TaxTMI 
TaxTMI 
2026 (6) TMI 1265
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....hat the present cross appeals originally involved both Transfer Pricing issues as well as Corporate Tax issues arising from the order passed by the learned CIT(A) dated 29.03.2019 for Assessment Year 2005-06.The assessee filed its appeal before the Tribunal on 06.06.2019 in ITA No.4140/Mum/2019 challenging various additions/disallowances sustained by the learned CIT(A). The Revenue also preferred appeal in ITA No.4037/Mum/2019 against the relief granted by the learned CIT(A) in respect of certain additions. 3. During the pendency of the appeals before the Tribunal, the Assistant Commissioner of Income Tax, Transfer Pricing-4(1)(2), Mumbai passed an order dated 05.03.2020 giving effect to the order of the learned CIT(A) whereby the entire TP adjustment was deleted. Consequent thereto, the Assistant Commissioner of Income Tax, Circle-8(2)(1), Mumbai passed consequential order dated 16.03.2020 giving effect to the aforesaid TP order. In view of the said developments, the assessee, as directed by the Coordinate Bench, filed revised Form No.36 on 20.06.2022 withdrawing the TP grounds and retaining only the CT grounds. 4. Subsequently, the Assistant Commissioner of Income Tax, Tran....
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....trary to the mandatory CBDT Circular and therefore invalid in law. 9. In paragraph 27 of the judgment, the Hon'ble Bombay High Court held as under: "27. In view of the above, it is apparent that Respondent No.1 has acted beyond jurisdiction, and we accordingly quash and set aside the impugned order dated 29.03.2024 passed by Respondent No.1 and the impugned letter dated 10.07.2024 issued by Respondent No.1. We have not made any observations on the merits of the transfer pricing addition made by the TPO and Respondent No.1." 10. In view of the aforesaid judgment of the Hon'ble Bombay High Court quashing the rectification order under section 154 of the Act, the TP adjustment which was sought to be revived stood annulled. Accordingly, during the course of hearing before us, it was submitted on behalf of the assessee that the TP grounds presently survive only academically and the same may be treated as infructuous at this stage, with liberty to revive the same in the event of any reversal/modification of the judgment of the Hon'ble Bombay High Court by any higher judicial forum. 11. In the above factual background, the surviving disputes requiring adjudication in the ....
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.... and the circumstances of the case and in law, the Ld AO erred in disallowing and Ld CIT(A) erred in confirming an adjustment of excise duty of Rs. 180,181,416 by following inclusive method of accounting as against exclusive method followed by the Appellant under section 145A of the Act. 8. On the facts and the circumstances of the case and in law, the Ld AO and Ld CIT(A) erred in confirming the said disallowance without considering the excise duty liability amounting to Rs 368,247,833 incurred on manufacturing of finished goods during the year. 9. The Appellant prays that the Ld AO and Ld CIT(A) both failed to appreciate that the adjustment considered such adjustments were consistently adopted from the inception of the section and that there was no justification for adopting a different position as there is no change in facts or law on the topic. Addition on account of Commission payments 10. On the facts and the circumstances of the case and in law, the Ld AO and Ld CIT(A) ought to have allowed Rs. 18,50,000 paid to M/s Apex Medi Equipment as business expenditure, if not as commission payment, based on the confirmation received from the party. ....
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....t of Article 10 of the India-Germany Double Taxation Avoidance Agreement, on the dividend declared by the Assessee to Siemens Aktiengesellschaft, Germany ("Siemens AG"). The learned AO erred in not holding that Dividend paid to Siemens AG is liable to DDT at the rate of 10% instead of 13.069% and consequently erred in not granting refund of excess DDT of Rs. 50,50,303. 15. The Revenue has raised the following grounds of appeal before us: 1. Whether, on the facts and in the circumstances of the case, the learned CIT(A), erred in deleting the disallowance of Rs. 2,14,58,000/- towards provision made for anniversary program without appreciating the fact that the AO had given clear findings in the assessment order that the same was not crystalized during the year? 2. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 49,60,000/- towards provision made for medical benefit of the employees without appreciating the fact that the AO had given clear findings in the assessment order that the same was not crystalized during the year.? 3. The appellant craves leave to amend or alter any ground or....
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....e Department failed to furnish any notification, authorisation or transfer order evidencing lawful assumption of jurisdiction by the learned Addl. Commissioner of Income-tax, Range-7(2), Mumbai. 21. The learned AR submitted that the issue raised by the assessee is a pure legal issue arising from facts already borne out from assessment records and therefore does not require any fresh investigation into facts. It was submitted that the notices issued during assessment proceedings, designation of officers issuing notices, and designation of the officer passing the assessment order are all part of assessment records already available before the authorities. Therefore, the additional ground deserves to be admitted and adjudicated. 22. In support of admissibility of the additional ground, reliance was placed upon the judgment of the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. v. CIT reported in 187 ITR 688 (SC), wherein the Hon'ble Apex Court held that an appellate authority possesses all plenary powers which the original authority may have while deciding the matter before it and there is no justification to curtail powers of appellate authorities in enterta....
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....s under section 127 were admitted and adjudicated in favour of assessees. Reliance was placed upon the following decisions: i. Tata Sons Ltd. v. ACIT reported in 162 ITD 450 (Mum); ii. Tata Communication Ltd. v. Addl. CIT in ITA No. 7071/Mum/2005 order dated 30.06.2017; iii. Tata Sons Ltd. v. ACIT in ITA No. 193/Mum/2006 order dated 27.11.2017; iv. Tata Sons Ltd. v. ACIT in ITA No. 2639/Mum/2009 order dated 11.03.2019; v. Tata Communication Ltd. v. Addl. CIT in ITA Nos. 2891/Mum/2010 and 1015/Mum/2010 order dated 16.08.2019; vi. Tata Power Co. Ltd. v. ACIT in ITA Nos. 3081 & 3082/Mum/2009 order dated 04.09.2019; vii. Tata Communication Ltd. v. Addl. CIT in ITA No. 4452/Mum/2011 and connected matters order dated 24.12.2019; viii. Tata Sons Ltd. v. ACIT in ITA Nos. 4893/Mum/2012 and connected matters order dated 03.02.2020; ix. Indian Hotels Company Ltd. v. Addl. CIT/DCIT(OSD) in ITA No. 8570/Mum/2011 and connected matters order dated 21.05.2021; x. Kishore Vithaldas v. JCIT in ITA No. 5661/Mum/2017 order dated 16.10.2019; xi. Vertiv Energy Pvt. Ltd. v. Addl. CIT reported in 65 CCH 0227....
