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Sum held in fiduciary capacity cannot be taxed as income in hands of holder: ITAT

2019-TIOL-1335-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘E’ MUMBAI

ITA No.5403/Mum/2014
Assessment Year: 2006-07

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE 3(1), ROOM NO 607, 6TH FLOOR
AAYAKAR BHAVAN, MUMBAI-400020

Vs

M/s EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD
5TH FLOOR, NIRMAL BUILDING
NARIMAN POINT, MUMBAI-21
PAN NO: AAACE0296K

C N Prasad, JM & Rajesh Kumar, AM

Date of Hearing: June 27, 2018
Date of Decision: July 31, 2018

Appellant Rep by: Shri S Venkatraman, AR
Respondent Rep by: 
Shri Rajesh Damor, DR

Income Tax – Current liabilities – Inadequate foreign exchanges – Un-apportioned claim recovery.

THE assessee company, issues insurance policies to exporters and banks in respect of transactions abroad or exports and when an exporter/bank was unable to realize export proceeds and it lodged a claim with the assessee and then it was settled up to 90% of the gross invoice value. In the case of Latin American/African countries, the amounts to be remitted by the importers towards dues were normally blocked by the Central Banks of such countries due to inadequate foreign exchanges. As and when these amounts were received from central banks, after identification of exporters and the ascertainment of their respective shares the necessary adjustments were made. During the year under consideration, the assessee reflected such amounts in the balance sheet under the head “current liabilities” as “Un-apportioned claim recovery”. The assessee identified the exporters to whom the amounts pertained and remitted their share to them while the remaining amount being the share of the assessee company in the realization, was taken to the income and offered to tax accordingly. During assessment, the AO did not accepted such accounting treatment and added the amount held in fiduciary capacity for exporters and banks as income of the assessee. On appeal, CIT(A), passed order in favour of the assessee.

On appeal, Tribunal held that,Whether the sum held in fiduciary capacity on behalf of the exporters cannot be taxed as income of the assessee – YES: ITAT

++ the co-ordinate bench of the Tribunal had decided the issue in favour of the assessee in ITA No.1971/M/2011 A.Y. 2007-08 – 2016-TIOL-181-ITAT-MUM by holding as under ” the assessee being a General Insurance Company, its income is liable to be computed strictly u/s 44 r.w. read with First Schedule, which provides for a special provision governing computation of taxable income earned from business of insurance and has an overriding effect over other provisions contained in the Income-tax Act. Section 44 mandates that the assessing authority has to compute the taxable income from the business of insurance strictly in accordance with the provisions of First Schedule. Rule 5 of the First Schedule mandates that the profits and gains of any business of insurance shall be taken to be the profits disclosed in the annual accounts. Such profits are only subject to any expenditure that are disallowable under sections 32 to 43B. Thus, the AO is bound to accept the profits as shown in the audited accounts and such profit can only be adjusted in respect of expenditure allowances that qualifies for disallowance under sections 32 to 43B. Here in this case, the amount of Rs.5.04 crores was received by the assessee from the foreign Central Banks and was classified in the Balance sheet as a “liability” which was as in accordance with the accepted accounting practice followed by the assessee right from the earlier years. The assessee has held the amount as a “trust” that is in fiduciary capacity on behalf of the exporters. Consequently, such amount had not been routed through profit and loss account by the assessee, as per the accounting system followed by the assessee. Hence, in accordance with the provisions contained in section 44 read with first schedule, such an adjustment by the AO for taxing the income in this year is wholly untenable. Apart from that, the CIT(A) has categorically noted the fact that during the previous year relevant to the assessment year 2009-10, the assessee after identifying the exporters has paid back the substantial amount which were collected on their behalf and whatever amount could not be identified, the same has been offered as an income in that year. Thus, the whole of the amount has now been accounted for and income has also been offered by the assessee in the assessment year 2009-10. On these facts, their is no reasons to deviate from the finding and the direction given by the CIT(A). Accordingly, the ground raised by the Department on this score stands dismissed.” Since the facts of the case are identical with that of the earlier years, therefore following the decision of the co-ordinate bench of the Tribunal, dismiss the ground raised by the Revenue.

