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Expenses incurred on account of club membership fee paid to employees is admissible as business expenditure u/s 37: ITAT

2019-TIOL-1440-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘A’ MUMBAI

ITA No.6960/Mum/2014
Assessment Year: 2008-09

G E POWER INDIA LTD
(FORMERLY KNOWN AS M/s ALSTOM INDIA LTD)
THE INTERNATIONAL, 5TH FLOOR 16, MARINE LINES
CROSS ROAD NO 1, OFF MAHARSHI KARVE MARG
CHURCHGATE, MUMBAI-400020
PAN NO: AABCA8679F

Vs

ADDITIONAL COMMISSIONER OF INCOME TAX
RANGE-1(1), MUMBAI

ITA No.6501/Mum/2008
Assessment Year: 2002-03

DEPUTY COMMISSIONER OF INCOME TAX
RANGE-1(1), MUMBAI

Vs

G E POWER INDIA LTD
(FORMERLY KNOWN AS M/s ALSTOM INDIA LTD)
THE INTERNATIONAL, 5TH FLOOR 16, MARINE LINES
CROSS ROAD NO 1, OFF MAHARSHI KARVE MARG
CHURCHGATE, MUMBAI-400020
PAN NO: AABCA8679F

CO No.83/Mum/2013
(Arising out of ITA No.6501/Mum/2008)
Assessment Year: 2002-03

G E POWER INDIA LTD
(FORMERLY KNOWN AS M/s ALSTOM INDIA LTD)
THE INTERNATIONAL, 5TH FLOOR 16, MARINE LINES
CROSS ROAD NO 1, OFF MAHARSHI KARVE MARG
CHURCHGATE, MUMBAI-400020
PAN NO: AABCA8679F

Vs

DEPUTY COMMISSIONER OF INCOME TAX
RANGE-1(1), MUMBAI

Saktijit Dey, JM & G Manjunatha, AM

Date of Hearing: June 18, 2019
Date of Decision: June 28, 2019

Appellant Rep by: Shri Mrunal Parekh a/w Shri Hasmukh Ravaria
Respondent Rep by: 
Shri Anadi Verma

Income Tax – Sections 35DDA & 37

Keywords – Business expenditure – Club subscription fee – Voluntary retirement scheme

(A) FOR the AY 2002-03 it was observed that the assessment was completed u/s 143(3) assessing the total income at Rs nil and book profit at Rs 75.52 cr. In the course of re-assessment proceedings, the AO noticed that the assessee has debited an amount of Rs.23.03 cr to the P&L account towards VRS expenses and also asked the assessee to explain as to why it should not be disallowed. In response, it was submitted by the assessee that he has claimed the deduction in terms of section 35DDA. However, the AO did not find merit in the submissions of the assessee. However AO was of opinion not that the assessee was unable to prove with supporting evidence that the VRS expenses therefore, he added back the amount to the income of the assessee. On appeal, the CIT(A) deleted the addition made by the AO.

(B) For the AY 2008-09 it was observed that during the assessment proceedings, the AO noticed that the assessee has debited an amount of Rs.25 lakh towards club subscription fee. The AO was of the view that such expenditure is of capital, therefore he disallowed such expenditure and added back to the income of the assessee. On appeal, the CIT(A) also upheld the disallowance agreeing with the decision passed by the AO.

On appeal, the Tribunal held that,

Whether deduction claimed on account of voluntary retirement scheme can be disallowed when it has included by the assessee in P&L account to arrive at the profit declared in the return – NO: ITAT

++ in so far as the issue of AY 2002-03 on account of deduction claimed towards VRS is concerned, it is seen in course of assessment proceedings itself the assessee had submitted that the amount of Rs 23.03 cr debited to the P&L account has been added back to arrive at the profit declared in the return. As it could be seen, upon going through the facts and material available on record that the CIT(A) has found that VRS expenses has been added back by the assessee to arrive at the profit which has been considered for computation of income and therefore, deleted the addition. The factual finding of CIT(A) remains uncontroverted. Therefore, this Tribunal does not find any reason to interfere with the decision of CIT(A) on this issue;

