TaxTMI 
TaxTMI 
2018 (12) TMI 1326
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....made by Ld. Assessing Officer an amount of Rs. 1,28,00,000/- on account of Addition of denial of change in the accounting policy. iii. That the appellant craves to add, delete or modify any grounds of appeal at the time of hearing." (ITA No.-6151/Del/2014) i. Whether Ld. CIT(A) is correct in incorporating incorrect fact in his order that the Ld. CIT(A) XXVIII had allowed the assessee's ground of appeal had allowed the assessee's ground of appeal in his order, dated 11.01.2012 against the disallowance of Rs. 5406554/- u/s 14A whereas the Ld. CIT(A) XXVIII had in fact, confirmed the above noted addition & had dismissed the assessee's ground of appeal. ii. Whether the order of the Ld. CIT(A)XV is not perverse on account of the incorrect facts incorporated in his order, as stated in ground (1) above. iii. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing." (1.1) In this order, the following abbreviations have been used: Assessing Officer as AO Commissioner of Income Tax as CIT Commissioner of Income Tax (Appeals) Commissioner of Income Tax as CIT(A) ....
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....08, though it was made effective from 01.01.2006, therefore, the provision made in respect thereof in the Previous Year 2006-07 was in the nature of an unascertained liability at that point of time. As this issue was not examined by the AO, the Ld. CIT-IV again set aside this issue to the AO. Lastly, the issue regarding under-statement of profit to the tune of Rs. 1.28 crores, which was recognized on actual realization basis than on mercantile basis, was also set aside to the AO. The AO subsequently issued notice to the appellant and after allowing due opportunity to the appellant, held that the contentions of the appellant with regard to the non-applicability of Rule 8D in the current year was not acceptable on the grounds that the appellant had not maintained separate accounts for investments and other business activities and the claim of the appellant that investments were made out of own surplus fund, was not supported by the figures shown by the appellant. The Ld. AO held that subsequent to the decision of Bombay High Court the case of Godrej and Boyce Mfg. Co. Ltd. Vs CIT 328 ITR 81 (Bom), and even prior to introduction of section 14A(2) and (3), the AO was duty bound to enfo....
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....ld not be claimed as expenditure for AY 2007-08. In the words of the AO, "Neither, the said liability accrued nor crystallized during the year under consideration. As per the recommendations of the central Sixth Pay Commission/Ministry of Finance etc. it was decided that 60% of arrears worked out on the implementation of Sixth Central Pay Commission was ordered by the Central govt. to be paid in Financial Year 2008-09 relevant to A.Y. 2009-10 and balance 40% was ordered to be paid in F.Y. 2009-10 relevant to A.Y. 2010-11. Accordingly, the assessee could have claimed the expenditure on account of revision of pay in the A.Y. 2009-10 and the balance amount of expenditure w.e.f. 1-4-2008 to the implementation of Sixth Pay commission should have been claimed in A.Y. 2010-11. Even the Ld. CIT-IV after careful consideration of the issue in question, has observed that the liability on account of revision of pay in consequence of report of Sixth Central Pay Commission has not accrued and crystallized during the F.Y. 2..6- 07 relevant to A.Y. 2007-08 because the implementation of the said report in respect of public sector undertaking and State Govt. Employees has been carried out only after....
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.... of its employees only in the assessment year 2009-10 and 2010-11. Hence, the provision, rather adhoc provision of Rs. 1,60,00,000/- is hereby disallowed. The Assessee filed appeal before Ld. CIT(A), who dismissed Assessee's appeal on this issue vide impugned order dated 28.8.2014. The relevant portion of the impugned order of Ld. CIT(A) is reproduced as under: "6.8 Regarding the Ground No.3 of the appeal relating to addition of Rs. 1.60 crores on account of disallowance of 'Provision of revision of pay', I find that in the current Financial Year, no decision of the Central Govt. was available, which may have a bearing on revision of pay of executives of the appellant company, therefore, it cannot be held that such liability had crystallized in the current year. For the Central Govt. Ministries and Departments, the recommendations of the 6th Central Pay Commission were announced in F.Y. 2008-09. Subsequently, it was decided that 60% of the arrears will be paid in 2008-09 while the balance 40% will be paid in 2009-10. Therefore, in the absence of happening of any germane event during the F.Y.2006-07, there was no ground to hold that liability for making revised pay to th....