Revenue’s appeal dismissed

ORDER

Per: Rajesh Kumar:

The present appeal has been preferred by the Revenue against the order dated 12.05.2014 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2006-07.

2. The various grounds raised by the Revenue are as under:

“1. Whether on the facts and in the circumstance of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 27,24,26,000/- to the total income being recoveries from abroad during the relevant previous year without appreciating that assessee had already claimed expenditure relating to such receipt in earlier years.

2. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in deleting the addition of Rs. 20,00,00,000/- being the amount arising consequent to change in the method of estimation of recoveries of claims paid.

3. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in deleting the addition of Rs.6,57,00,000/- being liability on account of revision in the pay-scales of the employees having got accrued in the hands of the assessee.

4. Whether on the facts and circumstances and in law the Ld CIT(A) erred in deleting the ISO certification expenses of Rs. 16,29,923/- by not treating it as Capital expenditure.

5. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.

6. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

3. The issue raised in ground No.1 is against the deletion of addition of Rs.27,24,26,000/- by the Ld. CIT(A) as made by the AO to the total income of the assessee on account of recoveries from abroad for which the assessee has already claimed expenditure in the earlier years.

4. The facts in brief are that the assessee is engaged in the business of insuring export credit risk of exporters and banks in India. The assessee issues insurance policies to exporters and banks in respect of transactions abroad or exports and when an exporter/bank is unable to realize export proceeds and it lodges a claim with the assessee and then it is settled up to 90% of the gross invoice value. In the case of Latin American/African countries, the amounts to be remitted by the importers towards dues are normally blocked by the Central Banks of such countries due to inadequate foreign exchanges. As and when these amounts are received from central banks, the remittances are not accompanied with the details as to which exporters or to whom the amounts pertain as well as the share of each exporter and therefore the sum so received from the Central Banks are held in a fiduciary capacity by the company in under current liabilities. After identification of exporters and the ascertainment of their respective shares the necessary adjustments are made. During the year under consideration, the assessee reflects such amounts in the balance sheet under the head “current liabilities” as “Un-apportioned claim recovery” in the financial year ended before the 01.03.2007. The assessee identified the exporters to whom the amounts pertained in the next year and remitted Rs.4,60,00,000/- to them while the remaining amount of Rs.22,64,26,000/- being the share of the company in the realization, was taken to the income and offered to tax accordingly as per the regular practice followed by the assessee. The not accepting such accounting treatment added the same to the income of the assessee.

5. The Ld. CIT(A), after following the earlier year orders by his predecessor, allowed the appeal of the assessee by holding that the amount of Rs.22,64,26,000/- was held by the assessee in fiduciary capacity for exporters and banks and thus deleted the addition.

6. The Ld. A.R. submitted before us that the case of the assessee is fully covered by the decision of the co-ordinate bench of the Tribunal in assessee’s own case in ITA No.1971/M/2011 for A.Y. 2007-08 = 2016-TIOL-181-ITAT-MUM and in ITA No.6495/M/2013 for A.Y. 2008-09 wherein the similar addition was deleted. The Ld. A.R. submitted before the Bench that in view of the said decisions the ground raised by the Revenue deserves to be dismissed.

7. The Ld. D.R., on the other hand, relied on the grounds of appeal and order of the AO.

8. After hearing both the parties and perusing the material on record including the decision cited by the Ld. A.R., we observe that the co-ordinate bench of the Tribunal had decided the issue in favour of the assessee in ITA No.1971/M/2011 A.Y. 2007-08 = 2016-TIOL-181-ITAT-MUM (supra) by holding as under:

