2017 (3) TMI 207 - AT - Income Tax

Leave encashment allowance u/s. 43B - Held that - It is no doubt true that the assessee in the present case did not file the evidence regarding payment before the due date of filing the return of income u/s 139(1) of the Act by the assessee for the relevant assessment year along with the return of income. Nevertheless the assessee had filed the details of payment of leave encashment before the due date of filing the return of income before the due date. The requirement of furnishing evidence of payment along with the return of income is only directory and is not mandatory. The ld. DR however submitted that the evidence of actual payment should be directed to be verified by the AO. We are of the view that it would be just and proper to uphold the order of CIT(A), however, with a direction that the payments said to have been made by the assessee as given in annexure-1 to this order should be verified by the AO and if the claim is found to be correct the deduction to that extent should be allowed. With these observations ground raised by the revenue is dismissed. Expenditure incurred on issue of debentures - Nature of expenditure - Held that - The debentures whether convertible or non convertible are in the nature of loan at the time of their issuance and any expenditure incurred on issue of such debentures or bonds had to be regarded as part of the borrowing cost and have to be allowed as a deduction and as a revenue expenditure. This expenditure cannot be regarded as capital. We do not find any infirmity in the order of CIT(A) and accordingly ground raised by the revenue is dismissed. Treatment to loss - loss incidental to the business or capital loss - Held that - As the Assessee did not acquire any capital asset and merely paid advance for acquiring capital asset. CIT(A) was of correct view that the loss in question was a loss incidental to the business and was not a capital loss. Disallowance made by the AO cannot be sustained Exclusion of retention money in computing total income under normal provision as well as in computing Book Profit u/s. 115JB - MAT - Held that - As on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability accrued or arose and, accordingly, it could not be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits of the assessee for the assessment year in question. The admitted factual and legal position in the present case is that retention money is not in the nature of income till such time the contractual obligations are fully performed to the satisfaction of the customer by the Assessee. Therefore the retention money cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard TDS u/s 194J - fees for professional or technical services - Held that - AO has accepted that the disputed income as shown in the TDS certificate has been included in the contract sales already disclosed by the assessee. Thus we are of the view that there is no merit in ground no.3 raised by the revenue. Corporate advances written off - Held that - The amount in question represented the money given in relation to contracts and had nexus with the business of the assessee. The amounts due from the aforesaid two companies were irrecoverable. It is evident from the fact that neither the interest nor the principal amount had been settled by the two companies right form A.Y.2004-05. The advances were therefore written off in the books of accounts of the assessee. Therefore the conclusions of CIT(A) that the advances written off have to be allowed as deduction u/s 28 r.w.s. 37(1) of the Act are correct and does not call for any interference. As far as the remaining sum being old government deposits are concerned the details of old government advances off are given at page-66 of the assessee s paper book. The old Govt deposits which were written off were so written off owing to the smallness of the amount and the efforts involved in recovering these deposits. We are satisfied that the claim for deduction on account of write off of these sums had to be considered as allowable expenditure u/s 28 r.w.s. 37(1) of the Act. As far as the advance written off of Kumardhubi division is concerned, these advances were given for business purpose to various parties for purchase of goods , consumable stores and electrical installation. These advances had nexus with the business of the assessee and their write off in the books of accounts has to be considered as allowable deduction u/s 28 r.w.s. 37(1) of the Act. We therefore are of the view that CIT(A) was fully justified in allowing deduciton claimed by the assessee. We also find that the arguments advanced by the assessee before us clearly supports the conclusion arrived at by CIT(A). Provision for doubtful debt added back while computing Book Profit u/s 115JB - whether the debit in the profit and loss account under the head provision for doubtful debts is really a provision for doubtful debts or write off of doubtful debts as bad debts? - Held that - It is clear from a perusal of the Schedule-9 to the Balance Sheet as well as profit and loss account and debtors on the asset side of the balance sheet that the assessee had in fact written off a sum as bad debts. In view of the above, the amount in question cannot be considered as provision for doubtful debts which is to be added to the net profit as per the profit and loss account to arrive at the book profit. In other words the sum in question was a bad debt written off which had to be reduced even while arriving at the profit as per profit and loss account and was accordingly reduced. Addition of the said sum to the net profit as per profit and loss account for the purpose of arriving at book profit u/s.115JB of the Act was therefore not warranted. We therefore accept the plea of the assessee in this regard and hold that a sum be excluded for the purpose of computing book profits u/s 115JB of the Act. MAT computation - provisions made for employee benefit - Held that - Since the amount in question was an obligation of the assessee as an employer the liability arising on account of such obligation should also be considered while arriving at the book profit for the purpose of Sec.115JB of the Act. Thus on the principle laid down in the decisions on which the ld. Counsel has placed on reliance, we are of the view that CIT(A) was justified in accepting the plea of the assesses. With regard to the directions of CIT(A) to verify whether the account of the provisions made for employee benefit has already been debited in the profit and loss account, the directions of CIT(A) his order is correct and is for the assessee to explain as to how the sum in question are not debited in the profit and loss account but nevertheless need to be excluded . We do not find any merits in the grounds raised by the assessee also.