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....ssee has not furnished any explanation whatsoever for not calling upon the Assessing Officer to furnish copy of the order under section 120(4)(b) during all these intervening years. 33. The learned CIT-DR further submitted that the assessee has failed to demonstrate that the additional ground raised before the Tribunal is bona fide and that the same could not have been raised earlier for good and sufficient reasons. Reliance in this regard was placed upon paragraph 6 of the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra), wherein while referring to the earlier judgment in Jute Corporation of India Ltd., the Hon'ble Apex Court observed that while exercising discretion to admit an additional ground, the appellate authority must consider whether such ground is bona fide and whether there existed good reasons for not raising the same earlier. The relevant para is reproduced below: 6. In the case of Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688, this Court, while dealing with the powers of the AAC, observed that an appellate authority has all the powers which the original authority may have in deciding the question before it....
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....before the Tribunal. It was accordingly contended that the conduct of the assessee in not seeking copy of the order for fifteen long years completely destroys credibility of the plea now raised before the Tribunal. 37. The learned CIT-DR further submitted that the assessee is barred by principles of acquiescence, estoppel and laches from raising the jurisdictional ground after such inordinate delay, particularly when facts relating to assumption of jurisdiction by the Addl. CIT were within knowledge of the assessee from the very beginning. 38. The learned CIT-DR also attempted to distinguish the various judicial precedents relied upon by the assessee by submitting that the facts involved in those decisions were materially different. According to the learned CIT-DR, in the present case: (i) the order under section 120(4)(b) had in fact been passed by CIT-7, Mumbai on 07.08.2007; (ii) the factum of such order and assumption of jurisdiction had been communicated to the assessee during assessment proceedings and also through the assessment order itself; (iii) no valid affidavit based on personal knowledge has been filed by the assessee to substantiate a....
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....thin prescribed period and remained silent for more than fifteen years. 43. The learned CIT-DR submitted that orders passed under sections 120 and 127 of the Act are administrative orders and are not appealable either before the CIT(A) under section 246A or before the Tribunal under section 253 of the Act. Therefore, according to the learned CIT-DR, the assessee cannot indirectly challenge such administrative allocation of jurisdiction by raising additional ground before the Tribunal at this belated stage. 44. Referring to scheme of Chapter XIII of the Act, the learned CIT-DR submitted that section 120 deals with jurisdiction of Income-tax Authorities, section 124 deals with jurisdiction of Assessing Officers, and section 127 deals with transfer of cases. It was contended that section 124 does not employ expression "territorial jurisdiction" and therefore scope of the provision cannot be artificially restricted only to territorial matters. According to the learned CIT-DR, section 124 encompasses all forms of jurisdictional allocation amongst Assessing Officers, including administrative assignment of jurisdiction under section 120(4)(b). 45. In support of aforesaid proposit....
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....ion under Section 120(4)(b), the ACIT could not have acted as an AO. ... 7....If so, at that first instance, the assessee could have raised the objection within a month having regard to the notification which existed on 01.08.2007. Secondly, even if for some reason, the assessee were unaware of the notification, it became aware that the ACIT was exercising jurisdiction when it received notice from that official in August 2008.Since that was in continuation of the proceeding by the DCIT it could well have been urged by the assessee within the stipulated time that the said officer, ACIT did not possess jurisdiction. Its failure to do so within the stipulated time, i.e. one month after receipt of notice which was in fact a condition of Section 143(2) proceeding and was treated as such by the assessee precluded it from urging lack of jurisdiction. The assessee, however, contended its omission by not urging this ground before the CIT(A) in the first ground but urging belatedly before the ITAT; precisely the situation which the provision seeks to eliminate. ... 10. In view of the above discussion that the question of law framed has to be answered in fa....
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....roceedings are completed, such issue cannot thereafter be agitated before appellate forums. 51. The learned CIT-DR further relied upon observations of the Hon'ble Delhi High Court in S.S. Ahluwalia and Allahabad High Court in Hindustan Transport Company reported in 63 Taxman 246, wherein it has been observed that legislature did not intend collection of revenue to be frustrated on account of technical pleas relating to jurisdiction and that allocation of functions amongst authorities is primarily procedural and administrative in nature. 52. The learned CIT-DR further submitted that the judicial precedents relied upon by the assessee are distinguishable on facts and cannot be mechanically applied to the present case. It was contended that the first and foremost objection of the Revenue is that the additional ground itself lacks bona fides and the said issue has to be adjudicated on peculiar facts of the present case alone. 53. The learned CIT-DR reiterated that in the present case, order under section 120(4)(b) of the Act had in fact been passed by CIT-7, Mumbai on 07.08.2007 and existence of such order was specifically recorded by the learned Addl. CIT at page 2 of the ass....
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....ed CIT-DR additionally submitted that reliance placed by the assessee upon judgment of Hon'ble Bombay High Court in Bansilal B. Raisoni& Sons reported in 260 Taxman 281 is misplaced. It was submitted that said judgment arose in entirely different factual and legal context involving validity of notice issued under section 153A in absence of search being conducted upon assessee. According to the learned CIT-DR, said case involved inherent lack of jurisdiction to invoke special provisions of section 153A itself and not mere administrative allocation of jurisdiction between one Assessing Officer and another under sections 120 and 124 of the Act. The learned CIT-DR emphasised that in Bansilal B. Raisoni& Sons, challenge was directed against very assumption of jurisdiction to initiate search assessment proceedings under section 153A, whereas in present case learned Addl. CIT had assumed jurisdiction pursuant to valid order passed under section 120(4)(b) by competent authority. It was therefore submitted that said judgment and other similar authorities dealing with invalid invocation of section 153A have no application to controversy arising in present appeal. 59. Summing up his submis....
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....eedings or determination of correct tax liability. The Hon'ble Supreme Court in the case of NTPC Ltd. (supra) has categorically held that "the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee", and further observed that there is "no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record". Similarly, in Jute Corporation of India Ltd. (supra), the Hon'ble Apex Court held that there may be several factors justifying raising of a new plea in appeal and that the appellate authority possesses all plenary powers necessary to entertain such ground in accordance with law and reason. The Full Bench of the Hon'ble Bombay High Court in Ahmedabad Electricity Co. Ltd. (supra) has likewise recognised that the Tribunal is not confined merely to issues arising from the order of the CIT(A) and possesses the widest possible jurisdiction to permit additional grounds to be raised, provided the same arise from the subject matter of assessment proceedings. 65. In the present case....
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....g Officer unless specifically empowered in terms of section 120(4)(b) read with section 2(7A) of the Act and that in absence of valid transfer order under section 127 transferring jurisdiction from the DCIT to the Addl. CIT, the impugned assessment order is void ab initio. 72. Before proceeding further, it would be appropriate to briefly notice the statutory scheme governing jurisdiction of income-tax authorities. Section 2(7A) defines "Assessing Officer" to mean, inter alia, an Assistant Commissioner, Deputy Commissioner, Assistant Director, Deputy Director, Income-tax Officer or Tax Recovery Officer and also includes an Additional Commissioner or Joint Commissioner who is directed under section 120(4)(b) to exercise powers or perform functions of an Assessing Officer. 73. Section 120(4)(b) empowers the Board or competent authority to authorise a Joint Commissioner or Additional Commissioner to exercise powers and perform functions of an Assessing Officer in respect of specified persons or classes of persons. Section 124 deals with jurisdiction of Assessing Officers and subsection (3) thereof specifically provides limitation for calling in question jurisdiction of an Assessi....