“5. After considering the rival submissions and on perusal of the relevant finding given in the impugned order, it is an undisputed fact that the assessee being a General Insurance Company, its income is liable to be computed strictly u/s 44 r.w. read with First Schedule, which provides for a special provision governing computation of taxable income earned from business of insurance and has an overriding effect over other provisions contained in the Income-tax Act. Section 44 mandates that the assessing authority has to compute the taxable income from the business of insurance strictly in accordance with the provisions of First Schedule. Rule 5 of the First Schedule mandates that the profits and gains of any business of insurance shall be taken to be the profits disclosed in the annual accounts. Such profits are only subject to any expenditure that are disallowable under sections 32 to 43B. Thus, the AO is bound to accept the profits as shown in the audited accounts and such profit can only be adjusted in respect of expenditure allowances that qualifies for disallowance under sections 32 to 43B. Here in this case, the amount of Rs.5.04 crores was received by the assessee from the foreign Central Banks and was classified in the Balance sheet as a “liability” which was as in accordance with the accepted accounting practice followed by the assessee right from the earlier years. The assessee has held the amount as a “trust” that is in fiduciary capacity on behalf of the exporters. Consequently, such amount had not been routed through profit and loss account by the assessee, as per the accounting system followed by the assessee. Hence, in accordance with the provisions contained in section 44 read with first schedule, such an adjustment by the AO for taxing the income in this year is wholly untenable. Apart from that, the Ld. CIT(A) has categorically noted the fact that during the previous year relevant to the assessment year 2009-10, the assessee after identifying the exporters has paid back the substantial amount which were collected on their behalf and whatever amount could not be identified, the same has been offered as an income in that year. Thus, the whole of the amount has now been accounted for and income has also been offered by the assessee in the assessment year 2009-10. On these facts, we do not find any reasons to deviate from the finding and the direction given by the CIT(A). Accordingly, the ground raised by the Department on this score stands dismissed.”

9. Since the facts of the case before us are identical with that of the earlier years, we therefore following the decision of the co-ordinate bench of the Tribunal, dismiss the ground raised by the Revenue.

10. The issue raised in second ground of appeal is against the deletion of addition of Rs.20 crores by Ld. CIT(A) as made by the AO on account of changes in the method of estimation of recoveries of claim paid.

11. The facts in brief are that the assessee is following the practice of estimating the amounts of recovery expected out of claims paid/payable based on assessment of each individual case. Where the recovery exceeded 3 years as on 31st March 2006, the company, in view of the chances of recovery of such claims being remote, changed the accounting practice in the current year and recognized Rs.100/- as the amount likely to be recovered in respect of each such claim. The said change in the accounting treatment had the effect of not recognizing the estimated recoveries in respect of claims paid and outstanding beyond 3 years as on 31.03.2006 to the extent of Rs.20 crores. According to the AO, the assessee has reduced its profit by writing back the provision of recovery of Rs.20 crores and same is required to be added back and in fact added the same to the income of the assessee by the AO.

12. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after considering the contentions and submissions of the assessee by observing and holding as under:

“6.3 I have considered the facts of the case, the reasoning given by the AO and submissions made by the Appellant. The Appellant is a public sector company and is engaged in the business of export credit insurance. Its entire capital is held by the President of India. The Appellant is also registered as an export insurance company with the Insurance Regulatory and Development Authority (IRDA) under the Insurance Regulatory and Development Authority Act of 1999. Being registered with the IRDA, it has to draw up its accounts in accordance with the IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002. The Appellant, being a Government of India Company, its accounts are subjected to audit by Auditors appointed by the Comptroller and Auditor General of India and in addition the accounts are also subjected to a supplementary audit by the Office of the Comptroller and Auditor General of India under Sec. 619 of the Companies Act, 1956. The financial statements have also been filed before the IRDA being the Regulator for all the insurance companies including the Appellant Company.

6.4 Since the Appellant is an insurance company, its income is to be computed in accordance with Sec. 44 of the I.T. Act, 1961, read with First Schedule. Rule 5 of the First Schedule that deals with the computation of Profits and Gains of other insurance business (other than Life insurance) begins as follows:

“The profits and gains of anti business of insurance, other than life insurance, shall be taken to be the profit before tax and appropriations as disclosed in the profit and Loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) or the Rules made there under or the provisions of the Insurance Regulatory and Development Authorial Act, 1999 (4 of 1999) or the Regulations made there under, subject to the following adjustments…..”

