TMI Blog2013 (1) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Rotork Controls India (P.) Ltd. v. CIT [2009 (5) TMI 16 - SUPREME COURT OF INDIA] had held that a provision made for warranty expenses, even though will be actually expended at a later point of time, is an allowable expenditure in the year of sale of product for which such warranty has been given The liability to pay security expenses to NFC accrued during the financial year and it was not contingent upon any other happening. The mere fact that it was not quantified during the year by way of raising of bills by NFC could not alter the fact that such liability even though on an estimated basis is an accrued and allowable liability. In the present case there is no dispute that the liability to share the expenses for security provided by NFC has accrued and pertains to the year under appeal. Therefore, the estimated liability for such expenses provided for in the books of account by the assessee is an allowable expenditure - appeal of the Assessee regarding disallowance of ₹ 69 lakhs out of the provision made for their share of security expenses is allowed. Weighted deduction u/s.35(2AB) - Held that:- As per the provisions of sec 35(2AB) as applicable to the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t pertained to the proportionate expenses at 32% of the total cost incurred by Nuclear Fuel Complex on CISF personnel, for providing security to their complexes and premises, has submitted that they are required to make such provision in the accounts for the financial year 2006-07, as per the approval of their parent department, Department of Atomic Energy (DAE), to the proposal in that regard submitted by NFC. The assessing officer was not satisfied with the explanation of the assessee. Referring to the letter of the department of Atomic Energy dated 16.4.2003, the assessing officer noted that the approval of competent authority has not been taken for finalizing the Memorandum of Understanding. He therefore, noted that such liability in this case is in the nature of a contingent liability and the same cannot be allowed as a deduction for the assessment year 2007-08. 3. The assessing officer, further, on verification of Form Nos.3CM and 3CL issued by the Ministry of Science Technology, Department of Scientific and Industrial Research, the assessing officer noticed that as per such certificates issued by the said authority, the R D expenditure was only Rs. 3126.02 lakhs. Based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal allowed the assessee's claim on the basis of the one time approval granted by the controlling department, viz. DAE. It was further submitted that NFC has been raising demand towards share on security expenses on provisions of CISF personnel, on quarterly basis and the ECIL has been making payments after adjusting NFC's share of private security expenses borne by ECIL, and thus, as against demands of Rs. 57,81,333 and Rs. 70,77,460 received from NFC for the first two quarters of financial years 2006-07, actual payments to NFAC amounted to Rs. 55,67,529 and Rs. 68,74,4893 respectively, which worked out to a total of Rs. 128.42 lakhs. Since demand letters for the last two quarters were not received from NFC before the close of the accounts, ECIL made a provision of Rs. 138 lakhs for these two quarters since it is mandatory to follow actual basis of accounting, and thus, the total expenditure including provision of Rs. 138 lakhs amounted to Rs. 262.42 lakhs, which has been claimed by the assessee. It was further submitted that on receipt of demand letters from NFC for the last two quarters, vide their letters dated 21.4.2007 and 12.6.2007, ECIL made the payments on 31.5.2007 and 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable as deduction in this case. Thus, out of such disallowance of Rs. 2,62,42,012/- towards provision of CISF security expenses made in the assessment, disallowance to the extent of Rs. 69,00,000/- is confirmed and the balance amount is deleted." 8. As for the other disallowances, disputed in the first appeal before him, of Rs. 1,69,73,787/- on account of excess claim made for weighted deduction under S.35(2AB) of the Act, and the disallowance of Rs. 10,64,l00,000/- towards provision for wage revision arrears, the CIT(A) confirmed the disallowances made by the assessing officer, rejecting the grounds of the assessee in that behalf, and in that process ultimately partly allowed the appeal of the assessee before him. 9. Aggrieved by the relief granted by the CIT(A) the assessee preferred the present appeal before us and has raised the following grounds of appeal: "The order of the CIT(A) in so far as it is prejudicial to the interests of the appellant, is against law, weight of evidence and probabilities of the case. Security Expenses (a) The learned CIT(A) erred in confirming an addition of Rs. 69,00,000/- out of expenditure incurred for deployment of security person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the liability of ECIL to pay its dues on account of security expenses to NFC definitely accrued during the AY 2003-04 relevant to the AY 2004-05. 11. The Tribunal, following the decision of the Apex Court in case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 upheld the claim of the assessee that the liability to pay security expenses to NFC accrued during the financial year and it was not contingent upon any other happening. Hence, the ITAT had allowed the claim of the assessee towards their share of security expenses. As held by the Tribunal in the assessee's own case for the assessment year 2004-05 the liability to pay their share to the security expenses to NFC is a defined and accrued liability. The mere fact that it was not quantified during the year by way of raising of bills by NFC could not alter the fact that such liability even though on an estimated basis is an accrued and allowable liability. The Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62 had held that a provision made for warranty expenses, even though will be actually expended at a later point of time, is an allowable expenditure in the year of sale of product for wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of ["biotechnology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to [two] times of the expenditure] so incurred. [Explanation - For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).] 2. No deduction shall be allowed in respect of the expenditure mentioned in clause(I0 under any other provision of this Act. 3. No company shall be entitled for deduction under clause (I) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, corresponding weighted deduction u/s.35(2AB) shall be granted on receipt of the clarification from DSIR. Consequentially if the assessee is able to prove that any amount of expenditure in their in-house research and development facilities was omitted to be considered by the DSIR for weighted deduction the same may be allowed as a deduction u/s.35/ 37 of the Act. With this observation we dismiss the appeal of the assessee on this issue. 18. With respect to the Provision for Wage revision, the Assessing Officer and the CIT(A) disallowed Rs. 10.64 Crores towards provision for wage revision arrears. From the facts furnished to us the assessee entered into wage agreement for a period of 10 years from 1.1.97 to 31.12.2006. Therefore the due date for revision of wages and salaries were from 1.1.07. The workmen had submitted their charter of demands on 30.6.06 during the previous year relevant assessment year under appeal. Even though final memorandum of settlement was reached on 24.9.09 the increase in salary was effective from 1.1.07. The enhanced salary is an accrued and crystallized liability from 1.1.07 to 31.3.07. Merely because the same was quantified later would not alter the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken in the books of account towards provision of enhanced salary/wages cannot be said to be unilateral entry made by the appellant. The appellant accepted its liability to the extent provision was made in the books of account based on the demands from its employees. It may also be noted that the accounting standards were also made part of the Act. Taking into account principle of prudence and the definition of accrual as given therein, as also the principle of real income, we are of the opinion that in the facts of the present case, the provision made towards additional liability on account of enhanced wages and salary are allowable in the year of making such provision. In this view of the matter, this ground of the assessee is allowed." 21. The CIT(A) has referred to the decision in the assessee's own case in ITA 875/H/06 dt.9.5.08 for the AY 2003-04. We find that the issue on appeal for that year is allowability of the provision of Rs. 82,57,45,377 being arrears payable on account of pay/wage revision referable to earlier years, i.e. from 1.1.97. In that case, the Tribunal concluded that the provision for arrears arising on account of wage revision relating to the earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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