TMI Blog2018 (7) TMI 1876X X X X Extracts X X X X X X X X Extracts X X X X ..... o prudence , while, on the other, objects when the assessee, in pursuance to those norms, refrains from booking income! No hesitation in, accepting the assessee s claim, directing the deletion of the amount of interest income. There is, we may though add, no question of the Revenue being not entitled to proceed in the matter in the absence of non-rejection of accounts. - Decided in favour of assessee Disallowance of fuel and hire charges u/s. 37(1) - Held that:- The (statutory) obligation was by itself not sufficient if the purpose of the expenditure was not for the benefit of or the running of the assessee s business. In the instant case, we find neither of these two conditions being satisfied; the former being in fact incidental in-as-much as a voluntary expenditure, shown to be for the purpose of the assessee s business, would qualify for deduction. In our considered view, therefore, the impugned expenditure does not meet the test of section 37(1), and stands rightly disallowed by the Revenue. We decide accordingly, and the Revenue succeeds. Income from other sources on account of non payment of dividend distribution tax by the assessee-company, which in fact claims to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould imply that the income would stand reduced by ₹ 48,691. The ld. CIT(A) accordingly held that there was no ground for making the impugned addition, and directed its deletion. The facts are not in dispute, and we find no infirmity in the adjudication by the ld. CIT(A). We decide accordingly, and the assessee succeeds Disallowance of provision (at the rate of 0.25% on standard loans) - Held that:- for AY 2007-08, accepted the assessee s claim as, in his view, there was nothing to show that the claim was not covered by the provision of section 36(1)(viia). The provision against standard loans being only a provision for bad and doubtful debts, would stand to be covered u/s. 36(1)(viia). That being the case, we find no reason for the Revenue impugning the provision against standard assets. Thus, subject to the limit prescribed u/s. 36(1) (viia), i.e., 7.5% of the income, being not breached, the assessee would be entitled to the provision against standard assets. Assessee s claim u/s. 36(1)(viia) - Held that:- assessee has to specify the provision where-under the said claim is admissible. Why, the ld. AR, on being queried by the Bench during hearing in this regard, was una ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, the provision based on income (for each year u/s. 36(1)(viia) would have to be made, accounted for and reckoned (for the breach of the limit specified in its respect) separately. The argument aforesaid appealing at first blush, does not hold. Disallowance u/s. 37(1) - deposits in a scheme framed by LIC of India - assessments are to be proceeded with and framed on the basis that section 43B(f) - Held that:- Exception is made for liabilities accruing during the relevant year, where paid by the due date of filing the return of income u/s. 139(1) for that year. It is in this context that the ld. counsel was enquired by the Bench as to how the payment of premium stands accounted for, which ought to be therefore adjusted against (debited to) the provision account. As it appears, the assessee has made a provision of ₹ 200 lacs on account of liability toward staff leave encashment, also paying this amount to the LIC of India (during the year). The assessee, making the payment to LIC is in fact discharging its liability toward leave encashment. As such, to the extent of payment the assessee s claim shall not be hit by section 43B(f). The matter, for factual verificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) as deduction for the following year, i.e., AY 2011-12, also in appeal before us. Though no ground in its respect has been taken by the assessee, who does not appear to have raised this issue by way of rectification application u/s. 154, that would not detain us to state that the assessment for AY 2011-12, subject to verification by the AO, the Revenue should have allowed the assessee s claim for the balance amount in the following year (AY 2011-12). - I.T.A. No. 47/Asr/2011, 93/Asr/2011, 699/Asr/2014, 684/Asr/2014, 683/Asr/2014, 348/Asr/2011, 399/Asr/2011, Cross Objection No. 16/Asr/2011 - - - Dated:- 16-7-2018 - Sh. Sanjay Arora And Sh. N. K. Choudhry, JJ. Appellant by: Sh. Surinder Mahajan (C.A.), Sh. J. S. Bhasin (Adv.) Respondent by: Sh. Alok Kumar, CIT- DR ORDER Per Bench: This is a set of seven Appeals and one Cross Objection (CO), being cross appeals (by the Assessee and the Revenue) for Assessment Years (AYs) 2007-08, 2008-09 and 2010-11, and assessee s CO and appeal for (AY) 2008-09 and (AY) 2011-12 respectively. The issues agitated being common, the appeals were posted for hearing and, accordingly, heard together, and are being disposed per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 237 ITR 889 (SC), relied by the assessee, was distinguished by him on the ground that the same was decided on the basis of a beneficial Circular by the Board and, further, that prior to AY 1997- 98 mixed system of accounting was admissible under the Act. The aspect of non rejection of books of account, also raised by the assessee before him, was also discussed with reference to the decisions by the tribunal. Addition being confirmed thus, the assessee is in second appeal. 