2023 (6) TMI 212 - AT - Income Tax

Disallowance of reversal of amount received as bank guarantees and interest for earlier years - HELD THAT - There is no dispute to the fact that the assessee is carrying on Government of India mission working on behalf of the Government of India. The contracts have been executed under the policy in directions of Government of India. The assessee being custodian of the Government money such money into the hands of assessee cannot be termed as income at any stage. CIT(A) was not in error in giving the finding that appellant is merely custodian of the money received from encashment of bank guarantee and that the assessee has rightly treated the amount receive on encashment of bank guarantee during financial year as a liability along with the interest is liability. However he failed to appreciate that the directions of the ministry being clarificatory in nature and also carrying a mandate of compliance by the assessee cannot be prospective only. The administrative directions in financial matter of Government entities have to be taken to be retrospective to time to which controversy relates unless specifically directed to be prospective. Accordingly Ld. CIT(A) erred in disallowing the reversal of amount received as bank guarantees and interest for earlier years - Decided in favour of the assessee. Addition of prior period expenses towards superannuation benefits - HELD THAT - The Bench is of the considered view that the settled provisions of law is that if any liability though relating to the earlier year depends upon making a demand and its acceptance by the assessee and such liability have been actually claimed and paid in the latter previous years it cannot be disallowed as deduction nearly on the basis that the accounts are maintained on mercantile basis and that it can relate to transactions of the previous years. Reliance can be placed on the judgement Saurashtra Cement and Chemical Industries Ltd 1994 (10) TMI 30 - GUJARAT HIGH COURT Since the change and accounting and computation is outcome of binding nature of department of Public Enterprises Guidelines the assessee had no option but to comply and accordingly the liability is to be considered to be crystallized during the year under consideration. The binding nature of instructions on assessee to make provision as per the instructions in itself is justification for making debit in the accounts which Ld. CIT(A) failed to appreciate. Even otherwise the business of assessee is ongoing and rates of taxes have not change thus making disallowance revenue neutral.- Decided in favour of the assessee. Disallowance of expenses incurred on Corporate Social Responsibility - HELD THAT - It can be appreciated that the assessee is supposed to follow the guidelines of department of Public Enterprises. The CSR expenses have been incurred by the assessee voluntarily taking as responsibility under the mandate of CSR guidelines of the DPE. Ld. CIT(A) has fallen in error to apply strict principles of Act that expenditure should be wholly and exclusively for the purpose of business to the assesee which is a public enterprises. The nexus theory with the objectives of CSR expenditure qua the objectives have to be considered in case of public enterprises on different footing as they also have wider horizon of benefit of society than their objectives alone and Ld. CIT(A) has failed to appreciate same. As decided in M/s. HLL Life Care limited 2018 (6) TMI 552 - ITAT COCHIN assessee had incurred CSR expenses to comply with the directions of Govt. of India thus the expenditure incurred is incidental to the assessee s business and ought to be allowed as deduction u/s 37 - Decided in favour of assessee.

Summary

Issues Involved:

1. Treatment of Encashment of Bank Guarantees and Interest as Income
2. Disallowance of Prior Period Expenses towards Superannuation Benefits
3. Disallowance of Corporate Social Responsibility (CSR) Expenses

Summary:

1. Treatment of Encashment of Bank Guarantees and Interest as Income:

The primary issue was whether the encashed bank guarantees and interest should be treated as the assessee's income. The assessee argued that the funds belonged to the Ministry of New and Renewable Energy, Government of India, and that they were merely acting as a custodian. The Assessing Officer (AO) disagreed, stating that the income accrued to the assessee since they were a party to the contracts. The CIT(A) concluded that the assessee was only a nodal agency and directed the deletion of the addition made for the financial year 2012-13 but upheld the addition for previous years. The Tribunal found that the directions from the Ministry were clarificatory and retrospective, thus ruling in favor of the assessee for all years under consideration.

2. Disallowance of Prior Period Expenses towards Superannuation Benefits:

The AO disallowed Rs. 1.34 crore claimed by the assessee as superannuation benefits for prior periods, arguing that it was an unascertained liability. The CIT(A) upheld the disallowance, stating that the assessee failed to demonstrate the changes in methodology for computing the benefits. The Tribunal, however, found that the liability crystallized during the year under consideration due to government audit objections and guidelines from the Department of Public Enterprises, thus ruling in favor of the assessee.

3. Disallowance of Corporate Social Responsibility (CSR) Expenses:

The AO disallowed Rs. 11,75,593/- spent on CSR activities, stating that there was no nexus between the expenditure and the business of the assessee. The CIT(A) upheld this disallowance, applying strict principles that the expenditure should be wholly and exclusively for business purposes. The Tribunal, however, noted that the assessee, being a public enterprise, had a broader mandate that included societal benefits. It ruled that CSR expenses incurred as per government guidelines should be allowed as a deduction, thus ruling in favor of the assessee.

Conclusion:

The Tribunal ruled in favor of the assessee on all three issues, allowing the appeal and dismissing the Revenue's appeals. The judgment emphasized the role of government guidelines and the broader mandate of public enterprises in determining the allowability of expenses.