Trinity Cleantech Pr... v. Assistant Commission...

ITA Nos.470 & 543/Hyd/2021

3. Since the issues in both the appeals are common, therefore, we are dealing both the appeals together for the sake of brevity and convenience. However, we are taking ITA 543/Hyd/2021 for A.Y. 2016-17 as lead case wherein the assessee has raised the following grounds :

1. On the facts and in the circumstances of the case the appellate order passed by the CIT(A) is erroneous both on facts and in law to the extent the order is prejudicial to the interest of the appellant.

2. The Ld.CIT(A) ought to have appreciated the fact that the Ld.AO erred in invoking provisions of sec 153A of the IT Act without there being any incriminating material found relating to the present appellant during the course of search.

3. The learned CIT (Appeals) ought to have appreciated the fact that in a search assessment, no addition can be made without there being any incriminating material found during the course of search proceedings when the assessment was already completed u/s. 143(3) of the Act.

4. The Ld. CIT(A) ought to have appreciated on the facts and in the circumstances of the case, the ld. Assessing Officer has erred in passing the order u/s. 153A of the Act without obtaining the prior approval of the competent authority JCIT / Addl. Commissioner of Income Tax u/s. 153D of the Act.

5. The Ld.CIT(A) ought to have appreciated that the Assessing Officer erred in making addition of Rs.63,04,561 towards provision for late delivery charges.

6. The Ld.CIT(A) ought to have appreciated the fact that the provision for late delivery charges is on account of the amount deducted by the customers from the sale proceedings for not delivering the product as per the schedule time.

7. The CIT(A) erred in not appreciating the fact that provision for late delivery charges is incurred wholly and exclusively for the purposes of the business and is allowable revenue expenditure under section 37(1) of the Income Tax Act.

8. The Ld.CIT(A) erred in not appreciating the fact that the assessee is following same accounting policies consistently.

9. The Ld.CIT(A) ought to have appreciated the fact the Ld.AO erred in making disallowance of Rs.14,75,850/- towards ROC expenditure without properly appreciating the facts of the case.

10. The Ld.CIT(A) ought to have appreciated the fact that the Assessing Officer erred in making addition on account of ROC fee ignoring the fact that the fee was paid towards increase in authorized share capital of the company and such incremental share capital was used for meeting the need for more working capital recruitment and hence, was to be allowed as revenue expenditure.

11. The learned CIT (Appeals) ought to have appreciated the fact tha the entire ROC expenditure is incurred and claimed is exclusively for the purpose of business and the same is in direct proportion to the business needs of the company and accordingly allowable u/s. 37 of the Act.

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ITA Nos.470 & 543/Hyd/2021

12. Without prejudice to the above, the learned CIT (Appeals) erred in not giving the relief toas. In accordance with provisions of section 35D of the Act..

13. The learned CIT (Appeals) ought to have appreciated the Assessing Officer erred in making an addition of Rs.63,04,561 towards provisions for late delivery charges while computing Book Profits for the purpose of section 115JB of the Act.

14. The Ld.CIT(A) ought to have appreciated the fact that the Assessing Officer has no authority to go beyond the accounts of a company which were certified by auditors of company as having been maintained in accordance with provisions of the Companies Act and which account had been accepted in general meeting of company as well as by Registrar of Companies.

15. The Ld.CIT(A) ought to have appreciated the fact that no adjustment to Book Profit is permitted apart from those specified in Explanation 1 to section 115JB of the Act.

16. The learned CIT (Appeals) ought to have appreciated the fact that the Assessing Officer has no authority to go beyond the accounts of a company which were certified by auditors of company as having been maintained in accordance with provisions of the Companies Act and which account had been accepted in general meeting of company as well as by Registrar of Companies.

17. The Ld.CIT(A) ought to have appreciated the fact that provision for late delivery charges is ascertained liability and therefore cannot added to book profit su.115JB of the Act.

18. The learned CIT (Appeals) ought to have appreciated the fact that the Assessing Officer erred in making an addition of Rs.63,04,561 towards provision for delivery charges to book profits u/s. 115JB without considering the fact that the same is revenue in nature and also not covered under Explanation 1 to section115JB of the Act.

19. Without prejudice to the above, the learned CIT (Appeals) ought to have appreciated the fact that the ld. Assessing Officer completed the assessment without affording reasonable opportunity of being heard to the appellant, which is against to the Principles of Natural justice and is bad in law, which, view is supported by the decision of Hon'ble Supreme Court of India in the case of M/s. Andaman Timber Merchants Vs. Commissioner of Central Excise, Kolkata-II.

20. The Ld.CIT(A) ought to have appreciated that the Assessing Officer erred in computing interest u/s. 234A and 234B at higher interest rates.

21. The appellant may add or alter or amend or modify or substitute or delete and/or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal."

4. The brief facts of the case are that the assessee had filed its original Return of Income for A.Y. 2016-17 on 12.10.2016 declaring loss of Rs.72,71,571/-. Subsequently, search and seizure operations u/s 132 of the Act were carried out in the case of the assessee and its other associated companies on 09.11.2017. The case has been centralized and notice u/s

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ITA Nos.470 & 543/Hyd/2021 153A of the Act has been issued to the assessee and in response, the assessee filed its Return of Income for A.Y. 2016-17 on 12.06.2019 declaring loss of Rs.72,71,571/-. Thereafter, assessment was completed u/s. 143(3) r.w.s. 153A of the Act making addition of Rs.63,04,561/- towards provision for late delivery charges, disallowance of Rs.14,75,850/- towards ROC expenditure and addition of Rs.3,17,07,378/- towards unexplained cash credit being unsecured loans.

5. Feeling aggrieved with the order of Assessing Officer, assessee carried the matter before ld.CIT(A), who granted part relief to the assessee.

6. Feeling aggrieved with the order of ld.CIT(A), assessee is now in appeal before us.

6.1 The ld.AR submitted that no addition can be made in the absence of incriminating material. In this regard, the following written submissions were filed :

"2.1. Addition cannot be without Incriminating Material found in assessment u/s 153A of the Act.

The assessment in assessee's case for AY 2016-17 was completed u/s 143(3) r.w.s 153A of the Act as a result of search operations u/s 132 carried out on 09.11.2017. The assessee filed original return of income on 12.10.2016 and the time limit to issue notice u/s 143(2) of the Act has lapsed on 30.09.2017 i.e., before the date of search. The original assessment was completed U/s. 143(3) of the Act 19.03.2018. Thus, the assessment for AY 2016-17 is a concluded assessment.

As per the provisions of section 153A of the Act no addition can be made in respect without there being reference to the incriminating materials found during the course of search. In the present, a perusal of assessment orders would show that the Assessing Officer(`A0') did not refer to any of the materials found during the course of search for making additions cited above.

Hence the addition made beyond the scope of provisions of 153A of the Act and needs to be deleted.

