2018 (12) TMI 1326 - AT - Income Tax

Tribunal dismisses Assessee's appeal on salary provision, allows Revenue's appeal on Section 14A.

M/s Housing And Urban Development Corporation Ltd. Versus Addl. Commissioner of Income Tax And ACIT, Circle 12 (1), New Delhi

The Assessee's appeal regarding the disallowance of ad-hoc provision of salary and denial of change in accounting policy was dismissed. The Tribunal ... Disallowance of ad-hoc provision of salary - failure to make a protective claim in subsequent year - Held that:- A claim wrongly made by an Assessee in an earlier year cannot be allowed in that year, merely because the Assessee did not make the claim correctly in a subsequent year. During the pendency of a dispute as to the year in which a claim of the Assessee is to be allowed; a prudent Assessee can make the claim in other year(s), on protective basis, subject to final outcome of such a dispute, by explaining such a protective claim in other year(s). Assessee, having failed to make protective claim in subsequent year(s) in which it was lawfully allowable, cannot force the claim in an earlier year in which it was not lawfully allowable. However, the Assessee is free to exercise its legal options in respect of the subsequent year(s) in which the claim was lawfully allowable; such as U/s 264 of I.T. ACT with particular reference to Proviso to Section 264(3) - thus sustaining the disallowance on account of ad hoc provision for pay revision - Decided against assessee. Addition of denial of change in the accounting policy - Held that:- The Assessee is a company incorporated under the Companies Act, 1956 and follows mercantile system of accounting. An Assessee company registered under the Companies Act, 1956 is required to maintain accounts in accordance with provisions of The Companies Act, 1956. However, the profits computed in this manner need not necessarily be the same as Total Income for the purposes of I.T. Act. The computation of Total Income for the purposes of Income Tax Act requires giving effect to statutory provisions under I.T. Act, by making necessary adjustments/modifications/alterations/variations to profits compounded in accordance with provisions of the Companies Act, 1956. In view of this, the Assessee was in clear error of law by not adding back the aforesaid amount of ₹ 1.28 crores in the computation of Total Income for the purposes of I.T. Act. This error of law is further aggravated by the error of fact, in that the change of accounting policy was based on faulty premise (i.e. error of fact) that there was no financial impact. Thus a clear errors of law and fact on the part of the Assessee, we uphold the addition of aforesaid amount - Decided against assessee. Revision u/s 263 - Disallowance u/s 14A - Held that:- CIT(A) has mentioned in his impugned order dated 28.8.2014, in computing disallowance U/s 14A of I.T. Act, the AO should have carried out necessary verifications regarding the nature of investments as directed by CIT in the order U/s 263 of I.T. Act; which the AO failed to do. However, CIT(A) also not only himself failed to carry out this verification; but also, he failed to cause this verification to be done by the AO. It is well-settled that powers of CIT(A) are co-terminus with powers of the AO. Useful reference may be made to case of CIT v/s Kanpur Coal Syndicate (1964 (4) TMI 18 - SUPREME COURT) as held that AAC has plenary powers in disposing off an appeal; that the scope of his power is co-terminus with that of the ITO, that he can do what the ITO can do and also direct him to do what he failed to do. CIT(A), having noticed lack of proper verification at the end of the AO, should have ensured that effective verification was carried out. CIT(A) could have made the verification himself, or he could have caused the verification by way of further inquiry in exercise of powers U/s 250(4) of I.T. Act - we are of the view that the lower authorities, the AO as well as the Ld. CIT(A), have not considered the issue regarding disallowance U/s 14A of I.T. Act properly and the matter requires fresh consideration at the level of the AO. Therefore, we restore the disputed issue regarding disallowance U/s 14A of I.T. Act to the file of the AO for fresh order Issues Involved:1. Addition of disallowance of ad-hoc provision of salary.2. Addition of denial of change in the accounting policy.3. Disallowance under Section 14A of Income Tax Act read with Rule 8D of Income Tax Rules.Detailed Analysis:1. Addition of Disallowance of Ad-hoc Provision of Salary:The Assessee claimed a deduction of Rs. 1,60,00,000 for ad-hoc provision of salary based on anticipated pay revision following the Pay Revision Committee's recommendations. The AO disallowed this claim, stating that the liability was unascertained and had not crystallized during the relevant financial year (FY 2006-07). The CIT(A) upheld this disallowance, noting that the liability had not accrued during the year, as the final decision on pay revision was taken in FY 2008-09.The Tribunal agreed with the AO and CIT(A), stating that the liability for the pay revision had not accrued during FY 2006-07, as the Pay Revision Committee had not completed its deliberations, and the final implementation occurred in FY 2008-09. The Tribunal emphasized that each assessment year is separate and self-contained, and a liability not actually present but only contingent cannot be deducted for tax purposes.2. Addition of Denial of Change in Accounting Policy:The Assessee changed its accounting policy for recognizing revenue from application fees, processing fees, front-end fees, and administrative fees from accrual basis to receipt basis, resulting in a reduction of profit by Rs. 1,28,00,000. The AO added back this amount, stating that the change in accounting policy was made after the close of the accounting year and was not in compliance with Accounting Standard-9.The CIT(A) upheld this addition, noting that the Assessee's change in accounting policy was based on a faulty premise that it had no financial impact. The Tribunal agreed, stating that the Assessee was not permitted to selectively adopt a cash system of accounting for certain items while following a mercantile system for others. The Tribunal emphasized that statutory provisions under the Income Tax Act would prevail over any observations by the Audit Party of Comptroller & Auditor General.3. Disallowance under Section 14A of Income Tax Act Read with Rule 8D of Income Tax Rules:The AO made a disallowance of Rs. 1,90,27,57,705 under Section 14A read with Rule 8D, which was later revised to Rs. 1,89,73,51,151. The CIT(A) deleted this disallowance, stating that Rule 8D was not applicable for AY 2007-08, and the AO had not examined the Assessee's claim properly.The Tribunal noted that Rule 8D was applicable only from AY 2008-09, as held by the Supreme Court in CIT v/s Essar Teleholdings Ltd. However, the Tribunal observed that the AO should have computed the disallowance under Section 14A without relying on Rule 8D and should have carried out necessary verifications regarding the nature of investments. The Tribunal found that both the AO and CIT(A) failed to conduct proper verification and thus restored the issue to the AO for fresh consideration.Conclusion:- Assessee’s appeal (ITA No. 5705/Del/2014): Dismissed.- Revenue’s appeal (ITA No. 6151/Del/2014): Partly allowed for statistical purposes.