Whether expenditure incurred on account of club membership fee paid to the employees by the assessee is admissible as business expenditure as per sec 37 – YES:ITAT

++ in so far as the issue of AY 2008-09 on account of club subscription fee is concerned, the assessee has claimed it as revenue expenditure. The Revenue is of the view, since the expenditure incurred is towards subscription for acquiring the membership of the club it is capital in nature and hence, not allowable. The Supreme Court in United Glass Mfg. Co. Ltd. v/s CIT held that “….club membership fee for employees incurred by the assessee is allowable as business expenditure u/s 37 ….” Further, the Supreme Court has also held that even otherwise also, it is a pure business expenditure as the expenditure is incurred by the assessee to improve its business relations and prospects. The same view has been expressed by the Jurisdictional High Court in CIT v/s Lubrizol India Ltd. Therefore, following the judicial pronouncements, this Tribunal holds that the deduction claimed by the assessee on account of club membership fee is allowable as business expenditure.

Assessee’s appeal partly allowed

Cases followed:

United Glass Mfg. Co. Ltd. v/s CIT, – 2012-TIOL-102-SC-IT

CIT v/s Lubrizol India Ltd., [2013] 37 taxmann.com 294

(….Editor’s note: Ground’s no 2, 3 & 4 of appeals for AY 2002-03 and AY 2008-09 are not discussed here….)

ORDER

Per: Saktijit Dey:

Captioned appeals by the assessee and the Revenue and cross objection by the assessee arise out of two separate orders passed by the learned Commissioner (Appeals)-1, Mumbai, for the assessment year 2002-03 and 2008-09.

ITA no.6501/Mum./2008
Revenue’s Appeal – A.Y. 2002-03

2. In ground no.1, the Revenue has challenged deletion of addition of Rs.23,03,48,610, made by the Assessing Officer on account of deduction claimed towards Voluntary Retirement Scheme (VRS) expenses.

3. Brief facts are, in case of assessee, the assessment was originally completed under section 143(3) of the Income-tax Act, 1961 (for short “the Act”) vide order dated 22nd March 2005, assessing the total income at Rs.nil and book profit at Rs.75,52,70,710. Subsequently, the Assessing Officer re-opened the assessment under section 147 of the Act. In the course of re-assessment proceedings, the Assessing Officer noticing that the assessee has debited an amount of Rs.23,03,48,610, to the Profit & Loss account towards VRS expenses called for necessary details and also asked the assessee to explain as to why it should not be disallowed. In response, it was submitted by the assessee that the assessee has claimed the deduction in terms of section 35DDA of the Act. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, though the assessee had claimed deduction under section 35DDA of the Act towards VRS expenses of Rs.11,03,45,554, being 1/5th of Rs.55,17,27,077, However, it has debited an amount of Rs.23,03,48,610, to the Profit & Loss Account. Alleging that the assessee was unable to prove with supporting evidence that the VRS expenses amounting to Rs.23,03,48,610, has been added to arrive at the profit of the amalgamating company, the Assessing Officer added back the said amount to the income of the assessee. The assessee challenged the aforesaid addition before the first appellate authority.

4. After considering the submissions of the assessee in the context of facts and material on record, learned Commissioner (Appeals) having found that the amount of Rs.23,03,48,610, has been added back by the assessee to arrive at the profit disclosed in the return of income, deleted the addition made by the Assessing Officer.

5. Shri Anadi Verma, the learned Departmental Representative relied upon the observations of the Assessing Officer.

6. Shri Mrunal Parekh, the learned Authorised Representative for the assessee relied upon the observations of learned Commissioner (Appeals).

