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2023 (10) TMI 263 - AT - Income TaxRevision u/s 263 - AO in his detailed order has made various disallowances U/s. 14A of the Act and further has also observed that certain expenses as described U/s. 43B are allowed in the year of payment only - HELD THAT - From this observation of the Ld. AO which was also relied on by the Ld. AR, we find that the Ld. AO has applied his mind on the claim made by the assessee U/s. 43B of the Act for allowance of expenditure on payment basis pertaining to the AY 2007-08 and earlier years. In the instant case, the order of the Ld. AO is not erroneous as the Ld. AO has applied his mind while allowing the deduction claimed by the assessee U/s. 43B of the Act and therefore one of the conditions as laid down U/s. 263 of the Act is absent. Further, in the case of CIT vs. Chettinad Logistics Pvt Ltd 2017 (4) TMI 298 - MADRAS HIGH COURT held that if no exempt income forming part of the total income of the assessee was earned in the relevant assessment year, additions made by the Ld. AO by relying upon section 14A of the Act read with Rule 8D is beyond the scope and content of the main provisions. Further, in the case of Redington (India) Ltd 2017 (1) TMI 318 - MADRAS HIGH COURT , the same view was upheld by the Hon ble Madras High Court. In view of these facts and circumstances of the instant case and relying on the judicial pronouncements as discussed above, we considered it deemed to be fit that exercise of powers u/s. 263 of the Act by the Ld.CIT-1, Visakhapatnam is not valid in law and deserves to be quashed. Disallowance of prior period expenses - only contention of the Ld. AO is that these expenditures related to prior period where the assessee has claimed exemption of income and hence disallowance U/s. 14A of the Act is applicable to the instant case - HELD THAT - These items of prior period expenses raised in the grounds are crystallized during the impugned assessment year 2010-11 and accordingly, the assessee has claimed it as an expenditure during the impugned assessment year. We also find that these prior period items are not a result of errors or omissions in the financial statements of one or more prior periods. These items / adjustments are necessitated by the circumstances which are determined in the current accounting period. Even though it relates to the prior periods, it needs to be allowed as an expenditure in the impugned assessment year as it has been crystallized only during the AY 2010-11. Based on the discussion above, we find that even though the items of expenditure pertain to the earlier period where exemption U/s. 11 was claimed by the assessee these items of expenditure was crystallized only during the current assessment year and hence cannot be accrued in the previous assessment years. We therefore have no hesitation to delete the addition made by the Ld. Revenue Authorities on this ground and thereby allow the ground raised by the assessee. Disallowance of arrears of salaries and wages and arrears of pension - DR fully supported the orders of the Ld. Revenue Authorities and stated that since the expenditure pertains to the earlier years where the assessee is entitled for exemption U/s. 11 of the Act, this expenditure needs to be disallowed U/s. 14A of the Act in the current assessment year - HELD THAT - These prior period items are not a result of errors or omissions in the financial statements of one or more prior periods. These items / adjustments are necessitated by the circumstances which are determined in the current accounting period. Even though it relates to the prior periods needs to be allowed as an expenditure in the impugned assessment year as it has been crystallized only during the AY 2010-11. The only contention of the Ld. AO is that these expenditure related to prior period where the assessee has claimed exemption of income and hence disallowance U/s. 14A of the Act is applicable to the instant case. Based on the discussion above, we find that even though the items of expenditure pertain to the earlier period where exemption U/s. 11 was claimed by the assessee these items of expenditure was crystallized only during the current assessment year and hence cannot be approved in the previous assessment years. We therefore have no hesitation to delete the addition made by the Ld. Revenue Authorities on this ground and thereby allow the ground raised by the assessee. Disallowance of excess depreciation as claimed by the assessee in respect of capital dredging - Admittedly, the assessee has incurred expenditure of capital dredging on which the assessee claimed depreciation @ 15% considering the capital dredging as Plant Machinery - AO disallowed the excess depreciation claimed by the assessee and observed that the assessee is entitled for depreciation @ 10% on capital dredging as it has to be considered as buildings - HELD THAT - We find that the ship way constructed for dredging is on par with the construction of roads and culverts constructed in the premises of the factory and by placing