TMI Blog2011 (10) TMI 724X X X X Extracts X X X X X X X X Extracts X X X X ..... that income, the Assessing Officer was only right to disallow the expenses on proportionate basis. ii) On the facts and in the circumstances of the case and in law, the CIT(A) has erred in merely relying upon the predecessor s decision in assessee s case for assessment year 2003-04 and assessment year 2002-03 (order was u/s 154 of the Act) where as the issue of determination of the expenses is a question of fact and has to be determined/examined independently in each assessment year. iii) The CIT(A) failed to take cognizance of a. the rule 8D of IT Rules inserted by the IT(Fifth Amendment) Rule,2008,w.e.f. 24.3.2008 prescribed the method for determining amount of expenditure in relation to income not included in total income. b. The ITAT Special Bench Mumbai has in its judgment reported in 2008- TIOL-ITAT-MUM-SB has held that the provisions of sec. 14A are special in nature and has over riding effect over all other sections allowing deduction. It has also held Rule 8D to be retrospective of expenses attributable to earn tax free income should be applied as per Rule 8D of IT Rules. c. In case of Kapoor Chand,266 ITR 48(ITAT)All while interpreting the applicability o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. ITA No.4688/Del/2010 1) On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of ₹ 9,67,49,250/- made u/s 14A of the Income-tax Act, 1961 in respect of expenses attributable to income not forming part of total income. 2) The appellant craves to the allowed to amend, delete or add any other grounds of appeal during the course of hearing of this appeal. 2. At the out set, it may be pointed out that initially the appeal for the assessment year 2002-03 was dismissed by the ITAT vide their order dated 27.7.2009 and appeals for the AYs 2003-04 and 2004-05 were also dismissed vide order dated 18th December, 2008, for want of COD approval. Subsequently, the Revenue obtained COD approval and accordingly, the appeal for the AY 2002-03 was recalled vide order dated 15.10.2010 in MA no.303/Del./2010 while appeals for the AYs 2003-04 2004-05 were recalled vide order dated 25.6.2010 in MA nos. 146 147/Del./2010 after order dated 4.12.2009 of the Hon ble High Court in ITA no. 1276/2009 . This is how these appeals came up for hearing before us along with appeal for the AY2007-08. 3. Adverting now to grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses while referring to his findings in the AY 2001-02: [In Rs. crores] Power charges 0.99 Rates and Taxes 0.08 Insurance 1.13 Depreciation 5.38 Transmission charges written back on account of revision of tariff 11.90 Interest 15.17 Bonds interest written back 16.78 Surcharge written back 4.38 others 7.93 Total 64.34 3.4 In this assessment year also, the amount was also added back while computing book profits u/s 115JB of the Act. 4. On appeal, the learned CIT(A), merely following his decision for the AYs 2001-02 and 2002-03, deleted the disallowance in the following terms:- 4.3 I have carefully considered the facts of the case and have gone through the order of the AO and the detailed submissions made by the ld. AR appearing for the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-05 crystallized in the years under consideration, accordingly, the claim was allowable. 6. We have heard both the parties and the facts of the case as also the break up of the expenses comprising the aforesaid amount of ₹ 616 lacs and ₹ 6432 lacs as also the decision of the ITAT in the AY 2001-02. At the outset, we find that neither the AO nor the ld. CIT(A) analysed each item of expenditure, comprising the aforesaid amounts in these two assessment years in order to ascertain as to whether or not the liability for the various items of expenditure crystallized in the years under consideration. We find that the AO merely followed his findings for the AY 2001-02 and disallowed the claim for the aforesaid expenses in these two assessment years. On appeal, the ld. CIT(A) allowed the claim of the assessee on the basis of his findings for the assessment year 2001-02. The ld. DR did not enlighten us to as to whether Revenue preferred any appeal against the findings of the ld. CIT(A) in the AY 2001-02 . We find that on appeal by the assessee in the AY 2001-02 in relation to disallowance of ₹ 2.60 crores on account of prior period expenses, the ITAT vide their order da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account. An estimated income or liability, which is yet to be crystallized, can only be adjusted as a contingency item but not as an accrued income or liability of that year. In view of the foregoing and in the light of view taken by the Hon ble Gujrat High Court in the aforecited decision, especially when the ld. CIT(A) have not recorded any findings as to whether or not the liability in respect of each of the claim made by the assessee in the amount of ₹ 616 lacs and ₹ 64.32 lacs ,crystallized in the year under consideration, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue raised in the ground no.1 in the appeals for the AYs 2003-04 2004-05, afresh in accordance with law in the light of various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the issue, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not the liability for each item of the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not mean that because these items were shown separately, they did not constitute part of net profit. Paragraph 5 of the Accounting Standard (AS-5), which has been extracted above, specifically requires that all items of income and expenses which are recognised in a period should be included in the determination of net profit or loss for the period unless an accounting standard requires or permits otherwise. We have already extracted the definition of prior period items as given in AS 