2010 (9) TMI 85 - HC - Income Tax

Disallowance - Assessing Officer also disallowed the claim on the ground that since the accounts of the company had been finalized and adopted by the Board of Directors and the shareholders, they could not be interfered with by the appellant after a lapse of three years - Assessee in default - Penalty u/s 271(c) - Tribunal, thus can give a finding that the deduction/income does not belong to the relevant assessment year/years, but though it may incidentally find that the deduction/income relates to another assessment year, it cannot give a finding that the deduction/income belongs to another specified year. There is, however, an exception to the general rule that the jurisdiction of the Tribunal is confined to the subject matter of the appeal. The exception is where an additional ground has been raised with the leave of the Tribunal. In that case, the subject matter of the appeal constitutes the original grounds of appeal and such additional ground/grounds as may be raised with leave of the Tribunal. The Tribunal rightly did not accede to the prayer of the appellant for a direction to be issued that the amounts should be allowed as a deduction in the assessment year 1999-2000 - Tribunal incidentally remarked that the argument of the appellant that it had made payment by way of incentive to its expatriate employees, though was not available to it in the assessment years under consideration of the Tribunal, may be available to it in the year of payment, that is, the assessment year 1999-2000 - Appeal is dismissed

Issues Involved:
1. Jurisdiction of the Tribunal to direct deductions in a different assessment year.
2. Deductibility of incentives paid to expatriate employees.
3. Commercial expediency as a ground for deduction.
4. Contractual liability for payment of incentives.

Detailed Analysis:

1. Jurisdiction of the Tribunal to Direct Deductions in a Different Assessment Year:
The primary issue was whether the Tribunal had the jurisdiction to direct that the amount of Rs. 2,78,28,161 paid by the appellant as incentives to expatriate employees be allowed in the year of payment (assessment year 1999-2000) while considering appeals for assessment years 1997-98 and 1998-99. The Tribunal, while dismissing the appellant's claim for these years, opined that the principle of commercial expediency might allow the deduction in the year of payment, i.e., 1999-2000. However, the Tribunal did not issue a direction for the deduction in the assessment year 1999-2000, citing its limited jurisdiction to the subject matter of the appeal before it, which was confined to the assessment years 1997-98 and 1998-99.

2. Deductibility of Incentives Paid to Expatriate Employees:
The appellant claimed deductions for the amounts paid as incentives to expatriate employees in the assessment years 1997-98 and 1998-99. The Assessing Officer disallowed the claim, stating that the liability was contingent and unascertained at the relevant time, and the payment was actually made in the financial year 1998-99, relating to the assessment year 1999-2000. The Commissioner of Income-tax (Appeals) upheld this decision, stating that the payments were actually discharges of statutory liability under section 201 of the Income-tax Act, 1961, disguised as incentives.

3. Commercial Expediency as a Ground for Deduction:
The appellant argued that the payments were made on the grounds of commercial expediency, citing the Supreme Court judgment in CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601. The Tribunal, however, concluded that the principle of commercial expediency did not apply to the assessment years 1997-98 and 1998-99, as there was no pre-existing liability. It held that this argument could only be raised in the year of actual payment, i.e., the assessment year 1999-2000.

4. Contractual Liability for Payment of Incentives:
The appellant contended that there was an oral arrangement with the expatriate employees for the payment of incentives. However, the Tribunal found no evidence of any enforceable contractual liability. The Tribunal noted that it was difficult to believe that the appellant, well-advised in tax matters, would not claim such substantial amounts in the original returns if there was a genuine liability. The Tribunal concluded that the payments were made under pressure from the Income-tax Department, not due to any contractual obligation.

Conclusion:
The High Court upheld the Tribunal's decision, agreeing that the Tribunal had no jurisdiction to direct deductions for a different assessment year. The deductions could not be claimed for the assessment years 1997-98 and 1998-99, as there was no contractual liability, and the principle of commercial expediency was only applicable in the year of payment. The appeal was dismissed, and no costs were awarded.

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