Summary

Issues Involved:
1. Leave Encashment under Section 43B.
2. Employees’ Contribution to Provident Fund under Section 36(1)(va).
3. Expenditure on Foreign Currency Convertible Bonds (FCCB).
4. Loss on Advance Payments.
5. Retention Money and its Treatment in Book Profits under Section 115JB.
6. Provision for Doubtful Debts under Section 115JB.
7. Income from Service Charges not Credited to Profit & Loss Account.

Detailed Analysis:

1. Leave Encashment under Section 43B:
The Revenue challenged the CIT(A)'s decision to allow ?13,82,121 as leave encashment, while the Assessee contested the disallowance of ?44,57,282. The Tribunal upheld the CIT(A)'s decision, stating that the proviso to Section 43B allows deduction for sums paid before the due date of filing the return. The AO was directed to verify the payments. The Assessee's cross-objection was allowed for statistical purposes, pending the Supreme Court's decision on the constitutional validity of Section 43B(f).

2. Employees’ Contribution to Provident Fund under Section 36(1)(va):
The CIT(A) allowed the deduction for employees' contribution to PF paid before the due date of filing the return, following the Delhi High Court's decision in CIT vs AIMIL Ltd. The Tribunal upheld this decision, referencing the Calcutta High Court's rulings in similar cases.

3. Expenditure on Foreign Currency Convertible Bonds (FCCB):
The CIT(A) allowed the deduction of ?1,34,11,254 as revenue expenditure, relying on the Rajasthan High Court's decision in CIT vs Secure Meters Ltd. The Tribunal upheld this, noting that debentures, whether convertible or not, are loans and the related expenditure is revenue in nature.

4. Loss on Advance Payments:
The Assessee claimed a loss of ?2,15,00,000 due to the cancellation of a property purchase agreement. The AO treated it as a capital loss, but the CIT(A) allowed it as a business loss. The Tribunal upheld the CIT(A)'s decision, distinguishing it from the Supreme Court's ruling in Hashimara Industries Ltd., where the loss was on capital account.

5. Retention Money and its Treatment in Book Profits under Section 115JB:
The Assessee argued that ?28,87,72,022 as retention money should not be considered income. The CIT(A) agreed, following the Calcutta High Court's decision in CIT vs Simplex Concrete Piles (India) Ltd. The Tribunal upheld this, stating that retention money is not income until the contractual obligations are fulfilled. This principle was also applied to book profits under Section 115JB.

6. Provision for Doubtful Debts under Section 115JB:
The AO added back ?8,72,921 as provision for doubtful debts while computing book profits. The CIT(A) upheld this, but the Tribunal reversed it, citing the Supreme Court's decision in Vijaya Bank vs CIT, which held that if the provision is reduced from debtors, it represents bad debts written off and should not be added back.

7. Income from Service Charges not Credited to Profit & Loss Account:
The AO disallowed ?57,25,701, claiming it was not accounted for in the P&L account. The CIT(A) found that the income was included under 'contract sales' and directed the AO to verify this. The Tribunal noted that the AO had subsequently accepted the Assessee's claim, making the Revenue's ground infructuous.

Conclusion:
The Tribunal dismissed the Revenue's appeals and allowed the Assessee's cross-objection for statistical purposes. The Assessee's appeals were partly allowed, particularly regarding the treatment of leave encashment, provision for doubtful debts, and employees' contribution to PF.