3. We have heard the parties, and perused the material on record. The question at heart, as we perceive it, is whether interest on accounts classified as NPA has in fact accrued or not? If it has, the same has to be regarded as the assessee s income (section 5 r/w s. 145). A different position would obtain only on the basis of the specific provisions, as sections 43B, 43D, etc., of the Act, which being specific and non obstante, shall prevail. The accounting standards notified by the Central Government u/s. 145(2) of the Act, lists Prudence and Substance over form , as among the major considerations influencing the accounting policies to be followed by an entity (assessee) for the financial statements t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Prudential Norms (Reserve Bank) Directions, 1998, including the provisions of Chapter III-B of the RBI Act, 1934 (which contains the said s.45Q), stand considered therein in the context of computation of income under the Act in extenso. With reference to the judicial precedents, including Poona Electric Supply Co. Ltd. (supra), it stands explained that income under the Act has to be on the basis of real income subject to the provisions of the Act. Reference to s. 45Q, considered by the Apex Court, may therefore not be of moment. Why, on facts, we have found that there is no inconsistency between the said income recognition norms by RBI, i.e., assuming the assessee to be covered thereby, and not that by NABARD, as contended by the Revenue, in which case the question of application of section 45Q of the RBI Act does not arise. Reasonable certainty, on the basis of objective material and available information, as to the ultimate realizability of the income, is a pre-condition for recognition of income, for which reference may be made to Accounting Standard (AS) 9 issued by the ICAI, also adverted to in Vasisth Chay Vyapar Ltd. (supra). The same being missing, there is no acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grieved, the assessee is in second appeal. 5. We have heard the parties, and perused the material on record. The facts are not in dispute. The law per section 37(1), under which section the deduction for expenditure is being claimed, or is otherwise allowable, mandates deduction of any expenditure incurred wholly and exclusively for the purposes of its business by an assessee. As is well-settled, the word wholly in the said expression refers to its quantum, while exclusively therein refers to the object or purpose for incurring the expenditure. The other conditions, not applicable in the instant case, are that the expenditure should not be in the nature of capital or personal expenditure or of the nature referred to in sections 30 to 36. The scope and ambit of the word wholly and exclusively stands explained by the Apex Court per its decisions, interalia, in Sassoon J. David Co. P. Ltd. v. CIT [1979] 118 ITR 261, 275 (SC); Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 (SC); CIT (Addl.) v. Kuber Singh Bhagwandas [1979] 118 ITR 379, 386-88 (MP)(FB); CIT v. Sales Magnesite (P.) Ltd. [1995] 214 ITR 1 (Bom). Again, the expression for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, apart from the fact that it does not serve any business purpose of the assessee. We may here refer to the decision in Lakshmiji Sugar Mills Co. Pvt. Ltd. v. CIT [1971] 82 ITR 376 (SC). The assessee in that case emphasized the statutory obligation under which the contribution (for constructing roads) was made by it, pointing out to the element of compulsion therein. The Apex Court did not, however, stop thereat. It proceeded to examine the purpose for which the contribution, i.e., for the development of road, was being defrayed by the assessee. The expenditure was allowed, finding it to have been incurred to facilitate the transportation of sugarcane. The expenditure was thus incurred essentially for the benefit of the business, which got an advantage of an enduring benefit for itself. In other words, the (statutory) obligation was by itself not sufficient if the purpose of the expenditure was not for the benefit of or the running of the assessee s business. In the instant case, we find neither of these two conditions being satisfied; the former being in fact incidental in-as-much as a voluntary expenditure, shown to be for the purpose of the assessee s business, would qualify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 36(1)(viia) is applicable to cooperative banks (other than those excluded) w.e.f. 01.04.2007, i.e., AY 2007-08 onwards. The assessee has not been shown to us as falling within the excluded categories, which we note to be the same as those saved u/s. 80P(4). As such, clearly either of the two sections, i.e., 36(1)(viia) or section 80P, shall apply to the assessee, who cannot take an ambivalent stand with regard to its status. The parameters of a primary agricultural credit society or a primary cooperative agricultural and rural development