2022 (10) TMI 1238 - AT - Income Tax

Revision u/s 263 - Voluntary Retirement Scheme expenditure - With regard to early separation scheme Ld. DIT by relying heavily on the letter issued by CBIT to all the Chief CIT s to consider the facts of the cases and disallow the schemes involving voluntary retirement where the expenditures are incurred which increases the nature of treatment benefits of enduring nature which can be classified as capital in nature - HELD THAT - We observe that the Hon ble Jurisdictional High Court decided and held the similar issue in favour of the assessee in the case of CIT v. Bhor Industries Ltd 2003 (2) TMI 20 - BOMBAY HIGH COURT wherein the Voluntary Retirement Scheme expenditure allowed as revenue expenditure based on the criteria commercial expediency. These expenditure does not have enduring nature. Further we observe that Ld. DIT has observed in his order that Hon ble High Court decision was not accepted by the revenue and an SLP has been filed before Hon ble Supreme Court. Since the matter has not reached finality therefore this expenditure on VRS is not allowable expenditure. We are not inclined to accept the arguments proposed by the Ld. DIT and at that point of time or even now there was no decision contrary to the decision of Bhor Industries Ltd. (supra) is submitted before us or any contrary decision brought to our notice by the revenue. Therefore we are inclined to accept the submissions made by the assessee that this expenditure on early separation scheme is favorable to the assessee on merit. Therefore Ground No. 2 raised by the assessee is accordingly allowed. Addition u/s 40(a)(ia) - Payment made to visa and master card - We observe that Ld. DIT observed from the record that assessee has not made the payments to visa and Master card and failed to deduct TDS for the fourth quarter. Therefore it is disallowable u/s. 40(a)(i) of the Act. At this point of time we observe from the submissions made by the Ld. AR that no doubt assessee has deducted TDS and remitted to the exchequer but there is several amendments and judicial precedents as well as several amendments had been made in section 40(a)(i) and 40(a)(ia) of the Act as per which when payee declares the income in its return of income and offered to tax the payer is considered to be assessee not in-default. In the present case we observe that the payees i.e. visa and master card entered into MAP under DTAA between India and USA Treaty and accordingly they declared the income and paid the relevant taxes including the current assessment year. The assessee has submitted relevant information and brought to our notice filed before us which contains certificate issued in this regard which clearly shows that the payees have declared the income and paid the due taxes. Since the payee has complied with the relevant rules the assessee cannot be held as assessee-in-default. Even though this development happened in the subsequent year the revenue is properly compensated. Accordingly provision as held in section 40(a)(ia) are fully satisfied. However the above said amendments were not made u/s. 40(a)(i) of the Act. As held in the case of Celltick Mobile Media (India) (P.) Ltd 2021 (3) TMI 1121 - ITAT MUMBAI it is clear that the amendment provision u/s. 40(a)(i) retrospective in nature. Therefore the provisions of section 40(a)(ia) are equally applicable u/s.40(a)(i) of the Act with that above discussion we are inclined to accept the first proposition made by the assessee and accordingly Ground No.3 raised by the assessee is allowed and we do not wish to consider the proposition No. 2 raised by the assessee at this point of time. Deduction u/s. 36(1)(viia) claimed during current Assessment Year - in earlier years the assessee had incurred losses and no deduction u/s. 36(1)(viia) was claimed by the assessee in earlier years - We observe that Ld. AR of the assessee submitted that the provisions made to determine the deductibility requirement u/s.36(1)(vii) has to be on the opening balance of the provision not on the closing balance of the provision as suggested by the Ld. DIT. Calculation submitted before us clearly indicates that assessee has calculated the bad debts allowable based on the provisions made by them in the earlier Assessment Years to the extent they have made the claim for actual bad debts after adjusting the relevant deduction u/s. 36(1)(viia) of the Act.This issue already settled by now that u/s.36(1)(vii) of the Act assessee is allowed to claim the deduction only to the extent of the provisions already made in the books of accounts. Therefore provision already made clearly suggest that the provision has to be made in the earlier year i.e. opening balance of provision balance alone should be considered for determining the deduction u/s. 36(1)(vii) of the Act. Therefore this issue is also covered in favour of the assessee on merit and also the Assessing Officer has considered and dealt with this deduction in detail which we infer from the submissions made by the assessee. Determining the book profits u/s.115JA - DIT observed that assessee has failed to adjust provisions of section u/s. 36(1)(vii) and u/s. 36(1)(viia) of the Act in determining the book profits u/s. 115JA of the Act and according to him they are unascertained liability - We observe that the deduction claimed u/s. 36(1)(vii) and u/s. 36(1)(viia) are not unascertained liability rather the provisions are recommended by Reserve Bank of India which has to be considered as an ascertained liability rather the reduction of the value of the assets and which has an impact on the carryforward value assets in the Balance Sheet. On merit this issue also covered in favour of the assessee. At the time of hearing Ld. AR filed additional Ground as well as submitted before us that the provision of section 115JA are not applicable in the case of the banking companies by referring to various case laws including the Hon ble Jurisdictional High Court decisions. It is clear from the decision of the various High Courts that the provisions of section 115JA are not applicable to the banking companies prior to the amendment made in the Finance Act 2012. Considering with the above discussion we are inclined to accept the submissions of the assessee and the issue raised by the Ld. DIT relating to 115JA is also in favour of the assessee on merit. Thus all the issues raised by the Ld. DIT in revision proceedings are covered in favour of the assessee on merit and as per the section 263 of the Act in order to initiate the proceedings there has to be a finding that the order passed by the Assessing Officer is not only erroneous as well as prejudicial to the interest of the Revenue. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the revision proceedings under Section 263 of the Income-tax Act.
2. Nature of expenditure on Early Separation Scheme (ESS) - whether capital or revenue.
3. Disallowance under Section 40(a)(i) for payments made to Visa and MasterCard.
4. Deduction for bad debts under Section 36(1)(vii) and 36(1)(viia).
5. Adjustment to book profits under Section 115JA.