6.5 The Hon’ble Supreme Court in the case of CIT vs. Calcutta Hospital and Nursing Home Benefits Association Ltd (57 ITR = 2002-TIOL-1699-SC-IT-LB while dealing with the assessment of an insurance company have held that in view of the First Schedule of the Act, the AO is bound to accept the profits disclosed in the annual accounts that are filed before the Regulator, subject to adjustments as prescribed in Clauses (a), (b) and (c) of Rule 5 to the First Schedule.

6.6 Clause (a) of Rule 5 to the First Schedule reads as follows:

“subject to the other provisions of this rule, any expenditure or allowance including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be prescribed which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of a business shall be added back.”

6.7 The Hon’ble Supreme Court in the case of General Insurance Corporation vs. CIT (240 ITR 139) = 2002-TIOL-2292-SC-IT has also interpreted the above clause as permitting an adjustment to an expenditure or allowance which is not admissible under Sec.30 to 43B of the Act.

6.8 The provision for estimation in the recovery of claims paid is not an expenditure which is inadmissible under the provisions of Sec. 30 to 43B of the IT. Act, 1961. Rather is an item of income side reduced by the appellant, on estimate basis. Hence, the addition made in the reassessment order cannot survive. Besides, the Apex Court has also held that the balance of profits disclosed in the Profit and Loss account prepared in accordance with the provisions of IRDA is to be accepted. The AO is, therefore, bound by the figure of the pro it before tax and appropriations as appearing in the Profit and Loss account filed by the Appellant before the IRDA. Consequently, the addition of Rs.20,00,00,000/- made by the AO in the reassessment order on account of change in the estimation of the provision for recovery of claims cannot be sustained and is hence deleted.”

13. The Ld. D.R. while relying on the grounds of appeal and order of AO submitted before the Bench that the change in the method of accounting by not recognizing the estimated recoveries in respect of claim paid and payable beyond three years has resulted into reduction of profit to the tune of Rs.20 crores and therefore the AO has rightly made the addition on that account. Thus the Ld. D.R. prayed before the Bench that since the change in the accounting treatment of such recoveries is understated the profits of the assessee, therefore the order of Ld. CIT(A) is wrong and should be reversed.

14. On the other hand, the Ld. A.R. submitted before the Bench that the first appellate authority has correctly passed the order after considering the provisions of section 44 and rule 5 of first schedule which are special provisions to compute the profit of insurance other than life insurance. The Ld. A.R. submitted that section 44 of the Act begins with non obstante clause and hence overwrites the other sections relating to computation of income under the Act. The Ld. A.R. further argued that rule 5 of the First Schedule mandates that profits and gains of net business of insurance other than life insurance shall be taken to be profit disclosed in the annual accounts. The Ld. A.R. therefore submitted that the AO has to accept the profit as disclosed by the assessee as it is engaged in the business of insurance other than life insurance. The Ld. A.R. submitted that no adjustment can, therefore, be made to the income shown in the P & L account of the assessee in in view of the provisions in section 44 of the Act read with First Schedule. The Ld. A.R. relied on a couple of decisions in defense of his arguments namely; CIT vs. Calcutta Hospital and Nursing Home Benefits Association Ltd. 57 ITR 313 (SC) = 2002-TIOL-1699-SC-IT-LB & General Insurance Corporation of India vs. CIT 240 ITR 139 (SC) = 2002-TIOL-2292-SC-IT.