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....ters concerning jurisdictional allocation amongst assessing authorities. 79. We have carefully considered the rival submissions and the judicial precedents relied upon by both sides. The principal contention of the assessee is that the impugned assessment order is void ab initio since the learned Addl. CIT was not specifically empowered under section 120(4)(b) read with section 2(7A) of the Act and further that no valid transfer order under section 127 was passed transferring jurisdiction from the DCIT to the Addl. CIT. In support of such proposition, heavy reliance was placed by the learned AR upon the decisions of the coordinate benches, particularly, in the cases of Tata Sons Ltd. vs. ACIT reported in 162 ITD 450 (Mumbai) and Tata Steel Ltd. reported in 163 taxmann.com 345 (Mumbai). 80. In Tata Sons Ltd. (supra), the coordinate bench observed that "assignment of jurisdiction to an officer and its transfer from one officer to the other can be made only through the prescribed process of law" and further held that "the assignment of jurisdiction to an officer and its transfer from one officer to the other can be made only through the prescribed process of law. Section 127 con....
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....at "an assessment order passed without making reference to Commissioner/Commissioners under section 124 is not a nullity for want of jurisdiction but it results in irregularity which can be rectified." 84. Further, in British India Corporation Ltd. reported in 20 taxmann.com 446, the Hon'ble Allahabad High Court held that "the question of jurisdiction of the assessing authority cannot be disputed after the completion of the assessment proceedings." The Hon'ble High Court further observed that where the Assessing Officer had jurisdiction when assessment proceedings commenced, "subsequent change in the jurisdiction, if any, unless brought to the notice of the authority concerned, would not in any manner vitiate the assessment order in the absence of any objection with regard to lack of jurisdiction by the assessee." 85. We further find that the Hon'ble Delhi High Court in Mega Corporation Ltd. noticed the Revenue's contention that "the ACIT"s jurisdiction could have been challenged, if at all, within the one month of his assuming it" and that since the assessee failed to do so, "it was precluded from doing so." The Hon'ble High Court admitted the Revenue's appeal specifically o....
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....fer order under section 127 despite specific directions issued by the Tribunal. However, the factual position in the present case stands materially distinguished. In the instant case, the assessment order itself specifically records that jurisdiction was assumed by the learned Addl. CIT pursuant to order dated 07.08.2007 passed by the CIT-7, Mumbai under section 120(4)(b) of the Act authorizing the Addl. CIT to exercise powers and perform functions of the Assessing Officer in the assessee's case. Thus, unlike the facts before the coordinate benches relied upon by the assessee, existence of authorisation and assumption of jurisdiction was expressly disclosed in the assessment order itself and remained within the knowledge of the assessee throughout the assessment proceedings. Further, no objection regarding such assumption of jurisdiction was raised by the assessee within the statutory framework contemplated under section 124 of the Act. Therefore, having regard to the peculiar facts of the present case and keeping in view the binding nature of the judgments of the Hon'ble High Courts relied upon by the Revenue, we are unable to persuade ourselves to accept the contention of the ass....
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.... of the Revenue that the objection regarding jurisdiction was not raised contemporaneously when assessment proceedings were actually conducted by the learned Addl. CIT, despite the assessee being fully aware of the authority exercising jurisdiction. Though such conduct by itself may not preclude admission of a legal ground where jurisdictional issues are involved, the same nevertheless constitutes a relevant surrounding circumstance while appreciating the overall factual matrix and merits of the controversy. 94. The learned AR contended that the judgment of the Hon'ble Delhi High Court in the case of Mega Corporation Ltd. was rendered per incuriam inasmuch as certain earlier judgments including those dealing with inherent lack of jurisdiction and absence of valid authorisation under section 120(4)(b) were allegedly not brought to the notice of the Hon'ble Court. It was thus submitted that the said decision ought not to be followed. 95. We are unable to accept the aforesaid contention. Once a judgment is rendered by a Hon'ble High Court after considering the statutory provisions and rival submissions, it is not open for us to sit in judgment over correctness thereof and declar....
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....tained and adjudicated the additional ground in exercise of our appellate jurisdiction under section 254 of the Act, the surrounding facts and circumstances pointed out by the Revenue materially weaken the assessee's plea that the alleged defect in jurisdiction was wholly unknown to it during earlier proceedings. 101. Accordingly, the additional ground No.35 raised by the assessee is dismissed. Additional Ground relating to beneficial rate in respect of DDT 102. We shall now take up the second additional ground raised by the assessee relating to applicability of beneficial rate prescribed under Article 10 of the India-Germany Double Taxation Avoidance Agreement ("DTAA") in respect of Dividend Distribution Tax ("DDT") paid under section 115-O of the Act. 103. In support of the aforesaid additional ground, the learned AR submitted that the issue raised is a pure legal issue arising from undisputed facts already available on record and therefore no further investigation into facts is required. 104. Referring to the factual matrix, the learned AR submitted that during the year under consideration the assessee paid dividend aggregating to Rs. 29,82,45,627/- to its shareho....
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....laim were not available on record. 108. Elaborating the aforesaid objection, the learned CIT-DR submitted that Form No. 10F prescribed under Rule 21AB read with section 90 of the Act and Tax Residency Certificate ("TRC") of the non-resident shareholder are mandatory jurisdictional documents for claiming treaty benefit under the applicable DTAA. It was contended that neither Form No. 10F nor the TRC of Siemens AG, Germany, was furnished either before the Assessing Officer or before the learned CIT(A), nor are the same forming part of the assessment records presently available before the Bench. 109. The learned CIT-DR further submitted that Form No. 10F itself contains various material particulars including status of the assessee, country of incorporation or residence, tax identification number, period for which residential status is applicable and address of the non-resident in the treaty jurisdiction, and therefore existence and verification of such statutory documents constitute foundational facts necessary for adjudication of treaty entitlement. According to the learned CIT-DR, in absence of such primary facts being available on record, the additional ground cannot be chara....
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....efore proceeding further, we may briefly note that the Hon'ble Supreme Court in the cases of National Thermal Power Co. Ltd. vs. CIT (supra) and Jute Corporation of India Ltd. vs. CIT reported (supra)has consistently held that the Tribunal possesses wide powers to admit a pure legal ground arising from facts already available on record, particularly where such ground has bearing upon correct determination of tax liability and does not require fresh investigation of facts. 116. The aforesaid principles clearly establish that a pure legal issue can be permitted to be raised before the Tribunal provided adjudication thereof does not require investigation into fresh facts outside the existing record. The crucial test therefore is whether all foundational and material facts necessary to adjudicate the legal claim are already available on record. 117. At this stage, it becomes necessary to notice the recent decision of the Hon'ble Bombay High Court in the case of Colorcon Asia (P.) Ltd. vs. JCIT reported in 181 taxmann.com 301, wherein the Hon'ble jurisdictional High Court held that DDT paid under section 115-O is entitled to benefit of treaty rate under the relevant DTAA. The Hon'....