Reliance in this regard is placed on the following:

Jurisdictional High court in the case of Commissioner of Income Tax (Central) vs M/s. Hyderabad House Pvt. Ltd (ITTA No. 266 of 2013), wherein it was held as under;

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ITA Nos.470 & 543/Hyd/2021

"In our opinion, the aforesaid question is very vague, as the undisclosed income shall be computed always on the basis of the material, which is found during the course of search. No material, which was disclosed at the time of regular assessment or block assessment period, can be relied on to arrive at the undisclosed income."

High court of Delhi in the case of Commissioner of Income-tax (Central)-III Vs. Kabul Chawla (61 taxmann.com 412) has held that

'Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post- search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material."

Decision of Special Bench of ITAT Mumbai in the case of All Cargo Global Logistics Ltd [2012] 23 taxmann.com 103 (Mum.) (SB)

ITAT Vishakhapatnam in the case of Depute Commissioner of Income Tax (Circle-1) vs Mr. A.T. Rayudu (ITTA No. 313 to 319 of 2014) held as under;

28. The details of additions made in these five years. A perusal of assessment orders of these five years would show that the Assessing Officer did not refer to any of the materials found during the course of search for making both type of additions cited above. The basis for making both these tupes of addition is the information already available in the returns of income filed prior to the date of search. We have already discussed about the scope of 153A assessments in respect of concluded proceedings. Since the additions shown in the chart have been made without reference to any incriminating materials, we are of the view that these additions are beyond the scope of provisions of 15.3A and hence we find merit in the contentions of ld A.R. Accordingly, we are of view that the AO could not have made these additions as they are beyond the scope of provisions of section 153A of the Act. Similar view was expressed by the Hon'ble ITAT Hyderabad in the case of Indukuri Sundari Vs. DCIT (ITA No. 645,646/HYD/2o17) that addition/disallowance should be made based only on the materials seized/unearthed during the course of search proceedings.

Further, your kind reference is invited to the decision of the Hon'ble ITAT in the assessee group case as follows

In the case of Olectra Greentech Limited Vs. ACIT in ITA No. 466/HYD/2o21, the relevant extract is reproduced as under:

"On both the additions made, no incriminating material found with regard to these issues in the search operations. It clearly shows that the basis of catena of judicial precedents wherein the issue was decided in favour of the assessee that if no incriminating material found during the course of search, no additional can be called for in respect of unabated assessment years."

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ITA Nos.470 & 543/Hyd/2021 In the case of Lam Paul Sashikumar Vs. ACIT in ITA No. 33/HYD/2o22, the ITAT, Hyderabad has held that no addition can be made without there being any incriminating material.

Further, reliance is placed on the decision of the Hon'ble Delhi ITAT in the case of ACIT Vs. Varun Beverages Ltd in ITA No. 3833/De¹/2o15, wherein it was held that in the absence of any incriminating material found during the course of search, no addition can be made.

Distinguishing Decision of the Hon'ble Andhra Pradesh High Court in Gopal Das Bhadruka Vs. Dy. Commissioner of Income Tax (2012) 346 ITR 0106.

We would like to submit that the reliance placed by the department on the decision of the jurisdictional high court in the case of Gopal Lal Bhadruka(supra) is clearly distinguishable from the facts of the present assessee case as the facts prevailing in the Gopal Lal Bhadruka are completely different from the facts of the present case of the assessee.

At this juncture, it is very pertinent to note that in Gopal Lal Bhadruka, incriminating evidence was found in relation eight plots of land. Since incriminating material was found in respect of eight plots, Hon'ble Court held that the AO can estimate the income in respect of all 32 plots. The fact was that incriminating material was found in that case. Further, we would like to submit that issue relating to concluded assessment and pending assessment was not before the Hon'ble High court in Gopal Lal Bhadruka.

Further, we would like to submit that the similar issue came before the Hon'ble High Court of Gujarat in the case of CIT Vs. Jayaben Ratilal Sorathia in 120131 40 taxmann.com 436 (Gujarat) where in the Hon'ble High Court after considering the decision of the Hon'ble High Court of Andhra Pradesh in the case of Gopal Das Bhadruka has held that no addition can be without incriminating material. In support of the same relevant extract of the judgement is reproduced as under:

"4.2 Now so far as the reliance placed upon the decision of the Andhra Pradesh High Court in the case of Gopal Lal Bhadruka (supra) is concerned, it is required to be noted that in the case before the Andhra Pradesh High Court, the land sale transaction was in the very assessment year in which the search was carried out. It is true and it cannot be disputed that considering section 153A of the Act, Assessing Officer can reopen and/or reassess the return with respect to six preceding years. However, there must be some incriminating material available with the assessing officer with respect to the sale transactions in the particular assessment year such as in the present case 2005-2006. Under the circumstances, on facts, the decision of the Andhra Pradesh High Court shall not be applicable to the facts of the present case." Further, we would like to draw your attention to the decision of the Hon'ble ITAT Vishakhapatnam in case A.T.Rayudu Vs. DCIT, Central Circle in ITA No. 313 to 319/viz/2014, the relevant extract of the same is under;

"Further we agree with the contentions of the assessee that the decision rendered by the jurisdictional High Court in the case of Gopal Das Bhadruka (supra) have been rendered on the facts prevailing in those cases, since the issue relating to concluded assessments and pending assessments was not before the Hon'ble Andhra Pradesh High Court"

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ITA Nos.470 & 543/Hyd/2021 In view of the above submissions and judicial precedents, it is submitted that no addition can be made without incriminating material in an assessment U/s. 153A of the Act."

6.2. On the other hand, the ld.DR for the Revenue had relied upon the decision of the jurisdictional High Court in the case of Gopal Lal Bhadruka Vs. Dy. Commissioner of Income Tax (2012) 346 ITR

0106.

6.3. We have heard the rival contentions of the parties and perused the material available on record. Undoubtedly, in the case of Gopal Lal Bhadruka(supra), the jurisdictional High Court had decided the issue against the assessee by holding that the assessment can be carried out by the Assessing Officer u/s 153A of the Act, even in the absence of incriminating material. The relevant paragraph of the decision is as under :

" 17. By virtue of section 158BI of the Act, the various provisions of Chapter XIV-B of the Act are made inapplicable to proceedings under section 153A/l53C of the Act. The effect of this is that while the provisions of Chapter XIV-B of the Act limit the inquiry by the Assessing Officer to those materials found during the search and seizure operation, no such limitation is found in so far as section 153A/153C of the Act are concerned. Therefore, it follows that for the purposes of section 153A/ 153C of the Act the Assessing Officer can take into consideration material other than what was available during the search and seizure operation for making an assessment of the undisclosed income of the assessee.