15. We have heard the rival submissions of both the parties and perused the material on record including the decisions cited by the Ld. A.R. We observe that Ld. CIT(A) has comprehensively considered the provisions of section 44 of the Act and First Schedule which deal with and provide for the computation of profit of the business of insurance other than life insurance. The Ld. CIT(A) decided the issue in favour of the assessee after following the decisions of the Hon’ble Supreme Court in the case of CIT vs. Calcutta Hospital and Nursing Home Benefits Association Ltd. (supra) and General Insurance Corporation of India vs. CIT (supra),. Since the assessee is registered as an export insurance company with Insurance Regulatory and Development Authority (IRDA) Act of 1999 and therefore it has to draw up its accounts in accordance with IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002. Since the assessee is a government company whose accounts are subjected to audit by the auditors appointed by Comptroller and Auditor General of India, besides, the audit by the staff of Comptroller and Auditor General of India. Therefore, whatever profit is disclosed in the P & L Account has to be accepted by the AO unless the expenditure is inadmissible under the provisions of section 30 to 43B of the Act. The case of the assessee is also find support from the decision of the Apex Court namely CIT vs. Calcutta Hospital and Nursing Home Benefits Association Ltd. (supra) wherein it has been held that AO is bound to accept the profit as disclosed in the annual accounts that are filed before the Regulatory body subject to adjustments as prescribed in Clauses (a), (b) and (c) of Rule 5 to the First Schedule. The Hon’ble Supreme Court in the case of General Insurance Corporation of India vs. CIT (supra) has also held that adjustment is permissible qua an expenditure or allowance which is not permissible under section 30 to 43B of the Act. Under these circumstances, we do not find any reason to deviate from the finding of the Ld. CIT(A) and we are, therefore, inclined to uphold the same by dismissing the ground raised by the Revenue.

16. The issue raised in 3rd ground of appeal is against the deletion of Rs.6,57,00,000/- by the Ld. CIT(A) as made by the AO on account of revision in the pay-scales of the employees having accrued in the hands of the assessee in the current year.

17. The facts in brief are that the pay scales of the officers and employees of the assessee were due from 01.08.2002. Such revision in the pay scale requires the formal approval of the Nodal Ministry which is in the present case is Ministry of Commerce, Govt. of India. Since the assessee is an insurance company, the revision of pay scale is based upon the similar revision in the pay scale of LIC employees. The Ministry of Finance had approved the revision of pay scale of LIC employees in August/September 2005. Since the LIC has been given approval to revise the scale, it was a mere formality to obtain the approval of Ministry of Commerce which was ultimately obtained vide letter dated 26.08.2006 and was on the same lines as in the case of LIC. The assessee recognised the revenue as per Act and pursuant to accounting standard-4 dealing with the events occurring after the balance sheet date which existed or prevailed on the balance sheet date on the ground that proposal for approval to Ministry was forwarded in December 2005 itself was actually granted in August 2006 which means that it was a condition prevailing on the balance sheet date but the subsequent approval of the Ministry in August 2006 was an event after the balance sheet date. Thus the assessee recognised the liability of Rs.6,57,00,000/- at the year end 31.03.2006. The AO disallowed the claims of the assessee on the ground that proposal for revision of pay scale was forwarded to the Government of India in December 2005 which was approved on 26.08.2006 and therefore the pay revision in this case cannot be said to be an event occurring after the date of balance sheet in order to recognize the liability at the year end. According to the AO, since the approval was granted in the month of August 2006 the liability crystallized in the financial year 2006-07 relevant to assessment year 2007-08 and not in the current year and accordingly the same was added to the income of the assessee.

18. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after considering the detailed submissions and contentions of the assessee by observing and holding as under:

“7.3 I have considered the facts of the case, the reasoning given by the AO and the submissions made by the Appellant. The Appellant being a company is required to draw up its accounts under the accrual basis of accounting by following the Accounting Standards prescribed under Sec.209(3) of the Companies Act, 1956, r/w Section 211(3C) of the said Act. The Accounting Standard (AS4) that deals with Events Occurring after the Balance Sheet Date in Para 13 require adjustments to be made to liabilities for events that occur after the Balance Sheet Date which provide additional evidence to assist the estimation of amounts relating to conditions existing on the Balance Sheet Date. It is also a fact that the Appellant had forwarded the proposal for revision of the payscales of its employees to the Nodal Ministry in the month of December 2005 (i.e. in the current Financial Year), which was based on a similar revision in the pay-scales of the officers and employees of LIC that had been approved by the Government of India in September 2005. Therefore, on the Balance Sheet Date, viz. 31 March 2006, the proposal of the Appellant had already been forwarded to the Nodal Ministry and was pending approval. In principle, it had to get approved on the basis of the approval already granted by the Government of India in the case of LIC. The subsequent approval in August 2006 by the Government of India to the proposal sent by the Appellant was an event that occurred after the Balance Sheet Date that required adjustment of the liability in the accounts for the year ended 31 March 2006 as it provided additional evidence insofar as the estimation of the liability payable to the employees and officers of the Appellant was concerned.

