CAVINKARE PRIVATE LIMITED,CHENNAI V. ASSISTANT COMMISSIONER OF INCOME TAX, CHENNAI

ITA 41/CHNY/2021

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Cavinkare Private Limited appealed against the order of the Commissioner of Income Tax (Appeals), Chennai, which sustained various additions and disallowances made by the Assessing Officer during the assessment year 2007-08. The main issues revolved around the disallowance of depreciation on non-compete fees, disallowance under section 14A related to exempt income, and additions to book profits under section 115JB. The Tribunal examined precedents and the specifics of the agreements and financial practices of Cavinkare, leading to a decision that partly favored the appellant by reducing certain disallowances while upholding others.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 472428 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Other Referred Cases: Pentasoft Technologies Ltd vs DCIT, Techno Shares and Stocks Ltd vs CIT, Dresser Valve India Pvt Ltd vs ACIT, My Home Cement Industries Ltd vs DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A. SASIKUMAR
• Assessee Lawyers: T. BANUSEKAR
• Keywords: Revised return; Bad and doubtful debts; Depreciation; Earning of tax free income; Rule 8D; Provision of bad debts
• Section: 251; 13; 14A; 43B; 115JB

Judgement Text

" आयकर अपीलीय अिधकरण ‘डी’’ Ɋायपीठ चेɄई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ŵी मनोज क ुमार अŤवाल ,लेखा सद˟ एवं माननीय ŵी मनु क ुमार िगįर, Ɋाियक सद˟ क े समƗ। BEFORE HON’BLE SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER AND HON’BLE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER आयकरअपील सं./ ITA No.41/Chny/2021 (िनधाŊरणवषŊ / Assessment Year: 2007-2008) Cavinkare Private Limited, No.12, Poonthamallee Road, Ekkattuthangal, Chennai 600 032. [PAN: AAACB 3754B] Vs. The Assistant Commissioner of Income Tax, Central Circle 2(1) Chennai. (अपीलाथȸ/Appellant) (Ĥ×यथȸ/Respondent) अपीलाथȸ कȧ ओर से/ Appellant by : Shri. T. Banusekar, Advocate Ĥ×यथȸ कȧ ओर से /Respondent by : Shri. A. Sasikumar, CIT सुनवाई कȧ तारȣख/Date of Hearing : 15.01.2025 घोषणा कȧ तारȣख /Date of Pronouncement : 31.01.2025 आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member) This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (A), Chennai-18 [In short ‘CIT’(A)] in ITA No.58/17-18, dated 07.01.2021. The assessment was framed by the ACIT, Company Circle-I(3), Chennai for the assessment year 2007-08 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 31.12.2009. 2. The assessee has raised the following grounds of appeal:- ‘’1. For that the order of Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest 2 ITA No.41/Chny/2021 of the appellant and at any rate is opposed to the principles of equity. natural justice and fair play. 2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the provisions of section 14A read with Rule 8D are not invocable in the facts and circumstances of the case. 4. For that the Commissioner of Income Tax (Appeals) erred in confirming the disallowance u/s. 14A to the extent of dividend income earned during the year under consideration i.e. Rs.5,01,000/- 5. For that without prejudice to the above, the Commissioner of Income Tax (Appeals) ought to have restricted the disallowance to 2% of dividend income earned during the year under consideration. 6. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of depreciation of Rs.42, 18,750/- claimed on non-compete fee. 7. For that the Commissioner of Income Tax (Appeals) erred in concluding that there is no transfer of division as per the Memorandum of Understanding (MOU) & hence depreciation on non-compete fee is not allowable. 8. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Memorandum of Understanding (MOU) clearly contemplated payment of non-compete fee of Rs.3 crores as a part of the total consideration for the acquisition of the trademark \"RUCHI\". 9. For that the Commissioner of Income Tax (Appeals) erred in upholding the denial of weighted deduction u/s.35 of Rs.22,36,827/- claimed on motor car depreciation. 