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TMI Blog2018 (12) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... of I.T. ACT with particular reference to Proviso to Section 264(3) - thus sustaining the disallowance on account of ad hoc provision for pay revision - Decided against assessee. Addition of denial of change in the accounting policy - Held that:- The Assessee is a company incorporated under the Companies Act, 1956 and follows mercantile system of accounting. An Assessee company registered under the Companies Act, 1956 is required to maintain accounts in accordance with provisions of The Companies Act, 1956. However, the profits computed in this manner need not necessarily be the same as Total Income for the purposes of I.T. Act. The computation of Total Income for the purposes of Income Tax Act requires giving effect to statutory provisions under I.T. Act, by making necessary adjustments/modifications/alterations/variations to profits compounded in accordance with provisions of the Companies Act, 1956. In view of this, the Assessee was in clear error of law by not adding back the aforesaid amount of 1.28 crores in the computation of Total Income for the purposes of I.T. Act. This error of law is further aggravated by the error of fact, in that the change of accounting policy was ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer an amount of ₹ 1,60,00,000/- on account of Addition of disallowance of ad-hoc provision of salary. ii. The Ld. CIT(A) has erred in facts and in law by not deleting the addition made by Ld. Assessing Officer an amount of ₹ 1,28,00,000/- on account of Addition of denial of change in the accounting policy. iii. That the appellant craves to add, delete or modify any grounds of appeal at the time of hearing." (ITA No.-6151/Del/2014) i. Whether Ld. CIT(A) is correct in incorporating incorrect fact in his order that the Ld. CIT(A) XXVIII had allowed the assessee's ground of appeal had allowed the assessee's ground of appeal in his order, dated 11.01.2012 against the disallowance of ₹ 5406554/- u/s 14A whereas the Ld. CIT(A) XXVIII had in fact, confirmed the above noted addition & had dismissed the assessee's ground of appeal. ii. Whether the order of the Ld. CIT(A)XV is not perverse on account of the incorrect facts incorporated in his order, as stated in ground (1) above. iii. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing." (1.1) In this order, the following abbreviations ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revision of pay of ₹ 1.60 crores, the CIT-IV held that as the report of the 6th Central Pay Commission was received only in September, 2008, though it was made effective from 01.01.2006, therefore, the provision made in respect thereof in the Previous Year 2006-07 was in the nature of an unascertained liability at that point of time. As this issue was not examined by the AO, the Ld. CIT-IV again set aside this issue to the AO. Lastly, the issue regarding under-statement of profit to the tune of ₹ 1.28 crores, which was recognized on actual realization basis than on mercantile basis, was also set aside to the AO. The AO subsequently issued notice to the appellant and after allowing due opportunity to the appellant, held that the contentions of the appellant with regard to the non-applicability of Rule 8D in the current year was not acceptable on the grounds that the appellant had not maintained separate accounts for investments and other business activities and the claim of the appellant that investments were made out of own surplus fund, was not supported by the figures shown by the appellant. The Ld. AO held that subsequent to the decision of Bombay High Court the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India, the report of which was pending. The AO disallowed this claim, holding that the expenditure was purely a provision against unascertained liability and that this provision could not be claimed as expenditure for AY 2007-08. In the words of the AO, "Neither, the said liability accrued nor crystallized during the year under consideration. As per the recommendations of the central Sixth Pay Commission/Ministry of Finance etc. it was decided that 60% of arrears worked out on the implementation of Sixth Central Pay Commission was ordered by the Central govt. to be paid in Financial Year 2008-09 relevant to A.Y. 2009-10 and balance 40% was ordered to be paid in F.Y. 2009-10 relevant to A.Y. 2010-11. Accordingly, the assessee could have claimed the expenditure on account of revision of pay in the A.Y. 2009-10 and the balance amount of expenditure w.e.f. 1-4-2008 to the implementation of Sixth Pay commission