2017 (3) TMI 264 - AT - Income Tax

Tribunal rules in favor of assessee on gratuity, turnover tax, and doubtful debt provisions. Disallowance overturned under section 115J.

Kesoram Industries Limited (Successor of Hindustan Heavy Chemicals Ltd.) Versus Assistant Commissioner of Income-tax, Central Circle-X, Kolkata and Deputy Commissioner of Income-tax, Circle-4, Kolkata Versus Kesoram Industries Ltd. (Successor of Hindustan Heavy Chemicals Ltd.)

The Tribunal dismissed the revenue's appeal on all grounds related to the addition of provisions for gratuity, interest on turnover tax, and doubtful debt ... MAT computation - provisions for gratuity not added to book profit - Held that:- Here the liability had been calculated on the basis of actuarial valuation towards future payment to the employees. The assessee had submitted a copy of the actuarial valuation certificate issued by the Advocate and registered valuer which is on record. We further observe that when the provisions for gratuity is made on the basis of actuarial valuation for future payments to employees such a liability cannot be held as contingent liability as held by the Hon’ble Apex Court in the case of Bharat Earth Movers Ltd.[2000 (8) TMI 4 - SUPREME Court]. We also observe that the ground of the AO for rejecting the claim of the assessee that there was a change in the method of accounting in respect of gratuity liability is not correct because the change made by the assessee was not proved to be mala fide as it is on record and the change was made on the basis of accepted accounting principles. On that basis of this finding, we do not find any infirmity in the order of Ld. CIT(A) on this issue, and, therefore, the relief granted to the assessee by the Ld. CIT(A) is sustained . - Decided against revenue. Liability of interest on turnover tax - whether an allowable expenditure for computing book profit? - Held that:- CIT(A) in his detailed order provided the reasons carefully as to why the claim of assessee is justified herein. At the same time we also observe the decision of the West Bengal Tribunal in the case of Kingsway & Co. [1989 (7) TMI 326 - WEST BENGAL TAXATION TRIBUNAL ] wherein the provisions for interest on turnover tax is determined as an ascertained liability and once it is so, the same cannot be added to the book profit u/s. 115J of the Act. We agree with the findings of the Ld. CIT(A) and the relief given to the assessee on this issue is, therefore, sustained. - Decided against revenue. Provision of doubtful debt - whether an allowable expenditure for computing book profit? - Held that:- Issue is decided in favour of the assessee company by the jurisdictional High Court of Kolkata in the case of ICI (India) Ltd. Vs. CIT (2011 (9) TMI 136 - CALCUTTA HIGH COURT ) in which the decision in the case of CIT Vs. Comnet Systems & Services Ltd.(2008 (9) TMI 18 - SUPREME COURT ) was followed by the Hon’ble Calcutta High Court. The Ld. CIT(A) held on the basis of the judicial principles and decisions that the AO is directed to delete the addition of ₹ 8,70,932/- from the computation u/s. 115J of the Act on account of provision for doubtful debts.- Decided against revenue. Disallowance on account of unabsorbed loss is being lower than brought forward business loss computing adjusted book profit for the purpose of section 115J - Held that:- Once loss is held to be arrived at after taking into account depreciation, there is no scope of disputing the contention of the assessee that the amount of depreciation of ₹ 13,85,66,473/- is to be set off in terms of clause (iv) of the Explanation to section 115J of the Act. Thus, it was a duty of the AO to set off the said amount as the said duty falls within the purview of the limited power of making increases and deductions provided for in the explanation to the said section. See M/s. Pieco Electronics & Electricals Ltd. (now known as Philips India Ltd.) Vs. CIT, WB-4 & Anr. [2011 (8) TMI 352 - CALCUTTA HIGH COURT]- Decided against revenue. Issues Involved:1. Whether provisions for gratuity should be added to book profit.2. Whether liability of interest on turnover tax is an allowable expenditure for computing book profit.3. Whether provision for doubtful debt is an allowable expenditure for computing book profit.4. Whether the disallowance of Rs. 20,479,843/- in computing adjusted book profit for the purpose of section 115J of the Act claimed by the assessee on account of unabsorbed loss being lower than brought forward business loss is justified.Detailed Analysis:1. Provisions for Gratuity:The first issue pertains to whether the provisions for gratuity should be added to book profit. The AO added Rs. 36,93,429/- on account of provision for gratuity, contending it was an unascertained liability. The assessee argued that the provision was based on actuarial valuation and hence was not unascertained. The CIT(A) accepted the assessee's argument, referencing the Supreme Court's decision in Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428 (SC), which held that such a provision based on actuarial valuation is not a contingent liability. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this ground.2. Liability of Interest on Turnover Tax:The second issue concerns the liability of interest on turnover tax. The AO added Rs. 37,56,330/- to the book profit, arguing it was an unascertained liability. The assessee contended that the liability was statutory under the Bengal Finance (ST) Act, 1941, and thus ascertained. The CIT(A) agreed, referencing the West Bengal Taxation Tribunal's decision in Kingsway & Company & Ors. Vs. Commercial Tax Officer, which held that the liability to pay interest is statutory and not contingent. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this ground as well.3. Provision for Doubtful Debt:The third issue involves the provision for doubtful debt. The AO added Rs. 8,70,932/-, arguing it was a contingent liability. The assessee argued that the provision was for diminution in the value of assets, not a liability. The CIT(A) sided with the assessee, referencing the Calcutta High Court's decision in ICI (India) Ltd. Vs. CIT 347 ITR 442 (Cal), which followed the Supreme Court's decision in CIT Vs. Comnet Systems & Services Ltd. 305 ITR 409 (SC). The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this ground.4. Disallowance of Rs. 20,479,843/- in Computing Adjusted Book Profit:The final issue pertains to the disallowance of Rs. 20,479,843/- in computing adjusted book profit for the purpose of section 115J of the Act. The AO did not allow the deduction of the lower of business loss or unabsorbed depreciation. The assessee argued that the business loss was Rs. 2,32,03,893/- and unabsorbed depreciation was Rs. 2,04,79,543/-, thus the lower amount should be allowed. The CIT(A) held that since the assessee declared and paid dividends, it was presumed there was no loss or unabsorbed depreciation to set off. The Tribunal, however, sided with the assessee, referencing the Calcutta High Court's decision in M/s. Pieco Electronics & Electricals Ltd. Vs. CIT, which ruled in favor of the assessee under similar circumstances. Thus, the Tribunal allowed the assessee's appeal on this ground.Conclusion:The Tribunal dismissed the revenue's appeal on all three grounds concerning the addition of provisions for gratuity, interest on turnover tax, and doubtful debt to the book profit. It allowed the assessee's appeal regarding the disallowance of Rs. 20,479,843/- in computing adjusted book profit for the purpose of section 115J of the Act.