2016 (3) TMI 449 - AT - Income Tax

Disallowance u/s 43B on account of Provision for Leave Encashment written back - CIT(A) deleted the disallowance - Held that - When the Assessee files return of income for any Assessment year, he has to add back the provision for leave encashment and declare income from business for the purpose of determining total income, because it is not actual liability but contingent. If the Assessee in an Assessment year adds back provision for leave encashment of say ₹ 100 when filing return of income, his total income to that extent stands increased. When later, when actual liability is incurred by the Assessee on account of leave encashment and it is realized that the Provision that ought to have been made was only ₹ 85, than the excess provision which was made earlier and had gone to increase the profit of the Assessee, had to be neutralized and ₹ 15 should be removed from the income in the Assessment Year in which the Assessee based on actual liability discovers that excess provision made in the earlier years. The Assessee has not claimed any deduction while determining its profit from business on account of Provision for leave encashment but has claimed such deduction only on the basis of actual incurring of liability which is paid in accordance with Sec.43B(f) of the Act. That has got nothing to do with the write back off excess provision for leave encashment. The CIT(A) has clearly brought out these aspects in his order. We are of the view that the factual conclusions and the legal inference based on those conclusions drawn by the CIT(A) are just and proper - Decided against revenue Disallowance on account of loss in Foreign Exchange Fluctuation, a contingent liability - CIT(A) deleted the disallowance - Held that - We are of the view that in the light of the judicial pronouncement in the case of Woodward Governor India Pvt.Ltd. (2009 (4) TMI 4 - SUPREME COURT ) for the proposition that loss or gain on account of foreign exchange fluctuation as on the last date of the accounting year has to be allowed as a deduction u/s.37(1) of the Act on accrual basis, if such loss in account of loans availed on revenue account and the decision of the Tribunal in Assessee s own case on identical issue and keeping in mind the fact that the liability in question is on revenue account, the order of the CIT(A) does not call for any interference - Decided against revenue Disallowance of obsolete stock written off - Held that - AO has not disputed the fact that the Assessee conducted physical inspection of its stock upon which obsolete, non-moving and damaged stocks were identified having no realizable value. The fact that the expenditure in question was written off against revaluation reserve and not charged to profit and loss account cannot be the basis to disallow a legitimate revenue expenditure and that entries in the books of accounts are not always conclusive in the matter of deciding whether a claim for deduction has to be allowed or not. The created a value for its brand Eveready and disclosed in the Asset side of the Balance Sheet and reduced therefrom the value of obsolete stock instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of legitimate revenue expenditure. Write off in the profit and loss account of the previous year is not a condition for allowing deduction under Chapter IV D of the Income Tax Act, 1961 (Act). Any expenditure which is otherwise to be allowed in computing income from business under Sec.28 to 43 has to be allowed as a deduction. Entries in the books of accounts is not decisive or determinative of the question whether the Assessee is entitled to a deduction or not while computing income from business. The deduction on account of write of obsolete stock is also allowable as held by the Cuttack Bench of the ITAT in the case of National Aluminium Co. Ltd. Vs. DCIT (2005 (11) TMI 483 - ITAT CUTTACK) - Decided in favour of assessee Disallowance of expenses for shifting of Chennai Plant - Acquisition of new asset or deriving of any enduring benefit - Held that - The reasons for shifting the Guindy Plant to Tiruvottiyur Plant was a business decision and taken keeping in view four factors, viz., completion from Chinese battery makers as a result of free economy, Centralizing operations with a view to reduce costs and better control and location of the Plant being in a residential area and the industrial waste in the process of manufacture creating environmental issues for the Assessee. By shifting of Guindy plant there was no increase in the overall production capacity but it was a decision to reduce costs, improve productivity and profitability and eliminate duplication of processes and costs besides environmental considerations. Hence, it cannot be said that either there was acquisition of new asset or deriving of any enduring benefit to the Assessee. Nor can it be said that the expenditure in question was not for the purpose of business but for the purpose of selling the land over which Guindy Plant was located - Decided against assessee disallowance on account of upfront fees paid to ICICI Bank - Held that - Similar expenditure had been allowed in the past and there can be no other reason not to allow the expenditure in question as deduction while computing income from business - Decided in favour of assessee Sale of factory land at Guindy, Chennai - Capital Gain OR business profit - Held that - without bringing any material on record merely based on some remote circumstances, an inference cannot be drawn that the Assessees indulged in an adventure in the nature of business or trade. We are of the view that the conclusion of the AO in this regard cannot be sustained. We also find that even in the decisions referred to by the learned AO, intention is an important factor which has been highlighted. On facts and circumstances of the present case, we are of the view that the Assessee never intended to plunge into the waters of trade. We therefore uphold the order of the CIT(A) whereby he held that the income from sale of the property by the Assessees was to be assessed under the head Capital Gain - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 31.76 lakh under Section 43B on account of Provision for Leave Encashment written back.
2. Deletion of disallowance of Rs. 256.32 lakh on account of loss in Foreign Exchange Fluctuation.
3. Deletion of disallowance of obsolete stock written off.
4. Deletion of disallowance of expenses for shifting Chennai Plant.
5. Deletion of disallowance on account of upfront fees paid to ICICI Bank.
6. Determination of whether the sale of factory land at Guindy, Chennai gave rise to Capital Gain or business profit.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of Rs. 31.76 lakh under Section 43B on account of Provision for Leave Encashment written back:
The Assessee, a company engaged in manufacturing and selling dry cell batteries and tea, had claimed exclusion of Rs. 31.76 lakh from its profit as per the profit and loss account on account of "Provision for leave encashment" payable to its employees. The Assessee argued that the liability was allowed only on a payment basis under Section 43B of the Income Tax Act, 1961. The AO disallowed this claim, stating that the leave encashment was not actually paid but written back. The CIT(A) found that the provision for leave encashment was not allowed as a deduction in earlier years, and therefore, the write-back could not be taxed again. The Tribunal upheld the CIT(A)'s decision, noting that the financial statements drawn in compliance with statutory requirements are not relevant for determining total income under the Income Tax Act.