18. At this stage, we may mention that learned counsel for the assessees relied upon Manish Maheshwari v. Asst. CIT [2007] 289 ITR 341 (Se) for the purposes of interpreting section 158BB of the Act. We have gone through the decision cited by learned counsel and find that it does not support his case for the simple reason that the provisions Chapter XIV-B of the Act are not applicable to proceedings under section 153A/153C of the Act. Consequently, the principles of section 158BB of the Act cannot be imported for the purposes of interpreting section 153A/l53C of the Act. The view expressed by the Supreme Court in Manish Maheshwari has no application to the present case.

19. Under these circumstances, in our opinion, since the interpretation of section 153A/153C of the Act is quite clear, no substantial question of law arises for consideration. We may in this context recall the words of the Supreme Court in Santosh Hazari v. Purushottam Tiwari (Deceased) By Lrs. (dead) [2001] 251 ITR 84 (SC) wherein it was said (page 90) :

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ITA Nos.470 & 543/Hyd/2021

"A point of law which admits of no two opinions may be a proposition of law but cannot be a substantial question of law."

20. It was contended by learned counsel for the assessees that there was no evidence before the Assessing Officer to conclude that on-money was received by Ahura Holdings in respect of all the sale transactions. It was submitted that there may have been material with regard to eight such transactions but that does not mean that the same script was played out for all the transactions. We cannot agree. There was adequate material before the Assessing Officer in the form of eight sale deeds and in the form of replies given by Gopal to questions posed to him with regard to receipt of on-money to enable the Assessing Officer to come to an informed conclusion in this regard. Appreciation of the available material is within the domain of the Assessing Officer and this does not lead to any substantial question of law, unless the conclusions arrived at are perverse. That is not the position in this case.

21. In CST v. H M Esufali, H M Abdulali [1973] 90 ITR 271 (SC) ; [1973] 2 SCC 137 the Supreme Court noted the difficulty in making an assessment of the escaped turnover for the purposes of levy of sales tax in the following words (headnote) :

"In estimating any escaped turnover, it is inevitable that there is some guess-work. The assessing authority while making the 'best-judgment' assessment no doubt should arrive at its conclusion without any bias and on rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his 'best judgment' and not of anyone else's. " In our opinion, these principles would equally apply for deciding whether, as, in the present case, the evidence of payment of on-money in some transactions would or would not relate to all similar transactions."

6.4. In our view, once there is a binding jurisdictional High Court's decision on the issue under consideration before us, then the same is required to be followed being binding and enforceable against the assessee in the jurisdiction of Telangana High Court. We have no reason to deviate from the decision of the Hon'ble jurisdictional High Court and accordingly, the grounds raised by the assessee are dismissed.

7. Before us, the learned Authorised Representative of the assessee had drawn our attention to the order passed by the assessing officer in respect to late delivery charges to the following effect:

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ITA Nos.470 & 543/Hyd/2021

"4.1 With regard to expenditure claimed towards late delivery charges of Rs.63,04,561/- and the same was passed through P/L account. The assessee was show caused vide letter dt.09.12.2019 to furnish the details with supportive evidences. The assessee company vide letter dt.Nil received in this office on 16.12.2019 submitted the ledger copies maintained showing the provision of LD charges maintained by the company, which is amounting to Rs. 63,04,561/- , the same is brought out here as under:

………………………………………………

But while going through the assessment proceedings for the AY.201718, it was observed that the assessee has not incurred such provision maintained. It has been kept by the assessee to meet the expenditure if any arise in future. The same can be verified from the submission of the ledger copies with regard to provision maintained on LD charges. A copy of the same is brought out as under:

…………………………………………….

As seen from the above ledger copies it is observed that the assessee is not incurring such expenditure. It is only maintaining such expenditure in form of provisions. The amount shown in P&L account as late delivery charges of Rs. 63,04,561/- for which nothing has been spent and the same amount has not been disallowed in his computation sheet. Thus the expenditure to which the assessee has not spent anything during the year under consideration cannot claim such expenditure. Keeping the same expenditure in form of provision does not entitle an assessee for getting the benefit of deduction. Thus as the assessee has maintained only provision for late delivery charges and nothing has been spent during the year and the provision maintained has not been disallowed in his computation sheet, the same is disallowed and added back to the total income of the assessee. Penalty proceedings u/s 271(1)(c) initiated for furnishing."

8. The Ld.AR for the assessee had submitted that feeling aggrieved by the order passed by the assessing officer, the assessee had preferred the appeal before the ld.CIT(A). However, the ld.CIT(A) had also dismissed the ground raised by the assessee. The finding of the Ld. CIT(A) was recorded in paragraph 6 of the order to the following effect:-

"Going into the facts of the case, the AO observed that the appellant has made provision for late delivery charges amounting to Rs.63,04,561/- and that neither the amount has been paid nor been disallowed by the appellant in its computation statement. The AO disallowed the amount of Rs.63,04,561/- and added back to the income of the appellant under both normal and MAT provisions. During the course of appellate proceedings, the appellant stated that provisions for Late delivery charges amounting to Rs.63,04,561/- is on account of the amount deducted by the customers from the sale proceedings as against for the performance

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ITA Nos.470 & 543/Hyd/2021 and delay of the product delivered by the appellant for a period of time as er terms agreed. Further the appellant has stated that provision for Late Delivery Charges was estimated based 'on experience and historical trends for the year under consideration and as there is probability of an outflow of resources, the Provision for Late Delivery Charges is an allowable expenditure as it is incurred for ordinary course of business. In this regard, it is to be noted that the appellant has not furnished any scientific basis for the provision except for merely stating that the same was done based on experience and historical trends. In this regard, reliance is placed on the decision of Hon'ble Apex Court with regard to provision for warranty in the case of M/s. Rotork Controls India (P) Ltd held that the method of accounting for such liability must be scientific and reliable to be eligible for claiming as expenditure. Further reliance is also placed on the decision of the Hon'ble Delhi High Court in the case of Director Of Income-Tax v. Ericsson Communications Ltd. [2009] 318 ITR 340 wherein the Hon'ble High Court has held that the liability on account of warranty computed on a scientific basis and by way of consistent policy adopted by the assessee should be accepted.

In the instant case, the provision for late delivery is also on similar lines of provision for warranty. However, the appellant could not establish any scientific basis based on which provision is made apart from merely making a statement in this regard that the provision was made on experience and historical trends. The appellant has claimed that the customers have deducted payments on account of late delivery, but the appellant has failed to establish a single amount out of the amount created as provision being done on account of late delivery. The appellant has not brought out any ledger or historical data to claim and establish these amounts. The provision was created in FY 2015-16, the present appeal is being adjudicated in the year 2021 and even after 5 years, the appellant has not been able to establish any such claims or deduction by the debtors. The appellant did not furnish any data or material about the liability incurred in the past and in the absence of such data, it cannot be held that the liability is ascertained. In view of the above, the provision made for late delivery charges cannot be held to be a ascertained liability eligible for deduction and further, as the provision is not established, it is not eligible for deduction and further, it is nothing but an unascertainable liability/contingent liability which is not allowable for deduction under the normal provisions and also while computing income u/ s 115JB as the explanation for computing mandates disallowance of unascertainable liability and the same has to be added to the Book profits. In view of the above discussion, the disallowance of provision for late delivery charges amounting to Rs.63,04,561/- is upheld and accordingly the ground no. 5, 6, 7 and 19 are dismissed.

