2020 (12) TMI 967 - AT - Income Tax

Disallowance of provision for retention bonus - amount not paid before the due date for filing return of income out of provision - HELD THAT - A perusal of provision of section 43B of the Act would show that clause (c) relates to the sum referred to in 36(1)(ii) of the Act, which in turn relates to any sum paid to an employee as bonus or commission for services rendered. Admittedly in the instant case, provision for retention bonus is payable to an employee for services rendered by him during the year under consideration. Hence, the retention bonus is allowable as deduction u/s. 36(1)(ii) of the Act only and not u/s. 37(1) as contended by Ld A.R. Provisions of section 43B of the Act would also apply to the Provision for retention bonus. As per the provisions of section 43B of the Act, the provision for retention bonus is not allowable as deduction. As per the proviso to sec. 43B, the amount paid before the due date for filing return of income out of the provision so created is allowable as deduction. Admittedly, the assessee has paid a sum out of the provision so created, before the due date for filing return of income. Accordingly, we are of the view that the Ld. CIT(A) was justified in directing the A.O. to restrict the disallowance being the amount not paid before the due date for filing return of income out of provision for retention bonus claimed by the assessee. Accordingly, we uphold the order of Ld. CIT(A) on this issue. Addition of interest income - Addition on the ground that the same is not offered to tax by the assessee, even though it is reflected in form 26 AS and the TDS relating to the same was claimed - HELD THAT - We notice that the Ld. CIT(A) has not disposed of this ground in his order. Nevertheless the Ld. A.R. submitted that the interest income was received from M/s. Tata Power Company Ltd., which was adjusted against electricity bills raised by the above said company. Since the assessee had accounted for net amount of electricity bills, the interest income was not separately disclosed in the profit loss account. Accordingly, the Ld. A.R. submitted that the impugned interest income has actually been offered by the assessee by way of reduction in the electricity bill. Since the submissions made by Ld. A.R. require verification of facts, we restore this issue to the file of A.O. for examining it afresh.

Summary

Issues involved:
1. Disallowance of provision for retention bonus.
2. Addition of interest income.

Analysis:

Issue 1: Disallowance of provision for retention bonus
The assessee challenged the disallowance of a provision for retention bonus made by the Assessing Officer (A.O.). The A.O. disallowed the claim as the provision was considered an unascertained liability and not paid before the due date for filing the return of income. The assessee argued that the provision was for employees who had already rendered services and would be reversed if an employee resigned. The assessee cited a case to support the claim that the provision for accrued bonus should not be treated as uncertain. The Commissioner of Income Tax (Appeals) [CIT(A)] relied on a Supreme Court decision and held that the provision for retention bonus was an ascertained liability and should be allowed. The CIT(A) directed the A.O. to restrict the disallowance to the amount not paid before the due date. The A.R. contended that the provision should be deductible under section 37(1) of the Act, while the D.R. argued that section 43B applied. The tribunal found that the provision for retention bonus fell under section 36(1)(ii) and was subject to section 43B. The tribunal upheld the CIT(A)'s order to restrict the disallowance.

Issue 2: Addition of interest income
The A.O. added interest income to the assessee's income as it was not offered for tax despite being reflected in Form 26AS and TDS claimed. The A.R. explained that the interest income was adjusted against electricity bills, hence not separately disclosed. The tribunal noted that the CIT(A) did not address this issue and decided to send it back to the A.O. for further examination due to the need for factual verification.

In conclusion, the appeal was partly allowed for statistical purposes, with the tribunal upholding the CIT(A)'s decision on the disallowance of the provision for retention bonus and remanding the issue of interest income addition back to the A.O. for further review.