7. We have considered rival submissions and perused the material on record. It is evident, in course of assessment proceedings itself the assessee had submitted that the amount of Rs.23,03,48,610, debited to the Profit & Loss Account has been added back to arrive at the profit declared in the return of income. However, the Assessing Officer rejected the aforesaid claim of the assessee alleging lack of complete detail. As could be seen, upon going through the facts and material available on record learned Commissioner (Appeals) has found that VRS expenses of Rs.23,03,48,610, in fact, has been added back by the assessee to arrive at the profit which has been considered for computation of income. Thus, the assessee had not claimed the deduction of Rs.23,03,48,610. The aforesaid factual finding of learned Commissioner (Appeals) remains uncontroverted before us. In view of the aforesaid, we find no reason to interfere with the decision of learned Commissioner (Appeals) on this issue. Ground is dismissed.

8. In ground no.2, the Revenue has challenged the decision of learned Commissioner (Appeals) in directing the Assessing Officer not to add the provision of doubtful debts and advances while computing the book profit under section 115JB of the Act.

9. Brief facts are, in course of assessment proceedings the Assessing Officer noticed that the assessee has created a provision for doubtful debt and advances amounting to Rs.8.97 crore in its books of account. Being of the view that such provision is in the nature of unascertained liability, he observed that as per clause (c) to Explaination-1 to section 115JB(2) of the Act, it has to be added back for computing book profit. Accordingly, he added back the said amount to the book profit computed under section 115JB of the Act. The assessee challenged the aforesaid decision of the Assessing Officer before the first appellate authority.

10. Learned Commissioner (Appeals) relying upon the Special Bench decision of the Tribunal, Kolkata Bench, in JCIT v/s Usha Martin Industries Ltd., [2007] 104 ITD 249 (Kol.) = 2006-TIOL-256-ITAT-KOL-SB and the decision of the Tribunal, Mumbai Bench, in Maharashtra State Electricity Board v/s JCIT, [2002] 82 ITD 422 (Mum.) = 2003-TIOL-87-ITAT-MUM, held that the provision for bad and doubtful debt and advances is not a liability of the assessee but diminution in value of the asset. Therefore, Explanation-1(c) of section 115JB(2) of the Act would not be applicable. Accordingly, he directed the Assessing Officer not to add the amount while computing the book profit under section 115JB of the Act.

11. The learned Departmental Representative submitted, as per clause (g) to Explanation to section 115JA r/w clause (i) of Explanation-1 to section 115JB(2) of the Act, the amounts set aside as provision for diminution in the value of an asset have to be adjusted while computing book profit. He submitted, the aforesaid provision though brought to the statute by finance Act, 2009, however, they will apply retrospectively from 1st April 2001. Thus, he submitted, the Assessing Officer was correct in adding back the amount while computing the book profit under section 115JB of the Act.

12. The learned Authorised Representative submitted, the provision for doubtful debt and advances is not a liability of the assessee, hence, cannot be added back to the book profit as per clause (c) to Explanation-1 of section 115JB(2) of the Act. He submitted, in assessee’s own case for assessment year 2001-02 and 2003-04, the Tribunal has decided the issue in favour of the assessee. In this context, he drew our attention to the decision of the Tribunal in ITA no.4925/Mum./2006, dated 10th December 2008. Further, he submitted, following the aforesaid decision of the Tribunal, learned Commissioner (Appeals) has decided the issue in favour of the assessee in assessment year 2004-05. In addition, the learned Authorised Representative relied upon various other decisions, as referred to in the chart submitted before us, including the decision of the Hon’ble Supreme Court in CIT v/s HCL Comnet Systems and Services Ltd., [2008] 305 ITR 409 (SC) = 2008-TIOL-182-SC-IT.