9. The ld.AR for the assessee has submitted that the assessee had made the reversal of the provisions made for late delivery charges in the subsequent years. The ld.AR had also filed the written submissions in support of the allowability of late delivery charges to the following effect.

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ITA Nos.470 & 543/Hyd/2021

"Addition towards disallowance of provision made towards Late delivery charges of Rs. 63.04 561/- under normal provisions and 115JB of the Act.

The assessee is engaged in business of manufacturing of electrical transformers and being in such line of business is inherently coupled with the certain commitments that the product to be delivered in time.

The Late delivery charges is the amount which is deducted by the customers from the sale proceedings for not delivering products as per the scheduled time, i.e., As per the late delivery clause in the purchase order.

Thus the assessee has created a provision on late delivery charges on the basis of reliable estimates and past trends for foreseeable its loss, which is admissible in accordance with the guidelines of Companies Act as well as, as per Accounting Standard which says that provision may be created for foreseeable loss, if it has incurred a present obligation as a result of past events, there is probability outflow of resources and cost is measured reliably, and hence a reliable estimate of the obligation can be vividly made.

The AO in the assessment order U/s. 143(3) r.w.s 153A of the Act disallowed provision made towards the late delivery charges stating that "appellant has not incurred said expenditure, it is only maintaining in the form of provision and the same is not been disallowed by the appellant in computation sheet and said provision is just a contingent liability in nature which is not allowable deduction as per the proviso of section 37 of the Act".

It is submitted that said provision is created through reliable estimates and after taking into consideration past trends and present facts and circumstances, and it is further submitted that AO erred in treating said provision as contingent liability, as said provision met all the three conditions specified in AS 29, and hence such liability so created is a ascertained liability and not contingent liability. It is further submitted that if a business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at a future date as per the provision of section 37(1) of the Act. For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of its business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. It is further submitted that assessee is following consistent accounting policies, provision so created in the FY 2015-16 has been discharged/accrued in future date that in the FY 2018-19 the same has been charged to such provision for late delivery charges ledger copies for such is submitted vide a paper book-IL page no. 62-67. Reliance can be made on the following caselaw's:

Hon'ble Supreme Court Judgement in case of Bharath Earth Movers Vs. CIT [2000]

112 Taxman 61 (SC), relevant gist are as follows:

4. 4.The law is settled: i f a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be ,Quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty

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ITA Nos.470 & 543/Hyd/2021 though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. Hon'ble ITAT in case of Apeejay Education Trust Vs. DCIT [2021] 130 taxmann.com 4Further, reliance is placed on the decision of the Hon'ble ITAT Delhi in the case of Eltek SGS Private Limited Vs. DCIT in ITA No. 1499/HYD/24313, wherein it was held as under; Thus, liquidated damages ranges from 1% to 10%. The assessee has worked out percentage of late delivery deduction @ 2% of the total purchase order which worked out to Rs.24.951akhs and accordingly a provision of Rs.251akhs was made under this head. Making of such a provision has also been justified by occurring of actual events thereby assessee actually had to pay Rs.19,46,519/- towards late delivery charges and the excess provision of Rs.5,53,481/- has been written back and offered as other income in the subsequent assessment year 2009- 10. It is trite law laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT reported in [2000]

245 ITR 428 (SC) that if a business liability has definitely arisen in the accounting year. the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability and it should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. In the present case, provision has been recognized by the assessee on the basis of obligation stipulated in the contract which ranges from 1 to lo% and assessee has given a detailed working for making the provision 2% which also gets ratified by the actual payments in the subsequent year. Here the obligation of the assessee is a result of an event which is probably outflow of resources required to settle the obligation and based on this, a reasonable estimate has been made. Thus, it cannot be held that provision made by the assessee is not proper and it is some kind of unascertained liability. In any case, actual event happening in the subsequent year that assessee did incur expenditure of approximately Rs.1Q.47 lakhs and also offered the income of excess provision of Rs.5.54 lakhs, such disallowance of provision is uncalled for. Accordingly, the ground raised by the assessee is allowed

Addition of Rs. 63,04,561/- to the book profit U/s. 115JB of the Act

The book profit as contemplated under provisions of section 115JB of the Act would allow the adjustments that are provided in Explanation I only and the AO cannot go beyond the same.

The books of account of the assessee were duly prepared in accordance with schedule VI of the companies Act and audited by the statutory auditor. As per the above submissions, it is very clear that the provision towards late delivery charges is an ascertained liability and no adjustment for the same can be in book profit U/s.115 JB of the Act as the provision for ascertained liability does not come under any limb of explanation 1 to section 115JB of the Act. Further, no adjustment for the same was made by the auditor in the Form 29B filed for the AY 2016-17.

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Therefore, no power is available to the AO to go beyond book profit declared by the assessee."

10. On the other hand, the ld.DR for the Revenue relied upon the order passed by the Ld.CIT(A).

11. We have heard the rival contentions of the parties and perused the material available on record. Admittedly, the assessee had made the provisions in the books of accounts for late delivery charges on the basis of the accounting policy of the assessee based on the past experience and the obligation under the contracts. However, we noticed that during the assessment proceedings and appellate proceedings, the assessee had not provided the details of the contract and also the financial statements for the subsequent assessment year, showing the reversal of the unused provisional liability of late delivery charges in the books of account. In the light of the above, we deem it appropriate to remand the matter to the file of the learned Assessing Officer with the direction to the assessee to provide all the information as may be required to substantiate that the assessee has made reversal of the unused provision for late delivery charges in the subsequent year i.e., in the assessment year 2019-20. Needless to mention that the assessee shall be given a fair opportunity of hearing and the assessee is also directed to appear and file all the details and cooperate with the Assessing Officer for an early completion of the assessment. We may point out that though the assessee has raised the ground pertaining to Addition of Rs. 63,04,561/- to the book profit U/s. 115JB of the Act, as the adjudication of this ground had a bearing on the computation of book profits, therefore, we remit back this ground also to the file of Assessing Officer. In the light of the above, the issue is decided in favour of the assessee for statistical purposes.

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12. With respect to the other ground, it was submitted by the Ld.AR for the assessee that the Assessing Officer had dealt with the issue in paragraph 4.2 of his order in the following manner :-

"4.2 Disallowance of ROC &stamp duty: During the course of assessment proceedings it was observed that while filing returns before ROC for increase of share capital the assessee had paid Rs.12,51,000/- as fee for increase of authorized share capital and Rs.2,24,850/- as stamp duty for the same. These expenses incurred are in nature of capital as the same have been incurred to enhance the capital of the assessee company. The assessee has shown in P&L account as revenue expenditure. Thus the expenses incurred are not allowable revenue expenditure. Hence, the same are disallowed and added back to the total income of the assessee."