reliance on the decision of the Hon ble Bombay High Court in the case of CIT vs. Mazagaon Dock Ltd 1993 (7) TMI 61 - BOMBAY HIGH COURT we have no hesitation to confirm the order of the Ld. Revenue Authorities on this ground and thereby dismiss the grounds raised by the assessee. Addition towards upfront premium received on lease of lands - HELD THAT - On perusal long term lease agreement entered into by the parties on 29/03/2010, we find that the assessee has also paid an amount as non-refundable premium to the lessor in addition to the provisional upfront free for a period of 30 years from the date of taking possession of land. It is also observed from the recitals of the lease agreement that a nominal rent of Rs. 1/- per sqmt per annum up to 30 years from the date of handing over of the land is payable by the lessee in advance on or before of 01st April of each year. Further, we observed that the assessee is following mercantile system of accounting and has also followed consistent policy of treating the revenue from upfront premium over the period of lease. This method of accounting is being followed by the assessee on regular basis which was not disputed by the Revenue in earlier years. We are of the considered view that since the assessee is consistently following a method of recognizing the revenue over the period of lease, the treatment of upfront premium received by the assessee during the impugned assessment year by considering it as a revenue income deserves to be deleted and we direct the Ld. AO to delete the addition made on account of upfront premium received during the assessment year. We are therefore inclined to allow this ground raised by the assessee. Addition towards unaccounted sundry debtors - HELD THAT - From the annual report, we find that the assessee has rendered services to M/s. P.S Co., and has not considered an amount as receivable from the firm since whereabouts the firm were not known. It is an admitted fact that invoice was not accounted in the books of accounts and recognized as a revenue during the impugned assessment year. The argument of the Ld. AR could not be accepted due to the fact that accounting the same in the impugned assessment year and later claiming it to be a bad debt since the whereabouts of the firm is not known is not a valid argument. Income has to be recognized when the services are rendered as per the AS-9 issued by the ICAI. Merely non-accounting of income due to the fact that the party could not be traceable is not a valid accounting procedure. Accordingly, we are of the considered view that the income has to be recognized in the books of accounts and the Ld. AO has rightly added the amount which was also confirmed by the Ld. CIT(A). Thus, we do not want to interfere in the order of the Ld. Revenue Authorities. Contribution to pension fund in excess of the annual limit of 27% of the salaries and wages - HELD THAT - As relying on GlaxoSmithkline Pharmaceutical 2011 (1) TMI 1530 - ITAT MUMBAI seven if the expenditure is not allowable U/s. 36(1)(iv) of the Act, but the same is allowable U/s. 37 of the Act. Respectfully following the above decision, we are inclined to allow the contribution to Pension Fund in excess of 27% on account of salaries, wages and pension U/s. 37 of the Act and hence this ground raised by the assessee is allowed. Since, the expenditure is allowed on contribution basis, we are of the opinion that the provisions of section 43B of the Act are not applicable. Addition being the expenditure incurred towards donations and contributions - AR submitted that the assessee has incurred contribution to the Major Ports Sports Council Board (MPSCB) and also expenditure on compassionate grounds, disaster management plant, cultural activities, Teacher s Day celebrations etc. - HELD THAT - In the instant case, it was accepted by the assessee that certain expenditure was incurred towards disaster management plan, cultural activities, Teacher s Day Celebrations etc. CIT(A) also adjudicated this issue after verification of the submissions made by the assessee and has held that out all part pertains to the expenditure which are not related to the business activities of the assessee and thereby disallowed a sum of Rs. 1,49,325/-. From the submissions made before us by the Ld. AR we are of the opinion that cultural activities, Teacher s Day Celebrations etc. are not in the nature of expenditure for business purposes and therefore concur with the findings of the Ld. CIT(A) on this issue and we find no infirmity in the order of the Ld. CIT(A). Thus, this ground raised by the assessee is dismissed. Disallowance of provision for payment of Gratuity for Rs. 30.17 Crs which is beyond the scope of the rectification U/s. 154 - HELD THAT - This payment has been necessitated due to shortfall to meet the actuarial valuation of the Fund to ensure that there is sufficient balance in Gratuity Fund to discharge its obligation at a future date. It is neither an annual contribution nor an ordinary contribution. Even though the contribution is in excess of the specified limit, in