2015 (12) TMI 1283 - AT - Income Tax

Tribunal decisions: Deductions allowed, reassessment ordered, foreign income included

The Tribunal partly allowed the assessee's appeal, directing the AO to allow the deduction under section 36(1)(viii) based on reserves created in ... Disallowance of deduction u/s 36(1)(viii) - Held that:- Admittedly, in the case in hand, the assessee has transferred the amount of ₹ 200 crores in the special reserve created during the subsequent year, out of the general reserve created during the year under consideration, whereas the claim of deduction has been made in respect of the amount of ₹ 161 crores only. We, therefore, direct the AO to allow the claim for the deduction to the assessee in the light of the decision of the co-ordinate bench of the Delhi Tribunal in the case of 'M/s. Power Finance Corporation Ltd. vs. JCIT' (2008 (7) TMI 982 - ITAT DELHI). - Decided in favour of assessee Disallowance of provision towards liability arising on account of wage revision payable to employees - Held that:- The issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of 'Tata Communications Ltd. vs. DCIT' [2013 (2) TMI 506 - ITAT MUMBAI ] wherein the Tribunal has taken a view that in case of salary/wage revision, what is important is not the date of signing the agreement nor the date of approval granted by the DRE, what is important is the effective date of commencement. The Tribunal, while relying upon the decision of the Hon'ble Supreme Court in the case of 'Bharat Earth vs. CIT [2000 (8) TMI 4 - SUPREME COURT], held that in such a case the incurring of liability was certain and the same could also be estimated with reasonable certainty, although, the actual quantification may not be possible. In the case in hand also as per the agreement and the policy, the wage revision was certain and it could have been reasonably estimated also. Hence, the provision made by the assessee towards wage revision was allowable - Decided in favour of assessee Inclusion of income of foreign branches into the total income of the assessee - Held that:- The assessee will be entitled to credit of such taxes which have been paid by the branches in other contracting states. Since the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the own case of the assessee, hence, respectfully following the same, the appeal of the Revenue is treated as allowed in the same lines. Issues Involved:1. Disallowance of deduction under section 36(1)(viii) of the Income Tax Act.2. Disallowance of provision towards liability arising on account of wage revision payable to employees.3. Disallowance under section 14A as per Rule 8D.4. Taxability of management fee and dividend from foreign subsidiaries.5. Inclusion of income of foreign branches into the total income of the assessee.Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 36(1)(viii):The assessee claimed a deduction of Rs. 161,55,76,163 under section 36(1)(viii) for the assessment year 2008-09, asserting that it had transferred Rs. 651.05 crores to general reserves, which should be considered as fulfilling the requirement for a special reserve. The Assessing Officer (AO) disallowed this claim, stating that the required amount was not transferred to a special reserve during the year. The CIT(A) upheld the AO's decision, emphasizing that the transfer must occur within the same year. The Tribunal, however, referred to the decision in 'M/s. Power Finance Corporation Ltd. vs. JCIT,' which allowed consideration of reserves created in subsequent years before finalizing the deduction. Consequently, the Tribunal directed the AO to allow the deduction in light of this precedent.2. Disallowance of Provision for Wage Revision:The assessee made a provision for wage revision based on ongoing negotiations, which was disallowed by the CIT(A) as a contingent liability. The Tribunal referred to the decision in 'Tata Communications Ltd. vs. DCIT,' which held that the effective date of liability is crucial, not the date of agreement signing. Given the certainty of wage revision as per policy, the Tribunal ruled in favor of the assessee, directing the AO to allow the provision for wage revision.3. Disallowance under Section 14A as per Rule 8D:The AO applied Rule 8D directly for disallowance under section 14A without considering the assessee's computation. The Tribunal noted that the AO did not follow the guidelines for objective satisfaction as laid down in 'Godrej & Boyce Manufacturing Co. Ltd.' The Tribunal also referenced 'CIT vs. Reliance Utilities and Power Ltd.,' which presumes the use of own funds for investments if available. Additionally, the Tribunal cited 'CIT vs. India Advantage Securities Ltd.,' which excluded shares held as stock in trade from disallowance calculations. The Tribunal directed the AO to reassess the issue, considering these judicial precedents and providing the assessee an opportunity to present its case.4. Taxability of Management Fee and Dividend from Foreign Subsidiaries:The Tribunal dismissed this ground as the assessee did not advance any argument.5. Inclusion of Income of Foreign Branches:The Revenue contended that the income of foreign branches should be included in the assessee's total income. The Tribunal noted that this issue was already decided against the assessee in its own case for A.Y. 2005-06, where it was held that such income is taxable in India but the assessee is entitled to credit for taxes paid in foreign countries. Following this precedent, the Tribunal allowed the Revenue's appeal.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes and allowed the Revenue's appeal, directing the AO to reassess the disallowance under section 14A and to include the income of foreign branches while allowing credit for taxes paid abroad. The order was pronounced in the open court on 4.11.2015.