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.... the entitlement sought to be canvassed by the assessee arises directly from the subsequent declaration of law by the Hon'ble jurisdictional High Court in Colorcon Asia (P.) Ltd. (supra), which admittedly was not available when the assessment proceedings were completed. 123. We further find that the issue sought to be raised substantially turns upon interpretation and applicability of treaty provisions vis-a-vis section 115-O of the Act in light of subsequent binding judicial pronouncement of the Hon'ble jurisdictional High Court. The relevant facts relating to declaration of dividend, identity of non-resident shareholder and payment of DDT are already borne out from record. The objection of the Revenue regarding Form No.10F and TRC pertains more to ultimate allowability of treaty claim rather than to maintainability of the legal ground itself. 124. At the stage of admission of additional ground, we are not expected to conclusively adjudicate the claim on merits. The limited question is whether the assessee should be permitted to urge the legal contention before the appellate forum. In our considered opinion, once the foundational facts relating to payment of dividend to a sp....
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....rther, in para 61, the Hon'ble High Court held: "Once the treaty allocates taxing rights and also prescribes a rate of tax in respect of dividend income, the domestic law cannot impose tax at a higher rate indirectly through the mechanism of section 115-O." 131. The aforesaid judgment of the Hon'ble jurisdictional High Court constitutes binding precedent and materially alters the legal position which earlier stood concluded against the assessee by the Special Bench decision in Total Oil India Pvt. Ltd. relied upon by the assessee itself in its application for raising additional ground. 132. We further find that the assessee has specifically identified: i. the non-resident shareholder namely Siemens AG, Germany; ii. the amount of dividend distributed; iii. the quantum of DDT paid; and iv. the treaty provision invoked, namely Article 10 of India-Germany DTAA. 133. Thus, the foundational facts necessary to examine the legal claim are broadly available on record. The assessee has specifically contended that dividend amounting to Rs. 16,45,71,937/- was distributed to Siemens AG, Germany and DDT amounting to Rs. 2,15,07,496/- was paid....
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....te bench accordingly declined to entertain the claim at appellate stage in absence of foundational treaty material. 137. Thus, the ratio emerging from the aforesaid decision is not that a DTAA-based claim in respect of DDT can never be entertained through additional ground. Rather, the underlying principle is that treaty relief cannot be granted mechanically without verification of statutory treaty requirements contemplated under section 90(4), section 90(5) and Rule 21AB of the Rules. 138. In our considered opinion, the aforesaid objection of the learned CIT-DR certainly has relevance while examining ultimate allowability of treaty relief on merits. However, at the same time, the same cannot be elevated to a threshold bar completely shutting out examination of the legal claim itself, particularly when the legal position regarding applicability of DTAA rate to DDT now stands governed by the binding judgment of the Hon'ble jurisdictional Bombay High Court in the case of Colorcon Asia (P.) Ltd. vs. JCIT. As noticed hereinabove, the Hon'ble Bombay High Court has categorically held that though DDT is payable by the domestic company, the levy remains intrinsically connected with d....
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....e also find that the learned CIT-DR had further submitted that though the assessee has relied upon the judgment of the Hon'ble jurisdictional Bombay High Court in the case of Colorcon Asia (P.) Ltd. (supra), the Revenue has already sought reconsideration/reference of the said issue before a larger bench of the Hon'ble High Court and therefore the issue has not attained finality. 144. We have duly considered the aforesaid submission. However, mere pendency of proceedings seeking reconsideration before a larger bench or pendency of further challenge against a judgment does not dilute the binding nature of a judgment presently holding the field. Unless the operation of the judgment is stayed, reversed or overruled by a competent forum, the same continues to constitute binding precedent upon subordinate authorities and we are duty bound to follow the law as declared by the Hon'ble jurisdictional High Court. In this regard, the settled principle laid down by the Hon'ble Supreme Court in the case of Union of India vs. Kamlakshi Finance Corporation Ltd. reported in 55 ELT 433 (SC) clearly mandates that subordinate authorities are bound to follow binding appellate decisions notwithstand....
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....or adjudication, we are of the considered view that the interests of substantial justice would be better served by restoring the issue to the file of the Assessing Officer for limited factual verification and consequential adjudication rather than rejecting the claim at the threshold merely because the requisite treaty-related documents were not examined during the original assessment proceedings. 150. We may observe that a TRC issued by the tax authorities of the contracting State constitutes the primary statutory evidence of residence for the purposes of claiming treaty benefits under section 90 of the Act, while Form No.10F supplements the particulars necessary for availing treaty relief where such particulars are not fully contained in the TRC itself. Both these requirements are intended to facilitate verification of treaty entitlement and are essentially evidentiary in nature. Therefore, where the foundational facts relating to treaty eligibility otherwise exist, the claim ought not to be rejected merely on technical or procedural considerations without affording an opportunity to furnish and verify the requisite documents. The doctrine of substance over form, repeatedly re....
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....served that the assessee had created total provision for liquidated damages amounting to Rs. 11,01,67,341/- during the relevant previous year. The Assessing Officer noted that the provision account reflected opening balance, fresh provision created during the year, utilisation during the year and reversals made during the year. The details recorded by the Assessing Officer were as under: Particulars Amount Opening balance Rs.35,89,57,410/- Add: Fresh provisions made during the year Rs.11,01,67,341/- Less: Utilised during the year Rs.2,36,07,354/- Less: Released or reversed during the year Rs.3,05,06,069/- 156. The assessee explained before the Assessing Officer that the company followed consistent accounting policy of creating provisions for LD wherever delays occurred in execution of projects or delivery of goods in terms of contractual conditions. It was submitted that whenever contracts contained LD clauses, provision was created immediately upon anticipated delay in execution. It was further explained that where final settlement with customers resulted in lower liability or no liability, the unutilized provisions were subsequently reversed and o....
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....diture but had restricted the disallowance on grounds of reasonableness. The learned CIT(A) observed as under: "Since, I had taken a decision in AY 2007-08 that provision for liquidated damages is an allowable expense and has confined myself to reasonableness, I stick to same decision. Accordingly, I hold that the expenses per se is eligible expense and modify disallowance based on reasonableness." 162. The learned CIT(A) thereafter referred to paragraphs 15 and 16 of his appellate order for A.Y. 2007-08 wherein utilisation pattern of provisions created in earlier years had been analysed. The learned CIT(A) observed that utilisation percentages in earlier years fluctuated substantially and therefore scaling down of the provision was justified on reasonable basis. The learned CIT(A) also accepted the assessee's alternative contention that where provisions disallowed in earlier years were subsequently written back and offered to tax, corresponding adjustment should be granted to avoid double taxation. 163. Following the reasoning adopted in A.Y. 2007-08 and for the sake of consistency, the learned CIT(A) held that though provision for LD was in principle allowable busi....
