TMI Blog2018 (12) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... vision 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 based on faulty premise (i.e. error of fact) that there was no financial impact. Thus a clear errors of law and fact o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Assessing 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 263 dated 24.02.2012, on examination of plea of the appellant, the Ld. CIT-IV held that even though the appellant had worked out the disallowance under Section 14A read with Rule 8D at ₹ 42,69,731, the AO failed to examine whether the exempt income included income on investments in long term equity shares and bonds and accordingly set aside the issue for the examination in accordance with the provisions of the Act. Similarly, regarding the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ld. CIT(A) dated 28.8.2014. (2.1) In the Assessee s appeal vide ITA No. 5705/Del/2014 the 1st ground of appeal is related to Assessee s claim for deduction on account of ad hoc provision of salary amounting to ₹ 1,60,00,000. This deduction was claimed by the Assessee on account of provision for revision of pay in the books of accounts. This claim for deduction was made by the Assessee in the light of Pay Revision Committee appointed by Govt. of 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 cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted for approval please. Sd/- ACF(S) 13.10.2007 This note was finally approved on 15.10.2007. The accounts for the year under consideration are from 1.4.2006 to 31.3.2007 and are closed on 31.3.2007. That the deduction claimed is on account of creation of provision. Additionally, the Provision is an an adhoc provision . Neither the liability for revision of pay accrued during the year before 31.3.2007 nor crystallized before 31.3.2007. Additionally, no payment of the same was made before 31.3.2007. All proposals were made in the month of October 2007 after 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided to appoint the Pay Revision Committee which comprises of the following: Chairman Mr. Justice M.J. Rao ( Retired Judge, Supreme Court of India) Members (1) Dr. Nitish Sen Gupta ( Economist Former Member Secretary, Planning Commission, Government of India) ( 2) Shri P.C. Parakh ( Former Secretary, Department of Coal, Government of India) ( 3) Shri R.S.S.L.N. Bhaskaradu ( Former Managing Director, Maruti Udyog Ltd. Ex-Chairman, Public Enterprises Selection Board) Ex-Officio Member (4) Secretary, Department of Public Enterprises, Government of India Secretary Joint Secretary, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount the report of the Sixth Pay Commission. 3. The Committee will devise its own procedures as it may consider necessary. Ministries and Departments of the Government of India and State Governments will furnish such relevant information and documents as may be required by the Committee and which they are in a position and at liberty to give, and extend the necessary cooperation and assistance to it. 4. The Committee will make its recommendations to the Government within a period of 18 months and it will have its headquarters in Delhi. 5. The decision of the Government on the recommendations of the Committee will take effect from 1.1.2007. 6. The Committee will be 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 ₹ 1,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay revision liability, was made in the accounts. Though the date of signing of the M.O.U. i.e. 24.09.2000, which is done after the approval of the Department of Public Enterprises, the negotiations were completed during the year and the liability was known as liability accrued from the effective date of commencement. It is also to be noted that the provision for salary was not a contingent liability. It was in respect of the outcome of the decision of the DPE. Thus the provision was made by the Assessee AFTER the negotiations were completed during the year and the liability was known. However, in the case before us, the Pay Revision Committee had not completed its deliberations before the end of 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) sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed by the Assessee on account of ad hoc provision for pay revision, had not accrued during the relevant FY i.e. 2006-07 (AY 2007-08). Merely because Pay Revision Committee was constituted during the year, it cannot be said that liability towards pay revision had accrued during the year, when we consider the facts that the Pay Revision Committee had not completed its deliberations before the end of the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end; and furthermore, that the pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries Public Enterprises. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship 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; does not merit any favourable consideration. A claim wrongly made by an Assessee in an earlier year cannot be allowed in that year, merely because the Assessee did not make the claim correctly in a subsequent year. During the pendency of a dispute as to the year in which a claim of the Assessee is to be allowed; a prudent Assessee can make the claim in other year(s), on protective basis, subject to final outcome of such a dispute, by explaining such a protective claim in other year(s). The Assessee, having failed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accounting policy of revenue recognition in respect of processing fees of loans etc., I find that the appellant was regularly following the accounting practice upto 31.03.2007 by which such incomes were accounted for on accrual basis. Subsequently, in view of its Board's decision in the meeting dated 27.09.2007, the appellant company revised its accounts in the light of the advice from the statutory auditors and thereby changed the accounting policy and recognized the revenue in respect thereof on receipt basis. I find that the CAG audit party had raised the observation that accounting of such receipts at the time of signing of loan agreement was not in conformity with the Accounting Standard 9 to which 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date w.e.f. AY 1989-90 in view of the amendment to Section 145 of I.T. Act. Thus, the Assessee was in clear error of law in changing the method of accounting to selectively adopt cash system of accounting for certain items, while following mercantile system of accounting for rest of the items. Even if the accounting policy was changed in pursuance of observation of Audit Party of Comptroller Auditor General ( CAG for short), even then, statutory provisions under I.T. Act will prevail over any observation/objection/remark of Audit Party of CAG. Moreover, despite having changed the accounting policy, in pursuance of observation of Audit Party CAG, the Assessee would have added back the aforesaid amount of ₹ 1.28 crores 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds is a taxable income and the same is already offered to tax purposes i.e. already form the part of total income of the assessee. However, details of such Bonds and income offered on the same was not filed with the reply. Accordingly, vide this office questionnaire/notice u/s 142(1) dated 6.2.2013 tie assessee was apprised that vide S.No.2 of this office questionnaire dated 22.11.2012 you were asked to file complete details of exempt income giving the name of the Investment and the amount of exempt income or taxable income earned from the investments in long term/short term equity of giving the said details, you have simply stated that interest income on bonds is taxable income and the same is already officered to tax purposes i.e. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng period and redemption of investment at the opportune time. These decisions are generally taken in the meetings of Board of Directors, for which administrative expenses and other expenses are incurred. As held in Southern Petrochemicals Inds. Vs. DCIT (2005) 3 SOT 157 (Chennai), it is not correct to say that dividend income can be earned by incurring no or nominal expenditure. After comprehensive consideration of all the relevant aspects of the case including the provisions of law, it was held in the decision supra that investment decision are very strategic decisions in which to management is involved and therefore proportionate management expenses are required to be deducted while computing exempt income from dividend. In Harish Krishnakant Bhatt Vs. ITO (2004) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or equities of which company are to be invested in. There are various mutual funds operating in the market and each mutual fund house is running several schemes. Out of the thousands of mutual funds schemes being offered for sale, it really take some efforts, time and, energy to make a due diligence and then select right schemes which would give reasonable return in future. Therefore, some portion out of the expenditure incurred on Director s remuneration, Senior Executives salaries and other overheads could definitely be attributed to teaming the tax free income. The Hon'ble Supreme Court in the case of CIT Vs. Walfort Stock Brokers Pvt. Ltd. (2010) 326-ITR-l (SC) has held that u/s 14A of the Act all relatable expenses claimed u/s 30 to 37 of the I. T. Act can 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share Stock Brokers P. Ltd (supra) to the fallowing effect:- The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A. Also decision of Hon'ble Supreme Court in the case of United General Trust Pvt. Ltd. 200-ITR-488(SC) is in favour of the Department. ( i) In light of the above, the contentions of the assessee is not acceptable. Accordingly disallowance under section 14A is reworked as follows: Clause Particulars Amount (in Rs.) i. Expenditure directly related to exempt income Nil Nil Nil ii. Disallowance of interest expenditure A) Interest expenditur e incurred during the year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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): 6. I have carefully considered the facts of the case in the light of the submission and the applicable law in this regard. Accordingly, my decision on various grounds of appeal is as under: 6.2 The Ground No.1 of the appeal is against the addition of ₹ 1,89,73,51,151 on account of disallowance made under Section 14A. I find that in the original assessment order, the Ld. AO had examined the issue relating to disallowance under Section 14A and did not accept the plea of the appellant by holding that the provision of Rule 8D, being procedural are retrospective in operation. Accordingly, by passing a speaking order, he had invoked the provisions of Rule 8D and thereby made addition of ₹ 54,06,554. This order was challenged by the appellant before the Ld. CIT(A)-XXVIII. The Ld. CIT(A)-XXVIII, in her order dated 11.01.2012 passed under Section 250, has held that the provisions of Rule 8D were not applicable to the case of the appellant and accordingly deleted the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under Section 14A is however, well- settled now. The Hon'ble Mumbai High Court in the case of CIT Vs Godrej and Boyce Manufacturing Co. Ltd. Vs. DCIT (ITA No.626 of 2010) and the Hon'ble Delhi High Court in the case of CIT Vs Maxopp Investment Ltd.: 347 ITR 272 have held that the provisions of Rule 8D are not applicable for the A.Y.2007-08 and earlier A.Yrs. These orders were passed on 13.04.2010 and 18.11.2011 respectively before the order under Section 253 was passed by the Ld. CIT-IV. I find that the Ld. AO, in the original assessment order dated 30.12.2009 disregarded the plea of the appellant in this regard and invoked the provisions of Rule 8D in an automatic manner by holding that Rule 8D will have retrospective operation and accordingly computed the disallowance under Section 14A. The Ld. CIT(A)-XXVIII, while passing the order under Section 250 dated 11.01.2012 had examined the issue in detail and held that for examining the correctness of the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account the value of investments in shares aggregating to ₹ 7,36,19,000 (after excluding taxable bonds) leads to disallowance of ₹ 46,78,610, which is not higher than the disallowance of ₹ 54,06,554 originally made by the AO under Rule 8D in the original assessment order( which was eventually deleted by the Ld. CIT(A)-XXVIII),hence there was no scope for further revision of the disallowance under Rule 8D. 6.6 Keeping in view the above and respectfully following the order of Delhi High Court in the case of CIT Vs Maxopp Investment Ltd. and the Hon'ble Mumbai High Court in the case of CIT Vs Godrej and Boyce Manufacturing Co. Ltd. Vs. DCIT, the addition made by the AO without verifying the nature of investments as directed by the Ld. CIT-IV in the order under Section 263 is unsustainable as provisions of Rule 8 D are not applicable to the current year. Accordingly, this ground is decided in favour of the appellant. (5.1) At the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 brought into the statute book with effect from March 24, 2008 to implement sub-sections (2) and (3) of section 14A. It is a clear indicator of the fact that a new method for computing the expenditure was brought in by the Rules which was to be utilized for computing expenditure for the assessment year 2007-08 and onwards. . The provisions of section 14A as inserted by the Finance Act, 2001 were fully workable without there being any mechanism provided for computing the expenditure .. .Thus, although the Hon ble Supreme Court held in CIT v/s Essar Teleholdings Ltd. (Supra) that Rule 8D of I. T. Rules was prospective in nature; it recognized that Section 14A of I.T. Act was workable even before Rule 8D of I.T. Rules came into existence and that 8D of I. T. Rules was the new mode of computation of disallowance U/s 14A of I.T. Act. Therefore, we are of the view that the AO erred in computing disallowance U/s 14A of I.T. Act by taking recourse to Rule 8D of I. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