should have been claimed in A.Y. 2010-11. Even the Ld. CIT-IV after careful consideration of the issue in question, has observed that the liability on account of revision of pay in consequence of report of Sixth Central Pay Commission has not accrued and crystallized during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the close of the accounting year. As per the recommendations of the Central Sixth Pay Commission the assessee should have claimed such expenses of revised pay of its employees only in the assessment year 2009-10 and 2010-11. Hence, the provision, rather adhoc provision of ₹ 1,60,00,000/- is hereby disallowed. The Assessee filed appeal before Ld. CIT(A), who dismissed Assessee's appeal on this issue vide impugned order dated 28.8.2014. The relevant portion of the impugned order of Ld. CIT(A) is reproduced as under: "6.8 Regarding the Ground No.3 of the appeal relating to addition of ₹ 1.60 crores on account of disallowance of 'Provision of revision of pay', I find that in the current Financial Year, no decision of the Central Govt. was available, which may have a bearing on revision of pay of executives of the appellant company, therefore, it cannot be held that such liability had crystallized in the current year. For the Central Govt. Ministries and Departments, the recommendations of the 6th Central Pay Commission were announced in F.Y. 2008-09. Subsequently, it was decided that 60% of the arrears will be paid in 2008-09 while the balance 40% will be paid in 2009-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etary, Department of Public Enterprises, Government of India 2.2 The Terms of Reference of the Committee will be as follows. 2.2.1 The Committee will examine the principles that should govern present structure of pay, allowances, perquisites, and benefits for the following categories of Central Government Public Sector Enterprises (CPSEs) executives, taking into account the total package of benefits available to them including non-monetary ones, and suggest changes therein which may be desirable and feasible: (i) Board level functionaries (ii) Below Board level executives (iii) Non-unionized supervisory staff 2.2.2 The Committee will make recommendations so as to transform the CPSEs into modern, professional, citizen-friendly and successful commercial entities that are also dedicated to the service of the people. 2.2.3 The Committee will work out a comprehensive pay package for the categories of employees of CPSEs mentioned at sub-para 2.2.1 that is suitably linked to promoting efficiency, productivity and economy through rationalization of structures, organizations, systems and processes as well as promoting functional and operational autonomy within the Publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serviced by the Department of Public Enterprises. (2.2.1) The Ld. Counsel for Assessee further submitted that pay revision finally took place vide Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises, after considering the report of the aforesaid Pay Revision Committee. The Ld. Counsel for Assessee submitted that in view of the Government appointing aforesaid Pay Revision Committee, the Assessee made an ad hoc provision of ₹ 1,60,00,000 on account of anticipated pay revision in FY 2006-07 (AY 2007-08) itself, although the final decision regarding pay revision was taken in FY 2008-09 (AY 2009-10), vide the aforesaid Office Memorandum dated 26.11.2008. The Ld. Counsel for Assessee also placed reliance on Gail India Ltd. v. CIT [2016] 69 taxmann.com 50 (Delhi - Trib.)/[2015] 42 ITR(T) 265 (Delhi - Trib.); CIT v. Kerala State Financial Enterprises Ltd. [2009] 178 Taxmann 449 (Kerala)/[2008] 219 CTR 147 (Kerala) and Bharat Earth Movers v. CIT [2000] 112 Taxman 61 (SC)/[2000] 245 ITR 428 (SC)/[2000] 162 CTR 325 (SC). The Ld. Counsel for assessee also submitted that if this claim is not allowed in this year, it will cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end. In view of the foregoing, the case of Gail India Ltd. v. CIT (Supra) does not advance the case of the Assessee; and, instead, it goes against the assessee. Now, we come to the case of Bharat Earth Movers v. CIT (Supra). In this case, the Hon'ble Supreme Court, after considering Metal Box Co. of India Ltd. v. Their Workmen[1969] 73 ITR 53 (SC) and Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC) stated, at Paragraph 4 of the Order, the well settled law in these words: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. During FY 2006-07 (AY 2007-08), there was neither any statutory liability nor any legally enforceable liability against the Assessee in respect of the Assessee's