2019 (9) TMI 443 - AT - Income Tax

Disallowance of provision for leave liability and disallowance of Transitional Liability for leave provided - HELD THAT - A sum had been claimed towards leave liability, which had not been paid. Besides, the assessee had also claimed an additional leave liability on account of adoption of AS-15 prescribed by ICAI regarding recognition of liability. We note that the Hon ble Calcutta High Court has struck down provision of section 43B(f) of the Act, while deciding the case of Exide Industries vs. Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT We note that based on the identical facts, the Coordinate Bench of ITAT Kolkata in the case of SICPA Vs. DCIT 2017 (3) TMI 1383 - ITAT KOLKATA , has remitted the matter back to the file of the assessing officer. Therefore, we deem it fit and appropriate, in the interest of justice and fair play, to remand this issue to the file of the ld AO. Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the assessing officer to pass order based on the outcome of the main appeal on merits by the Hon ble Supreme Court as stated 2008 (9) TMI 921 - SC ORDER MAT computation - whether transitional liabilities of gratuity and leave encashment as per provisions of AS-15, which is debited to General Reserve in the Balance Sheet, can be adjusted while computing book profit under section 115JB of the Act? - HELD THAT - Transitional Liability' provided in book of accounts and adjusted against Opening General Reserve as per AS-15 (Revised 2005), towards leave liability and towards gratuity liability done by an outside actuary under mandatory AS-15 (Revised 2005) on employee benefits issued by ICAI, should be reduced from current year s profit for computation of Book Profit u/s 115JB of the Act. Therefore, we note that notes to accounts are part of financial statements (Profit Loss account and Balance Sheet, cash flow statement etc,) therefore the computation of book profit under section 115JB of the Act should be done taking into account the figures mentioned in the notes to accounts. Hence, we direct the assessing officer to allow deduction in respect of transitional provisions of leave liability of ₹ 85,34,000/- and gratuity liability while assessing book profit u/s 115JB of the Income Tax Act Expenditure disallowed u/s 14A for computation of book profit u/s 115JB of the Act for minimum alternate tax - HELD THAT - Disallowances made under the Provisions of Sec. 14A r.w.s 8D of the TT Rules, cannot be applied to the Provision of Sec. 115JB of the Act. Therefore, the AO shall work out disallowances in terms of the clause (f) to Explanation-1 of Sec. 115JB of the Act independently after considering the expenses debited in the profit loss account as mandated under the provisions of law. See DCIT vs. CBSC Ltd. 2018 (6) TMI 828 - ITAT KOLKATA Non- allowance of deduction on account of operating tease rent equalization - appellate authority has power even to admit a claim not made in the proceedings before the lower authority - HELD THAT - As relying on case of Goetze India Ltd. 2006 (3) TMI 75 - SUPREME COURT that CIT(A) has power to admit additional ground claiming relief not claimed in the return and without filing revised return, even if the same results in assessed income going below the returned income. In his report dated 3.1.2014, the assessing officer has not given any comment or adverse remark on merit of the claim and not pointed out any defect or shortcoming in the same. In the light of the facts discussed earlier, the assessee is entitled for deduction Lease Rent Equalization disclosures under the head Prior Period Items - HELD THAT - The incremental liability on account of lease rental equalization provided for pursuant to the clarification issued by the Expert Advisor Committee of the ICAl, accrued during the relevant previous year and is allowable deduction in computing income for the said year, notwithstanding that such liability may relate to the earlier years. Therefore, we direct the assessing officer to allow the claim of the assessee in respect of lease rent Disallowance u/s 43B - employees share of contribution towards PF and ESI, if it is paid before filing of return of income then it would be a sufficient compliance of the Act. Accordingly, we dismiss the ground No.1 raised by the Revenue. Depreciation on account of River Embankment under the block of assets building - HELD THAT -Respectfully following the decision of the Coordinate Bench in the assessee's own case, the ld CIT(A) deleted the disallowance of depreciation . That being so we decline to interfere on the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeals raised by the Revenue is dismissed. Payment of lumpsum royalty as Capital Expenditure' - HELD THAT - The assessment for AY 2007-08 was framed u/s 143(3),in that year the Assessing Officer himself did not dispute that the expenditure on royalty payments was revenue in nature and no disallowance was made. That being so we decline to interfere on the order passed by the ld CIT(A), his order on this issue is hereby accepted and grounds of appeals raised by the Revenue is dismissed. MAT computation - prior period items on computation of book profit u/s 115JB - HELD THAT - We note that this issue is covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of CIT vs. Khaitan Chemicals Fertilizers Ltd 2008 (9) TMI 89 - DELHI HIGH COURT wherein the Court reversed the decision of the Tribunal with regard to deduction of prior period expenses charged to profit and loss account while computing book profit under section 115JA CIT(A) correctly deleted the addition on account of adjustment made by the Assessing Officer on the prior period items held no adjustment to the profit as per P L A/c can be made unless specifically provided under any of the clauses of the explanation to section 115JB. Therefore, it is held that the Assessing Officer was not correct in disallowing such debit. The adjustment made by the Assessing Officer on the prior period items is accordingly deleted. Addition on account of dividend income ignoring the fact that the assessee has never claimed such amount in its return of income - HELD THAT - We note that dividend income exempts in terms of section 10(34) of the Act therefore it should be excluded under normal computation provisions. It should also be excluded in computing book profit in terms of clause (ii) of Explanation 1 to section 115JB of the Act. Therefore, we direct the AO to exclude dividend income from normal computation as well as computation of book profit under section 115JB of the Act. Contribution to Bata Workers Sickness Benefit Society - HELD THAT - Issue stands squarely covered in favour of assessee by the decision of the jurisdictional Kolkata Bench of ITAT in assessee's own case in various earlier assessment years. One of the orders of the Kolkata Bench in assessee's case on the issue of allowability of contribution to BWSBS 2002 (9) TMI 254 - ITAT CALCUTTA-A TP adjustment - downward adjustment - PLI i.e. OP/OC of the assessee was determined by the TPO at 6.55% whereas the PLI of the comparable was 7.47% - HELD THAT - We note that the downward adjustment proposed by the TPO was in gross violation of the provisions of second proviso to Section 92CA of the Income-tax Act, 1961. Without prejudice to the assessee's claim for use of multiple year data for determining PLI of the comparables, making functional working capital adjustments to the PLI and the manner in which PLI was worked out by the Transfer Pricing Officer, at the very onset it is submitted that going by TPO's own computation of the arm's length value of the transactions, the arm's length price was within the prescribed range of /- 5% of the actual transaction amount. Arm's length value the transactions as computed by the TPO at ₹ 2,44,31,005/- is within the permitted range for variation of / -5% of the actual value of the transaction. However in the order passed u/s 92CA(2) and the impugned order u/ s 143(3) neither the TPO nor the AO took into consideration the provisions of Section 92C of the Income-tax Act, 1961 and failed to appreciate that since the actual value of the transactions was within the permitted variation from the arm's length price so determined, the downward adjustment of ₹ 4,50,658/- was totally unwarranted. Applying the benefit accorded to the assessees in the second proviso to Section 92CA, it is clearly evident that the arm's length price is within the permitted variation of (-) 5% from the actual value of transactions and therefore the impugned addition has rightly been deleted by the ld CIT(A) Allowance value added tax from sales consideration while computing capital gain - HELD THAT - The assessee was statutorily required to pay VAT on the sale consideration received. Therefore, the expenditure was directly related with transfer of the asset namely trade-mark. I do not agree with the assessing officer's view that the expenditure on VAT was not related to transfer of trade-mark. Rather, the VAT was directly related to sale of trade-mark and was to be necessarily paid. Thus, this is an expenditure directly related to transfer of asset and hence deductible from sale of consideration in view of clause (i) of section 48. The disallowance to be deleted.