13. We have considered rival submissions and perused the material on record. It is evident, the Assessing Officer taking recourse to clause (c) of Explanation-1 to section 115JB(2) of the Act has added back the provision for doubtful debts and advances to the book profit of the assessee. Reading of the aforesaid provision makes it clear that only the amount set aside towards provision for meeting unascertained liability can be added back to the book profit under the aforesaid provisions. Undisputedly, the provision for bad and doubtful debts and advances are not in the nature of unascertained liability. Rather, it represents the assets of the assessee. Therefore, under no circumstances, clause (c) to Explanation-1 of section 115JB(2) of the Act can be brought into play to make the adjustment to book profit. The aforesaid legal proposition has been expressed by the Tribunal while deciding identical issue in assessee’s own case for the assessment year 2003-04 vide ITA no.4925/Mum./2006, dated 10th December 2008. As regards contention of learned Departmental Representative that as per clause (i) to Explanation-1 of section 115JB(2) of the Act, the Assessing Officer can make such adjustment, we are of the view that this was neither the case before the Assessing Officer nor before learned Commissioner (Appeals).Since, at the time of completion of the assessment proceedings such provision was not in the statute book, therefore, applicability of such provision has never been examined vis-a-vis the relevant facts. That being the case, at this stage we cannot entertain a completely new plea taken by the Revenue on the issue. Therefore, respectfully following the decision of the Tribunal in assessee’s own case as referred to above, we uphold the decision of the learned Commissioner (Appeals) on this issue. Ground is dismissed.

14. In ground no.3, the Revenue has challenged the decision of learned Commissioner (Appeals) in directing the Assessing Officer to allow assessee’s claim of deduction under section 80HHC of the Act from the book profit computed under section 115JB of the Act.

15. Brief facts are, in the course of assessment proceedings the Assessing Officer noticed that while computing book profit under section 115JB of the Act, the assessee has claimed deduction of Rs.24,16,179, under section 80HHC of the Act. From the facts on record, he found that the assessee had no profit as per the computation of income under normal provisions of the Act and its income was computed at nil after giving effect to the brought forward loss. Thus, he observed that since there is no income of the assessee for allowing deduction under section 80HHC of the Act under the normal provisions, it cannot be allowed while computing book profit under section 115JB of the Act.

16. While deciding assessee’s appeal on the issue, learned Commissioner (Appeals) following the decision of the Special Bench of the Tribunal, Mumbai, in DCIT v/s Syncom Formulations India & Ors., [2007] 106 TTJ 193 (Mum.) = 2007-TIOL-96-ITAT-MUM-SB allowed the claim.

17. The learned Departmental Representative submitted, the Special Bench decision of the Tribunal in Syncom Formulations India &Ors. (supra) is no more a good law in view of the decision of the Hon’ble Jurisdictional High Court in CIT v/s Ajanta Pharma Ltd., [2009] 318 ITR 252 (Bom.) = 2009-TIOL-256-HC-MUM-IT. Further, he relied upon the decision of the Tribunal, Vishakhapatnam Bench, in Rashtriya Ispat Nigam Ltd. v/s ACIT, [2011] 141 TTJ 758 (Vizag.). Thus, he submitted, the decision of the Assessing Officer on the issue should be upheld.

18. The learned Authorised Representative strongly relying upon the observations of learned Commissioner (Appeals) submitted, the issue has now being set at rest by the decision of the Hon’ble Supreme Court in CIT v/s Bhari Information Technology Systems Pvt. Ltd., [2012] 340 ITR 593 (SC) = 2011-TIOL-107-SC-IT. Further, he relied upon the following decisions:-

i) ASB International Pvt. Ltd. v/s DCIT, [2012] 26 taxmann.com 87 (Bom.) = 2012-TIOL-447-ITAT-MUM;

ii) Reliance Industries Ltd. v/s ACIT, [2012] 28 taxmann.com 189 (Mum.); and

iii) KEC International Ltd. v/s DCIT, [2013] 33 taxmann.com 243 (Mum.).

19. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As could be seen, learned Commissioner (Appeals) relying upon the Special Bench decision of the Tribunal, in Syncom Formulations India &Ors. (supra) has held that while computing book profit under section 115JB of the Act, deduction under section 80HHC of the Act has to be allowed. It is the contention of the learned Departmental Representative that the aforesaid Special Bench decision is no more a good law in view of the decision of the Hon’ble Jurisdictional High Court in Ajanta Pharma Ltd. (supra). We are unable to accept the aforesaid contention of the learned Departmental Representative for the following reasons. The Hon’ble Supreme Court in Bhari Information Technology Systems Pvt. Ltd. (supra), has approved the view taken by the Special Bench decision of the Tribunal in Syncom Formulations India &Ors. (supra). Further, in case of KEC International Ltd. (supra), the Tribunal following the aforesaid decision of the Hon’ble Supreme Court has directed the Assessing Officer to compute deduction under section 80HHC of the Act on the basis of adjusted book profit and not on the basis of profit computed under the normal provisions of the Act. In view of the aforesaid, we do not find any reason to interfere with the decision of the learned Commissioner (Appeals). Ground raised is dismissed.

20. In ground no.4, the Revenue has challenged the decision of the learned Commissioner (Appeals) in directing the Assessing Officer to allow set-off of brought forward loss and unabsorbed depreciation for the assessment year 2001-02.

21. In course of proceedings before the learned Commissioner (Appeals), the assessee raised additional ground claiming set-off of accumulated loss and unabsorbed depreciation for the assessment year 2001-02. The ground raised by the assessee was forwarded to the Assessing Officer for his remark. In his reply, the Assessing Officer observed that set-off of accumulated loss and unabsorbed depreciation amounting to Rs.3,41,02,28,314, relating to the amalgamated company was not allowed to the assessee in the impugned assessment order since the assessee did not furnish the complete details to prove that the conditions of section 72A of the Act have been fulfilled. After considering the submissions of the assessee and reply of the Assessing Officer in the context of facts and material on record, learned Commissioner (Appeals) directed the Assessing Officer to allow set-off of accumulated loss and unabsorbed depreciation as claimed by the assessee.

22. The learned Departmental Representative relied upon the observations of the Assessing Officer.

23. The learned Authorised Representative strongly relied upon the observations of learned Commissioner (Appeals). Further, he relied upon the following decisions as well.

i) Marshall Sons & Co. v/s ITO, [2996] 223 ITR 809 (SC) = 2002-TIOL-2570-SC-IT; and

ii) ACIT v/s Hindustan Dorr Oliver Pvt. Ltd., ITA no.7093/Mum./2004.

24. Further, learned Authorised Representative submitted that while deciding identical issue in assessee’s own case for assessment year 2006-07, in ITA no.8670/Mum./2010, dated 23rd July 2013, the Tribunal has restored the issue to the Assessing Officer and while giving effect to the directions of the Tribunal, the Assessing Officer has allowed assessee’s claim.

25. We have considered rival submissions and perused material on record. As could be seen from the facts on record, the Assessing Officer has disallowed assessee’s claim of set-off of accumulated loss and unabsorbed depreciation of the amalgamating company primarily on the ground of lack of complete details. Further, learned Commissioner (Appeals) after examining the issue in the context of facts and material on record found that there was amalgamation of three associate companies with the assessee from the appointed date of 31.03.2001 by virtue of a scheme of merger approved by the Hon’ble Jurisdictional High Court and Hon’ble Delhi High Court. Learned Commissioner (Appeals) has also observed that the dispute between the assessee and the Department is only with regard to the appointed date and whether the scheme becomes operative from 31st March 2001. It is further noticed that while allowing assessee’s claim, learned Commissioner (Appeals) has relied upon the ratio laid down by the Hon’ble Supreme Court in case of Marshall Sons & Co. (supra). As per the aforesaid decision, the date of merger is from the appointed date and not the date on which the High Court granted its approval. In our view, as per the ratio laid down by the Hon’ble Supreme Court in assessee’s claim of set-off of accumulated loss and unabsorbed depreciation has to be allowed from the appointed date of merger in terms of section 72A of the Act. That being the case, we do not find any infirmity in the decision of learned Commissioner (Appeals) on the issue. Accordingly, the ground raised is dismissed.

