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TMI Blog2014 (11) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... lity on revaluating the amount of reduction was treated by the Department as taxable income of the assessee and therefore when to that extent when liability is again enhanced by the assessee in its books of account, the enhanced amount is to be allowed as deduction from taxable income on the very same analogy - ₹ 28,23,735/- enhanced as liability during the year being part of ₹ 82,47,082/- which was reduced as liability during the AY 1996- 97 and assessed as taxable income of the assessee for that AY – thus, the order of the CIT(A) is modified – Decided against revenue. Disallowance u/s 14A – Held that:- No material was brought on record by the assessee to show that the investments in shares of M/s. Paras Petrofills Ltd. were not made out of interest bearing funds of the assessee and that the assessee had sufficient interest free funds for making such investments in shares – there was no reason to interfere with the order of CIT(A) – Decided against assessee. Confirmation of adhoc disallowance out of staff welfare expenses – Held that:- CIT(A) confirmed the action of the AO - assessee contended that the disallowance was made without pointing out the items of the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in both the Assessment Years i.e. AYs 2002-03 and 2003-04, is directed against the order of CIT(A)-III, Baroda in deleting the addition of ₹ 6,84,182/- in AY 2002-03 and ₹ 8,07,334/- in AY 2003-04 on account of reversal of the provision made by the assessee for revaluation of liability. 3. The ground No.1 of the appeal of the assessee in Assessment Year 2002-03 is directed against the order of the CIT(A)-III, Baroda in sustaining the disallowance made by the Assessing Officer of ₹ 21,39,553/- on account of revaluation of liability. 4. The facts of the case are that a tripartite agreement was made between Sarabbai Machinery Ltd. (SML), Ambalal Sarabhai Enterprise Ltd. (ASE Ltd.) and the purchasers of the shares of SML on 18.04.1994. At that particular point i.e. in 1994, SML was indebted to ASE Ltd. for an aggregate amount of ₹ 7,40,96,250/- (consisting of unpaid purchase consideration, advances received by SML from ASE Ltd and interest provided on these amounts). In the said agreement, clause 3 expressly provided that the interest on the unpaid purchase consideration shall cease to accrue with effect from 01.10.1993. The clause 4 of the agreement pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1989-90 72,47,625 31,06,125 41,41,500 1990-91 41,41,500 Nil 41,41,500 1991-92 41,41,500 Nil 41,41,500 1992-93 41,41,500 Nil 41,41,500 1993-94 41,41,500 Nil 41,41,500 1994-95 20,71,000 Nil 20,71,000 TOTAL 3,41,67,625 1,13,89,125 2,27,78,500 (-) 14,81,375 TDS on interest accounted in books 3,26,86,250 Balance due to ASE 6. It was further submitted that the Tripartite Agreement had the effect of ceasing the accrual of interest on the unpaid purchase consideration with effect from 01.10.1993. Thus, so far as the liability for interest upto 30.9.1993 is concerned, there was no cessatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le only upon maturity/early redemption of the bonds, no entry was passed in the books of account for taking credit on account of income on these bonds in the books of account for the year ended 31.3.1997 and thereafter. However, as per one of the conditions of issue of the above bonds, ICICI Ltd exercised the option of Early Redemption of the Bond and paid ₹ 11,000 per bond on 15/07/2001. The effect of same was under: Gross Amount @ ₹ 11,000 per Bond On 290 Bonds 31,90,000 Less : TDS 3,43,128 Net Amount 28,46,872 This has created a surplus of ₹ 16,82,000/- as under: Gross Amount 31,90,000 Less : Cost of 290 [email protected],200 15,08,000 Surplus 16,82,000 Therefore, the aforesaid surplus amount was offered to tax in the A. Y. 2002-2003 and the TDS thereon was claimed in the return. 9. It was also submitted by the AR of the assessee that now the position in SML's books of accounts is that the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t bond for repayment of liability. Therefore, the AR of the assessee submitted that during the year ended 31.3,1997, SML had subscribed an amount of ₹ 15,08,000 for 290 Deep Discount Bonds of ICICI Limited (@ ₹ 5,200 per bond.) which were to mature on 15.7.2021 and which, on maturity, were to fetch SML ₹ 5,20,00,000 (@ ₹ 2,00,000 per bond). He pointed out one of the conditions of the above referred issue of bond, which reads as under: (2) Early Redemption The holder(s) of the Bond (s)/the Company shall have the option of Early Redemption of the Bond only at the dates and at the Deemed Face Value mentioned below: a) on July 15,2001 for ₹ 11,000 b)on July 15,2006 for ₹ 24,000 c) on July 15,2011 for ₹ 50,000 d)on July 15,2016 for ₹ 1,00,000 12. The AR of the assessee further submitted that assessee had an option to get early redemption of said bonds on July 2011 and therefore it had purchased such bonds. The assessee would have made early redemption of said bonds in 2011 and from same, fresh investments would have been made from the said amount and on the basis of such proceeds, the assessee would have paid the lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that as soon as the bonds of ICICI was redeemed on 15/07/2001, the assessee-company had decided to revalue its liability from A.Y. 2002-2003 and onwards. In view of aforesaid, it is stated that the assessee had reason for not revaluing its liability from the date it purchase the bonds till the date of redemption and the assessee had not diverted in its regular practice of accounting. 