7.4 As observed by the Apex Court in Bharat Earth Movers Ltd. vs. CIT (245 ITR 426) = 2002-TIOL-123-SC-IT-LB at page 431:

“The law is settled if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability……..”

7.5 On identical facts, the jurisdictional High Court in CIT vs. United Motors (India) Ltd (181 ITR 347) has allowed deduction in respect of a liability for which provision was made on account of change in service conditions of the workmen. In the said case, negotiations with the trade unions resulted in settlements in May 1972/ October 1972. The company paid amounts in May and June 1972, which were claimed as a deduction by the company in the AY 1972-73 relevant to the year ended 31 December 1971. Their Lordships at page 350, while allowing the deduction observed as follows:

“The assessee’s Board of Directors took note of this and made a provision of a sum of Rs. 1,00,000 in respect of the impending liability that arose, pursuant to the termination, on account of the revision, in the service conditions of the workmen,. This was done in the manner of a prudent businessman who knew that the service conditions would have to be bettered. The liability was rightly recognized as having accrued and it was provided for.”

7.6 In the circumstances, following the decisions of the Hon’ble Supreme Court in Bharat Earth Movers Ltd. vs. CIT (supra) and that of the Hon’ble Bombay High Court in CIT vs. United Motors (India) Ltd. (supra), the liability on account of the revision in pay- scales of employees having got accrued in the hands of the Appellant, the addition of Rs.6,57,00,000/- is hereby deleted.

7.7 Ground of appeal No. 8 is allowed.”

19. The Ld. D.R. while relying on the order of AO and the grounds raised, submitted that though the proposal was moved in December 2005 but actually the same was sanctioned by the Government of India in August 2006 meaning thereby that the liability has crystallized in the F.Y. 2006-07 and not in the current year as has been claimed by the assessee. The Ld. D.R. submitted that the wrong appreciation of facts and erroneous interpretation and application of AS-4 had resulted into understatement of profit of the assessee and thus justified the addition made by the AO.

20. The Ld. A.R., on the other hand, prayed before the Bench that a sum of Rs.6,57,00,000/- was arrears of salary and wages on the basis of proposal moved to the Government of India in December 2005 which was finally approved in August 2006. Therefore, following the AS-4, the liability was recognised in respect of an event after the date of balance sheet qua which the conditions were prevailing as on the date of balance sheet. The Ld. A.R. relied heavily on the order of Ld. CIT(A) and relied on a series of decisions namely CIT vs. United Motors India Ltd. 180 ITR 347 (Bom.-HC)Bharat Earth Movers Ltd. vs. CIT (245 ITR 426) (Delhi-HC) and he submitted that the Ld. CIT(A) has allowed the appeal of the assessee by relying on the above decisions. Finally, the Ld. A.R. submitted that since the liability was ascertained liability and therefore same was recognised as accrued liability in the year ended 31.03.2006 and in view the said reasoning the order of CIT(A) should be affirmed on this ground.

21. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has provided for the liability in respect of revision in the pay scale of officers and employees on the basis of a proposal moved to the Ministry in December 2005 for revision of pay scales which were based upon the approval of revision of pay scale of LIC employees in August/September 2005. In the case of the assessee the proposal was finally approved by the concerned Ministry in August 2006. The assessee provided for this liability in the accounts for the year ended 31.03.2006 on the ground that the same was ascertained liability and was correctly recognized as accrued liability in the year ended 31.03.2006. According to AS-4, the assessee has to recognize the liability in respect of an event after the balance sheet date if it relates to the condition prevailing on the date of balance sheet. Therefore, in the present case, the revision of pay scale was proposed in December 2005 on the lines of revision of pay scales of LIC by the Govt. of India and thus finally was approved in August 2006 by the Ministry of Commerce, Govt. of India. In our opinion, the Ld. CIT(A) has fully and comprehensively considered the facts of the case and passed a very detailed and reasoned order by holding that the liability provided was ascertained one and was correctly provided for during the year. The case of the assessee is also supported by the decision of the Hon’ble Bombay High Court in the case of CIT vs. United Motors India Ltd. (supra) and Bharat Earth Movers Ltd. vs. CIT (supra) wherein the similar issue has been decided in favour of the assessee. Therefore, there is no reason to deviate from the finding of the Ld. CIT(A) which appears to be correct as per the ratio laid down in the above two decisions. We are, therefore, inclined to uphold the order of the Ld. CIT(A) on this issue by dismissing the ground raised by the Revenue.