our opinion these are incurred for the purpose of business of the assessee and hence are deductible U/s. 37(1) of the Act. We therefore do not concur with the opinion of the Ld. CIT(A) and we are inclined to set-aside the order of the Ld. CIT(A) and allow the grounds raised by the assessee. Disallowance of provision made towards interest payable on Government Loans - HELD THAT - In the instant case the interest is payable on loans taken from Government of India. In our opinion interest payable on loans taken from Government of India is not covered u/s 43B of the Act. Respectfully following the decision of UP. RAJYA VIDYUT UTPADAN NIGAM LTD. 2013 (9) TMI 961 - ALLAHABAD HIGH COURT we have no hesitation to delete the addition of Rs. 7 Crs made on account of interest payable to Government of India during the impugned assessment year. Accordingly, this ground raised by the assessee is allowed. Addition towards disallowance of contribution to VPT Employees Family Security Fund - AR submitted that a provision has been made during the FY towards the Family Security Fund of the employees of the VPT and these expenditure are incurred during the course of carrying of the assessee s business and shall be allowable U/s. 37 - HELD THAT - The Ld. CIT(A) has therefore rightly considered the disallowance being the provision made in the books of account and hence we find no infirmity in the order of the Ld. CIT(A) on this ground and accordingly the ground raised by the assessee is dismissed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Disallowance of prior period expenses. 3. Disallowance of excess depreciation on capital dredging. 4. Treatment of upfront premium received on lease of lands. 5. Disallowance of donations and contributions. 6. Disallowance of excess contribution to pension fund. 7. Disallowance of provision for interest on government loans. 8. Treatment of Railway Permanent Way for depreciation purposes. Summary of Judgment: 1. Disallowance under Section 14A: The Tribunal held that the Assessing Officer (AO) had applied his mind while allowing the deduction claimed under Section 43B and examined the issue in the context of Section 14A. The Tribunal relied on the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT and other case laws, concluding that the order of the AO was not erroneous and prejudicial to the interest of the Revenue. Therefore, the exercise of powers under Section 263 by the CIT was not valid in law and deserved to be quashed. 2. Disallowance of prior period expenses: The Tribunal found that the prior period expenses were crystallized during the relevant assessment year and were not a result of errors or omissions in the financial statements of prior periods. Hence, these expenses were allowed as they were incurred for the purpose of business. The Tribunal deleted the addition made by the Revenue Authorities on this ground. 3. Disallowance of excess depreciation on capital dredging: The Tribunal upheld the Revenue Authorities' view that capital dredging should be treated as "buildings" and not "plant and machinery," thus allowing depreciation at 10% instead of 15%. This decision was based on the judgment of the Bombay High Court in CIT vs. Mazagaon Dock Ltd. 4. Treatment of upfront premium received on lease of lands: The Tribunal held that the assessee consistently followed the method of recognizing revenue over the lease period. The upfront premium received was to be amortized over the lease period, and the addition made by the AO considering it as revenue income was deleted. 5. Disallowance of donations and contributions: The Tribunal found that certain expenses like cultural activities and Teacher's Day celebrations were not related to business activities and upheld the disallowance of Rs. 1,49,325. However, other contributions were allowed as business expenses. 6. Disallowance of excess contribution to pension fund: The Tribunal allowed the excess contribution to the Pension Fund under Section 37 of the Act, following the decision of the Bombay High Court in CIT-6 vs. Glaxo Smithkline Pharmaceuticals. The provisions of Section 43B were not applicable. 7. Disallowance of provision for interest on government loans: The Tribunal held that interest payable on loans taken from the Government of India is not covered under Section 43B of the Act. The addition of Rs. 7 crores made on this account was deleted. 8. Treatment of Railway Permanent Way for depreciation purposes: The Tribunal upheld the CIT(A)'s decision to treat Railway Permanent Way as "plant and machinery" and allowed depreciation at 15%. This decision was based on the principle of consistency and earlier decisions which were not challenged by the Revenue. Conclusion: The appeals were allowed or partly allowed in favor of the assessee on most grounds, quashing the disallowances and additions made by the AO and CIT under various sections of the Income Tax Act, 1961. The Revenue's appeals and cross-objections were dismissed or partly allowed based on the Tribunal's findings.
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