5. It clearly stipulates that prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Therefore, the income or expenses relatable to prior period items are those which arise in the current period, i.e., the period relevant for the purposes of computing the net profit or loss. Clearly, prior period items are to be included in the determination of net profit or loss. Furthermore, paragraph 7 of AS 5 stipulates that the net profit or loss, inter alia, comprises of extraordinary items and the same should be disclosed on the face of the statement of profit and loss. From t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss account prepared under section 115JA(2). The assessee was not claiming any reduction in the net profit on the basis of any of the clauses appearing in the Explanation. The assessee's claim was that the prior period items/extraordinary items were, in any event, subsumed in the computation of net profit. It is only that they were to be shown separately so that their impact on the current net profit or loss could be perceived. 6.22 Since the ld. CIT(A) did not examine the facts of the instant case in the light of aforesaid decision while we have restored the issue of disallowance of prior period expenses in ground no.1 in the appeals of the Revenue for the AYs 2003-04 2004-05, to the f ile of the ld. CIT(A), we consider it fair and appropr iate to restore the issue raised in ground no. 3 in the appeal for the AY 2003-04 a portion of ground no.4 in the appeal for the AY 2004-05, relating to addition of prior period expenses while determining book profits , also to his file with the directions to examine the issue in the light of various judicial pronouncements including that referred to above and thereafter pass a speaking order in accordance with law after allowing suf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores on account of interest free tax free bonds in the AY 2004-05, resulting in disallowance of ₹ 2.83 crores besides adding the amount while computing book profits u/s 115JB of the Act. 7.3 In assessment year 2007-08, the AO having recourse to provisions of Rule 8D of the Income-tax Rules, 1962 disallowed an amount of Rs. `96,74,920/- in terms of provisions of section 14A of the Act besides adding the amount while computing book profits u/s 115JB of the Act. 8 On appeal, the learned CIT(A) allowed the claim of the assessee in the AY 2003-04 while relying upon decision of a co-ordinate Bench in ACIT vs. Eicher Ltd.,101 TTJ 369(Delhi) and concluded that the assessee company did not make any further investment decisions during the year,as evident from its Balance Sheet nor engaged in any trading activity in the bonds held by it. Moreover, borrowed funds were not utilized in acquiring these bonds and the company came to own the same by virtue of sovereign decision of the Government of India..Since there was no material on the basis of which the AO estimated the disallowance @ 2.5% of the administrative expenses, the ld. CIT(A) deleted the disallowance as also the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here are two opinions possible. An apparent error must be from the record of the assessee and not an error discovered from other sources. This issue is squarely covered in favour of the appellant by the Hon ble Apex Court s decision in the case of T.S. Balaram, ITO vs. Volkart Brothers (82 ITR 50). 5.1 Coming to the merits of the disallowance made by the AO, I find that similar addition was made in the case of the appellant in AY 2003- 04 based on estimation of expenses in regard to the earning of exempt income. The said addition made in AY 2003-04 stands deleted vide my order in Appeal No.79/05-06 dated 8.9.2006, wherein it has been held as under:- I have carefully considered the facts of the case and have gone through the order of the AO and the submissions made on behalf of the appellant company. The undisputed facts are that the appellant company earned tax free interest income of ₹ 60.96 crores and the overall business receipts amounted to ₹ 2533 crores. I find that the AO has disallowed on an estimate basis expenses @ 2.5% of administrative expenses, which worked out to ₹ 2,31,57,500/-. The undisputed facts are that the appellant company did not make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessarily been incurred to produce nontaxable income. A look at the language of the section shows that the AO can disallow only expenditure incurred by the assessee in relation to the exempt income. The word incurred clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. It was open to the legislature to confer power upon the AO to assume that a part of the expenditure must have necessarily been incurred to produce exempted income which the AO can estimate and disallow and accordingly, use suitable expressions in the section conferring such power upon the AO .. But when Sec.14A has not given such specific power to the AO, he has no authority to estimate the expenditure which the assessee would have in the opinion of the AO incurred in relation to the exempted income. The words in relation to income which is exempt under the Act, no doubt, appear to be broad at first impression, but on deeper examination, and read in conjunction with the word incurred , it seems to us that these are restrictive words, restricting the power of the AO to estimate e a part of the expenditure incurred by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut any fresh fact/material, which could indicate otherwise. Accordingly, disallowance of ₹ 16,40,34,228/- made by the AO u/s 14A is deleted. 8.2 In the AY 2004-05 also, the ld. CIT(A) deleted the disallowance following the decision of the ITAT in Eicher Ltd.