2017 (2) TMI 742 - AT - Income Tax

Addition u/s 40A(3) - Held that - Since the assessee has not been able to substantiate that it falls under any of the circumstances specified under Rule 6DD of the Rules, we are of the considered opinion that the assessee cannot be allowed cash payment exceeding ₹ 20,000/- under section 40A of the Act. Accordingly, we uphold the finding of the learned Commissioner of Income-tax (Appeals) making disallowance - Decided against assessee Disallowance under section 14A r.w.r 8D of Rules - Held that - We direct the Assessing Officer to restrict the disallowance under section 14A of the Act to the extent of exempt income earned by the assessee. Enhancement to book profit by way of adding provision for leave encashment and provision for gratuity - Held that - Since in the instant case, the facts that how the provision for leave encashment and gratuity have been computed, are not before us and, therefore, we are unable to hold whether the provisions made by the assessee towards the leave encashment and gratuity are ascertained liabilities. In view of above, we feel it appropriate to restore the matter to the file of the Assessing Officer with the direction to examine the actuarial valuations made by the assessee in respect of provision for leave encashment and gratuity and then decide, whether these are ascertained liability or not, keeping in view of the ratio of the Hon ble Supreme Court in the case of Bharat Earth Movers (2000 (8) TMI 4 - SUPREME Court ).

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income-tax Act.
2. Disallowance under Section 14A read with Rule 8D of the Income-tax Act.
3. Enhancement of book profits under Section 115JB by adding provisions for leave encashment and gratuity.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income-tax Act:
The assessee contested the disallowance of ?4,45,076/- under Section 40A(3) of the Act, which was upheld by the Commissioner of Income Tax (Appeals). The facts revealed that the assessee made cash payments for freight charges to truckers due to the strong influence of the 'Nalagarh Truck Operators Union' in Baddi, which restricted the use of outside trucks. The assessee argued that the payments were made in cash because the truckers lacked bank accounts, and the payments were necessary for business operations. The Assessing Officer disallowed the amount, stating there was no provision to exclude these payments from the purview of Section 40A(3). The Commissioner of Income Tax (Appeals) upheld this disallowance, noting the improbability of truckers not having bank accounts. The Tribunal concluded that the assessee could not substantiate that it fell under any exceptions specified under Rule 6DD of the Income Tax Rules, thus upholding the disallowance.

2. Disallowance under Section 14A read with Rule 8D of the Income-tax Act:
The assessee challenged the disallowance of ?33,01,445/- under Section 14A read with Rule 8D. The Assessing Officer observed investments in shares but no disallowance for expenses towards earning exempt income. The assessee claimed that no expenditure was incurred as substantial investments were made in earlier years from its own funds. The Assessing Officer, relying on the Cheminvest Ltd. case, computed the disallowance under Rule 8D. The Commissioner of Income Tax (Appeals) upheld this finding. The Tribunal noted the Delhi High Court's decision in Joint Investments Pvt. Ltd. Vs. CIT, which held that disallowance under Section 14A should be restricted to the amount of exempt income earned. Consequently, the Tribunal directed the Assessing Officer to limit the disallowance to the exempt income of ?2000/- earned by the assessee.

3. Enhancement of book profits under Section 115JB by adding provisions for leave encashment and gratuity:
The assessee contested the enhancement of book profits by adding provisions for leave encashment and gratuity. The Assessing Officer added back these provisions, arguing they were not crystallized and were based on actuarial valuations, which involved assumptions. The Commissioner of Income Tax (Appeals) upheld this decision. The Tribunal referred to the Supreme Court's judgment in Bharat Earth Movers Vs. CIT, which held that provisions for leave encashment and gratuity, based on actuarial valuation, represent ascertained liabilities. However, due to the lack of detailed facts on how these provisions were computed, the Tribunal remanded the matter back to the Assessing Officer to examine the actuarial valuations and decide whether these liabilities were ascertained, following the Supreme Court's ratio in Bharat Earth Movers.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the disallowance under Section 40A(3), restricting the disallowance under Section 14A to the exempt income earned, and remanding the issue of enhancement of book profits under Section 115JB for further examination.