13. The finding of the Ld. CIT(A) was recorded in paragraph 6 of the order to the following effect:-

"With regard to disallowance of ROC fee of Rs.14,75,850/-, the AO held that the same was incurred for increasing share capital of the appellant company and thus the expenditure is capital in nature.

During the course of appeal proceedings, the appellant stated that the ROC fee was incurred for increasing share capital and the incremental share capital was used for working capital requirements and thus the same has to be allowed as revenue expenditure.

In this regard, reliance is placed on the decision of Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. Vs. CIT (supra) and the decision of the Hon'ble Apex court in the case of Brooke Bond India Ltd, therefore, the same is treated as capital in nature. Thus, it is held that ROC expenses towards increasing the share capital is capital in nature and the ground no. 9,10 and 11 are dismissed accordingly."

14. The ld.AR for the assessee had submitted that the increase in share capital was necessary with a view to provide working capital. It was

15

ITA Nos.543 & 470/Hyd/2021 submitted that the Mumbai Bench of the Tribunal in the case of Navi Mumbai SEZ P. Ltd., had decided the issue in favour of the assessee and relying upon the decision of the Hon'ble Bombay High Court, the Co- ordinate Bench of the Tribunal in the case of Madhucon Toll Highways Ltd., in ITA No. 1487/Hyd/2018 & another and Haryana Jewelers P. Ltd., Vs. ITO ITA No. 2315/Del/2018 decided the issue in favour of the assessee.

14.1. The ld.AR had also filed written submissions to the following effect :

"The AO in relative assessment year, erred made addition towards ROC expenditure stated that such expenditure is being incurred are in the nature of capital as the same have been incurred to enhance the capital base of the assessee company, disallowed and added back the income of the assessee.

Assessee company during the year under consideration has paid an amount of Rs.3,17,07,378/- towards increasing authorised share capital that is used been used for the working capital requirement of the business, which directly related to the regular business of the assessee.

Reliance can be made on the decision of the Hon'ble ITAT Hyderabad in the case of Madhucon Toll Highways Ltd Vs. ACIT in ITA No. 1487/H/2018, wherein it was held as under:

11.2 In view of the above observations, it is observed that the assessee has paid ROC fers to the Registrar of companies for raising the authorised share capital of a company which is wholly and exclusively in the nature of revenue expenditure because as per the submissions made by the ld. AR that the increased capital has been invested in its subsidiaries and associated companies for the working capital nos Ongoing through the financial statements. as per Schedule - 2.5, under the head

"non-current investments", there was a total investment of Rs. 277,95,82,000k invested in the associated and subsidiaries. The name of the subsidiary companies and associate companies are mentioned at page 29 at Para No. 4&5 of the paper book Further, we also find that the

... 16. In the result, the appeal filed by the assessee is allowed. Further reliance is placed on the following decisions :

16

ITA Nos.543 & 470/Hyd/2021

• Bombay Steam Navigation Co. (P.) Ltd. vs. CIT in Supreme Court of India

[1965] 56 ITR 52 (SC),

• M/s Bhatia Corporation Pvt. Ltd. Vs. ACIT, Circle-1 Kota in ITAT Jaipur ITA. No. 1044/JP/2o17

• Lakshmi Auto Components Ltd.* Vs. DCIT, in ITAT Chennai ITA. No.[2006]

1011TD209

Without prejudice to the above, The fee paid for the ROC to increase authorized share capital is allowable U/s. 3cD of the Act. Reliance in this regard is placed in the decision of the Hon'ble ITAT Hyderabad in the case of Ocimum Bio Solution India Ltd Vs. DCIT in ITA No. 2178/H/2018, the relevant extract is reproduced as under:

On perusal of the financial statements submitted by the assessee, we find that there is no doubt that the assessee has increased share capital. On perusal of the provisions of section 35D, we find substance in the written synopsis submitted by the ld. AR of the assessee relying on the judgements quoted supra that section 35D provides amortization of certain expenses, which are in the nature of capital/intangibles/preliminary expenses, which have been incurred by the assessee in the preliminary stage of the company or in the normal course of business and the assessee is entitled to amortize of expenses over a period of time as per section 35D. Therefore, the AO is directed to allow the ROC expenditure incurred towards increase of share capital as per section 25D of the IT Act, 1961. Accordingly the grounds raised on this issue are allowed.

Reliance is also placed on the following decisions;

High Court of Rajasthan in the case of CIT Vs. Multi Metals Ltd (1991) 188 ITR 151 (Rajasthan) wherein it was held as under

"We, consequently, hold that the fee paid to the Registrar of Companies for raising authorised capital of the assessee-company was covered by sub section (2)(c)(iv ) of section 35D of the Income-tax Act."

High court of Punjab and Haryana in the case of CIT Vs. Nuchem Ltd in (2015) 59 taxmann.com 455 (para 8) has also held that the fee paid for increase in authorised share capital of the company is eligible for deduction U/s. 35D of the Act and has followed the order of the Rajasthan High court in the case of CIT Vs. Multi Metal Ltd (supra)

CIT Vs. Buhler India Ltd in (2012) 20 taxmann.com 191 (Karnataka) (para 5) DCIT Vs. Mercury Projects Pvt Ltd in ITA No. 440/HYD/2018(para 16)"

17

ITA Nos.543 & 470/Hyd/2021

14.2. Per contra, the ld.DR for the Revenue relied upon the decision of the Hon'ble Supreme Court in the case of Booke Bond India Ltd., and he relied upon the order of the Ld.CIT(A).

15. We have heard the rival contentions of the parties and perused the material available on record. Admittedly, the learned Assessing Officer disallowed the amount of Rs. 14,75,850/- towards the ROC and stamp duty charges paid by the assessee for increasing the share capital of the assessee. The learned Assessing Officer held that the expenditure incurred by the assessee was in capital nature and, therefore, cannot be allowed as a revenue expenditure.

16. The assessee before the learned Assessing Officer has not produced any evidence with respect to utilization of the amount for working capital. In our view, the expenditure incurred by the assessee was necessary for increasing the share capital of the assessee and the utilization of the funds received after increase of share capital was nothing but application of the amount by the assessee. In our view, the answer had already been given by the Hon'ble Supreme Court in the case of Brooke Bond Ltd., (supra) and we may also draw support from the decision of the Hon'ble Madras High Court in the case of Ashok Leyland 23 taxmann.com 50 (Mad) and also of the Co-ordinate Bench in the case of Mold Tek Packaging Ltd., ITA No. 938/Hyd/2007 decided on 02.07.2021 relied upon by the Revenue in the written submissions wherein the Tribunal has decided the issue in favour of the Revenue to the following effect:

18

ITA Nos.543 & 470/Hyd/2021

"6. After hearing both the sides and perusal of the record, the assessee has claimed ROC expenses in the profit and loss account u/s. 35D of Rs.58,500. This issue has rightly been decided by the CIT(A) on relying on the judgment of Hon'ble Supreme Court in the case of Brookbond India Limited Vs. CIT (supra) and Punjab State Industrial Development Corporation Vs. CIT 225 ITR 792 (SC) wherein it was held that the ROC expenses as fees for enhancement of capital was not a revenue expenditure. Therefore this ground cannot be allowed. Respectfully following the above case laws relied on by the CIT(A), we dismiss this ground of assessee. The Ground 2 is dismissed."

