2016 (11) TMI 1612 - HC - Income Tax

Revision u/s 263 by CIT - Revision of orders prejudicial to revenue - allowability of payment on revision of pay scales as prior period expenses u/s 37 - unabsorbed overhead on capital works under Miscellaneous Expenses - CIT decided these two claims on merits - AO had no option in light of direction of CIT - HELD THAT - AO decided the matter in accordance with the directions of the CIT as he was indeed bound to. CIT therefore decided these two claims on merits. Even the other issues were decided by the CIT on merits. However they are not relevant for the reasons already stated. The Tribunal was therefore bound to consider the case on merits as well. We have come to the conclusion that the decision of the Tribunal on merits must be upheld. In view thereof it was open to the Tribunal and it certainly is open to us to proceed on the basis that the proceedings under section 263 were valid. Once we proceed even on a demurer that the proceedings under section 263 are valid we are entitled indeed bound to consider the issues on merits. Allowability of payment on revision of pay scales as prior period expenses u/s 37 - when the liability to pay the arrears arose? - whether the liability to pay the entire arrears arose in the assessment year in question namely 2009-10 or whether the liability arose to the extent of 40% in the AY 2009-10 and to the extent of 60% in the following AY 2010-11? - HELD THAT - Tribunal rightly held that the entire liability was incurred in the assessment year in question; had been estimated with reasonable certainty and that it was not a contingent liability. The assessee was however liable to discharge a part of that liability at a future date. What is relevant is when the assessee s decision that the amount was payable was taken. The provision for the payment of the salary including arrears was not a contingent liability. It arose on account of the sixth pay commission which was approved by the Haryana Government and adopted by the assessee. We are in agreement with this finding of the Tribunal. The liability in the case before us arose in the assessment year 2009-10. Sixty percent of it was liable to be discharged in the next assessment year. It is undoubtedly estimated with more than just reasonable certainty. The liability was therefore not a contingent one but one in praesenti. A part of it was to be discharged at a future date. The judgment supports the assessee s case. - Decided in favour of assessee. Allowability of Misc. expenses - assessee has charged the administrative expenses incurred on construction staff at 14% to capital work and repair and maintenance as per accounting policy. The system was adopted from the PWD. The remaining expenses were charged to revenue expenditure as unabsorbed overhead on capital works under miscellaneous expenses in the profit and loss account - HELD THAT - This was the first time that the Department had not accepted the assessee s case. The Tribunal found on facts that the CIT (Appeals) had not pointed out any defect in the assessee s accounting policy. This was disclosed in the return. It was not contended that the assessee had not disclosed the true and proper income. Thus a substantial question of law in this regard does not arise. This question is therefore also answered against the Department/Revenue and in favour of the assessee. Perversity of Tribunal order - grossly overlooked the material evidence/information on record - HELD THAT - It is apparent that the order of the Tribunal does not suffer from any perversity. Even on issue No.3 the Tribunal has taken a possible view. This question is therefore also answered in favour of the assessee

Summary

Issues Involved:
1. Validity of the Tribunal's cancellation of the CIT's order under Section 263.
2. Allowability of revision of pay scales as prior period expenses under Section 37.
3. Classification of miscellaneous expenses as capital expenditure.
4. Alleged perversity and oversight of material evidence by the Tribunal.
5. Tribunal's partial acceptance of the CIT's order under Section 263 and examination of issues on merits.

Issue-wise Detailed Analysis:

Re: Question Nos. (i) & (v):
The Tribunal's cancellation of the CIT's order under Section 263 was challenged. Section 263 allows the Principal Commissioner or Commissioner to revise an order if it is erroneous and prejudicial to the interests of the revenue. The CIT had directed the Assessing Officer (AO) to re-compute the income, effectively deciding the matter on merits. The Tribunal was thus bound to consider the issues on merits, and it upheld the Tribunal's decision on merits, affirming that the proceedings under Section 263 were valid but the Tribunal's decision on merits must be upheld.

Re: Question (ii):
The revision of pay scales was notified by the Haryana State with effect from 01.01.2006, and the liability for arrears was to be drawn in two installments (40% in the current financial year and 60% in the next). The Tribunal rightly held that the entire liability was incurred in the assessment year in question (2009-10) and was not a contingent liability. The liability arose in praesenti and was to be discharged in future. The Supreme Court judgment in Bharat Earth Movers vs. Commissioner of Income Tax supported this view, establishing that a business liability incurred in the accounting year should be allowed as a deduction even if discharged in the future. Thus, the Tribunal's decision was upheld, and the question was answered in favor of the assessee.

Re: Question (iii):
The classification of miscellaneous expenses as capital expenditure was not considered a substantial question of law. The assessee's accounting policy, charging administrative expenses incurred on construction staff at 14% to capital work and repair and maintenance, was consistent and disclosed. The Tribunal found no defect in this policy, and it was not contended that the assessee had not disclosed true and proper income. Therefore, this question was also answered in favor of the assessee.

Re: Question (iv):
The Tribunal's order was not found to be perverse or overlooking material evidence. The Tribunal took a possible view on the issues, and thus, this question was answered in favor of the assessee.

Conclusion:
The appeal was dismissed, with the Tribunal's decisions on all relevant issues being upheld. The Tribunal's cancellation of the CIT's order under Section 263 was valid, the entire liability for the revision of pay scales was incurred in the assessment year 2009-10, the classification of miscellaneous expenses as capital expenditure was not a substantial question of law, and the Tribunal's order did not suffer from any perversity.