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....eversed and offered to tax in the year of reversal. 168. In support of the aforesaid contention, reliance was placed upon the decision of the Mumbai Bench of the Tribunal in the case of Jacobs Engineering India (P.) Ltd. reported in 14 taxmann.com 186, wherein provision towards foreseeable contractual losses was held allowable by relying upon the judgment in Woodward Governor India (P.) Ltd. reported in 294 ITR 451. Reliance was also placed upon the judgment of the Hon'ble Supreme Court in Bharat Earth Movers vs. CIT reported in 245 ITR 428 for the proposition that if business liability has definitely arisen during the accounting year, deduction cannot be denied merely because liability may have to be quantified and discharged at future date. 169. The learned AR further drew support from Accounting Standard principles and Notification issued under section 145(2), emphasising the principle of prudence requiring recognition of known liabilities and foreseeable losses even where exact quantification may not be possible. It was submitted that the provisions were duly supported by vouchers, file notes, internal calculations and customer contracts prepared and approved by technical....
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....lance of provision carried forward year after year, coupled with recurring reversals and low actual utilisation, itself establishes that the provisions were excessive and not based on any robust estimation process. According to the learned DR, had the estimation truly been scientific and based upon historical experience, large accumulated balances and regular reversals would not have continued over multiple years. 174. The learned DR further submitted that the assessee failed to establish existence of liability in praesenti during the relevant assessment year. It was argued that mere existence of LD clause in the contract does not automatically result in accrual of liability. Reliance in this regard was placed upon the decision of the Hon'ble Madras High Court in the case of CIT v. Seshasayee Industries Ltd. reported in 242 ITR 691 (Mad.), wherein it was held that where no demand had been raised by the customer, no adjudication had taken place and the assessee itself had not admitted responsibility for delay, the liability for damages remained wholly inchoate and contingent and therefore not allowable merely because entries were passed in books of account. The learned DR pointed....
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....ssessing Officer as well as emphasised by the learned DR regarding abnormal accumulation of provision was itself erroneous inasmuch as the opening balance of provision for Liquidated Damages had been incorrectly considered in the assessment order. In this regard, the learned AR submitted that the correct movement of LD provision during the year was as under: Particulars Amount (Rs.) Opening balance as on 01.04.2004 23,49,86,407/- Provision created during the year 13,67,42,995/- Release / reversal during the year 4,92,41,256/- Utilisation during the year 83,20,949/- Closing balance as on 31.03.2005 31,41,67,196/- 180. The learned AR submitted that the Assessing Officer, while discussing the issue in the assessment order, had incorrectly adopted the opening balance at Rs. 35,89,57,004/- instead of the correct figure of Rs. 23,49,86,407/-. According to the learned AR, the entire reasoning of the Assessing Officer as well as the arguments subsequently canvassed by the learned DR regarding alleged excessive accumulation of provision and lack of scientific basis stood materially vitiated on account of this factual error. 181. The learned AR furth....
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.... internal authorisation mechanism and supported by calculation sheets forming part of the paper book. According to the learned AR, these contemporaneous documents clearly establish that the provision was created after project-wise evaluation and technical assessment carried out by responsible officials based upon contractual obligations. 184. It was therefore submitted that the allegation of the Revenue that the provision lacked scientific basis or was merely a contingent or hypothetical liability is contrary to the documentary evidence placed on record. According to the learned AR, the very existence of detailed computation sheets, contractual references, delay analysis and approval mechanism demonstrates that the provision represented a bona fide business estimate of foreseeable contractual liability arising during the year. 185. We have carefully considered the rival submissions and perused the material placed on record. We have also gone through the assessment order, the impugned order of the learned CIT(A), the detailed project-wise provision workings furnished by the assessee and the judicial precedents relied upon by both the sides. 186. At the outset, it is pertine....
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....y the Senior Officers." 189. Thus, from the aforesaid findings itself, it becomes evident that the learned CIT(A) in A.Y. 2007-08 accepted: a. existence of legally enforceable contractual obligations; b. accrual-based recognition policy followed by the assessee; c. project-wise evaluation mechanism; d. supporting vouchers and technical calculations; and e. the essential allowability of provision for LD. 190. However, the learned CIT(A), while examining historical utilisation trends for several years, observed that the actual utilisation and reversals reflected that the provisions created by the assessee were substantially higher than the amounts ultimately crystallised. On that basis, he concluded that the provision created was excessive to a certain extent. The relevant observations are reproduced herein below: "The last column in the data above shows that, on an average of 10 years in respect of the items evaluated, the utilisations were only 31% of the amounts provided in respect of these items only. Ironically, the percentage increases to 37% if the gross amounts are taken. This means, where Rs. 31 or 37 were actually ....
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.... reversals have consistently taken place over the years and the actual utilisation percentages were significantly lower than the gross provisions created. The historical data relied upon by the learned CIT(A) does indicate that the provisioning methodology adopted by the assessee resulted in sizeable accumulation of balances over a long period. 195. The judgment of the Hon'ble Supreme Court in Rotork Controls India (P.) Ltd. lays down that for recognition of provision, the assessee must establish: i. existence of present obligation arising from past events; ii. probability of outflow of resources; and iii. reliable estimation based on scientific method and historical trend. 196. Similarly, the Hon'ble Madras High Court in Seshasayee Industries Ltd. emphasised that mere existence of contractual clause does not automatically result in accrued liability unless the obligation has reasonably crystallised. 197. In the present case, we find that the assessee has undoubtedly established the existence of contractual clauses and project-specific delay analysis. However, the historical trend simultaneously demonstrates substantial variation between provisio....
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....e Hon'ble Supreme Court in the case of M/s Excel Industries Ltd. (Civil Appeal No. 125 of 2013). 202. During the course of assessment proceedings, the Assessing Officer observed that the assessee had debited an amount of Rs. 24,16,03,044/- towards provision for warranty during the year under consideration. The Assessing Officer noted the movement in the warranty provision account as under: Particulars Amount Opening Balance Rs. 29,08,80,000/- Add: Creation during the year Rs. 24,16,03,044/- Less: Reversed / released during the year Rs. 6,76,06,605/- Utilised during the year Rs. 5,04,53,999/- 203. The Assessing Officer called upon the assessee to furnish details of warranty provisions exceeding Rs. 15 lakhs. Upon examination of the sample provision vouchers and supporting notes furnished by the assessee, the Assessing Officer observed that the assessee was making estimated provisions towards future servicing obligations, replacement costs, manpower requirements and material consumption during the warranty period. 204. The Assessing Officer referred to several sample entries examined during assessment proceedings. In one instance relating to CES....