17. The ld.AR for the assessee had relied upon the decision in the cases of Co-ordinate Bench of the Tribunal in the case of Madhucon Toll Highways Ltd., in ITA No. 1487/Hyd/2018 & another and Haryana Jewelers P. Ltd., Vs. ITO ITA No. 2315/Del/2018 (supra). In our view the said decisions are not applicable to the facts of the case as the Co-ordinate Bench had not considered the decision of the earlier Co-ordinate Bench decision in the case of Mold Tek (supra) and further, there was no case of the assessee before the learned Assessing Officer that the increase in share capital was used for working capital.

18. Even in the case of Navi Mumbai SEZ Ltd. (supra), the Tribunal had recorded the finding of fact to the following effect:

"13. A perusal of the balance sheet shows that the share capital has been increased from 477.77 crores to 722.35 crores and the share application money has been increased from 172.12 crores to 1170 crores. The inventories which were Nil during the previous year ending on 31.3.2007 now stand at 2472.48.

14. The aforementioned figures clearly show that the entire incremental share capital has been absorbed in the inventories. The Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. (supra) has clearly laid down that the celebrated test as laid down in the case of Lord Cave L.C. in Atherton (supra) must yield where there are special circumstances leading to a contrary conclusion. After considering the balancesheet of the assessee as stated hereinabove, we find that special circumstances do exist in the present case which lead to taking a contrary

19

ITA Nos.543 & 470/Hyd/2021 conclusion. There is not an iota of doubt that the increase in the share capital has been fully utilized only in the purchase of trading stock."

19. In the present case, the facts of the case are not identical to the facts decided in case of Navi Mumbai SEZ Ltd (supra). The authorized capital as on 31^stMarch, 2014 was Rs. 1 lakh whereas the authorized capital as on 31^stMarch, 2015 was Rs. 15,00,00,000/-. The Hon'ble Supreme Court in the case of Brooke Bond Ltd., (supra) has held as under:

"6. Dr. Pal has, however, submitted that this decision does not cover a case, like the present case, where the object of enhancement of the capital was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as the revenue expenditure. In this connection, Dr. Pal has invited our attention to the submissions that were urged by the learned counsel for the assessee before the AAC as well as before the Tribunal. It is no doubt true that before the AAC as well as before the Tribunal it was submitted on behalf of the assessee that increase in the capital was to meet the need for working funds for the assessee-company. But the statement of case sent by the Tribunal does not indicate that a finding was recorded to the effect that the expansion of the capital was under taken by the assessee in order to meet the need for more working funds for the assessee. We, therefore, cannot proceed on the basis that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business. In any event, the above quoted observations of this Court in Punjab State Industrial Development Corpn. Ltd. 's case (supra)clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company."

20. Though, it is not the case of the assessee before the learned Assessing Officer that the increase in share capital was utilized for working capital, however, before the Ld.CIT(A), it is categorically mentioned that

20

ITA Nos.543 & 470/Hyd/2021 the enhancement of the share capital was necessary for making available for the purpose of working capital. Th Ld.CIT(A) had decided the issue against the assessee on the basis of the decision of the Hon'ble Supreme Court. The perusal of the decision of the Hon'ble Supreme Corut in the case of Brooke Bond Ltd., (supra) may not help the Revenue as it is the case of the assessee before the Ld.CIT(A) that the increase in share capital was necessary for making working capital available. In the light of the above, we deem it appropriate the remand back the matter to the file of the Assessing Officer with a direction to examine the financials of the assessee and to find out whether the increase in share capital was necessary for the purpose of making available the working capital or not?

The above said issue shall be decided after following the principles of nature justice and after affording an opportunity of being heard to the assessee. Needless to mention that the assessee shall be given a fair opportunity of hearing and the assessee is also directed to appear and file all the details and cooperate with the Assessing Officer for an early completion of the proceedings. Accordingly, the appeal of assessee is allowed for statistical purposes.

20. In the result, the appeal of assessee in ITA 543/Hyd/2021 is partly allowed for statistical purposes.

20.1. Now we will deal with ITA No.470/Hyd/2021 for A.Y. 2017-18.

21. The grounds raised in ITA 470/Hyd/2021 reads as under :

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ITA Nos.543 & 470/Hyd/2021

"1. On the facts and in the circumstances of the case the appellate order passed by the CIT(A) is erroneous both on facts and in law to the extent the order is prejudicial to the interest of the appellant.

2. The Ld.CIT(A) ought to have appreciated the fact that the Ld.AO erred in invoking provisions of sec 153A of the IT Act without there being any incriminating material found relating to the present appellant during the course of search.

3. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have appreciated the fact that the Ld. AO has erred in passing the order u/ s 153A of the Act without obtaining the prior approval of the competent authority JCIT / Additional commissioner of income tax u/ s 153D of the Act.

4. The Ld. CIT(A) failed to appreciate the fact there is no valid satisfaction recorded in the name of assessee.

5. The Ld.CIT(A) erred in upholding the addition of Rs. 56,91,894/ - towards provision for late delivery charges without appreciating the facts of the case.

6. The Ld.CIT(A) ought to have appreciated the fact that the provision for late delivery charges is on account of the amount deducted by the customers from the sale proceedings for not delivering the product as per the schedule time.

7. The CIT(A) erred in not appreciating the fact that provision for late delivery charges is incurred wholly and exclusively for the purposes of the business and is allowable revenue expenditure under section 37(1) of the Income Tax Act.

8. The Ld.CIT(A) erred in not appreciating the fact that the assessee is following same accounting policies consistently.

9. The Ld.CIT(A) ought to have appreciated the fact the Ld.AO erred in making addition of Rs. 3,56,132/- pertaining to provision made for leave encashment stating that the assessee has not made the payment during the year under consideration.

10. The Ld.CIT(A) ought to have appreciated the fact that the leave encashment is trading liability not statutory liability accordingly, the provisions of section 43B of the act will not attract.

11. Without prejudice, the Ld.CIT(A) ought to have appreciated the fact that the assessee is following consistent policy of claiming deduction of provision As stated above for leave encashment and not on payment basis.