Summary

Issues Involved:
1. Disallowance of provision for leave liability and transitional liability.
2. Deduction of transitional liability for leave and gratuity under section 115JB.
3. Disallowance of dividend income under section 14A for book profit computation.
4. Deduction of lease rent equalization.
5. Disallowance of depreciation on river embankment.
6. Treatment of royalty payments as capital expenditure.
7. Adjustment of prior period items in book profit computation.
8. Deduction of VAT from sales consideration while computing capital gain.
9. Contribution to Bata Workers' Sickness Benefit Society.
10. Transfer pricing adjustment.
11. Exemption of dividend income in book profit computation.

Detailed Analysis:

1. Disallowance of Provision for Leave Liability and Transitional Liability:
The assessee claimed deductions for leave encashment and transitional liability as per AS-15, which were disallowed by the AO under section 43B(f). The CIT(A) upheld the AO's decision. The ITAT noted the Supreme Court's interim order in the Exide Industries case and remanded the issue back to the AO to await the Supreme Court's final decision.

2. Deduction of Transitional Liability for Leave and Gratuity under Section 115JB:
The assessee adjusted transitional liabilities against the opening general reserve as per AS-15. The AO disallowed these adjustments for book profit computation under section 115JB. The ITAT allowed the deduction, stating that notes to accounts are part of the financial statements and should be considered for book profit computation.

3. Disallowance of Dividend Income under Section 14A for Book Profit Computation:
The CIT(A) disallowed 10% of the dividend income as expenditure under section 14A. The ITAT ruled that section 14A disallowance should not be considered while computing book profit under section 115JB, following the Special Bench decision in ACIT vs. Vireet Investments.

4. Deduction of Lease Rent Equalization:
The assessee claimed lease rent equalization as per AS-19, which was initially disallowed by the AO. The CIT(A) allowed the claim, and the ITAT upheld this decision, emphasizing the mandatory nature of AS-19.

5. Disallowance of Depreciation on River Embankment:
The AO disallowed depreciation on river embankment, treating it neither as a building nor a road. The CIT(A) allowed the depreciation, and the ITAT upheld this decision, noting that similar depreciation claims were allowed in previous years.

6. Treatment of Royalty Payments as Capital Expenditure:
The AO treated royalty payments as capital expenditure, which was reversed by the CIT(A). The ITAT upheld the CIT(A)'s decision, citing consistency with previous years where such payments were treated as revenue expenditure.

7. Adjustment of Prior Period Items in Book Profit Computation:
The AO disallowed the adjustment of prior period items in book profit computation. The CIT(A) allowed the adjustment, and the ITAT upheld this decision, referencing the Delhi High Court's ruling in CIT vs. Khaitan Chemicals & Fertilizers.

8. Deduction of VAT from Sales Consideration while Computing Capital Gain:
The AO disallowed the deduction of VAT paid on the sale of a trademark from the sales consideration. The CIT(A) allowed the deduction, and the ITAT upheld this decision, stating that VAT was an expenditure incurred wholly and exclusively in connection with the transfer of the trademark.

9. Contribution to Bata Workers' Sickness Benefit Society:
The AO disallowed the contribution to Bata Workers' Sickness Benefit Society. The CIT(A) allowed the deduction, and the ITAT upheld this decision, referencing previous decisions in favor of the assessee.

10. Transfer Pricing Adjustment:
The TPO made a downward adjustment of ?4,50,658, which was deleted by the CIT(A). The ITAT upheld this decision, noting that the arm's length price was within the permitted range of ±5% of the actual transaction value.

11. Exemption of Dividend Income in Book Profit Computation:
The AO did not allow the exemption of dividend income in book profit computation. The CIT(A) allowed the exemption, and the ITAT upheld this decision, directing the AO to exclude dividend income from both normal computation and book profit computation under section 115JB.

Conclusion:
The ITAT provided detailed rulings on each issue, often remanding matters back to the AO for reconsideration in light of higher court decisions or allowing deductions based on consistent treatment in previous years and adherence to accounting standards. The ITAT emphasized the importance of considering notes to accounts and following judicial precedents.