26. Grounds no.5 and 6 being general in nature do not require adjudication.

27. In the result, Revenue’s appeal is dismissed.

C.O. no.83/Mum./2013 – By Assessee
[Arising out of ITA no.6501/Mum./2008
Revenue’s Appeal – A.Y. 2002-03]

28. In this cross objection, the assessee has challenged the validity of assessment under section 147 of the Act.

29. Since, while dealing with Revenue’s appeal in ITA no.6201/ Mum./2008 in earlier part of the order, we have decided the issues raised by the Revenue on merit in favour of the assessee., he legal issue raised in the cross objection is of mere academic importance, hence, there is no need to adjudicate the same. Therefore, the cross objection having become infructuous is dismissed.

30. In the result, assessee’s cross objection is dismissed.

ITA no.6960/Mum./2014
Assessee’s Appeal – A.Y. 2008-09

31. In ground no.1, assessee has challenged disallowance of club entrance/subscription fee of Rs.25 lakh.

32. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs.25 lakh towards club subscription fee. Being of the view that such expenditure is of capital, the Assessing Officer disallowed the same.

33. The learned Commissioner (Appeals) also upheld such disallowance agreeing with the decision of the Assessing Officer. While doing so, he relied upon certain judicial pronouncements.

34. The learned Authorised Representative submitted, expenditure incurred towards club subscription fee is allowable as revenue expenditure in view of various judicial precedents. In support, he relied upon the following decisions:-

i) United Glass Mfg. Co. Ltd. v/s CIT, – 2012-TIOL-102-SC-IT;

ii) Otis Elevator Co. India Ltd. v/s CIT, [2992] 195 ITR 682 (Bom.)

iii) CIT v/s Lubrizol India Ltd., [2013] 37 taxmann.com 294 (Bom.);

iv) Bank of America Securities India Pvt. Ltd. v/s DCIT, – 2010-TIOL-630-ITAT-MUM;

v) Maersk India Pvt. Ltd. v/s DCIT, – 2009-TIOL-322-ITAT-MUM;

vi) Development Credit Bank Ltd. v/s DCIT, [2013] 40 taxmann.com 532 (Mum.) = 2013-TIOL-216-ITAT-MUM;

vii) Clariant Chemicals India Ltd. v/s ACIT, [2015] 53 taxmann.com 39 (Mum.) = 2014-TIOL-838-ITAT-MUM;

viii) CIT v/s Nestle India Ltd., [2008] 296 ITR 682 (Del.);

ix) CIT v/s M/s. Upper India Steel Mfg. and Engg. Co. Ltd., 50 taxmann.com 395;

x) CIT v/s Samtel Color Ltd., [2010] 326 ITR 425 (Del.) = 2009-TIOL-58-HC-DEL-IT; and

xi) CIT v/s Groz Beckert Asia Ltd., 31 taxmann.com 155 (P&H) = 2013-TIOL-128-HC-P&H-IT-LB.

35. The learned Departmental Representative submitted, there is a difference between entrance fee and subscription fee. He submitted, any payment made towards entrance is of capital nature, hence, not allowable as expenditure.

36. In rejoinder, the learned Authorised Representative drawing our attention to the material placed in the paper book submitted, these are membership renewal fee, hence, cannot be considered as capital expenditure.

37. We have considered rival submissions and perused material on record. The dispute is with regard to allowability of club expenditure incurred by the assessee towards its employees. While the assessee has claimed it as revenue expenditure, the case of the Revenue is, since the expenditure incurred is towards subscription for acquiring the membership of the club it is capital in nature, hence, not allowable. Keeping in view the aforesaid factual position, we have to examine the allowability of the expenditure. The Hon’ble Supreme Court in United Glass Mfg. Co. Ltd. (supra), has held that club membership fee for employees incurred by the assessee is allowable as business expenditure under section 37 of the Act. Further, the Hon’ble Supreme Court has also held that even otherwise also, it is a pure business expenditure as the expenditure is incurred by the assessee to improve its business relations and prospects. The same view has been expressed by the Hon’ble Jurisdictional High Court in Lubrizol India Ltd. (supra). In view of the aforesaid judicial pronouncements, the deduction claimed by the assessee on account of club membership fee is allowable as business expenditure. This ground is allowed.