(supra) in the following terms: 5.3.2 The case of the appellant is squarely covered by the above cited decision in the case of Eicher Ltd. As discussed hereinabove, there is no evidence or material on record in the present case authorizing the AO to invoke section 14A for the purpose of disallowing expenditure on an estimate basis. The AO has not made out a case that any expenditure was actually incurred to earn the tax free income; in fact, it appears that he has proceeded on the presumption that some expenditure must have been incurred in relation to the earning of such tax free income. As discussed above, no disallowance is permissible on presumption or estimate basis; disallowance can only be made if it is established by the AO, with an acceptable degree of accuracy, that certain expenditure has been incurred in relation to the earning of tax free income. On overall consideration of the facts and the ratio of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile relying upon the decision in the case of CIT Vs. Catholic Bank Ltd. others 237 CTR (Ker..) 164; CIT Vs. Printers House (P) Ltd.,188 Taxman 70(Del.),Minda Investments Ltd. Vs. DCIT 138 TTJ (Del.) 240 and State Bank of Travancore vs. ACIT,318 ITR(AT)171 (Cochin.) and CIT vs. Hero Cycles Ltd., 323 ITR 518 (P H); the ld. AR added that no disallowance could be made out of administrative expenses, having recourse to provisions of sec. 14A of the Act. 10. We have heard both the parties and gone through the facts of the case as also the aforecited decisions relied on by the ld. AR on behalf of the assessee. Indisputably, the assessee did not incur any expenditure by way of interest for investment in tax free bonds. In fact, the tax free bonds were acquired on the orders of the Government on conversion of sundry debtors of State Electricity Boards, facing financial crunch. The AO disallowed 2.5% of the administrative expenses for earning interest income from tax free bonds in the assessment years 2002-03 to 2004-05 while in assessment year 2007-08 disallowance has been made having recourse to provisions of rule 8D of the I.T. Rules, 1962. There is no material before us, suggesting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic 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 purport of section 14A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, especially when the Revenue has not placed before us any material in order to controvert the aforesaid findings of the ld. CIT(A) so as to enable us to take a different view in the matter nor even referred to us any material that impugned expenditure was incurred to earn tax free interest income, we are not inclined to interfere with the findings of the ld. CIT(A). In view thereof, ground no.2 in the appeal for assessment year 2003-04, ground nos. i to iii in the appeal for the AY 2002-03, ground no.2 in the appeal for assessment year 2004-05 and ground no.1 in the appeal for the AY 2007-08, are dismissed. 12. Ground no.3 in the appeal of the Revenue for the assessment year 2004- 05, related to disallowance of ₹ 3.82 crores . The AO noticed that the assessee claimed an amount of ₹ 3.82 crores by way of provision for medical benefits post retirement. To a query by the AO, the assessee replied that the provision for the post retirement medical benefits was an ascertained liability. Since the assessee was under obligation in terms of employment to provide its employees the benefit of medical facilities for post retirement and the liability was based on actuarial va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making this disallowance is that there are many variables which make such provision uncertain, which is different from the case of provision for gratuity made on the basis of actuarial valuation. On the other hand, the case of the appellant is that the provisions for gratuity and retirement benefits are on the same footing and have same uncertainties, for which reason actuarial valuations are made and considered to be a scientific method of providing for these liabilities. On careful consideration of the view of the Assessing Officer and /the submissions of the learned AR, I find sufficient merit in the contentions of the appellant that/the provision made for retirement benefits on the basis of actuarial valuation is not a contingent liability and is allowable as a deduction. I have taken note of the decision of the Hon ble Supreme Court in the case of Metal Box Co. of India Ltd.(supra),wherein it has been held that the provision for gratuity on actuarial variation represents real liability and can not be said to be a contingent liability. The appellant s case is also found to be supported by the decisions rendered by the Hon ble Supreme Court in the case of Bharat Earth Mov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve not placed before us any material in order to controvert the findings of the ld. CIT(A) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision. In the absence of any basis, especially when similar claims have been allowed by the AO in the preceding as well as succeeding assessment years, we have no hesitation in upholding the findings of the ld. CIT(A) arrived at while following the decision of a co-ordinate Bench in NALCO(supra). Therefore, ground no. 3 in the appeal for the AY 2004- 05 is dismissed. 16. As regards portion of ground no..4 in the appeal for the AY 2004-05, since we have already upheld the findings of the ld. CIT(A),deleting the disallowance on account of disallowance u/s 14A and disallowance on account of provision for post retirement medical benefits, there is no question of adding these amounts in terms of provision of section 115JB of the Act. It may be pointed out that similar addition on account of disallowance u/s 14A of the Act in the AYs 2002-03,2003-04 and 2007-08 , deleted by the ld. CIT(A) , have not been disputed in further appeal by the Revenue. Accordingly, this ground in the AY 2004-05 is dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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