2022 (12) TMI 582 - AT - Income Tax

Expenditure claimed on account of overstatement of expenditure - over-statement of expenses, i.e., on account of the same relating to a prior period - deduction of interest expenditure on GPF - HELD THAT - The impugned sum comprises three sums representing liabilities on account of interest and employee terminal benefits, admittedly pertaining to the immediately two preceding years, while the fourth is a credit representing a lower provision for depreciation on fixed assets, ostensibly on account of a smaller assignment of fixed assets to the assessee-company. It is not clear if the differential depreciation is on account of the revision therein for the current year and/or the preceding year/s. Continuing further, while the AO relied on the statutory auditor s report, further stating that the impugned expenditure does not relate to the current assessment year, the ld. CIT(A) has allowed relief on the basis that the liability has crystalized only during the year under consideration. In fact, the sense that we got on hearing the parties, as indeed the documents referred to thereat, was that it is the increased liability/s as on 31/5/2005, i.e., in the opening statement of assets and liabilities (balance-sheet) as on 01/6/2005, to the extent modified by GoMP, that stands claimed by the assessee through debit to the profit loss account, i.e., the operating statement, for the relevant year. The same, even as also observed by the Bench during hearing, are capital liabilities, of course at net of capital assets. As even, notwithstanding the fact that they stand to the extent modified or varied, intimated and confirmed by GoMP only later, so that they could not be co-opted in the books of account on 31/5/2005 (31/3/2005), but only later, i.e., on 12/6/2008 (31/3/2008), would be of no consequence inasmuch as the same does not alter the nature of the liability (asset) as on capital account, but only its quantum. The interest liability for the 22 month period, i.e., from 01/6/2005 to 31/3/2007, would, in the given facts and circumstances of the case, stand to arise to the assessee only on 12/6/2008, i.e., during fy 2008-09, corresponding to AY 2009-10. Assessee following mercantile system of accounting, with prudence and conservatism being fundamental accounting principles, the same stands correctly provided for on 31/3/2008 inasmuch as the books for fy 2007-08 had not been closed by that date (12/6/2008). Assessee could not have provided for the same at any time earlier; the books for fys. 2005- 06 2006-07 having been since closed, and the delay in making the provision in its respect is not on account of any error or omission in finalizing the accounts for those years. Reference in this regard may be made to Accounting Standards I II issued by the Central Government u/s. 145(2) of the Act. It is therefore not necessary to dwell on the accounting standards by ICAI. There is no question of accrual and, resultantly, accounting for the interest obligation for the period prior to 01/6/2005, i.e., the period prior to the transfer date, as, as afore-explained, it is a capital liability in the assessee s hands, and which stands incorporated at its value as on 31/5/2005. The expenditure on the salary or GPF of the employees of other entities and, correspondingly, interest thereon, cannot possibly be the liability of the assessee s business, even if statutorily assumed by the assessee. The Income Tax Act is, as is well-settled, a separate code in itself for the computation and assessment of income liable to charge to tax thereunder. The same would therefore, where so, need to be segregated. We may though hasten to add that if however a separate, dedicated funding in its respect, i.e., the capital liability/salary in respect of the employees other than the assessee s employees, stands provided for by GoMP on reorganisation, though it does not appear to be so, the income arising on these assets shall stand to be assessed u/s. 56 as Income from other sources and, consequently, corresponding interest liability deductible as expenditure there against u/s. 57(iii). The matter shall accordingly travel back to the file of the AO, who shall (a) subject to (b), compute the qualifying amount for deduction of interest expenditure on GPF at Rs. 2317.76 lacs for the 22 month period (from 01/6/2005 to 31/3/2007), as per the interest arising under the relevant arrangement/s. (b) segregate the interest on GPF to the extent it relates to the employees other than the assessee s employees, and exclude it from the total interest on GPF (i.e., Rs. 2317.76 lacs); (c) set-off the interest liability as excluded (as per (b)) against income, if any, arising to the assessee from the separate, dedicated funding provided by GoMP in respect of the proportionate GPF. If not, the said excluded amount cannot be setoff by regarding it as the liability of the assessee s business. (d) Likewise for the interest cost on loan for Rs. 1318.75 cr. (as against earlier figure of Rs. 1379 cr.), i.e., as per (a). It would though need to be clarified as to how the interest liability (which is to be in terms of underlying agreement/s) arises; the final loan (capital borrowed), rather than exhibiting an increase with reference to the provisional sum, stands decreased by Rs. 6025.44 lacs in the final opening balance sheet (as on 01/6/2005). There ought to be thus, on the contrary, a reversal of the interest provided on the excess loan for the preceding two years, resulting in a prior period income, i.e., on the same basis and principle as the increased liability results in an additional interest cost/liability. The adjudication, thus, though in agreement with the assessee s stand in principle, would need to be determined on quantum, and which may though result in an income, qua which the AO shall of course seek clarification, and issue clear and definite finding/s. e). the interest as per (a) and (d) shall be allowable u/s. 36(1)(iii) (loan) or s. 37(1) (GPF), in computing the assessee s business income. However, the interest liability shall, where and to the extent subject to the condition of tax deduction at source and/or of payment, its deductibility would subject to relevant provisions, viz. s. 40(a)(ia); 43B, et. al. Needless to add, the requisite data, information and explanation/s for the purpose shall be furnished by the assessee, as also the necessary working. The AO shall make necessary verification in the manner deemed proper and, in case of any difference, extend reasonable opportunity to the assessee to present and explain it s working, deciding as per law issuing clear findings of fact. We decide accordingly. Liability in respect of the terminal benefits, being pension and gratuity, provided at defined rates for the two preceding years - HELD THAT - The quantum of provision is to be governed by the underlying arrangement/s. We make it clear that the allowance of provision shall though be subject to specific provisions, if any, under the Act in respect thereof viz. s. 40A(7); s.43B, etc. Further, if and to the extent the same relates to the employees of other than the assessee s business, i.e., employed by it and working therefor, the same shall be subject to the same directions/adjudication as in respect of GPF. We are conscious that the pension liability could be in respect of the retired (i.e., as on 31/5/2005) employees of the Board. The same shall be subject to the same adjudication as qua the employees of other than the assessee s business. The AO shall, upon verification, allow the assessee s claim accordingly, granting it reasonable opportunity to present and explain its working. Credit for a lower depreciation charge - HELD THAT - The written down value (WDV) of the fixed assets is to be u/s. 43(6) the actual cost less depreciation actually allowed. The actual cost to the assessee-company, it may be clarified, would be the transfer price (value), i.e., at which it takes-over/is assigned the fixed asset/s. The AO shall work the depreciation claim exigible u/s. 32(1) based on the revised working, adopting the cost as now revised, and modify the assessee claim for depreciation, i.e., if and to the extent not consistent with the working u/s. 32(1) r/w s. 43(6), of course, upon allowing the assessee an opportunity to present and explain itself working. Reference in this context be made to Maharana Mills (P.) Ltd 1959 (4) TMI 7 - SUPREME COURT - We are conscious that the fixed assets as finally allotted to the assessee are at an increase (i.e., by Rs. 252.74 lacs, after adjusting the capital WIP), rather than a decrease, over that initially assigned, and which should therefore result in an enhanced charge for depreciation. So, however, the methodology adopted, which is to be in terms of s. 32(1) r/w s. 43(6), would coalesce the charge of depreciation for the current year to a single sum, obviating the need for any reversal of, or additional, charge for depreciation for the current year.