12. The Ld.CIT(A) ought to have appreciated the fact that adding the provision in books of accounts would tantamount to double taxation.

22

ITA Nos.543 & 470/Hyd/2021

13. Without prejudice, the Ld.CIT(A) ought to have appreciated the fact the Ld.AO erred in not allowing provision for leave encashment to the extent of the amount paid before the due date of filing return of income and the same is allowable u/ s 43B of the Act.

14. The Ld.CIT(A) erred in upholding the addition of Rs. 5,24,952/ - pertaining to provision made for bonus without appreciating the facts of the case.

15. The Ld.CIT(A) ought to have appreciated the fact that the bonus is trading liability not statutory liability accordingly, the provisions of section 43B of the act will not attract.

16. Without prejudice, the Ld.CIT(A) ought to have appreciated the fact that the assessee is following consistent policy of claiming deduction of provision for bonus and not on a payment basis.

17. The Ld.CIT(A) ought to have appreciated the fact that adding the provision in books of accounts would tantamount to double taxation.

18. Without prejudice, the Ld.CIT(A) ought to have appreciated the fact that the Ld.AO erred in disallowing bonus without appreciating fact that the bonus amount has been paid before the due date of filing return of income and the same is allowable u/ s 43B of the Act.

19. The CIT(A) ought to have appreciated the fact that the Ld.A.O erred in making an addition of Rs.56,91,894 and Rs.3,56,132/- towards Provisions for late delivery charges, provision for leave encashment respectively while computing Book Profits for the purpose of section 115JB of the Act.

20. The Ld.CIT(A) ought to have appreciated the fact that the AO has no authority to go beyond the accounts of a company which were certified by auditors of company as having been maintained in accordance with provisions of the Companies Act and which account had been accepted in general meeting of company as well as by Registrar of Companies.

21. The Ld.CIT(A) ought to have appreciated the fact that no adjustment to 'Book Profit' is permitted apart from those specified in Explanation 1 to section 115JB of the Act.

22. The Ld.CIT(A) ought to have appreciated the fact that the provision for late delivery charges and provision for leave encashment is ascertained liability and therefore cannot added to book profits u/ s 115JB of the Act.

23. The Ld. CIT(A) failed to appreciate the fact the expenses in the nature of business expediency are to be allowed u/s 37 of the income tax act, 1961.

24. Without prejudice to the above, the Ld.CIT(A) ought to have appreciated the fact that the Ld.AO completed the assessment without affording

23

ITA Nos.543 & 470/Hyd/2021 reasonable opportunity of being heard to the appellant, which is against to the Principles of Natural justice and is bad-in-law, which, view is supported by the decision of Honourable Supreme Court of India in the case of M/s. Andaman Timber Merchants Vs Commissioner of Central Exercise, Kolkata II.

25. The learned CIT (Appeals) ought to have appreciated the fact that the ld. Assessing Officer erred in initiating penalty proceedings u/s. 270A of the Act, without appreciating the fact that the appellant has not concealed any particulars of income.

26. The learned CIT (Appeals) ought to have appreciated the fact that the ld. Assessing Officer erred in computing interest u/s. 234A and 234B at higher interest rates."

22. With respect to the assessment year 2017-18 it was submitted that the first ground with respect to disallowance of provision for late delivery charges is identical to the appeal of the assessee for the earlier assessment year namely 2016-17.

23. It was submitted by the AR that the decision of the Tribunal for the assessment year 2016-17 may be applied mutatis mutandis to the present appeal so far as the first issue of late delivery charges consider.

24. With respect to the provision for late delivery charges we have already remitted back the matter pertaining to the assessment year 2016- 17, to the file of the assessing officer for fresh adjudication after affording opportunity of hearing to the assessee to the file of Assessing Officer , with the direction to the assessee to produce the evidence of reversing of the provisions of the unused late delivery charges in the subsequent assessment years. Respectfully following our own decision for the assessment year 2016-17, we also remand back this issue to the file of the assessing officer for the assessment year 2017-18.

24

ITA Nos.543 & 470/Hyd/2021

25. However, with respect to the other issues namely for disallowance of the provision for the leave encashment, the ld.AR for the assessee had drawn our attention to the order passed by the ld.CIT(A) to the following effect :

"Further, the appellant submitted that the provision made for bonus and leave encashment is trading liability not statutory liability and accordingly, the provisions of section 43B of the act will not attract.

It is important to note that leave encashment provision is a contingent liability as held in the case of M/s. Rashtriya Ispat Nigam Ltd. Vs. JCIT (OSD) by Hon'ble ITAT Visakhapatnam in I.T.A. No. 13/Vizag/2013 vide order dated 22/11/2017 and the relevant portion of the order is reproduced as under:

"10. Ground No. 4 is related to the provision for future leave encashment. During the assessment proceedings, the A.O. found that the assessee company has created a provision under the head leave encashment for an amount of Rs. 34,64,82,796/ -. The assessee has explained that the liability was created on actuarial basis as per the certificate issued by the competent consultant and debited the expenditure as per accounting standard-15 issued by the Institute of Chartered Accountants of India. Not being impressed with the explanation of the assessee, the assessing officer made the addition holding that the expenditure was purely provisional and not an ascertained liability and the assessee has failed to furnish any factual details regarding outstanding leave of each staff member the eligibility of encashment of leave and the liability related to encashment of leave. Further, the Ld. A.O. observed that the liability is neither accrued nor incurred unless the employees of the company en cash the leave accrued to them and the employees had option either to avail the leave or to en cash the same, hence, there is a high element of uncertainty and therefore, the expenditure was purely contingent in nature, accordingly disallowed.

11. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed order of the A.O.

12. Aggrieved by the order of the CIT(A), the assessee is in appeal before this Tribunal.

13. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. This issue is squarely covered by the order of this Tribunal in ITA Nos. 9 & 16/ Vizag/ 2015 dated 29.4.2015 against the assessee. The relevant part of the order is extracted below which reads as under:

25

ITA Nos.543 & 470/Hyd/2021

20. The assessee company has created a provision under the head 'Future Leave Encashment' of Rs. 66,31,68,389 during the F.Y. 2008- 09 relevant to the A. Y. 2009- 10 as found in schedule No. 16 of the balance sheet. During the course of assessment proceedings, the assessee company was asked to explain how the amount debited towards the provision for future leave encashment can be allowed as deduction. In response to which, the assessee company filed its explanation vide letter dated 25.10.2010 contending inter alia, that the assessee company is following mercantile system of accounting and the amount on account of leave encashment was provided in the accounts are based on the actuarial valuation certificate issued by Consulting Actuary. Therefore, the fact is, it is the liability towards ascertained employee cost for the present services, determined based on actuarial valuation i.e., on a realistic and scientific basis. However, Assessing Officer was not convinced with the explanation furnished by the assessee company. The Assessing Officer held that the provision is in the nature of contingent liability but not an ascertained liability. The liability is neither accrued nor incurred unless the employees of the company encashed the leave accrued to them. Further, the employees have an option either to avail the leave or to en cash the same and therefore, there is high element of uncertainty whether the said leave would be encashed or availed by the employees whose exact number under either head is not ascertainable. The provision therefore is clearly in the nature of contingent liability and the same is not an allowable expenditure. In this context, Assessing Officer relied on the decision of Karnataka High Court in the case of Mysore Lamp Works Ltd., vs. CIT 185 ITR 96 and added the amount Rs. 66,31,68,389 to the income of the assessee. On appeal, the Ld. CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, assessee filed appeal filed before the Tribunal.