claim for ₹ 1,60,00,000 deduction for which was claimed by the Assessee on account of ad hoc provision for pay revision. In fact, there was no such liability at all. Even if there was a liability, it was purely a contingent liability which is not deductible for income tax purposes. (3.2) We have given anxious consideration to the submission made by the Ld. AR of the Assessee that if this claim is not allowed in this year, it will cause hardship to the Assessee because the aforesaid claim of ₹ 1,60,00,000 towards ad hoc provision on account of pay revision has not been claimed by the Assessee in the subsequent years. However, in view of Kikabhai Premchand v/s CIT 24 ITR 506 (SC), ITO v/s Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC), CIT v/s British Paints India Ltd. 188 ITR 44 (SC) and CIT v/s Basant Rai Takht Singh 1 ITR 197 (SC), it is well settled that each year is separate and self-contained period, Income Tax is annual in its structure and organization. Thus, each previous year is a distinct unit of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to make protective claim in subsequent year(s) in which it was lawfully allowable, cannot force the claim in an earlier year in which it was not lawfully allowable. However, the Assessee is free to exercise its legal options in respect of the subsequent year(s) in which the claim was lawfully allowable; such as U/s 264 of I.T. ACT with particular reference to Proviso to Section 264(3) of I.T. Act. As the present appeal before us pertains to AY 2007-08; by way of abundant caution, we clarify, however, that we presently decline to give any directions to Revenue for any subsequent year; and that all questions of law, fact, and mixed questions are left open in case the Assessee exercises. (3.3) Therefore, in the facts and circumstances of this case, as discussed earlier; and respectfully following Bharat Earth Movers v. CIT (Supra), Indian Molasses Co. Pvt. Ltd. v/s CIT (Supra), Indian Smelting And Refining Co. Ltd. v/s CIT (Supra), Standard Mills v/s CIT (Supra) and CIT v/s Morarji Goculdas (Supra); and moreover, in view of the foregoing discussion, we dismiss the first ground of appeal filed by the Assessee (in ITA No. 5705/Del/2014) and confirm the impugned order of the Ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the appellant company had assured vide letter dated 06.11.2006 that the accounting policy shall be reviewed in F.Y.2006-07. Subsequently, in the Board meeting of the appellant company of September, 2007, the following resolution was passed: "Resolved that the changes in accounting policy from the year 2006-07 be and are hereby approved as detailed in the agenda item" The detailed note for comparing existing policy and the revised policy shows that the Board of the company took this decision by assuming that there was no financial impact and there was only change in language. However, the very basis of this decision that there was no financial impact was incorrect, as the proposed change had resulted in reduction in the taxable profit under the Income Tax Act, 1961. Further, AO's observation that the decision was taken only after the F.Y. is over was also note-worthy, even though such decision was taken with retrospective effect. Evidently, the appellant is a company incorporated under Companies Act 1956. As per Accounting Standards, it follows mercantile system of accounting. Therefore, even though the company may have changed the accounting policy, which as mentioned w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores in the computation of Total Income for Income Tax purposes. That would have ensured compliance with statutory provisions under I.T. Act, as well as with observation of Audit Party & CAG. The Assessee is a company incorporated under the Companies Act, 1956 and follows mercantile system of accounting. An Assessee company registered under the Companies Act, 1956 is required to maintain accounts in accordance with provisions of The Companies Act, 1956. However, the profits computed in this manner need not necessarily be the same as Total Income for the purposes of I.T. Act. The computation of Total Income for the purposes of Income Tax Act requires giving effect to statutory provisions under I.T. Act, by making necessary adjustments/modifications/alterations/variations to profits compounded in accordance with provisions of the Companies Act, 1956. In view of this, the Assessee was in clear error of law by not adding back the aforesaid amount of ₹ 1.28 crores in the computation of Total Income for the purposes of I.T. Act. This error of law is further aggravated by the error of fact, in that the change