2015 (4) TMI 174 - AT - Income Tax

ITAT upholds disallowance of leave encashment provision & interest assessment upfront

The Federal Bank Ltd. Versus The Addl. Commissioner of Income-tax

The ITAT upheld the disallowance of the provision for leave encashment and the assessment of interest received upfront on bills purchased/discounted, ... Disallowance of leave encashment - Whether on facts and circumstances of the case, the CIT(A) ought to have followed the decision of the jurisdictional High Court in the case of CIT vs. Hindustan Latex Ltd. [2012 (6) TMI 713 - KERALA HIGH COURT ] and deleted the disallowance of provision for leave encashment amounting to ₹ 24.37 crores - Held that:- issue is fully covered by the judgment of the Hon’ble Kerala High Court in the case of the South Indian Bank Ltd. vs. CIT reported in [2014 (2) TMI 1080 - KERALA HIGH COURT] wherein the Apex Court held that it pertains to the provision made for leave encashment and the disallowance was u/s. 43B(f). Therefore, the said disallowance is justified. In view of this, we are inclined to decide the issue against the assessee. Whether on facts and circumstances of the case, the CIT(A) erred in confirming the action of the Assessing officer in assessing interest/commission received upfront on inland/export bills purchased/discounted/LCs opened - Held that:- assessee has transferred an amount of ₹ 27.64 crores towards other liabilities out of the interest received upfront on inland bills and export bills purchased/discounted. Though initially, the full amount received is credited to the P&L account as it was received by the assessee, at the time of preparing final accounts, proportionate interest relating to the remaining period of maturity of the bills was transferred from the P&L account to unexpired interest/discount/commission in the balance sheet. According to the Ld. AR, this amount is not accrued to the assessee and since the assessee can charge interest only on the borrower, such income is apportioned on the basis of period of time. In our opinion, when bills are discounted, the transaction is completed and income is accrued to the assessee and there is no question of postponement of recognition of income. Hence, in our opinion, the lower authorities are justified in treating the amount accrued as income of the assessee - Decided against assessee. Issues:1. Disallowance of provision for leave encashment2. Assessment of interest received upfront on bills purchased/discountedIssue 1: Disallowance of provision for leave encashmentThe appeal concerns the disallowance of a provision for leave encashment amounting to Rs. 24.37 crores by the Assessing Officer. The Assessing Officer deemed this provision as vague and not a liability capable of accurate determination. The CIT(A) upheld this disallowance, leading to the appeal. The ITAT referred to a judgment of the Kerala High Court in a similar case involving leave encashment provisions, supporting the disallowance under section 43B(f). Consequently, the ITAT decided against the assessee, upholding the disallowance.Issue 2: Assessment of interest received upfront on bills purchased/discountedThe second ground of appeal pertains to the assessment of interest received upfront amounting to Rs. 27.64 crores. The assessee, engaged in banking business, argued that the income from bills and LCs with fixed maturity periods should be recognized based on a consistent accounting method. The assessee contended that income should be apportioned over time, with the current year's portion recognized as income and the remainder deferred. The CIT(A) disagreed, stating that income accrues at the point of bill discounting. The ITAT analyzed the method of accounting employed by the assessee and the nature of the transactions. Ultimately, the ITAT supported the lower authorities, ruling that the income from bill discounting is accrued at the point of transaction completion, dismissing the appeal.In conclusion, the ITAT upheld the disallowance of the provision for leave encashment and the assessment of interest received upfront on bills purchased/discounted, ruling against the assessee on both grounds.