21. During the course of hearing, the learned Counsel for the assessee reiterated the submissions made before the lower authorities. We find that an identical issue was decided by the coordinate bench vide order date 8th January, 2015 (supra) wherein it was held that the claim of the assessee cannot be allowed in view of the specific provisions of s.43B(f) of the Income Tax Act, 1961 which provides for allowance of such claim only in the year of payment. The findings of the coordinate bench in this regard are contained in para 51 of the order. Respectfully following the view taken by the coordinate bench, we uphold the orders of the lower authorities and confirm the same. Ground No. 5 of the assessee is dismissed.

14. Respectfully following the view taken by this Tribunal in the order cited (supra), we uphold the orders of the lower authorities and dismiss the appeal of the assessee on this ground....."

Further, it also important to note the relevant provisions of Section 43B(f) of the IT Act are reproduced as under:

26

ITA Nos.543 & 470/Hyd/2021

"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him...." From the above it is clear that provision for leave encashment is a contingent liability and is allowable only on payment basis and therefore allowance of such claim is done only in the year of payment. In view of the above discussion, the disallowance of provision for leave encashment

amounting to Rs.3,56,132/- is upheld and accordingly the ground no.8 and 9 are dismissed.

With regard to provision of bonus, it is to be noted that the same is covered as per provisions of Section 43B(c) read with provisions of Section 36(1)(ii) and the same are reproduced as under:

"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(c) any sum referred to in clause (ii) of sub-section (1) of section 36, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him...."

36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;

From the above it is clear that provisions of Section 43B are applicable for bonus and the same is allowable only on payment basis and therefore allowance of such claim is done only in the year of payment. In view of the above discussion, the disallowance of Rs.5,24,952/- is upheld and accordingly the ground no.13 and 14 are dismissed."

26. The Ld.AR for the assessee had submitted that the provisions were made for leave encashment and the same is required to be

27

ITA Nos.543 & 470/Hyd/2021 allowed. In support of his claim, he had filed the following written submissions :

"3.2. Disallowance of Provision for Bonus of Rs. 5,24,952/- and Provision for Leave encashment of Rs. 3,56,132/-

The AO in the assessment order U/s. 143(3) r.w.s 153A of the Act disallowed provision made towards bonus and leave encashment on the same reason that was given for disallowing the provision for late delivery charges.

In relation to provision for bonus, it is submitted that the assessee has computed the provision following the due process mentioned in the Payment of Bonus Act, 1965. In relation to provision for leave encashment, we would like to submit that as per Accounting Standard (`AS') - 15, leave encashment is payable on or post retirement of employees. Thus, creating provision for such an compulsory expenditure is admissible in accordance with the guidelines of Companies Act as well as Accounting Standards. In the present case the assessee has created the provision for leave encashment as per the manner prescribed in the AS -15.

It is submitted that said provisions were created through reliable estimates and after taking into consideration past trends and present facts and circumstances and met all the three conditions specified in AS 29, and hence such liability so created is a ascertained liability and not contingent liability. Reliance is placed on the decision of the Hon'ble jurisdictional high court in the case of CIT Vs. Pact Securities & Financial Services Ltd in [20151 61 taxmann.com 192 (Andhra Pradesh and Telangana) wherein it was held that the assessee had maintained accounts as per the accounting standard issued by ICAI then such method of accounting following by assessee could not be discarded and deduction to be allowed.

It is further submitted that if a business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at a future date as per the provision of section 37(1) of the Act. For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of its business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. It is further submitted that assessee is following consistent accounting policies, provision so created in the FY 2016-17 has been discharged in next accounting years i.e., FY 2017-18 & FY 2018-1Q and same has been charged to such provision for bonus

28

ITA Nos.543 & 470/Hyd/2021 and leave encashment respectively. The ledger copies are placed in paper book-IL page no. 62-67.

Reliance is placed on the decision of the Hon'ble Supreme Court Judgement in case of Bharath Earth Movers Vs. CIT [2000] 112 Taxman 61 (SC) 3.3• Addition of Rs. 3,56,132/- and Rs. 56,91,894/- to the book profit U/s. 115JB of the Act in relation to provision made towards leave encashment and late delivery charges respectively.

The book profit as contemplated under provisions of section 115JB of the Act would allow the adjustments that are provided in Explanation 1 only and the AO cannot go beyond the same.

The books of account of the assessee were duly prepared in accordance with schedule VI of the companies Act and audited by the statutory auditor. As per the above submissions, it is very clear that the provision towards late delivery charges is an ascertained liability and no adjustment for the same can be in book profit U/s. 115JB of the Act as the provision for ascertained liability does not come under any limb of explanation 1 to section 115JB of the Act. Further, no adjustment for the same was made by the auditor in the Form 29B filed for the AY 2017-18.

Therefore, no power is available to the AO to go beyond book profit declared by the assessee.

27. It was the contention of the ld.DR that order passed by the lower authorities in accordance with law as there is no provision in law to allow the expenditure on provision basis. He relied upon section 43B(f) of the Income Tax Act 1961.

28. We have heard the rival contentions of the parties and perused the material available on record. Section 43B of the Act provides as under [Certain deductions to be only on actual payment]. 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

29

ITA Nos.543 & 470/Hyd/2021 19 [(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,²⁰[or]] shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

33 [Explanation 3B.—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]

29. From the bare provision of the Act, it is abundantly clear that the sum paid by the assessee on actual basis only shall be allowed as a deduction. In the present case no evidence has been brought to our notice to show that the amount disallowed by the lower authorities has actually been paid by the assessee during the assessment year under consideration. However, as we are remanding back the other issues to the file of the Assessing Officer, therefore, this issue is also remanded back to the file of the Assessing Officer with a direction to allow the bonus / leave encashment on actual payment basis for the financial year under

30

ITA Nos.543 & 470/Hyd/2021

31. In the result, the appeal of assessee ITA 470/Hyd/2021 is partly allowed for statistical purposes.

32. To sum up, both the appeals filed by the assessee are partly allowed for statistical purposes.

Order pronounced in the Open Court on 31^stOctober, 2022.

Sd/- Sd/-

(RAMA KANTA PANDA) (LALIET KUMAR)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, dated 31^stOctober, 2022. TYNM/sps

Copy to:

By Order