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TMI Blog2012 (11) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... – Held that:- Liability to pay loyalty bonus to the employees, for whom provision has been made by the assessee in the accounts, is the liability in praesenti though it will be discharged at a future date. Thus it is not a contingent liability and is an ascertained liability. Once it is an ascertained liability and provision has been made in the accounts of the assessee who follows the mercantile system of accounting, the claim of the assessee has to be allowed - in favour of the assessee Addition - taxability of amount received - income had arisen to the assessee on account of the compensation of Rs.12,20,00,000/- received by assessee for recruiting certain employees by way of transfer from another company M/s.Verifone - CIT(A) obtained a remand report from the AO and upon consideration of the same concluded that the AO was justified in treating such receipt as income from other sources – Held that:- Issue results in huge addition of around 12 crores. We find from the record that for confirming such huge addition, the CIT(A) has not passed a speaking order though he concurred with the AO - appellate order that the CIT(A) has simply mentioned that the assessee has relied on case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed the disallowance made by the AO. Being aggrieved, the assessee is on further appeal before us. 3.2 Learned AR of the assessee has filed a paper book of 49 pages consisting of the following: 1 Submissions before ACIT dt.10-2-2005. 2. Confirmation letter from IIT, Madras on receipt of assets. 3. Submissions before CIT(A) dt.20-2-2006. 4. Memorandum of Understanding between IIT Madras and HP. 5. Alliance Agreement between IIT Madras and HP. 6. Bonus policy Loyalty Benefit Program of HP. 7. Break up of child education/wedding Asst provisions for March 2002. 8. Break up of disbursement of above mentioned provision. 9. Agreement with Verifone India Pvt. Ltd. Learned AR of the assessee submitted that the assessee indeed derived benefit on revenue account as is evident from the MOU entered by the assessee with IIT, Chennai. He relied on the decision of the Rajasthan High Court in the case of ACIT vs. Rajasthan Spinning Weaving Mills Ltd. (2003) 274 ITR 465)(Raj). He also relied on the decision of the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC) for the proposition that if the expenditure did not result in endu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has derived enduring benefit from the above transactions and expenditure has been incurred keeping in mind the long term benefits. Hence, it cannot be treated as revenue expenditure. The argument of the assessee that if the expenditure was held to be not allowable u/s 37, then the same is fully deductible u/s 35 cannot be accepted since R D was not carried out at the premises of the assessee. 4. We have heard rival submissions and considered the facts and materials on record. It is noticed that the assessee would set up a laboratory at IIT, Chennai so that its employees would work jointly with the faculty and research staff of IIT. Unless the assessee has made this arrangement by making payment for construction of laboratory and purchase of computers, employees of the assessee would have been denied the benefit of working with IIT faculty. Hence, in our view, it is a payment made due to commercial expediency. The Apex Court, in the case of S.A.Builders vs. CIT(A) another (2007)(288 ITR 1)(SC) has held that the phrase for the purpose of business appearing in sec.37 includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the assessee is not of enduring nature but of revenue nature and the same has been incurred due to commercial expediency of the assessee s business. Hence, we direct the AO to allow the claim of the assessee of Rs.20,27,678/- being payment made to IIT, Chennai. This ground of appeal of the assessee is allowed. II. PROVISION FOR EMPLOYEE-LOYALTY BONUS: 5. Brief facts in relation to the second issue viz., Disallowance of provision for employee loyalty bonus are as follows: The assessee had a scheme for its employees under which an employee is entitled to claim certain sums from the company upon completion of three years of service. The AO noted from the break-up of the provision for employees benefits appearing in schedule J of the balance sheet of the assessee as on 31-3-2002 that provision was made for a sum of Rs.30,77,954/- during the year. Hence, the AO concluded that the sum of Rs.30,77,954/- is only a provision and accordingly added back to the income of the assessee. 6. The assessee carried the matter on appeal to the CIT(A). The CIT(A), observing that the expenditure has not been incurred in the relevant assessment year and is still a mere provision and not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. (iv) In the material submitted before the CIT(A) the assessee never established whether the expenditure was actually incurred during the previous year relevant to the assessment year 2002-03. The assessee has only estimated that it may have to incur such expenditure and accordingly made a provision. The assessee also has not submitted the details of the employees for whom such provision was made. Hence, the submission of the assessee is not acceptable. (v) The assessee has relied on several case laws, one among which is Wipro GE Medical Systems Ltd. Vs. ACIT(ITA Nos.322 to 328/Bang/2001). The Karnataka High Court has also passed an order on the departmental against the order of the ITAT in the above case and it is in assessee s favour. However, the department has preferred SLP against the decision of the Karnataka High Court in the above case. Hence, the reliance of the assessee on the above case law is not acceptable. (vi) The assessee has made an alternative claim that deduction should be allowed to the as on payment basis in the financial year during which payments would be made to its employees. This claim may be acceptable only after the verification of the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed in view of the decision of the Apex Court cited supra. Hence, we are not allowing this claim of the assessee. Thus this issue is decided in favour of the assessee. III. AMOUNT RECEIVED FROM M/S. VERIFONE INDIA (P) LTD.: 10. Brief facts in so far as third issue viz. taxability of amount received by the assessee from M/s.Verifone India Pvt. Ltd. are: The assessee offered a sum of sum of Rs.10,42,17,030/- as income from other sources. This income had arisen to the assessee on account of the compensation of Rs.12,20,00,000/- received by it for recruiting certain employees by way of transfer from another company M/s.Verifone. Against this compensation received, the assessee had claimed the cost of the recruitment amounting to Rs.1,77,82,970/- as deduction u/s 57 and offered the balance of Rs.10,42,17,030/- as income from other sources. In the revised return filed on 31-10-2004 the income from other sources has not been offered to tax. The reason for not offering this amount as income from other sources is that the amount received is not in the nature of income. The AO held that the receipt is not a receipt arising from the business or the exercise of a profession or occupation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration would also include the tax element. He has relied on the letter dt.15-7-2002 from M/s.Verifone to the assessee giving the break-up of the sum of Rs.12.2 crores. He supported the orders of the AO as well as the CIT(A) in taxing the income as income from other sources. 12. We have heard rival contentions and considered the facts and material on record. This is an issue of addition of Rs.12,20,00,000/-. In other words, this issue results in huge addition of around 12 crores. We find from the record that for confirming such huge addition, the CIT(A) has not passed a speaking order though he concurred with the AO. We find from the appellate order that the CIT(A) has simply mentioned that the assessee has relied on case-laws, the facts of which are different from the instant case. However, in our considered opinion, the first appellate authority ought to have discussed about the caselaws relied upon and given his reasons as to how they are not applicable to the present facts and circumstances. This is most required for the reason that the next appellate authority has to see whether the first appellate authority has applied his mind properly or not. Hence, we deem it fit and prop ..... X X X X Extracts X X X X X X X X Extracts X X X X
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