Appellate tribunal decision: provision for leave encashment upheld, sales promotion expenses for review

The appellate tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal. The disallowance of the provision for leave encashment and the deduction under section 80IA(2) of the Income-tax Act were upheld, while the issue of sales promotion expenses was remitted back to the Assessing Officer for further verification. The disallowance of foreign travel expenses was dismissed as the assessee did not press the issue during the hearing. The order was pronounced on April 29, 2016.

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Issues involved:

1. Disallowance of 'Provision for Leave Encashment'.
2. Disallowance of 'Sales Promotion Expenses'.
3. Disallowance of 'Foreign Travel expenses'.
4. Deduction under section 80IA(2) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of 'Provision for Leave Encashment':

The first issue pertains to the disallowance of the provision for leave encashment amounting to Rs. 7,86,853/-. The assessee had debited a total of Rs. 41,19,961/- towards leave encashment, out of which Rs. 33,33,106/- was actually paid during the year, and the remaining Rs. 7,86,853/- was a provision based on actuarial valuation. The assessee argued that this provision was required as per Accounting Standard 15 and the mercantile accounting system. However, the Assessing Officer disallowed the deduction under section 43B(f) of the Act, which allows such deductions only on an actual payment basis. The CIT(A) upheld this disallowance, noting that the provision for leave encashment was not allowable unless the amount was actually paid before the due date of filing the return of income. The assessee conceded that this issue should be decided against them in light of the amended provisions of section 43B(f). Consequently, the appellate tribunal found no merit in the assessee's claim and upheld the CIT(A)'s order, dismissing the ground of appeal.

2. Disallowance of 'Sales Promotion Expenses':

The second issue involves the disallowance of Rs. 50,96,657/- out of sales promotion expenses, which was upheld by the CIT(A) and further enhanced by Rs. 36,90,771/-. The assessee claimed a total expenditure of Rs. 1,37,93,473/- under sales promotion, which included Rs. 41,96,741/- for gifts. The Assessing Officer disallowed the expenditure related to gifts and questioned the allocation of sales promotion expenses to the sister concern, Serum Institute India Ltd. (SIIL). The CIT(A) allowed the expenditure on gifts but disallowed the balance allocation to SIIL, attributing it to an incorrect basis of allocation and enhancing the disallowance. The tribunal noted that the CIT(A) had allowed the expenditure on gifts, and the remaining Rs. 95,96,732/- was to be shared between the assessee and SIIL. The tribunal remitted the issue back to the Assessing Officer to verify the nature of the expenditure and determine the allowable amount after providing a reasonable opportunity of hearing to the assessee.

3. Disallowance of 'Foreign Travel expenses':

The third issue raised by the assessee regarding the disallowance of foreign travel expenses amounting to Rs. 2,85,610/- was not pressed by the assessee during the hearing. Consequently, this ground of appeal was dismissed as not pressed.

4. Deduction under section 80IA(2) of the Income-tax Act:

The fourth issue raised by the Revenue concerns the deduction under section 80IA(2) of the Act. The CIT(A) held that the initial assessment year for claiming the deduction was the first year in which the assessee made such a claim after exercising the option, rather than the year in which the assessee started generating electricity. The CIT(A) ruled that only the losses from the initial assessment year should be brought forward, not the losses of earlier years. The assessee supported this view, citing the Tribunal's decision in their own case for earlier years and a recent CBDT circular clarifying the term 'initial assessment year'. The tribunal upheld the CIT(A)'s order, noting that the CBDT circular and the Tribunal's earlier decision supported the assessee's position. Consequently, the grounds of appeal raised by the Revenue were dismissed.

Conclusion:

In the result, the appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed. The order was pronounced on April 29, 2016.

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