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....Terms of Reference of the Committee will be as follows. 2.2.1 The Committee will examine the principles that should govern present structure of pay, allowances, perquisites, and benefits for the following categories of Central Government Public Sector Enterprises (CPSEs) executives, taking into account the total package of benefits available to them including non-monetary ones, and suggest changes therein which may be desirable and feasible: (i) Board level functionaries (ii) Below Board level executives (iii) Non-unionized supervisory staff 2.2.2 The Committee will make recommendations so as to transform the CPSEs into modern, professional, citizen-friendly and successful commercial entities that are also dedicated to the service of the people. 2.2.3 The Committee will work out a comprehensive pay package for the categories of employees of CPSEs mentioned at sub-para 2.2.1 that is suitably linked to promoting efficiency, productivity and economy through rationalization of structures, organizations, systems and processes as well as promoting functional and operational autonomy within the Public Sector Enterprises with a view to ....
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....ill be serviced by the Department of Public Enterprises. (2.2.1) The Ld. Counsel for Assessee further submitted that pay revision finally took place vide Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises, after considering the report of the aforesaid Pay Revision Committee. The Ld. Counsel for Assessee submitted that in view of the Government appointing aforesaid Pay Revision Committee, the Assessee made an ad hoc provision of Rs. 1,60,00,000 on account of anticipated pay revision in FY 2006-07 (AY 2007-08) itself, although the final decision regarding pay revision was taken in FY 2008-09 (AY 2009-10), vide the aforesaid Office Memorandum dated 26.11.2008. The Ld. Counsel for Assessee also placed reliance on Gail India Ltd. v. CIT [2016] 69 taxmann.com 50 (Delhi - Trib.)/[2015] 42 ITR(T) 265 (Delhi - Trib.); CIT v. Kerala State Financial Enterprises Ltd. [2009] 178 Taxmann 449 (Kerala)/[2008] 219 CTR 147 (Kerala) and Bharat Earth Movers v. CIT [2000] 112 Taxman 61 (SC)/[2000] 245 ITR 428 (SC)/[2000] 162 CTR 325 (SC). The Ld. Counsel for assessee also submitted that if this claim is not allowed in this year, it will cau....
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....d of the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end. In view of the foregoing, the case of Gail India Ltd. v. CIT (Supra) does not advance the case of the Assessee; and, instead, it goes against the assessee. Now, we come to the case of Bharat Earth Movers v. CIT (Supra). In this case, the Hon'ble Supreme Court, after considering Metal Box Co. of India Ltd. v. Their Workmen[1969] 73 ITR 53 (SC) and Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC) stated, at Paragraph 4 of the Order, the well settled law in these words: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be....
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....uring FY 2006-07 (AY 2007-08), there was neither any statutory liability nor any legally enforceable liability against the Assessee in respect of the Assessee's claim for Rs. 1,60,00,000 deduction for which was claimed by the Assessee on account of ad hoc provision for pay revision. In fact, there was no such liability at all. Even if there was a liability, it was purely a contingent liability which is not deductible for income tax purposes. (3.2) We have given anxious consideration to the submission made by the Ld. AR of the Assessee that if this claim is not allowed in this year, it will cause hardship to the Assessee because the aforesaid claim of Rs. 1,60,00,000 towards ad hoc provision on account of pay revision has not been claimed by the Assessee in the subsequent years. However, in view of Kikabhai Premchand v/s CIT 24 ITR 506 (SC), ITO v/s Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC), CIT v/s British Paints India Ltd. 188 ITR 44 (SC) and CIT v/s Basant Rai Takht Singh 1 ITR 197 (SC), it is well settled that each year is separate and self-contained period, Income Tax is annual in its structure and organization. Thus, each previous year is a distinct unit of time for the ....