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....sale itself. It was contended that the Assessing Officer erred in treating the provision as contingent in nature without appreciating that the warranty obligation was embedded in the contractual terms agreed with customers. 209. The assessee further contended that the revenue arising from the sale contracts had been brought to tax by the department and therefore it was impermissible to selectively disregard the corresponding contractual obligations arising from the same contracts. It was submitted that the assessee had consistently followed the same accounting practice over the years and the same had been accepted in earlier assessment years without any adverse finding. 210. The assessee also submitted before the learned CIT(A) that the provisions were made strictly in terms of contractual obligations and in accordance with established accounting principles and statutory requirements. It was argued that the Assessing Officer wrongly presumed the expenditure to be merely towards free servicing or marketing efforts whereas, in fact, the warranty commitments represented enforceable contractual obligations which were required to be recognised while determining the profits of the ....
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....lowing mercantile system of accounting and therefore was duty bound to recognize the warranty commitment in the same year in which the corresponding revenue from sale transactions was recognized. It was argued that the department could not accept the revenue arising from the contracts while simultaneously disregarding the corresponding contractual warranty obligations embedded in the very same agreements. According to the learned AR, the warranty commitment formed an inseparable part of the commercial understanding with customers and therefore the liability accrued simultaneously with the execution of sales. 215. The learned AR also relied upon the decision of the Co-ordinate Bench in the case of Jacobs Engineering India (P.) Ltd. v. DCIT reported in 14 taxmann.com 186 (Mum.) wherein, following the judgment of the Hon'ble Delhi High Court in Woodward Governor India (P.) Ltd. reported in 294 ITR 451, it was held that foreseeable business losses are allowable deductions. Reliance was also placed upon the judgment of the Hon'ble Supreme Court in Bharat Earth Movers v. CIT reported in 245 ITR 428 (SC) for the proposition that once a business liability has arisen during the accountin....
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....he year of creation would inevitably lead to double taxation because reversals were already subjected to tax and utilisations were not separately claimed as deduction. 220. The learned AR also placed reliance upon the orders of the Co-ordinate Bench in assessee's own case for A.Ys. 2001-02 to 2003-04 and A.Y. 2004-05 wherein proceedings initiated under section 263 on this very issue were quashed. Drawing our attention to the observations of the Tribunal, the learned AR submitted that the Tribunal had specifically noted that nowhere had the Principal CIT alleged that the warranty provision was not made on scientific basis and therefore the issue already stood accepted in earlier years. It was accordingly argued that on principles of consistency also no disallowance was warranted in the year under consideration. 221. Without prejudice to the above submissions, the learned AR submitted that the impugned disallowance merely represented a timing difference and would not result in any additional tax revenue to the department. Reliance in this regard was placed upon the judgment of the Hon'ble Supreme Court in the case of Excel Industries Ltd. v. CIT (Civil Appeal No. 125 of 2013), ....
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....ble deduction under section 37(1) of the Act where the assessee demonstrates existence of present obligation arising from past events coupled with reasonable estimation based on scientific methodology and historical experience. 226. The learned CIT(A), however, simultaneously proceeded to examine whether the assessee's estimation mechanism actually reflected a realistic and scientific assessment of expected warranty obligations. In this regard, detailed analysis of ten-year data relating to warranty provisions, reversals and actual utilisation was undertaken. The learned CIT(A) reproduced the following statistical data furnished by the assessee itself. 227. The learned CIT(A), after analysing the aforesaid data, recorded a categorical finding that actual utilisation and reversals demonstrated that the assessee was consistently creating provisions substantially in excess of actual warranty obligations. 228. The learned CIT(A) specifically observed that while only approximately 35% of the amounts provided were eventually required towards crystallized claims, the assessee had continued to create provisions at substantially higher levels leading to continuous accumulation in clos....
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..... In the present case, the material placed on record, particularly the detailed findings recorded by the learned CIT(A) in A.Y. 2007-08, demonstrates that actual utilisation percentages over a long period remained substantially lower than provisions created. The data also reveals continuous accumulation in provision balances over successive years. Further, the assessee itself revised its methodology after reviewing actual warranty trends, thereby indicating that earlier estimation parameters required moderation. 234. Before parting with this aspect, we may also deal with the reliance placed by the learned DR on the judgment of the Hon'ble Telangana High Court in Healthware (P.) Ltd. vs. ACIT(supra). In our considered view, the said decision does not advance the case of the Revenue on the peculiar facts obtaining before us. A careful reading of the judgment reveals that the Hon'ble High Court affirmed the disallowance primarily because the assessee therein had failed to establish that the warranty liability had arisen during the relevant year and, more importantly, the quantification of the provision was not shown to be based upon any scientific analysis or reliable histo....
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....ern, adopted a moderate approach by sustaining disallowance only to the extent of 50% of the provision created. We do not find any perversity in the said approach warranting interference. 237. At the same time, we also concur with the without prejudice directions issued by the learned CIT(A) in A.Y. 2007-08 that reversals/write-backs or subsequent utilization relatable to provisions disallowed in earlier years cannot again result in taxation of the same amount. Accordingly, the Assessing Officer is directed to ensure that suitable adjustment is granted in respect of reversals/utilisation to the extent corresponding provisions stand disallowed in the present year so as to avoid double taxation. 238. In view of the foregoing discussion, the ground raised by the assessee is partly allowed for statistical purposes in terms aforesaid. 239. Before moving to next grounds of appeal, we shall now deal with the alternative contention raised by the assessee relating to both provision for liquidated damages as well as provision for warranty, wherein it has been contended that the impugned disallowances merely give rise to timing differences and therefore no adjustment is warranted in ....
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.... At the same time, however, it cannot be overlooked that deferment of tax due to creation of excessive or inflated provisions carries economic implications inasmuch as postponement of tax collection results in corresponding loss of time value of money to the Revenue and concomitant undue benefit to the assessee. Therefore, merely because the amount may ultimately suffer tax in subsequent years, it cannot be laid down as an inflexible proposition that the Revenue is precluded from examining the correctness, adequacy or reasonableness of the provision claimed in the year under consideration. 243. Accordingly, since we have already upheld the action of the learned CIT(A) in estimating and sustaining partial disallowance on the ground that the provisions created were excessive in nature, the alternative plea founded upon the judgment of the Hon'ble Supreme Court in Excel Industries Ltd. (supra) cannot render the entire disallowance otiose. Nevertheless, in order to ensure that the same amount is not subjected to tax twice over in different years, we direct the Assessing Officer to grant consequential relief by excluding from taxation subsequent reversals/write-backs or by allowing c....
