Ltd. 1968 (8) TMI 53 - SUPREME COURT . In the present case, it is not the case of the Assessing Officer that the liability had not accrued therefore, having regard to the principles enunciated in the judicial precedents cited above, we do not see any difficulty to allow the same as a deduction. Advance salary paid to his employees on account of proposed pay revision - CIT-A allowed claim - HELD THAT -the liability for the increased salaries of its employees had not crystallized during the year under consideration as the necessary approvals from the Government are still awaited. The fact that the payment is treated as salary within the meaning of s. 17 of the Act in the hands of the employees does not amount to accrual of liability in the hands of the employee. It shall not be treated as accrued liability in the hands of the employer. The liability to the enhanced salaries and wages would arise when it was finally approved by the Government. The fact that a payment constitutes income in the hands of recipient is not material in determining wither the payment is allowable as a deduction. Reliance in this regard can be placed on the decision of Empire Jute co. Ltd. 1980 (5) TMI 1 - SUPREME COURT . Thus, the reasoning of the ld. CIT(A) does not stand the test of the law and hence, we reverse the findings of the ld. CIT(A) on this issue. Hence, this ground of appeal filed by the Revenue is allowed. TDS u/s 195 - disallowance of payment made to HEPI for the purchase of crude oil for non-deduction of tax at source - payee is a non-resident and payments are made towards purchase of crude oil - HELD THAT - The contention of the assessee-company that the sum paid is not chargeable to tax in India, therefore, there was no need to deduct tax in the light of the decision of GE Technology Center 2010 (9) TMI 7 - SUPREME COURT cannot be accepted as there is embedded element of income even in the case of transaction of purchase. The Hon ble Supermen Court in the case of Transmission Corporation of Assessing Officer Ltd. 1999 (8) TMI 2 - SUPREME COURT clearly laid down that any sum paid to a non-resident may be income or income hidden or otherwise embedded therein. Therefore, the tax is required to be deducted on the said sum. What would be the income is to be computed on the basis various provisions of the Act including the provisions for computation of income if the payment is a trade receipt. However, we find merit in the submission of the assessee that in the light of second proviso to s. 40(a)(ia) of the Act, the matter requires remission to the AO to examine applicability of second proviso to s. 40(a)(ia) of the Act, which is inserted by the Finance Act, 2012 w.e.f. 01.04.2013 held to be retrospective by the Hon ble High Court of Delhi. Accordingly, we remit this issue to the file of Assessing Officer to examine the allowability of the claim under the second proviso to s. 40(a)(ia) of the Act. Hence, this ground of appeal filed by the assessee is partly allowed for statistical purposes. Entitlement to interest on the interest u/s. 244A - HELD THAT - Hon ble Supreme Court in the case of Gujarat Fluoro Chemicals 2015 (9) TMI 862 - SUPREME COURT categorically held that the provisions of s. 244A of the Act provides for interest on refunds under various contingencies and it is only that interest provided for under the statute which may be claimed by the assessee from the Revenue. No other interest on such statutory interest. Following this decision the Hon ble Delhi High Court in the case of CIT v. Indian Farmer Fertilizer Co-operative Ltd. 2015 (3) TMI 280 - DELHI HIGH COURT held that the assessee is not entitled to interest on interest payable u/s. 244A of the Act. However, we must state here that a different law prevails in case of inordinate delay in grant of refunds. It is not the case of the assessee that there is inordinate delay in the grant of refunds. Hence, we do not find any merit in the appeal filed by the assessee is dismissed.

Summary

Issues Involved:
1. Effect of change in Accounting Policy.
2. Disallowance under Section 35DDA.
3. Provision for Leave Encashment.
4. Payment to Indocoserve.
5. Bad Debts.
6. Social & Community Welfare Expenses.
7. Disallowance under Section 14A.
8. Reassessment issues including payments to CMWSB, sponsorship of tennis tournament, and deduction under Section 80-IB.
9. Interest on refunds under Section 244A.

Issue-wise Detailed Analysis:

1. Effect of Change in Accounting Policy:
The Assessee appealed against the disallowance of ? 23,65,202/- due to a change in accounting policy. The CIT(A) granted relief based on a precedent in the Assessee’s own case for AY 2006-07, allowing the change in method of accounting on pre-paid expenses.

2. Disallowance under Section 35DDA:
The AO disallowed ? 1,00,291/- under Section 35DDA. This disallowance was not contested further in the judgment.

3. Provision for Leave Encashment:
The AO disallowed ? 11,85,84,791/- under Section 43B(f), which was confirmed by the CIT(A) due to the Supreme Court's stay on the Calcutta High Court’s decision in Exide Industries Ltd. The Tribunal upheld this disallowance, noting the provision remains in force due to the Supreme Court's stay.

4. Payment to Indocoserve:
The AO disallowed ? 3,52,51,825/- under Section 40(a)(ia) for non-deduction of TDS on payments to Indocoserve. The CIT(A) confirmed this disallowance. The Tribunal remitted the issue back to the AO to verify if the recipient had included the amount in their income and paid tax, potentially allowing the deduction under the second proviso to Section 40(a)(ia).

5. Bad Debts:
The CIT(A) confirmed the disallowance of ? 7,00,416/- for bad debts but allowed it as a trading loss under Section 37(1). This was not contested further.

6. Social & Community Welfare Expenses:
The AO disallowed ? 48,38,240/-, which the CIT(A) deleted based on a precedent in the Assessee’s own case. The Tribunal remitted the issue back to the AO to verify the commercial expediency of the expenditure.

7. Disallowance under Section 14A:
The AO disallowed ? 34,10,749/- under Section 14A. The CIT(A) reduced this to ? 5,91,750/-. The Tribunal further restricted the disallowance to 2% of the dividend income received, following jurisdictional precedents.

8. Reassessment Issues:
- Payments to CMWSB: ? 27,49,000/- was disallowed under Section 40(a)(ia) for non-deduction of TDS. The Tribunal remitted the issue back to the AO to verify if the Assessee was declared in default under the first proviso to Section 201.
- Sponsorship of Tennis Tournament: ? 50 lakhs disallowed as non-business expenditure. The Tribunal upheld the AO’s disallowance, noting no mandatory direction from the government and lack of demonstrated business benefit.
- Deduction under Section 80-IB: The Tribunal remitted the issue back to the AO to verify if the Assessee had set up a new undertaking or merely expanded the existing one, as the AO had allowed the deduction in subsequent years without proper examination.

9. Interest on Refunds under Section 244A:
The Assessee claimed interest on interest for delayed refunds. The Tribunal, following the Supreme Court’s decision in Gujarat Fluoro Chemicals, held that only statutory interest under Section 244A is claimable, dismissing the Assessee’s appeal.

Conclusion:
The Tribunal provided a detailed analysis and remitted several issues back to the AO for verification, particularly concerning the applicability of the second proviso to Section 40(a)(ia) and the commercial expediency of certain expenditures. The Tribunal upheld the disallowance of leave encashment and sponsorship expenses, while allowing limited relief under Section 14A and remitting the reassessment issues for further verification. The claim for interest on interest was dismissed based on Supreme Court precedent.