Issue-wise Detailed Analysis:

1. Validity of the Revision Proceedings under Section 263:
The assessee challenged the revision proceedings initiated by the Director of Income-tax (International Taxation) (DIT) under Section 263, arguing that the original assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The tribunal noted that for Section 263 to be invoked, both conditions must be met. Since the issues raised by the DIT were found to be in favor of the assessee on merits, the tribunal concluded that the order was not prejudicial to the Revenue and thus set aside the revision proceedings.

2. Nature of Expenditure on Early Separation Scheme (ESS):
The DIT considered the expenditure on ESS as capital in nature based on a CBDT circular, which suggested that such expenditure provides enduring benefits. The assessee argued that the expenditure was revenue in nature, citing the Bombay High Court's decision in CIT v. Bhor Industries Ltd., which held that VRS expenditure is deductible as revenue expenditure based on commercial expediency. The tribunal agreed with the assessee, noting that the High Court's decision was binding and no contrary decision was presented. Thus, the expenditure on ESS was allowed as revenue expenditure.

3. Disallowance under Section 40(a)(i) for Payments to Visa and MasterCard:
The DIT disallowed payments to Visa and MasterCard under Section 40(a)(i) due to non-deduction of TDS. The assessee argued that the payments were not chargeable to tax in India and that Visa and MasterCard had already paid taxes on the income received. The tribunal noted that the payees had declared the income and paid taxes, fulfilling the conditions of the second proviso to Section 40(a)(i). It also considered the retrospective application of the amendment to Section 40(a)(i), following the principle established in similar cases. Consequently, the tribunal allowed the deduction and set aside the disallowance.

4. Deduction for Bad Debts under Section 36(1)(vii) and 36(1)(viia):
The DIT argued that the deduction for bad debts should be limited to the credit balance in the provision account. The assessee contended that the opening balance of the provision account should be considered. The tribunal agreed with the assessee, referencing the Gujarat High Court's decision in CIT v. UTI Bank Ltd., which supported the consideration of the opening balance for determining the deduction. The tribunal concluded that the assessee's method was correct and allowed the deduction.

5. Adjustment to Book Profits under Section 115JA:
The DIT adjusted the book profits under Section 115JA by adding the provision for doubtful debts, considering it an unascertained liability. The assessee argued that the provision was for diminution in the value of assets, not a liability. The tribunal noted that the provisions for doubtful debts were ascertained liabilities and that the deduction was in line with RBI recommendations. Additionally, the tribunal accepted the assessee's argument that Section 115JA was not applicable to banking companies, referencing various judicial decisions. Thus, the tribunal ruled in favor of the assessee on this issue as well.

Conclusion:
The tribunal found that all issues raised by the DIT in the revision proceedings were in favor of the assessee on merits. Consequently, it concluded that the original assessment order was neither erroneous nor prejudicial to the interest of the Revenue and set aside the revision proceedings initiated under Section 263. The appeal filed by the assessee was allowed.