22. The issue raised in ground No.4 is against the deletion of addition of Rs.16,29,923/- by Ld. CIT(A) as made by the AO on account of ISO certification expenses by not treating it as capital expenditure in nature.

23. The facts in brief are that assessee incurred expenditure of Rs.16,29,923/- to obtain ISO certification to the effect that international documentation and processing are in line with the technical standards prevailing in the industry. According to the AO by incurring the expenditure on ISO certification, the assessee has been deriving the benefit of enduring nature and therefore has to be allowed over a period of time and accordingly the same were disallowed and added to the income of the assessee. However, depreciation was allowed @ 25% on the said expenditure.

24. The Ld. CIT(A) allowed the appeal of the assessee after considering the various contentions and arguments in the appellate proceedings by observing and holding as under:

“12.3 1 have considered the above submissions and the arguments of the Appellant. The ISO certification provides an affirmation that the internal processes that are followed by the Appellant are reliable and efficient. In the circumstances, the expenditure incurred on obtaining such certification represents expenditure incurred towards running the business and i s of revenue nature. No capital asset or any advantage of an enduring nature in the capital field is acquired by the Appellant. The expenditure incurred is therefore allowable and the addition is deleted.”

25. The Ld. D.R. submitted before the Bench that the Ld. CIT(A) has failed to appreciate the correct nature of the expenses which were incurred by the assessee on payment of fee to ISO certification, the benefit of which would accruing and flowing to the assessee over a period of time and thus the expenditure was of enduring nature. The Ld. D.R. further contended that considering all these facts, the AO treated the same as capital in nature and allowed the depreciation thereon which was a reasonable and plausible treatment as against the treatment given by the assessee by writing off and charging the whole amount in the current year. The Ld. D.R. further submitted that the Ld. CIT(A) has failed to appreciate the facts in proper perspective and wrongly allowed the appeal of the assessee on this issue. The Ld. D.R. prayed before the Bench that order of AO be restored on this issue.

26. The Ld. A.R., on the other hand, submitted that ISO certification fee is similar to audit fee who issues certificate based on the financial statements and records of the company. Similarly when a third party evaluates the internal processing and procedures qua claims and certifies in the insurance industry, it provides an affirmation to the world at large that internal processes and procedures are relevant, efficient and effective. In view of these facts, the Ld. A.R. argued that there is no capital asset which has been acquired or created by incurring these expenses but revenue in nature as it enables the assessee to conduct its operation in more seamless, smooth and efficient manner. The Ld. A.R. while relying heavily on the order of Ld. CIT(A) which in turn relied on the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT 124 ITR 1 (S.C) = 2002-TIOL-238-SC-IT. Finally, the Ld. A.R. prayed before the Bench that Ld. CIT(A)’s order may kindly be affirmed on this issue in view of the facts of the case and ratio laid down by the Apex Court.

27. We have heard the rival submissions of both the parties and perused the material on record. A perusal of the Ld. CIT(A)’s order reveals that the same is very well reasoned order passed after taking into account all the facts and legal aspects of the case. We concur with the conclusion drawn by the Ld. CIT(A) that the expenditure incurred by the assessee for ISO certification in connection with the certification of processing and procedures adopted by the assessee to be in accordance with the prevailing standards in the industry as a whole has not resulted into creation of assets or acquiring any fixed assets. We, therefore, uphold the order of Ld. CIT(A) by dismissing the ground raised by the Revenue.

28. In the result, appeal of the Revenue is dismissed.

(Order pronounced in the open court on 31.07.2018)

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