38. In ground no.2, the assessee has challenged the disallowance of unpaid service tax of Rs.4,89,54,645, under section 43B of the Act.

39. Brief facts are, in the course of assessment proceedings, the Assessing Officer while examining the tax audit report found that as on 31st March 2008, an amount of Rs.4,89,54,645, was shown as unpaid service tax in the books of account. He also observe that in the assessment year 2007-08, corresponding figure of Rs.3,34,75,448, was disallowed under section 43B of the Act. Therefore, he called upon the assessee to explain why similar disallowance should not be made in the impugned assessment year. Though, the assessee objected to the proposed disallowance, however, the Assessing Officer rejecting the submissions of the assessee disallowed the amount of Rs.4,89,54,645 under section 43B of the Act.

40. The learned Commissioner (Appeals) also upheld the disallowance on the reasoning that the amount in dispute being in the nature of tax and having not been actually paid during the previous year, has to be disallowed under section 43B of the Act.

41. The learned Authorised Representative submitted, the liability to pay service tax arises only after the collection of service charges by the service provider. He submitted, since the service charges corresponding to unpaid service tax were not collected by the assessee, the same cannot be disallowed under section 45B of the Act. Further, the learned Authorised Representative submitted, since the assessee had not claimed it as deduction, no disallowance under section 43B of the Act can be made. In support of his contention, the learned Authorised Representative relied upon the following decisions:-

i) PCIT v/s Tops Security Ltd., [2013] 97 taxmann.com 525 (Bom.) = 2018-TIOL-1913-HC-MUM-IT; and

ii) CIT v/s Knight Frank India Pvt. Ltd., ITA no.247 & 255/2014, dated 16.08.2016 = 2016-TIOL-2064-HC-MUM-IT.

42. Further, the learned Authorised Representative submitted, the decision of the Hon’ble Jurisdictional High Court in Tops Security Ltd. (supra) has attained finality as the SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court.

43. The learned Departmental Representative relied upon the order of the Assessing Officer.

44. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputedly, the amount in dispute represents service tax which remains to be paid by the assessee. It is the contention of the assessee that service tax is payable only on receipt from consumer of such service. It is observed that the Hon’ble Jurisdictional High Court in Tops Security Ltd. (supra) following its earlier judgment held that provision of section 43B of the Act does not impose liability to pay service tax before actual receipt of the fund in the account of the assessee. The Hon’ble Jurisdictional High Court held that liability to pay service tax into the treasury will arise only upon the assessee receiving the fund and not otherwise. Further, in Knight Frank India Pvt. Ltd. (supra), the Hon’ble Jurisdictional High Court held that since the assessee did not claim any deduction on account of service tax payable, there can be no occasion to invoke provisions of section 43B of the Act. In the facts of the present case also, it is the contention of assessee that since it has not claimed any deduction on account of service tax payable, no disallowance under section 43B of the Act can be made. Respectfully following the ratio laid down by the Hon’ble Jurisdictional High Court in the aforesaid decisions, we delete the disallowance made by the assessee under section 43B of the Act. Ground is allowed.