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.... that taxes and duties are required to be included notwithstanding the availability of MODVAT/CENVAT credit. Therefore, even if the assessee was entitled to MODVAT credit on duties and taxes paid on purchases, such duties and taxes were still required to be considered for valuation under section 145A. 249. The Assessing Officer further observed that while making adjustments to inventory comprising raw material, work-in-progress and finished goods, the excise duty element attributable thereto was necessarily required to be included. Likewise, in respect of purchases, excise duty paid at the time of purchase was required to be included irrespective of whether MODVAT credit was available or utilized during the year. Similarly, in relation to sales, excise duty collected on sales was also required to be considered while computing adjustments under section 145A. 250. The Assessing Officer further held that while making the aforesaid adjustments, excise duty collected and payable on current year's sales, whether through utilization of MODVAT credit or actual cash payment, had to be adjusted to arrive at the profits of the year. Accordingly, the Assessing Officer worked out the adju....
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....dded back. 255. The Assessing Officer also rejected the assessee's contention based on section 43B by observing that the excise duty element included in closing stock was not in the nature of liability but represented cost incurred by the assessee on purchase of goods and services. The Assessing Officer thus held that valuation of closing stock by including excise duty did not create any further liability deductible from profits. 256. Accordingly, rejecting the explanations of the assessee, the Assessing Officer made an addition of Rs. 18,01,81,416/- under the head "Profits and Gains from Business or Profession". 257. Before the learned CIT(A), the assessee challenged the addition made under section 145A of the Act and contended that the Assessing Officer had erred in making an unjustified adjustment to the profits returned by the assessee. The assessee submitted that the adjustments certified by the Chartered Accountant in the tax audit report ought to have been accepted and that the methodology adopted by the assessee had been consistently followed from the inception of section 145A without there being any change either in facts or in law. 258. The assessee further co....
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..... 2007-08. 263. The learned AR reiterated the submissions advanced before the lower authorities and submitted that the assessee consistently follows the net/exclusive method of accounting for CENVAT credit in its books of account in accordance with Accounting Standard-2 on "Valuation of Inventories" issued by the ICAI. It was submitted that both the inclusive as well as exclusive methods are revenue neutral and have no impact whatsoever on the ultimate profit or loss of the assessee, which was also evident from clause 12(a) and 12(b) of the tax audit report duly certified by the Tax Auditor. 264. The learned AR submitted that the methodology adopted by the assessee had consistently been followed over the years and had also been accepted by the Department in earlier years as well as in the immediately succeeding assessment year. It was contended that despite there being no change either in facts or in law, the Assessing Officer disregarded the assessee's explanation and proceeded to make an addition of Rs. 18,01,81,416/- under section 145A of the Act, which was subsequently upheld by the learned CIT(A). 265. The learned AR further submitted that the adjustments contemplated....
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....the primary contention, the learned AR further submitted that the Assessing Officer had incorrectly recomputed the adjustment under section 145A by ignoring the amount of excise duty liability actually paid during the year amounting to Rs. 36,82,47,401/-. It was contended that if proper effect is given to the said excise duty liability, the resultant adjustment, if any, would stand restricted to Rs. 4,85,20,362/- as per the detailed working furnished before the authorities below. 271. The learned AR also drew our attention to the detailed reconciliation statement furnished in the paper book showing estimated excise duty on opening stock, purchases, sales and closing stock for the year ended 31.03.2005. Referring to the said working, it was submitted that after considering the corresponding adjustments to opening stock, purchases and excise duty liability over and above MODVAT credit availed, the net impact on profits was either nil or substantially reduced. The learned AR also referred to the detailed workings regarding estimated raw material content in work-in-progress and the corresponding excise duty element therein and submitted that the Assessing Officer had proceeded merel....
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....e "gross method" is adopted for purchases, then the same method has to be consistently adopted for valuation of inventories as well. Similarly, if the "net method" is adopted, it has to be uniformly applied throughout. The Hon'ble Supreme Court categorically held as under: "We are unable to accept the view of the Assessing Officer that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act." 278. The Hon'ble Supreme Court further held: "The Assessing Officer adopted the "gross method" at the time of purchase, and the "net method" of valuation at the time of valuation of the stock on hand. By this method, which is wholly erroneous in our view, he assumed that the income, to the extent of the Modvat credit on the unconsumed raw material, was generated." 279. The ratio laid down by the Hon'ble Supreme Court squarely applies to the facts of the present case. Here also, the Assessing Officer has selectively attempted to load the excise duty component only into closing stock without granting corresponding effect to opening sto....
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....oresaid reconciliation assumes significance because it clearly demonstrates that the assessee had not merely adjusted the closing stock while ignoring corresponding effect on opening stock, purchases and sales. On the contrary, the assessee had carried out a comprehensive reconciliation in conformity with the inclusive method contemplated under section 145A and demonstrated that the overall impact on business profits was revenue neutral. 283. The Co-ordinate Bench in assessee's own case in ITA No.4355/Mum/2010 while dealing with identical controversy has elaborately considered the effect of section 145A and held that inclusion of MODVAT / excise duty element in opening stock, purchases, sales and closing stock would ultimately result in no impact on profits and would remain revenue neutral. The Co-ordinate Bench observed as under: "From the aforesaid table, it becomes amply clear that Modvat, tax due, cess, etc. have to be included by the assessee in respect of all the items, i.e. opening stock, purchases, sales and closing stock and pursuant to such inclusion, there will be no deviation in the profits of the assessee company. It is effectively revenue neutral as is evi....
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....sion, the same ought to have been allowed as business expenditure under section 37(1) of the Act, particularly in view of the confirmation furnished by the recipient party and the surrounding business circumstances. The assessee has also challenged the approach of the learned CIT(A) in adjudicating the issue exclusively from the standpoint of commission payment without examining the alternative claim of allowability as a business expenditure. 290. During the course of assessment proceedings, the Assessing Officer observed that the assessee had debited an aggregate amount of Rs. 7.93 crore towards commission payments. In order to verify the genuineness of such expenditure, notices under section 133(6) of the Act were issued to selected parties. According to the Assessing Officer, in certain cases either no response was received or discrepancies were noticed between the confirmations furnished by the parties and the books of account of the assessee. One such party was M/s Apex Medi Equipment, Raipur, to whom the assessee had claimed to have paid commission of Rs. 18,50,000/-. 291. The Assessing Officer noted that M/s Apex Medi Equipment did not confirm receipt of any commission....
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....for a remand report from the Assessing Officer. After considering the assessment order, remand report and submissions of the assessee, the learned CIT(A) observed that the recipient had classified the transaction as purchase of accessories and had specifically denied receipt of any commission. According to the learned CIT(A), the assessee had failed to place on record satisfactory evidence establishing that commission services were rendered or that the payment represented commission expenditure. The learned CIT(A) further held that no sufficient indirect corroborative evidence supporting the assessee's claim had been furnished. Proceeding on the premise that the issue before him was the allowability of commission payment, he concluded that the necessary evidence for payment of commission was absent and accordingly upheld the disallowance corresponding to M/s Apex Medi Equipment. Thus, the addition of Rs. 18,50,000/- made by the Assessing Officer came to be sustained by the learned CIT(A). 294. The learned AR reiterated the submissions advanced before the lower authorities and invited our attention to the factual paper book. It was submitted that the impugned amount of Rs. 18....
