2019 (5) TMI 991 - AT - Income Tax

Revision u/s 263 - no enquiry v/s lack of enquiry - HELD THAT - CIT has not exercised jurisdiction u/s 263 of the Act on the ground of no enquiry made by the AO or lack of enquiry made by the AO. CIT has held that conclusions drawn by the AO in allowing expenditure set out in the show cause u/s 263 of the Act ought not to have been allowed as deduction. We, therefore, hold that the jurisdiction u/s 263 of the Act was validly invoked by the CIT. Contribution to Bellary DC for formation of ring road - even though it was shown as donation in the profits and loss account can be considered as contribution for formation of roads and has to be held as revenue expenditure allowable as a deduction keeping in mind commercial expediency - assesses s plea is that the development of roads would help transportation of iron ore from mine by the assessee - HELD THAT - Keeping in mind the decision of Lakshmiji Sugar Mills Co. Pvt. Ltd. 1971 (8) TMI 13 - SUPREME COURT we are of the view that this expenditure was rightly allowed by the AO while concluding the assessment and exercise of jurisdiction u/s 263 of the Act which is not justified as far as this sum is concerned. Other items of expenditure for which jurisdiction u/s 263 of the Act is invoked, we do not find any material which can justify the action of the AO in allowing these items of expenditure as deduction.Therefore, the CIT was justified in directing the AO to examine the allowability of these items of expenditure. The assessee is always at liberty to show as to how items of expenditure made in cash were not hit by the provision of sec. 40A(3) of the Act and as to how the personal expenses of salary wages and bonus is not in the nature of provision. The assessee is also at liberty to show as how the prior period expenses is in fact liability which crystallized only during the relevant previous year. In the given circumstances of the case, we are of the view that the order u/s 263 of the Act in so far as aforesaid 3 items of expenditure are concerned is valid and deserves to be sustained. AO was directed to do denovo assessment, the same can be only be in respect of item set out in the order u/s 263 of the Act. We accordingly modify the order u/s 263 of the Act by restricting the enquiry in respect of items other than the expenditure incurred for payment of ₹ 10 cores for formation of road. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Allowability of ?10 crores paid to Bellary DC as business expenditure.
2. Disallowance of cash payments of ?79,33,710/- under Section 40A(3).
3. Allowability of ?2,38,88,552/- provision for group incentive to staff.
4. Allowability of ?1,63,86,153/- prior period adjustments.

Issue-wise Detailed Analysis:

1. Allowability of ?10 crores paid to Bellary DC as business expenditure:
The CIT-3, Bengaluru, in exercising his power under Section 263 of the Income-tax Act, 1961, held that the payment of ?10 crores to Bellary DC for the construction of a Ring Road was in the nature of a donation and not a business expenditure. The assessee contended that this expenditure was for Corporate Social Responsibility and facilitated the transportation of ores, thus qualifying as business expenditure. The Tribunal, referencing the Supreme Court decision in Lakshmiji Sugar Mills Co. Pvt. Ltd., agreed with the assessee, concluding that the expenditure was indeed for commercial expediency and should be allowed as a deduction.

2. Disallowance of cash payments of ?79,33,710/- under Section 40A(3):
The CIT observed that the assessee made cash payments in contravention of Section 40A(3) and these were not considered for disallowance by the AO. The assessee argued that the payments were made in areas without banking facilities and were for statutory dues. The CIT directed the AO to re-examine these payments to verify if they were indeed statutory liabilities and if the conditions of Section 40A(3) were met. The Tribunal upheld this direction, noting the necessity for such verification.

3. Allowability of ?2,38,88,552/- provision for group incentive to staff:
The CIT disallowed the provision for group incentive, arguing it was not an actual liability under the mercantile system of accounting. The assessee contended that the provision was made based on accrual and was consistent with accounting standards. The Tribunal agreed with the CIT, stating that provisions in the books do not equate to actual liabilities and thus require further examination by the AO.

4. Allowability of ?1,63,86,153/- prior period adjustments:
The CIT noted that the assessee, following the mercantile system of accounting, should only allow expenses accrued during the relevant year. The assessee provided a breakdown of prior period adjustments, claiming these liabilities crystallized during the relevant year. The CIT directed the AO to verify these claims. The Tribunal upheld this direction, allowing the assessee to demonstrate the actual accrual of these liabilities during the relevant year.

Conclusion:
The Tribunal held that the CIT validly invoked jurisdiction under Section 263, except for the ?10 crores paid to Bellary DC, which was deemed a business expenditure. The Tribunal directed the AO to conduct a denovo assessment for the other items. The appeal was partly allowed, restricting the enquiry to the specified items.