2025 (9) TMI 1318 - HC - Income Tax

VRS payments treated as revenue expenditure; advertising and dealer incentives partly limited; discounted sales-tax transfer not hit by s.41(1)

HC held that VRS payments are revenue expenditure and, since VRS was not disallowed by the AO for the year in question, the point was moot. Advertisement ... Addition made on account of VRS expenditure and the expenditure towards newly launched products - HELD THAT:- As regards the expenses relating to payment to the employees under the Voluntary Retirement Scheme (VRS), the ITAT Act observed that this Court in Simpson & Co. Ltd.'s case [1996 (6) TMI 12 - MADRAS HIGH COURT] had recognized VRS expenditure as revenue expenditure. We find no infirmity in the said finding. That apart, in this appeal which pertains to assessment year 1999 – 2000, it must be noted that the VRS expenditure was not disallowed by the AO. Hence, this question does not arise in this appeal, as rightly contended by the learned counsel for the assessee. Advertisement expenditure towards newly launched products, the CIT(A) accepted the entire expenditure claimed by the assessee. Though it is the case of the revenue that no vouchers were produced by the assessee, CIT(A) rightly found that it would not be easy for the assessee to locate the vouchers after seven years. ITAT found that though relevant evidence was not produced by the assessee to prove the expenses, the fact that the assessee had incurred expenses towards advertisement charges and incentives to dealers cannot be ruled out. It is not the revenue's case that the assessee had not spent any money towards advertisement and payment of incentive to dealers. However, the ITAT held that the entire expenditure claimed cannot be allowed and restricted it to 10% of the claim. The findings of the CIT(A) and the ITAT would indicate that the assessee had actually incurred expenses, which has not been disputed by the revenue. It is only in the quantum that there is a dispute. The ITAT's order in restricting the expenditure to 10% of what was claimed by the assessee, though, is without basis, cannot be said to be unjustified or perverse in the facts and circumstances of this case. In the absence of definite evidence on either side with regard to quantum, we are not inclined to interfere with the factual finding of the ITAT. Hence, the substantial question of law is answered in favour of the assessee. Taxability of the discounted value of the deferred Sales-Tax Liability - It is not the revenue's case that the Net Present Value of the tax of Rs. 31.75 Crores payable after twelve years was not Rs. 5.94 Crores. Therefore, assignment of the said liability for the value of Rs. 5.94 Crores would not be cessation of liability, as on such assignment at that value, the entire liability to pay the tax stood discharged. Therefore, the claim of the revenue that Section 41(1) of the Act is attracted is misconceived. The CIT (A) and the ITAT have rightly held against the revenue on this aspect. This issue is squarely covered by the Judgment of the Balkrishna Industries Ltd. [2017 (11) TMI 1626 - SUPREME COURT] and McDowell & Co. Ltd. [2014 (11) TMI 272 - KARNATAKA HIGH COURT] Therefore, the third substantial question of law is answered in favour of the assessee. Though we have answered one substantial question of law, viz., the fifth substantial question of law in favour of the appellant/revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether additions made for Voluntary Retirement Scheme (VRS) expenditure and expenditure on newly launched products were rightly disallowed for computation of book profit. 2. Whether an assessee may maintain two sets of accounts - one as presented to shareholders (printed P&L) and another for computation of book profit under Section 115JA - and whether such divergence can be relied upon by revenue. 3. Whether the discounted/consideration value received on assignment of a deferred sales-tax liability amounts to cessation of liability assessable under Section 41(1) of the Income Tax Act. 4. Whether a respondent in an appeal (who did not file a cross-objection) can invoke Rule 27 of the ITAT Rules to support the lower authority's order on grounds decided against it, in particular to challenge validity of reassessment. 5. Whether, after quashing reassessment as invalid, the appellate tribunal was competent to uphold the lower authority's merits findings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - VRS expenditure and expenditure on newly launched products Legal framework: Deductibility of revenue expenditures and admissibility of claimed advertising/launch expenses for computing taxable income/book profit; burden to prove expenditure; appellate scope on quantum of deduction. Precedent treatment: Reliance placed on this Court's decision recognising VRS expenditure as revenue expenditure (Simpson & Co. Ltd.) and on appellate practice permitting allowance where evidence of payment exists even if vouchers unavailable after several years. Interpretation and reasoning: The Court accepted that VRS payments are revenue in nature and, in the year(s) concerned, were not disallowed by Assessing Officer for the relevant assessment year; hence no issue arose on disallowance for that year. For advertisement and launch expenses, the lower authorities found that expenditure was incurred (bank statements and entries produced) though detailed vouchers were not available after lapse of years. ITAT restricted the claim to 10% where precise quantum lacked definite evidence; the Court held that restricting to 10% lacked detailed basis but was not perverse given the evidentiary gap and absence of contrary proof by revenue. Ratio vs. Obiter: Ratio - VRS expenditure recognised as revenue expense where supported; quantum disputes on advertisement expense where evidentiary lacuna exist are factual and appellate tribunals' discretionary findings on reasonable restriction will not be interfered with unless perverse. Obiter - comment that vouchers may be difficult to locate after seven years. Conclusion: Additions for VRS and for advertising/launch expenses were not interfered with; the first substantial question answered in favour of the assessee. Issue 2 - Permissibility of two sets of accounts for shareholders and for computation under Section 115JA Legal framework: Section 115JA (book profit taxation) requires profit & loss account prepared in accordance with Parts II & III of Schedule VI to the Companies Act; distinction between accounts presented to shareholders and statutory books of account; principle that tax computation must reflect actual incurred expenditure as per books. Precedent treatment: Decisions of Karnataka High Court and Gujarat High Court accepting that when books prepared under Schedule VI reflect actual expenditure, the printed P&L shown to shareholders (which may defer some expenditure) cannot be allowed to defeat tax computation; Supreme Court refused leave in challenge to such view. Interpretation and reasoning: The Court reasoned that divergence between printed P&L and the profit & loss prepared in accordance with Schedule VI does not permit revenue to deny deduction of expenditure actually incurred and appearing in statutory books. The object of Section 115JA is to prevent manipulation to avoid tax; where statutory books show the expenditure and comply with Schedule VI, the assessee is entitled to deduction notwithstanding a printed balance sheet for shareholders that defers expenditure. Ratio vs. Obiter: Ratio - An assessee cannot be denied the benefit of actual expenditure incurred if the statutory books (in accordance with Schedule VI) record it, even if a printed P&L for shareholders shows deferred expenditure; Section 115JA therefore looks to books maintained under Schedule VI rather than to printed P&L used for shareholders. Obiter - none material beyond reliance on authorities. Conclusion: The proposition that two sets of accounts (for shareholders and for tax/book profit computation) cannot be permitted was rejected; the second substantial question answered in favour of the assessee. Issue 3 - Taxability under Section 41(1) of amount received on assignment of deferred sales-tax liability Legal framework: Section 41(1) taxes amount representing cessation of liability; transaction of assignment of future statutory liability for consideration; accounting and tax consequences where net present value (NPV) consideration equals discounted liability. Precedent treatment: Reliance on Supreme Court authority and Karnataka High Court decisions holding that where assignment consideration represents true discounted present value of future liability and liability stands discharged, Section 41(1) does not get attracted beyond any income already offered. Interpretation and reasoning: The Court noted revenue did not dispute the correctness of the NPV figure. Assignment at the NPV discharged the entire liability; there was no cessation creating additional income beyond the difference already offered by assessee (the discount realized). Consequently, treating the NPV receipt as taxable under Section 41(1) as cessation of liability was misconceived. The CIT(A) and ITAT findings in favour of the assessee were upheld. Ratio vs. Obiter: Ratio - Where a deferred statutory liability is assigned for its correct net present value and the liability is thereby discharged, the assignment does not create assessable income under Section 41(1) beyond amounts already recognized; Section 41(1) is not attracted merely because liability is assigned for consideration that represents discounted value. Obiter - none material. Conclusion: The third substantial question answered in favour of the assessee; the discounted consideration did not give rise to additional tax under Section 41(1). Issue 4 - Applicability and scope of Rule 27 of the ITAT Rules to support lower authority's order on grounds decided against respondent, and validity of reassessment Legal framework: Rule 27 allows a respondent who has not appealed to support the order appealed against on any of the grounds decided against him; applicative question whether respondent can invoke Rule 27 to challenge reassessment validity before ITAT even if CIT(A) rejected same and no cross-objection was filed. Precedent treatment: Contrasting authorities considered - some High Court decisions denying Rule 27 relief in particular factual contexts; authorities of this Court and Delhi High Court upholding broad scope of Rule 27, permitting respondent to defend lower order on grounds decided against it, including oral applications; earlier Division Bench of this Court held Rule 27 permits respondent to sustain CIT(A) order on grounds decided against him. Interpretation and reasoning: The Court held Rule 27 permits the respondent to support the lower authority's order on any grounds decided against him; Rule does not prescribe a particular format and even oral application is permissible though written application is desirable. A respondent cannot raise totally new grounds not raised before CIT(A). In the instant facts, the assessee had raised validity of reassessment before CIT(A) (which rejected it) and had filed written Rule 27 application before ITAT; hence ITAT was justified in entertaining and allowing that ground and setting aside reassessment as mere change of opinion. Ratio vs. Obiter: Ratio - In appeals by revenue, a respondent may invoke Rule 27 to support the CIT(A)'s order on grounds decided against him, including on jurisdictional validity of reassessment, provided such grounds were earlier raised before CIT(A); Rule 27 does not require a specific formal application and may be invoked orally, though written notice is preferable. Obiter - distinction drawn with cases where issues were unrelated or where procedural posture differed (e.g., withdrawal of cross objections) limiting Rule 27's applicability. Conclusion: The fourth substantial question answered in favour of the assessee; ITAT properly entertained Rule 27 ground and quashed reassessment as change of opinion. Issue 5 - Competence to uphold merits after quashing reassessment Legal framework: Appellate scope where reassessment is quashed for jurisdictional infirmity; principle that merits cannot be adjudicated if reassessment itself is void. Precedent treatment: Authorities indicate that once reassessment is quashed as invalid, appellate tribunal ought not to proceed to decide merits as if reassessment were valid. Interpretation and reasoning: Having found reassessment invalid, the ITAT was not justified in upholding CIT(A)'s merits findings; where jurisdictional basis for reassessment is absent, merits adjudication on the basis of that reassessment is impermissible. The Court accordingly answered the fifth question in favour of the revenue (i.e., ITAT should not have decided merits after quashing reassessment). Ratio vs. Obiter: Ratio - Quashing reassessment on jurisdictional grounds precludes the appellate tribunal from deciding and upholding the lower authority's merits findings premised on the void reassessment. Obiter - none material. Conclusion: The fifth substantial question answered in favour of the revenue; ITAT erred in upholding merits after quashing reassessment. Nevertheless, on balance of other questions answered for the assessee, the appeals were dismissed and no costs ordered.