of accounting policy was based on faulty premise (i.e. error of fact) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already form the part of total income of the assessee. " Hence, the assessee was asked to give complete details of exempt income giving name of the Investments and the amount of exempt income or taxable income earned from the investments in long term/short term equity shares or bonds. The assessee sought adjournment. A further opportunity was provided to the assessee vide this office questionnaire dated 28.2.2013. The assessee filed the details in a tabular form showing the interest income of ₹ 242,&3,41,868/- on Investments in Bonds of 14 Entities and tax free j dividend income of ₹ 1,20,000/- has been shown on Investments in equity shares of Tamilnadu Urban Finance & Inf. Dev. Corpon. Ltd. As regards the contention of the assessee that no disallowance is called for and rule 8D is applicable from assessment year 2008-09, the same is not acceptable because of the following factual and legal position:- a) As per Balance-sheet the total investments have been shown at ₹ 24,50,49,75,000/- (which also includes Investments of ₹ 24,(16,14,50,000/- in Various Bonds, interest income from which has been shown at ₹ 2,42,83,41,868/-). b) The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91 ITD 311 (Ahd.) the Tribunal held that dividend being exempt u/s 10(34), interest on capital borrowed for acquisition of relevant share yielding such dividend cannot be allowed deduction by operation of section 14A of the Act. In DCIT Vs. S.G. Investment and Inds. Ltd. (2004) 89 ITD 44 (Cal.), the Tribunal said that in view of section 14|A of the Act, pro-rata expenses on account of interest relatable to investment in share for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses. Secondly it was held that the expression "expenses incurred by the assessee in relation to income which does not form part of total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision in CIT Vs. United General Trust Ltd. 200 ITR 488 (SC), it was held in the case of S .G. Investment and Inds. Ltd. (supra) that interest paid by the assessee being attributable to the money borrowed for the purpose of making investment which yielded the dividend income and other expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be subjected to disallowance. The relevant portion of the said judgment is reproduced hereunder:- "The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income..... The basis principle of taxation is to tax the net income i.e. gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purpose of Section 14A" (page 15-16) "The theory of apportionment of /expenditure between taxable and non-taxable income has, in principle, been now widened u/s 14A of the Act. Reading section 14A in juxtaposition with section 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for (see sections 30 to 37)". (page 17) (Emphasis mine) In a detailed judgement, recently delivered after considering the aforesaid judgment of Hon'ble Supreme Court, the Bombay High Court in the case of Godrej and Boycee Mfg. Co. Ltd. Vs. CIT 328 ITR 81 (Bom) has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year 17937819000 B) Average value of investment Investment as on 31.3.06 24857307000 Investment as on 31.3.07 24504975000 Total 49362282000 Average of investment (B) 24681141000 C) Average of total assets Assets as on 31.3.06 252605756000 Current assets as on 31.3.07 245020084000 Total assets 497625840000 Average value of total assets © 248812920000 Disallowance = AxB/CIT(A) 1779352000 1779352000 iii. Aggregate of opening and closing value of investment (Average value of investment 0.5% of above as per Rule 8D 123405705 123405705 Say 190,27,57,705 1902757705 (ii) In light of the above wording, an amount of ₹ 190,27,57,705/-. is being disallowed and added back to the total income of the assessee. Since an amount of ₹ 54,06,554/- has already been charged in the assessment order, net additions of ₹ 189,73,51,151/- is being made to the assessed income of the assessee. Since I am satisfied that the assessee has filed inaccurate particulars of income, penalty proceedings under section 271 (1)(c) are being separately initiated. (Addition of ₹ 189,73,51,151/-)" Relevant portions of the impugned order of Ld. CIT(A): " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments. The AO has not caused any inquiries to ascertain as to whether exempt income has been earned by way of investments in long term equity shares or bonds and as a result, the average value of investments arrived at by the AO suffer from irregularities resulting in incorrect computation of disallowance arrived at under Rule 8D of Section 14A of IT Act, 1961. Consequently, the assessment order to this effect passed by the AO has become erroneous and prejudicial to the interest of revenue and accordingly such order passed by the AO on this issue is hereby set-aside for re-examination in accordance with the relevant provisions of the Act after providing due opportunity of being heard to the assessee company to meet the ends of justice." 