2015 (7) TMI 641 - AT - Income Tax

Provisions for wage arrears - addition made for the purpose of computing books profits U/s.115JB and also for computing the total income as per the normal provisions of the Act - Held that - As submitted by the Ld. A.R, if the assessee has made a commitment in the draft wage settlement before the Joint Commissioner of Labour, to that extent it will be an ascertained liability of the assessee company because at least to that extent the assessee company will have to make the payment. However, these aspects can be verified only from the draft wage settlement agreement and the same is not before us for our perusal. Therefore, we remit back the issue to the file of Ld. Assessing Officer to examine the draft wage settlement agreement in the light of the decisions relied upon by the assessee and pass appropriate order as per merit and law. - Decided in favour of assessee for statistical purposes. Disallowance of provision for doubtful debts - Held that - The decision rendered by the Hon ble Apex court in the case of M/s.Vijaya Bank (2010 (4) TMI 46 - SUPREME COURT) is not applicable considering the facts of the assessee s case. In that case, the assessee is a bank who draws its account as per the guidelines provided by the Reserve Bank of India (RBI). There are legal implications for writing off the debts in the accounts of bank by crediting the debtor s accounts. The system of accounting is also different. Various classifications with respect to debtors are drawn in the books of accounts as per the norms specified by the RBI. In such circumstances, the Hon ble Apex Court had held that it would suffice to reduce the bad debts in the statement of accounts and actual write off bad debts in the books of accounts would not be necessary. With respect to other assessees, the Hon ble Apex Court had categorically held in the case TRF Ltd. Vs. DCIT reported in 2010 (2) TMI 211 - SUPREME COURT that it is not necessary for the assessee to establish the debt had become irrecoverable. It is enough if the bad debts are written off as irrecoverable in the books of accounts of the assessee. For the above reasons, we find that the action of the Revenue is appropriate in the case of the assessee which is not a Bank governed by the rules of RBI and accordingly we hereby hold that the amount of ₹ 1,42,321/- shown as provision for bad debts which is not credited to the accounts of the debtors and thus written off cannot be allowed as deduction while computing the income of the assessee - Decided against assessee. Disallowance 5% of the dividend income U/s.14A as expenses incurred for earning the exempt dividend income CIT (A) deleting the disallowance holding that invoking the provisions of Rule 8D is not in order - Held that - On this issue we find the finding of the Ld. CIT (A) to be in order because Rule-8D of the Rules has come into effect from 24.03.2008 relevant to the assessment year 2008-09. Therefore, the aforesaid rules will not be applicable to the case of the assessee, since the relevant assessment year is 2007-08. Moreover on this issue, this Bench of the Tribunal has been consistently taking a view that 3% of the exempt income can be treated as the expenditure incurred for earning such income and accordingly such amount has to be disallowed. Therefore in the case of the assessee also, we hereby hold that 3% of the dividend income which is exempt from tax shall be treated as the expenditure incurred for earning such dividend income and the same shall be disallowed as allowable deduction. It is ordered accordingly. - Decided against revenue.

Summary

Issues Involved:
1. Addition towards wage revision for computing book profits under Section 115JB and total income as per normal provisions.
2. Disallowance of provision for doubtful debts.
3. Disallowance of expenses under Section 14A for earning exempt dividend income.

Detailed Analysis:

1. Addition towards Wage Revision:
The Assessee had debited Rs. 81 lakhs in the Profit & Loss Account as provisions for wage arrears, explaining it was based on estimates due to ongoing negotiations with the labor union. The Assessing Officer disallowed this provision while computing book profit under Section 115JB and total income under normal provisions, citing it as an unascertained liability. The CIT (A) upheld this decision, referencing a similar case where the liability was not considered crystallized during the year. The Tribunal noted that if the assessee committed in the draft wage settlement before the Joint Commissioner of Labour, it would be an ascertained liability. However, the draft wage settlement agreement was not available for verification. Therefore, the issue was remitted back to the Assessing Officer for further examination.

2. Disallowance of Provision for Doubtful Debts:
The Assessing Officer added back the provision for doubtful debts of Rs. 1,42,321/- to the income, as it was not written off in the books of accounts. The CIT (A) confirmed this disallowance. The Assessee argued that the provision should be allowed based on the Supreme Court decision in Vijaya Bank. However, the Tribunal distinguished this case as it involved a bank governed by RBI guidelines, whereas the current case did not. The Tribunal upheld the disallowance, stating that the bad debts must be written off in the books of accounts to be allowed as a deduction.

3. Disallowance of Expenses under Section 14A:
The Assessee contested the CIT (A)'s decision to sustain a 5% disallowance of dividend income as expenses for earning exempt income, while the Revenue contested the rejection of Rule 8D computation. The Tribunal found the CIT (A)'s ruling appropriate, noting Rule 8D was applicable from the assessment year 2008-09 onwards. For the relevant assessment year 2007-08, the Tribunal consistently held that 3% of exempt income should be treated as the expenditure incurred for earning such income. Therefore, the Tribunal ordered that 3% of the dividend income be disallowed as an allowable deduction.

Conclusion:
The appeal of the Assessee was partly allowed for statistical purposes, and the appeal of the Revenue was dismissed. The Tribunal remitted the issue of wage revision back to the Assessing Officer for further verification and upheld the disallowance of provision for doubtful debts and adjusted the disallowance under Section 14A to 3% of the exempt income.