2. Deletion of disallowance of Rs. 256.32 lakh on account of loss in Foreign Exchange Fluctuation:
The Assessee had taken working capital loans in foreign currency, which led to a loss due to adverse fluctuation in the value of Indian currency. The AO disallowed the loss, considering it contingent and capital expenditure. The CIT(A) allowed the loss, referencing the Supreme Court decision in Woodward Governor India Pvt. Ltd. and the Tribunal's earlier decisions in the Assessee's case, which treated such losses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, confirming that the loss on account of foreign exchange fluctuation on the last date of the accounting year should be allowed as a deduction under Section 37(1) of the Act.

3. Deletion of disallowance of obsolete stock written off:
The Assessee claimed a deduction for obsolete stock written off, which was not routed through the profit and loss account but adjusted through the revaluation reserve. The AO disallowed the claim, stating that the write-off was not reflected in the profit and loss account. The CIT(A) allowed the deduction, emphasizing that the manner of accounting entries is not determinative of the claim's legitimacy. The Tribunal upheld the CIT(A)'s decision, noting that the write-off was based on physical verification and scientific valuation, and the method of accounting should not affect the deduction's legitimacy.

4. Deletion of disallowance of expenses for shifting Chennai Plant:
The Assessee incurred expenses for shifting its manufacturing operations from one plant to another for better control and efficiency. The AO disallowed the claim, considering it capital expenditure. The CIT(A) allowed the deduction, referencing judicial precedents that treated such expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the shifting was a business decision aimed at reducing costs and improving productivity, with no new asset creation or enduring benefit.

5. Deletion of disallowance on account of upfront fees paid to ICICI Bank:
The Assessee paid upfront fees to ICICI Bank for converting a rupee loan into a foreign currency loan, which was amortized over the loan period. The AO disallowed the claim, stating that the fees were not charged to the profit and loss account but adjusted through the revaluation reserve. The CIT(A) allowed the deduction, emphasizing the principle of consistency and the legitimacy of the expenditure. The Tribunal upheld the CIT(A)'s decision, noting that similar deductions were allowed in earlier years and the method of accounting should not affect the deduction's legitimacy.

6. Determination of whether the sale of factory land at Guindy, Chennai gave rise to Capital Gain or business profit:
The Assessee sold factory land at Guindy, Chennai, and claimed the income as capital gain. The AO treated the income as business profit, considering the transaction an adventure in the nature of trade. The CIT(A) held that the land was a capital asset used for manufacturing for over 30 years, and the sale was a realization of investment, not a business transaction. The Tribunal upheld the CIT(A)'s decision, noting that the Assessee's intention at the time of acquisition was to hold the property as a capital asset, and the sale did not indicate an adventure in the nature of trade.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues. The Tribunal emphasized the principles of consistency, the legitimacy of business decisions, and the distinction between capital and revenue expenditure in determining the Assessee's claims.