6.3 I find that the order of the CIT-IV dated 24.02.2012 is based on the understanding that application of provisions of Rule 8D for making disallowance under Section 14A are sin qua non even for the current year and the short purpose for which revision proceedings were initiated, was to address the computational error there under. The legal position relating to applicability of provisions of Rule 8D for the purpose of making disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Rule 8D were not applicable for the current year, no disallowance or revision thereof could have been made. Accordingly, there is no merit in the action of the AO. 6.5 On the facts of the case also, it is evident that all investments in equity shares (on which exempt dividend income could be earned) were made by the appellant prior to 1995-96 out of own funds and no financial expenses incurred in the current year can be attributed to such investments. Further, the bulk of the disallowance under Rule 8D(2)(ii)2(iii) is on account of inclusion of the value of bonds amounting to ₹ 2446.14 crores in 'average investments' on which the appellant had earned interest income, which being taxable, was offered for tax. Therefore, the action of the AO of including the same without verifying its nature in the light of the direction of Hon'ble CIT-IV vide his order under Section 263, was arbitrary and not justified. The provisions of Rule 8D call for including in the value of 'average value of investments', such investments from which exempt income is or shall be received. Even if Rule 8D was to be invoked, the total disallowance, taking into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions, the Ld. CIT(DR) contended that the order of the Ld. CIT(A) should be set aside. On the other side, the Ld. AR of the Assessee supported the order of the Ld. CIT(A) on this issue. He further contended that the disallowance made by the AO under Rule 8D of I.T. Rules was unsustainable in view of the order of Hon'ble Supreme Court in the case of CIT v/s Essar Teleholdings Ltd. (Supra) in which it was held that Rule 8D of I.T. Rules was applicable only from AY 2008-09. (5.2) We have heard both sides attentively and patiently. We have perused the materials on our records. We have considered the judicial precedents referred to in our records and also the judicial precedents brought to our attention at the time of hearing before us. We have carefully perused the relevant provisions of law. In CIT v/s Essar Teleholdings Ltd. (Supra), Hon'ble Supreme Court held: "…. When section 14A was inserted by the Finance Act, 2001, it was with retrospective effect from April 1, 1962 whereas when the Finance Act, 2006, inserted sub-sections (2) and (3) of section 14A, it was with effect from April 1, 2006 which was mentioned in clause 1(2) of the Finance Act, 2006. Rule 8D was brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AO, should have ensured that effective verification was carried out. The Ld. CIT(A) could have made the verification himself, or he could have caused the verification by way of further inquiry in exercise of powers U/s 250(4) of I.T. Act. Moreover, on perusal of earlier order dated 11.01.2012 of the Ld. CIT(A), it is found that the Ld. CIT(A) had confirmed the disallowance U/s 14A of I.T. Act in that order; and the observation of Ld. CIT(A) in his impugned order dated 28.8.2014 that the disallowance U/s 14A of I.T. Act had been deleted by Ld. CIT(A) in aforesaid order dated 11.1.2012; is an erroneous consideration in the outcome of the impugned order dated 28.8.2014 of Ld. CIT(A) on the disputed issue of disallowance U/s 14A of I.T. Act. In view of the foregoing, we are of the view that the lower authorities, the AO as well as the Ld. CIT(A), have not considered the issue regarding disallowance U/s 14A of I.T. Act properly and the matter requires fresh consideration at the level of the AO. Therefore, we restore the disputed issue regarding disallowance U/s 14A of I.T. Act to the file of the AO for fresh order in accordance with law on the limited issue of disallowance U/s 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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