TMI Blog2018 (8) TMI 1706X X X X Extracts X X X X X X X X Extracts X X X X ..... - Held that:- Whatever profit is disclosed in the P & L Account has to be accepted by the AO unless the expenditure is inadmissible under the provisions of section 30 to 43B of the Act. The case of the assessee is also find support from the decision of the Apex Court namely CIT vs. Calcutta Hospital and Nursing Home Benefits Association Ltd. [1965 (4) TMI 12 - SUPREME COURT] wherein it has been held that AO is bound to accept the profit as disclosed in the annual accounts that are filed before the Regulatory body subject to adjustments as prescribed in Clauses (a), (b) and (c) of Rule 5 to the First Schedule. The Hon’ble Supreme Court in the case of General Insurance Corporation of India vs. CIT [1999 (9) TMI 3 - SUPREME COURT] has also held that adjustment is permissible qua an expenditure or allowance which is not permissible under section 30 to 43B of the Act. - Decided against revenue. Accrual of income - Addition on account of revision in the pay-scales of the employees having accrued in the hands of the assessee in the current year - Held that:- In the present case, the revision of pay scale was proposed in December 2005 on the lines of revision of pay scales of LIC by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of ₹ 20,00,00,000/- being the amount arising consequent to change in the method of estimation of recoveries of claims paid. 3. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in deleting the addition of ₹ 6,57,00,000/- being liability on account of revision in the pay-scales of the employees having got accrued in the hands of the assessee. 4. Whether on the facts and circumstances and in law the Ld CIT(A) erred in deleting the ISO certification expenses of ₹ 16,29,923/- by not treating it as Capital expenditure. 5. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. 6. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. The issue raised in ground No.1 is against the deletion of addition of ₹ 27,24,26,000/- by the Ld. CIT(A) as made by the AO to the total income of the assessee on account of recoveries from abroad for which the assessee has already claimed expenditure in the earlier years. 4. The facts in brief are that the assessee is engaged in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal and order of the AO. 8. After hearing both the parties and perusing the material on record including the decision cited by the Ld. A.R., we observe that the co-ordinate bench of the Tribunal had decided the issue in favour of the assessee in ITA No.1971/M/2011 A.Y. 2007-08 (supra) by holding as under: 5. After considering the rival submissions and on perusal of the relevant finding given in the impugned order, it is an undisputed fact that the assessee being a General Insurance Company, its income is liable to be computed strictly u/s 44 r.w. read with First Schedule, which provides for a special provision governing computation of taxable income earned from business of insurance and has an overriding effect over other provisions contained in the Income-tax Act. Section 44 mandates that the assessing authority has to compute the taxable income from the business of insurance strictly in accordance with the provisions of First Schedule. Rule 5 of the First Schedule mandates that the profits and gains of any business of insurance shall be taken to be the profits disclosed in the annual accounts. Such profits are only subject to any expenditure that are disallowable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting practice in the current year and recognized ₹ 100/- as the amount likely to be recovered in respect of each such claim. The said change in the accounting treatment had the effect of not recognizing the estimated recoveries in respect of claims paid and outstanding beyond 3 years as on 31.03.2006 to the extent of ₹ 20 crores. According to the AO, the assessee has reduced its profit by writing back the provision of recovery of ₹ 20 crores and same is required to be added back and in fact added the same to the income of the assessee by the AO. 12. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after considering the contentions and submissions of the assessee by observing and holding as under: 6.3 I have considered the facts of the case, the reasoning given by the AO and submissions made by the Appellant. The Appellant is a public sector company and is engaged in the business of export credit insurance. Its entire capital is held by the President of India. The Appellant i s al so registered as an export insurance company with the Insurance Regulatory and Development Authority (IRDA) under the Insurance Regulatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be added back. 6.7 The Hon'ble Supreme Court in the case of General Insurance Corporation vs. CIT (240 ITR 139) has also interpreted the above clause as permitting an adjustment to an expenditure or allowance which is not admissible under Sec.30 to 43B of the Act. 6.8 The provision for estimation in the recovery of claims paid is not an expenditure which is inadmissible under the provisions of Sec. 30 to 43B of the IT. Act, 1961. Rather is an item of income side reduced by the appellant, on estimate basis. Hence, the addition made in the reassessment order cannot survive. Besides, the Apex Court has also held that the balance of profits disclosed in the Profit and Loss account prepared in accordance with the provisions of IRDA is to be accepted. The AO is, therefore, bound by the figure of the pro it before tax and appropriations as appearing in the Profit and Loss account filed by the Appellant before the IRDA. Consequently, the addition of ₹ 20,00,00,000/- made by the AO in the reassessment order on account of change in the estimation of the provision for recovery of claims cannot be sustained and is hence deleted. 