Summary

Issues Involved:
1. Disallowance of expenditure claimed by the assessee on account of overstatement of expenditure.
2. Determination of whether the expenditure is a prior period item or not.
3. Admissibility of the expenditure as a deduction in computing the income for the current year.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Claimed by the Assessee on Account of Overstatement of Expenditure:
The Revenue appealed against the order by the Commissioner of Income Tax (Appeals)-2, Jabalpur, which allowed the assessee's appeal contesting the assessment under section 143(3) of the Income Tax Act, 1961 for AY 2008-09. The sole issue raised was the disallowance of the expenditure claimed by the assessee in the sum of Rs. 4754.76 lacs, which was deleted by the CIT(A). The assessee-company, one of the entities succeeding the erstwhile MPSEB, had accounted for adjustments consequent to the final notification of assets and liabilities by the GoMP.

2. Determination of Whether the Expenditure is a Prior Period Item or Not:
The AO disallowed the expenditure, classifying it as a prior period item based on the statutory auditor's report. The assessee argued that the expenditure was not a prior period item as it was necessitated by the final opening balance sheet provided by the GoMP on 12/06/2008. The CIT(A) supported the assessee's view, stating that the liability was ascertained and crystallized during the current period, and thus, could not be classified as a prior period item.

3. Admissibility of the Expenditure as a Deduction in Computing the Income for the Current Year:
The Tribunal examined the nature of the liabilities and the adjustments made in the assessee's accounts. The Tribunal noted that the interest liability for the period from 01/06/2005 to 31/03/2007 would arise to the assessee only on 12/06/2008 and was correctly provided for on 31/03/2008. The Tribunal directed the AO to compute the qualifying amount for deduction of interest expenditure on GPF and loan, segregate the interest on GPF to the extent it relates to employees other than the assessee's, and allow the interest liability as a deduction subject to relevant provisions. The Tribunal also directed the AO to allow the provision for terminal benefits, subject to specific provisions under the Act, and to work the depreciation claim based on the revised values.

Conclusion:
The Tribunal concluded that the claim of expenditure charged in the profit and loss account due to the final opening balance sheet notified by the State Government during the year under consideration is justified. The AO was directed to verify the relevant details and allow the assessee's claims accordingly, subject to the provisions of the Act. The Revenue's appeal was decided on these terms.