45. In ground no,3, the assessee has challenged the disallowance of Rs.1,13,35,767, under section 40(a)(ia) of the Act.

46. Brief facts are, in the course of assessment proceedings, the Assessing Officer on examining the accounts of the assessee found that payment made amounting to Rs.1,13,35,767, towards various expenses incurred during the year and claimed as deduction was without deducting tax at source. Therefore, he called upon the assessee to explain why the deduction claimed should not be disallowed under section 40(a)(ia) of the Act. In response, it was submitted by the assessee that the amount represents the provision made at the end of the year purely on estimate basis under different heads. He submitted, at that stage the assessee even does not know the identity of the payees. Therefore, it was not possible on the part of the assessee to deduct tax at source. Further, he submitted, the provision for expenditure is never claimed as deduction by the assessee. Only when the amount is actually paid in the subsequent year, the assessee claims it as deduction after deducting tax on such payment and the provision made is reversed. Thus, he submitted, in such circumstances, no disallowance under section 40(a)(ia) of the Act can be made. The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to disallow the amount of Rs.1,13,35,767, under section 40(a)(ia) of the Act. While deciding assessee’s appeal, learned Commissioner (Appeals) sustained the disallowance made by the Assessing Officer.

47. Reiterating the stand taken before the Departmental Authorities, the learned Authorised Representative submitted, while making provision for expenditure at the end of the year, the assessee only specifies the head under which such expenditure is to be incurred and the payees are not identified. Therefore, the assessee could not have deducted tax at source in the absence of the details of the payees. He submitted, in the subsequent year, when the amount is actually paid the assessee deducts tax at source and entries were made in the books of account reversing the provision made earlier. The learned Authorised Representative submitted, in assessee’s own case for the assessment year 2006-07, the Tribunal has decided identical issue. Further, he relied upon the following decisions:-

i) Alstom own’s ITAT order in A.Y. 2006-07;

ii) Industrial Development Bank of India v/s ITO;

iii) Apollo Tyres Ltd v/s DCIT, [2017] 78 taxmann.com 195 (Del.) = 2017-TIOL-264-ITAT-DEL; and

iv) Pfizer Ltd v/s ITO, ITA no.1667/Mum./2010, etc., dated 31.10.2012 = 2012-TIOL-631-ITAT-MUM.

48. The learned Departmental Representative relied upon the observations of learned Commissioner (Appeals) and the Assessing Officer.

49. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. The specific contention of the learned Authorised Representative before us is, the amount in dispute is created as a provision towards expenditure under various heads at the end of the year and at that stage the payees are not identified. Therefore, the assessee is not in a position to deduct tax at source. Further, it is the claim of the assessee that the provision so created is not claimed as a deduction. In our view, the aforesaid claim of the assessee requires consideration. If at the time of creating the provision for expenditure payee is not identifiable, the assessee cannot possibly deduct tax at source, since, the details of the payees are not known to the assessee. Further, it is the contention of the assessee that the provision created is reversed in the subsequent year on the basis of actual payment made against the expenditure claimed. This claim of the assessee also requires verification along with the fact whether at the time of actual payment, the assessee has deducted tax at source. Since, the aforesaid facts have not been properly verified by the Departmental Authorities, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. Ground raised is allowed for statistical purposes.

50. In ground no.4, the assessee has challenged the disallowance of brought forward loss of amalgamating company.

51. The learned Authorised Representative submitted, the assessee’s claim for set-off of brought forward losses of amalgamating company arising in assessment year 2006-07 and 2007-08 were disallowed by the Assessing Officer on the ground that such claim was not allowed in those assessment years. The learned Authorised Representative submitted, assessee’s appeal for the assessment year 2006-07 in the meanwhile has been disposed of by the Tribunal by restoring the issue to the Assessing Officer. The appeal for the assessment year 2007-08 is still pending. Thus, he submitted, the Assessing Officer may be directed to grant consequential relief to the assessee on the basis of decision to be taken on assessee’s claim in assessment year 2006-07 and 2007-08.

52. Having considered rival submissions, we are of the view that this issue has to be restored back to the Assessing Officer for deciding afresh depending upon the decision to be taken on assessee’s claim on the issue in assessment years 2006-07 and 2007-08. This ground is allowed for statistical purposes.

53. In the result, assessee’s appeal is partly allowed.

54. To sum up, Revenue’s appeal and assessee’s cross objection are dismissed and assessee’s appeal is partly allowed.

(Order pronounced in the open Court on 28.06.2019)

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