13. The Ld. D.R. while relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nursing Home Benefits Association Ltd. (supra) and General Insurance Corporation of India vs. CIT (supra),. Since the assessee is registered as an export insurance company with Insurance Regulatory and Development Authority (IRDA) Act of 1999 and therefore it has to draw up its accounts in accordance with IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002. Since the assessee is a government company whose accounts are subjected to audit by the auditors appointed by Comptroller and Auditor General of India, besides, the audit by the staff of Comptroller and Auditor General of India. Therefore, whatever profit is disclosed in the P L Account has to be accepted by the AO unless the expenditure is inadmissible under the provisions of section 30 to 43B of the Act. The case of the assessee is also find support from the decision of the Apex Court namely CIT vs. Calcutta Hospital and Nursing Home Benefits Association Ltd. (supra) wherein it has been held that AO is bound to accept the profit as disclosed in the annual accounts that are filed before the Regulatory body subject to adjustments as prescribed in Clauses (a), (b) and (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognize the liability at the year end. According to the AO, since the approval was granted in the month of August 2006 the liability crystallized in the financial year 2006-07 relevant to assessment year 2007-08 and not in the current year and accordingly the same was added to the income of the assessee. 18. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after considering the detailed submissions and contentions of the assessee by observing and holding as under: 7.3 I have considered the facts of the case, the reasoning given by the AO and the submissions made by the Appellant. The Appellant being a company is required to draw up its accounts under the accrual basis of accounting by following the Accounting Standards prescribed under Sec.209(3) of the Companies Act, 1956, r/w Section 211(3C) of the said Act. The Accounting Standard (AS4) that deals with Events Occurring after the Balance Sheet Date in Para 13 require adjustments to be made to liabilities for events that occur after the Balance Sheet Date which provide additional evidence to assist the estimation of amounts relating to conditions existing on the Balance Sheet Date. It is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability was rightly recognized as having accrued and it was provided for. 7.6 In the circumstances, following the decisions of the Hon'ble Supreme Court in Bharat Earth Movers Ltd. vs. CIT (supra) and that of the Hon'ble Bombay High Court in CIT vs. United Motors (India) Ltd. (supra), the liability on account of the revision in pay- scales of employees having got accrued in the hands of the Appellant, the addition of ₹ 6,57,00,000/- is hereby deleted. 7.7 Ground of appeal No. 8 is allowed. 19. The Ld. D.R. while relying on the order of AO and the grounds raised, submitted that though the proposal was moved in December 2005 but actually the same was sanctioned by the Government of India in August 2006 meaning thereby that the liability has crystallized in the F.Y. 2006-07 and not in the current year as has been claimed by the assessee. The Ld. D.R. submitted that the wrong appreciation of facts and erroneous interpretation and application of AS-4 had resulted into understatement of profit of the assessee and thus justified the addition made by the AO. 20. The Ld. A.R., on the other hand, prayed before the Bench that a sum of ₹ 6,57,00,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of the Hon ble Bombay High Court in the case of CIT vs. United Motors India Ltd. (supra) and Bharat Earth Movers Ltd. vs. CIT (supra) wherein the similar issue has been decided in favour of the assessee. Therefore, there is no reason to deviate from the finding of the Ld. CIT(A) which appears to be correct as per the ratio laid down in the above two decisions. We are, therefore, inclined to uphold the order of the Ld. CIT(A) on this issue by dismissing the ground raised by the Revenue. 22. The issue raised in ground No.4 is against the deletion of addition of ₹ 16,29,923/- by Ld. CIT(A) as made by the AO on account of ISO certification expenses by not treating it as capital expenditure in nature. 23. The facts in brief are that assessee incurred expenditure of ₹ 16,29,923/- to obtain ISO certification to the effect that international documentation and processing are in line with the technical standards prevailing in the industry. According to the AO by incurring the expenditure on ISO certification, the assessee has been deriving the benefit of enduring nature and therefore has to be allowed over a period of time and accordingly the same were disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct its operation in more seamless, smooth and efficient manner. The Ld. A.R. while relying heavily on the order of Ld. CIT(A) which in turn relied on the decision of Hon ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT 124 ITR 1 (S.C). Finally, the Ld. A.R. prayed before the Bench that Ld. CIT(A) s order may kindly be affirmed on this issue in view of the facts of the case and ratio laid down by the Apex Court. 27. We have heard the rival submissions of both the parties and perused the material on record. A perusal of the Ld. CIT(A) s order reveals that the same is very well reasoned order passed after taking into account all the facts and legal aspects of the case. We concur with the conclusion drawn by the Ld. CIT(A) that the expenditure incurred by the assessee for ISO certification in connection with the certification of processing and procedures adopted by the assessee to be in accordance with the prevailing standards in the industry as a whole has not resulted into creation of assets or acquiring any fixed assets. We, therefore, uphold the order of Ld. CIT(A) by dismissing the ground raised by the Revenue. 28. In the result, appeal of the Revenue is dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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