bank, i.e., two specified excluded categories, are well settled. The AO shall accordingly examine the matter, and decide the same issuing definite findings of fact, of course, after hearing the assessee in the matter. In fact, as it appears, the assessee has not claimed deduction u/s. 80P, for otherwise this itself would have been the subject matter of dispute between the parties, with the AO clearly adverting to section 80P(4), excluding the assessee from the purview of section 80P. Why, in that case, i.e., of the assessee being considered as eligible for deduction u/s. 80P even for AY 2007-08 onwards, all the other issues would get subsumed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubtful debts, would stand to be covered u/s. 36(1)(viia). That being the case, we find no reason for the Revenue impugning the provision against standard assets. Thus, subject to the limit prescribed u/s. 36(1) (viia), i.e., 7.5% of the income, being not breached, the assessee would be entitled to the provision against standard assets. We decide accordingly. 13. This brings us to Grounds 3 and 4. The assessee s claim u/s. 36(1)(viia), however, was examined by him to find it to include the following: (a) Loss on sale of car: ₹ 0.11 lacs (b) Write off of perishable goods: ₹ 0.46 lacs (c) Unrealized interest for 2006-07 not realized during 2007-08 ₹ 1.43 lacs ₹ 2.00 lacs Loss on sale of car as well as write off of perishable goods could not be regarded as a provision for bad and doubtful debts. The assessee states that while, without doubt, write off of perishable articles cannot be claimed as a provision for bad and doubtful debts, it is not barred from claiming the same against any other provision falling under Chapter IV-D. Surely, however, the assessee has to specify the provision where-under the said claim is admissible. Why, the ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacs: (a) provision made against standard assets ₹ 100 lacs (b) provision against rural advances ₹ 750 lacs ₹ 850 lacs The provision u/s. 36(1)(viia) at the rate of 7.5% of income working to ₹ 98.31 lacs, the ld. CIT(A) restricted the deduction for the provision for bad and doubtful debts thereto, thus, in effect, directing a disallowance for ₹ 1.69 lacs (Rs.100 lacs- ₹ 98.31 lacs). The assessee s case (also refer Ground 2) is that the provision u/s. 36(1)(viia) should be considered at ₹ 850 lacs, i.e., by including ₹ 750 lacs, which is within the prescribed limit of 10% of the aggregate average advances made by rural branches of the bank (computed in the prescribed manner). That is, there is no scope for considering the provision (u/s. 36(1)(viia)) disjunctively. And that both the components of 36(1)(viia) must be considered together in-as-much as it is a single provision, albeit comprising of two parts, each of which is to be computed separately. As long as therefore the total provision is within the total amount computed as prescribed u/s. 36(1)(viia), no disallowance could be made with reference to either component. In ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reckoned on the basis of all rural branch advances is to be reckoned on a year-wise basis or the provision already credited in accounts is to be taken into account, i.e., if a provision for ₹ 10 lacs (say) stands already made and allowed for an earlier year (AY 2007-08, say), would the assessee be eligible for another deduction of ₹ 10 lacs qua rural advances assuming, for the sake of simplicity, no increase in the rural advances during the previous year relevant to AY 2008-09. This could be extrapolated for each succeeding year. It does not appear to be so, i.e., that the provision already made would have to be taken into account. This is as, where not so, the aggregate provision qua rural advances would, in time, exceed hundred per cent of such advances, i.e., as outstanding at the end of the relevant year, and which cannot be. The provision, it needs to be appreciated, is against an asset, i.e., recognizes the risk associated with its realisability and, therefore, is valid only with reference to the extant assets, i.e., as obtaining at the relevant time. The provision as on 31.03.2008 (asset) would therefore have to be reckoned with reference to the advances (by rur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider it proper to conclude the two (correlated) issues. Our foregoing observations notwithstanding, which may well be relied upon by either side in the set aside proceedings, we only consider it proper that the matter is restored to the file of the AO for adjudication afresh after allowing the assessee a reasonable opportunity of presenting its case, in accordance with law. No side, we may though add, be constrained by our observations, so that is an open set aside. Ground 2 of the assessee s and the Revenue s appeal is disposed of accordingly. Revenue s Appeal (ITA No. 399/Asr/2011) 16. The first Ground of the Revenue s appeal is the same as that for AY 2007- 08, decided by us vide para 6 of this order, which shall therefore apply mutatis mutandis for this year as well. We decide accordingly. Assessee s CO ( No. 16/Asr/2011) 17. This brings us to the assessee s CO, raising two grounds. The same was