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....tective 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) of I.T. Act. As the present appeal before us pertains to AY 2007-08; by way of abundant caution, we clarify, however, that we presently decline to give any directions to Revenue for any subsequent year; and that all questions of law, fact, and mixed questions are left open in case the Assessee exercises. (3.3) Therefore, in the facts and circumstances of this case, as discussed earlier; and respectfully following Bharat Earth Movers v. CIT (Supra), Indian Molasses Co. Pvt. Ltd. v/s CIT (Supra), Indian Smelting And Refining Co. Ltd. v/s CIT (Supra), Standard Mills v/s CIT (Supra) and CIT v/s Morarji Goculdas (Supra); and moreover, in view of the foregoing discussion, we dismiss the first ground of appeal filed by the Assessee (in ITA No. 5705/Del/2014) and confirm the impugned order of the Ld. CIT(A) on this i....
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....t company had assured vide letter dated 06.11.2006 that the accounting policy shall be reviewed in F.Y.2006-07. Subsequently, in the Board meeting of the appellant company of September, 2007, the following resolution was passed: "Resolved that the changes in accounting policy from the year 2006-07 be and are hereby approved as detailed in the agenda item" The detailed note for comparing existing policy and the revised policy shows that the Board of the company took this decision by assuming that there was no financial impact and there was only change in language. However, the very basis of this decision that there was no financial impact was incorrect, as the proposed change had resulted in reduction in the taxable profit under the Income Tax Act, 1961. Further, AO's observation that the decision was taken only after the F.Y. is over was also note-worthy, even though such decision was taken with retrospective effect. Evidently, the appellant is a company incorporated under Companies Act 1956. As per Accounting Standards, it follows mercantile system of accounting. Therefore, even though the company may have changed the accounting policy, which as mentione....
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....es in the computation of Total Income for Income Tax purposes. That would have ensured compliance with statutory provisions under I.T. Act, as well as with observation of Audit Party & CAG. 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 Rs. 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....
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.....e. already form the part of total income of the assessee. " Hence, the assessee was asked to give complete details of exempt income giving name of the Investments and the amount of exempt income or taxable income earned from the investments in long term/short term equity shares or bonds. The assessee sought adjournment. A further opportunity was provided to the assessee vide this office questionnaire dated 28.2.2013. The assessee filed the details in a tabular form showing the interest income of Rs. 242,&3,41,868/- on Investments in Bonds of 14 Entities and tax free j dividend income of Rs. 1,20,000/- has been shown on Investments in equity shares of Tamilnadu Urban Finance & Inf. Dev. Corpon. Ltd. As regards the contention of the assessee that no disallowance is called for and rule 8D is applicable from assessment year 2008-09, the same is not acceptable because of the following factual and legal position:- a) As per Balance-sheet the total investments have been shown at Rs. 24,50,49,75,000/- (which also includes Investments of Rs. 24,(16,14,50,000/- in Various Bonds, interest income from which has been shown at Rs. 2,42,83,41,868/-). b) The as....
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....Krishnakant Bhatt Vs. ITO (2004) 91 ITD 311 (Ahd.) the Tribunal held that dividend being exempt u/s 10(34), interest on capital borrowed for acquisition of relevant share yielding such dividend cannot be allowed deduction by operation of section 14A of the Act. In DCIT Vs. S.G. Investment and Inds. Ltd. (2004) 89 ITD 44 (Cal.), the Tribunal said that in view of section 14|A of the Act, pro-rata expenses on account of interest relatable to investment in share for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses. Secondly it was held that the expression "expenses incurred by the assessee in relation to income which does not form part of total income" in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision in CIT Vs. United General Trust Ltd. 200 ITR 488 (SC), it was held in the case of S .G. Investment and Inds. Ltd. (supra) that interest paid by the assessee being attributable to the money borrowed for the purpose of making investment which yielded the divid....
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....xpenses claimed u/s 30 to 37 of the I. T. Act can be subjected to disallowance. The relevant portion of the said judgment is reproduced hereunder:- "The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income..... The basis principle of taxation is to tax the net income i.e. gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purpose of Section 14A" (page 15-16) "The theory of apportionment of /expenditure between taxable and non-taxable income has, in principle, been now widened u/s 14A of the Act. Reading section 14A in juxtaposition with section 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for (see sections 30 to 37)". (page 17) (Emphasis mine) In a detailed judgement, recently delivered after considering the aforesaid judgment of Hon'ble Supreme Court, the Bombay High Court in the ca....