16. Further, the AR of the assessee submitted that the Assessing Officer has not appreciated the facts of the case that assessee has already shown the income of ₹ 82,47,082 for similar revaluation in the year relevant to the A. Y. 1996-97 which was taxed by the Department has been ignored. He submitted that as the assessee-company had claimed ₹ 28,23,735 being the reversal of provision of ₹ 82,47,082 made in A.Y. 1996-97 and which was taxed as income in said assessment year, there is no justification for making any disallowance of said ₹ 28,23,735 when there is no reason to deviate from the action of the Assessing Officer taken in the A.Y. 1996-97 when the amount was taxed. 17. In the backdrop of the above submissions, the AR of the assessee submitted that the CIT(A) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered opinion on similar revaluation made during the year under consideration when a debit has arisen in the profit and loss account because of write back of the liability which was written down in earlier year, such debit amount in the profit and loss account to the extent to which it was assessed as taxable income in the AY 1996-97 ought to be allowed as deduction as business loss to the assessee. We are alive to the fact that when no cessation or increase in real liability takes places then the taxable income of the assessee is not effected merely because of passing entry of revaluation of liability in the books of the assessee. However, in the instant case when no cessation of liability took place in the AY 1996-97 when the assessee by a book entry reduced its liability on revaluating the amount of reduction was treated by the Department as taxable income of the assessee and therefore when to that extent when liability is again enhanced by the assessee in its books of account, the enhanced amount is to be allowed as deduction from taxable income on the very same analogy. We, therefore, find that ₹ 28,23,735/- enhanced as liability during the year being part of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. 25. Ground No.3 of the appeal of the assessee in AY 2002-03 is directed against the order of the CIT(A) confirming the ad-hoc disallowances of ₹ 40,000/- out of Staff Welfare Expenses of 6,74,490/- and Ground No.1 of the Cross-objections filed by the assessee is directed against the order of the CIT(A) confirming the ad-hoc disallowance of ₹ 43,458/- out of staff welfare expenses of ₹ 5,79,459/- in AY 2003-04. 26. The brief facts of the case are that the Assessing Officer observed that majority of the staff welfare expenses were incurred in cash and vouchers of these expenses were not enclosed. Since the expenses were not fully verifiable, the Assessing Officer disallowed ₹ 40,000/- in AY 2002-03 and ₹ 43,458/- in AY 2003-04 out of these expenses. 27. On appeal, the CIT(A) confirmed the action of the Assessing Officer observing that the Assessing Officer has made disallowances in view of the discrepancies as mentioned in his order. 28. Before us, the AR of the assessee submitted that the Assessing Officer was not justified in making ad-hoc disallowances out of staff welfare expenses by making a general remark that expenses were not ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he disallowance of ₹ 3,98,212/- in AY 2002-03 and ₹ 3,07,493/- in AY 2003-04 on account of delay in payment of the employees contribution to the Provident Fund and ESI. 33. At the time of hearing, the Departmental Representative fairly submitted that the issue was covered in favour of the Revenue by the decision of the Hon'ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation, reported in [2014] 366 ITR 170 (Guj.), wherein it was held that if the assessee has not credit the employees' contribution to the employees' account in the relevant fund or funds on or before the due date mentioned in the Explanation to section 36(1)(va), the assessee shall not be entitled to deduction of such amount in computing the income referred to in section 28. Therefore, respectfully following the decision of Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation (supra), we set aside the order of CIT(A) and restore back the order of Assessing Officer. Thus, this ground of appeal of the Revenue is allowed for both the assessment years under consideration. 34. Ground No.3 of the Revenue's appeal in AY 2002- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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