withdrawn by the ld. counsel, Shri J.S. Bhasin, at the time of hearing, making an endorsement to that effect on the appeal memo itself. The ld. DR did not raise any objection thereto. No prejudice to either side, in our view, would be caused by the said withdrawal; the CO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee paid premium. It is the LIC of India ( LIC for short), the insurer, that shall, on the liability crystallizing, settle the leave encashment, at the defined rates, with the assessee s employees, i.e., on their retirement. This view, he would continue, is in fact supported by the decision by the Hon'ble Court in CIT v. Hindustan Latex Ltd. [2012] 209 Taxman 42 (Cal), the operative part of which reads as under: In any event what was intended by introduction of clause (f) was to deny the deduction of liabilities not actually incurred or in other words to exclude the provision being made as against future liabilities, from being granted a deduction. In the instant case, it was not a provision of future liability which was claimed as a deduction. The assessee, a Govt. company had insured itself against the liabilities that may arise out of claims made by the employees towards leave encashment. The assessee being covered by a valid insurance policy and premium being regularly paid, incurs no liability towards leave encashment. The liability being covered by valid insurance policy, is solely that of the insurance. Even if section 43B(f) stands, m the case of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certified actuary, further adding that the bank estimates its liability toward the same at ₹ 690 lacs (refer assessee s letter dated 31.01.2013), reproduced at para 7.2 (pgs. 8-11 of the assessment order). It is this provision only, made at ₹ 200 lacs during the current year, for which deduction, claimed u/s. 37(1), is being denied with reference to section 43B(f). If, even as the Hon'ble Court observes in Hindustan Latex Ltd. (supra), the premium stands paid to LIC of India on annual basis, the same gets allowed u/s. 37(1) of the Act as business expenditure. Why, then, should the assessee make the provision? Both the provision and, concomitantly, the payment (to the insurers) is only in respect of assessee s liability toward employee s leave encashment, since accrued. However, 43B overrides the method of accounting regularly employed by the assessee mercantile, in the instant case, so that the expenditure, specified therein, otherwise allowable, would only be so ( i.e., deducted in computing income u/s. 28) on its payment. Exception is made for liabilities accruing during the relevant year, where paid by the due date of filing the return of income u/s. 139(1) fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bliged under the contract to provide support services as envisaged under the contract for full one year, i.e., a period of 365 days, beginning 27.03.2010. The probability of this services being required, which would be for regular (periodic) maintenance or on breakdown, etc. spreads evenly throughout the year. Why, as observed by the Bench during hearing, to no reply by the ld. AR, would not the CCTV cameras be liable to be serviced, if required to, even on the last day of the contract year, i.e., 26.03.2011, or for that matter, at any time after 31.03.2010 (up to 26.03.2011). The benefit of the service, thus, arises to the assessee only for four days of the current year. The matching principle, a fundamental accounting concept, would thus come into play, so that expenditure relatable only to four days, i.e., the period for which the benefit acquired under the contract had elapsed during the relevant year, shall be accounted for and reckoned as expenditure, and the balance unexpired amount capitalized. It is, in fact, this principle that advocates for making a provision for all known liabilities, be it for depreciation, leave encashment, etc., even though the liability under the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC), is to deal with and determine all the questions which arise out of the subject matter of appeal, in light of the evidence and consistently with the justice of the case. We decide accordingly dismissing the assessee s Ground 3. 24. Ground 4 of the assessee s appeal was not pressed during the hearing, with the ld. AR making an endorsement to that effect on the appeal memo itself. The same being not objected to, and causing in our view, no prejudice to other side, is permitted to be withdrawn. The ground is accordingly dismissed as withdrawn. We decide accordingly. Revenue s Appeal (ITA No. 699/Asr/2014) 25. The only issue raised is with regard to the assessment of unpaid dividend distribution tax as income from other sources u/s. 56 of the Act. Our decision qua the Ground 1 of the Revenue s appeal for AY 2007-08 shall mutatis mutandis apply for this year as well. We decide accordingly, dismissing the Revenue s grounds 1 and 2. 26. In the result, the assessee s appeal is partly allowed for statistical purposes, and the Revenue s appeal is dismissed. AY 2011-12 Assessee s Appeal (ITA No. 684/Asr/2014) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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