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....wance of an otherwise genuine business expenditure. He accordingly pleaded that even assuming the amount was not allowable as commission expenditure, the same ought to be allowed under section 37(1) of the Act as a business expenditure incurred for purchase of accessories used in the assessee's business operations. The learned AR therefore prayed for deletion of the addition of Rs. 18,50,000/- sustained by the learned CIT(A). 298. Per contra, the learned DR strongly relied upon the findings recorded by the Assessing Officer and the learned CIT(A).The learned DR further contended that although the recipient had acknowledged receipt of the amount, the assessee had failed to place on record primary documentary evidence establishing the underlying transaction. In particular, he pointed out that no invoice or bill issued by M/s Apex Medi Equip for the alleged supply of accessories was available on record. According to him, in the absence of any invoice, delivery challan, goods receipt note, stock entry, or other contemporaneous evidence evidencing actual purchase of accessories, the assessee had failed to discharge the burden cast upon it under section 37(1) of the Act. 299. We ha....
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....ter dated 26.12.2008, acknowledged receipt of Rs. 18,50,000/- from the assessee towards supply of bought-out items and local accessories under the relevant purchase order. The recipient specifically clarified that it had never acted as a commission agent and that the payment was not in the nature of commission. Therefore, far from disproving the expenditure, the confirmation corroborates the assessee's explanation regarding the true character of the transaction. 304. The Assessing Officer has not disputed the genuineness of payment, the identity of the recipient, or the fact that the amount was paid through banking channels. No material has been brought on record to suggest that the payment has come back to the assessee or that the transaction is sham or fictitious. The sole basis of disallowance is the perceived inconsistency between the accounting classification adopted by the assessee and the description given by the recipient. In our considered view, such inconsistency by itself cannot justify disallowance once the underlying business transaction stands independently substantiated through the purchase order, payment records and recipient's confirmation. 305. The l....
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....eparate adjudication. 309. In the result, the appeal of the assessee is partly allowed in terms indicated hereinabove. Revenue's Appeal in ITA No. 4037/Mum/2025 310. We shall now take up the appeal preferred by the Revenue. The Revenue has challenged the relief granted by the learned CIT(A) in respect of certain additions made by the Assessing Officer during the course of assessment proceedings. Ground Nos. 1 and 2 involve a common controversy, namely, whether the provisions created by the assessee towards anniversary programme expenses and medical benefits to employees represented accrued and crystallised liabilities allowable under the Act or were merely contingent liabilities liable to be disallowed. Ground No. 1: Deletion of Disallowance of Rs. 2,14,58,000/- towards Provision for Anniversary Awards 311. During the course of assessment proceedings, the Assessing Officer observed that the assessee had created a provision of Rs. 2,14,58,000/- under the head "Other Provisions" towards anniversary awards proposed to be granted to employees upon completion of 25 years of service with the company. The assessee explained that the provision represented an employee benefit....
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....paper book) and, accordingly, a provision of Rs. 2,14,58,000/- was created during the year. The learned AR further submitted that the provision was not an ad hoc estimate but was based upon actuarial assumptions regarding employee retention, expected future payouts and service tenure, and therefore represented a present obligation arising from services already rendered by employees. It was further contended that the same accounting treatment had been consistently followed over the years and had been accepted by the Department in earlier assessments. Reliance was placed upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Insilco Ltd. ( 179 Taxman 55 )and various other judicial precedents including Toyota Industries Engine India (P.) Ltd. (138 taxmann.com 226), Rural Electrification Corporation Ltd. (ITA No.5153&6327/Del/2014), Eveready Industries (India) Ltd.(258 taxmann.com 313) and Mahindra & Mahindra Ltd.(117 taxmann.com 518), to contend that provisions for long service awards determined on actuarial basis constitute allowable business expenditure and cannot be treated as contingent liabilities merely because the actual payment may arise in future years. ....
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....he liability arose from the assessee's contractual obligation towards its employees under the post-retirement medical benefit scheme. It was explained that eligible employees, upon retirement, were entitled to medical benefits and, in the event of their death, such benefits continued to be available to the surviving spouse. Under the scheme, the assessee reimbursed 80% of the medical expenditure incurred by eligible employees in excess of the amount reimbursed by the insurance company, subject to the prescribed monetary limits. The learned AR submitted that the liability was not contingent or ad hoc in nature but represented a present obligation arising from the terms of employment and was quantified on the basis of actuarial valuation. It was further contended that the provision had been created in accordance with recognized accounting principles and the mercantile system of accounting and represented the present value of future obligations attributable to services already rendered by employees. The learned AR emphasised that the learned CIT(A) had rightly appreciated that the liability was actuarially determined and had correctly followed the decision of the Delhi Bench of th....
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....The scheme provides medical benefits to eligible employees after retirement and, in certain circumstances, even to the surviving spouse. The assessee's obligation is not dependent upon any future discretionary decision but flows directly from the contractual terms of employment. The liability was also determined on actuarial basis taking into consideration the present value of future obligations attributable to services already rendered by employees during the year. 322. The Assessing Officer has proceeded on the assumption that since actual payment would arise in future years, no liability exists during the current year. In our considered view, such reasoning is contrary to settled principles governing mercantile accounting and recognition of employee benefit liabilities. Under the mercantile system, expenditure is allowable when the liability accrues and not merely when payment is made. The distinction between a contingent liability and an accrued liability has been repeatedly explained by the Hon'ble Supreme Court and various High Courts. 323. The Hon'ble Supreme Court in Bharat Earth Movers v. CIT (245 ITR 428) laid down the principle that if a business liabil....
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....at the actual discharge would occur in future years. 329. We further find support from the decision of the Co-ordinate Bench in Mahindra & Mahindra Ltd., wherein deduction towards provision for post-retirement housing and medical benefit schemes was allowed in respect of present employees. The Bench specifically held that deduction could not be denied merely because the benefit would be received after retirement and not during the current period. 330. Another significant aspect which cannot be ignored is the principle of consistency. The learned CIT(A) has recorded a finding that similar provisions had been allowed by the Department in earlier years. The Revenue has not brought any material on record demonstrating any change either in facts or in law which would justify a departure from the accepted position. In absence of any distinguishing feature, consistency also supports the assessee's claim. 331. The entire approach of the Assessing Officer proceeds on the premise that because an employee may leave service before becoming eligible or may not ultimately avail the medical benefit, the liability remains contingent. Such reasoning overlooks the fundamental concept of....