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.... directly related to exempt income Nil Nil Nil ii. Disallowance of interest expenditure A) Interest expenditur e incurred during the year 17937819000 B) Average value of investment Investment as on 31.3.06 24857307000 Investment as on 31.3.07 24504975000 Total 49362282000 Average of investment (B) 24681141000 C) Average of total assets Assets as on 31.3.06 252605756000 Current assets as on 31.3.07 245020084000 Total assets 497625840000 Average value of total assets (c) 248812920000 Disallowance = AxB/CIT(A) 1779352000 1779352000 iii. Aggregate of opening and closi....
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....as incorrect and therefore, passed order under Section 263 dated 24.02.2012, by holding as under: "On examination of the above, it appears that the AO has not indicated any basis for arriving at the average value of investment, income from which does not or shall not form part of total income, as appearing in the balance sheet of the assessee as on the first day and the last day of the previous year. On the other hand, the AR of the assessee company while arriving at the opening value of investments as well as the closing value of investments has taken into consideration only the equity share (long term) being trading investment and also equity share (long term) being joint venture. However the investments in bonds have not been considered while arriving at the opening and the closing value of investments. The AO has not caused any inquiries to ascertain as to whether exempt income has been earned by way of investments in long term equity shares or bonds and as a result, the average value of investments arrived at by the AO suffer from irregularities resulting in incorrect computation of disallowance arrived at under Rule 8D of Section 14A of IT Act, 1961. Consequently, th....
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....o the passing of the order by the CIT(A)-XXVIII. 6.4 On careful consideration of the facts of the case and in the light of the Hon'ble Delhi High Court's decision in the case of CIT Vs Maxopp Investment Ltd. and the Hon'ble Mumbai High Court in the case of CIT Vs Godrej and Boyce Manufacturing Co. Ltd. Vs. DCIT, it is well settled that the provisions of Rule 8D are not applicable to the A.Y.2007-08 to which this appeal relates to. The Ld. CIT(A)- XXVIII by passing a well-reasoned order dated 11.01.2012, on examination of the facts, held that even if the provisions of Rule 8D were to be applicable for the current year, the AO could not have invoked the provisions of Rule 8D automatically, without examining the claim of the appellant, keeping in view the requirements of Section 14A(2). Moreover, as the provisions of Rule 8D were not applicable for the current year, no disallowance or revision thereof could have been made. Accordingly, there is no merit in the action of the AO. 6.5 On the facts of the case also, it is evident that all investments in equity shares (on which exempt dividend income could be earned) were made by the appellant prior to 1995-96 out....
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....y the IT (Fifth Amendment) Rules, 2008, w.e.f. 24-3-2008; was not applicable before AY 2008-09, as held by Hon'ble Supreme Court in CIT v/s Essar Teleholdings Ltd. 401 ITR 445 (SC); Section 14A of I.T. Act mandating disallowance of expenditure incurred in relation to income not includible in total income was inserted by Finance Act, 2001 with retrospective effect from 1.4.1962; and in that view, the disallowance U/s 14A of I.T. Act was required to be made. He further submitted that although the Ld. CIT(A), in his impugned order dated 28.8.2014 mentions that the AO made addition without verifying the nature of investments as directed by CIT in the order U/s 263; the Ld. CIT(A) also himself failed to carry out this verification and he also failed to cause this verification to be done by the AO. In view of these submissions, the Ld. CIT(DR) contended that the order of the Ld. CIT(A) should be set aside. On the other side, the Ld. AR of the Assessee supported the order of the Ld. CIT(A) on this issue. He further contended that the disallowance made by the AO under Rule 8D of I.T. Rules was unsustainable in view of the order of Hon'ble Supreme Court in the case of CIT v/s Essar Telehold....
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....ried 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, we have noticed that the Ld. 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 Ld. CIT(A) are co-terminus with powers of the AO. Useful reference may be made to order of Apex Court decision in CIT v/s Kanpur Coal Syndicate 53 ITR 225 (SC) in which it was 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. The Ld. CIT(A), having noticed lack of proper verification at the end of the AO, should have ensured that effective verification was carried out. The Ld. 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. Moreover, on perusal of earlier order dated 11.01.2012 of the Ld. CIT(A), it is found that the Ld. CIT(A) had confirmed the disallowance U/s ....