10. For that the Commissioner of Income Tax (Appeals) failed to appreciate the fact that the vehicle was exclusively used by the scientist who work in the R&D unit. 11. For that the Commissioner of Income Tax (Appeals) erred in sustaining the addition of Rs.47,70,078/- to the book profits u/s 115JB without appreciating that provision for performance linked incentive represents provision for ascertained liability. 12. For that the Commissioner of Income Tax (Appeals) erred in not granting relief with respect to addition made of Rs.41,42,500/- to the book profits u/s.115JB being provision for contingent liabilities reversed and credited to Profit & Loss account. 13. For that the appellant objects to the alteration of MAT credit u/s. 115JAA 14. For that the appellant objects to the levy of interest under sections 234C and 234D of Income Tax Act’’. 3. Brief facts of the case are that the appellant is engaged in the business of manufacturing of food products and chemicals and ding of cosmetics. The assessee company filed its return of income on 31.10.2007 admitting total income of Rs.1,78,93,696/- under the normal provisions of the Act and the book profit was Rs. 3 ITA No.41/Chny/2021 13,42,58,669/-. Subsequently, a revised return was filed on 20.3.2009 revising the book profit of Rs.12,50,40,765/- after reducing the fringe benefit tax paid. The case was selected for scrutiny and statutory notices were issued by the ld. Assessing Officer and the assessment was completed making the following additions / disallowances assessing the total income at Rs.3,27,82,087/- and raising a demand of Rs.14,78,525/-based on adjusted book profit of Rs.1,33,95,334/. In completing the assessment the Assessing Officer has disallowed the following:- (i) disallowed a sum of Rs. 14,01,564/-u/s.14A (ii) disallowed a sum of Rs.42,18,750/-being depreciation claimed on non- compete fee (iii) disallowed the claim of depreciation of Rs.70,31,250/- on goodwill (iv) disallowed the claim of weighted deduction u/s.35 to the extent of Rs 22,36,827/-. (v) Not excluded in the current year a sum of Rs.2,90,895/- being the provision for bad debts as on 31.03.2006 disallowed during AY 2006-07 (vi) addition of a sum of Rs.47,70,078 in computation of book profits u/s 115JB . (vii) addition of a sum of Rs.41,42,500 in computation of book profits u/s 115JB, being the provision for Sec 297 case reversed to revenue, disallowed previously. 4. The assessee carried the matter in appeal before the ld.CIT(A). The CIT(A) for the reasons stated in appellate order dated 07.01.2021 partly allowed the appeal filed by the assessee, where he has sustained the additions towards disallowance of depreciation on non-compete fees, disallowance of weighted deduction claimed u/s 35 towards vehicle used for R&D facility, partly disallowance u/s 14A and addition to book profits u/s 115JB of the Act dehors the provision for performance linked 4 ITA No.41/Chny/2021 incentive and addition to the book profits u/s 115JB being provision for the contingent liabilities reversed. 5. Ground Nos.6, 7 & 8: Disallowance of depreciation on non-compete fees:- At the outset, the ld. counsel for the assessee pointed out that this issue is covered by the order of the Tribunal in assessee’s own case for AYs 2005-06 & 2006-07 in ITA Nos.1597 & 1598/Chny/2018 dated 08.10.2021. This factual assertion of the ld. counsel is not disputed by the ld.CIT DR. The Tribunal in assessee’s own case referred supra held as under: ‘’4. The first issue that came up for our consideration from ground nos. 3 & 4 of assessee appeal is disallowance of depreciation on non-compete fees. The fact with regard to the impugned dispute are that the assessee has entered into a Memorandum of Understanding on 26.11.2003 for acquiring the trademark ‘Ruchi’ from M/s. Ruchi Food Products, a partnership firm and as per said MoU, the assessee has acquired trademark ‘Ruchi’ along with associate copyrights, goodwill, formulations and know-how relating to process, ingredient, technical or otherwise for manufacture/production of the products agreed under said trademark for consideration of Rs.15,20,00,000/-. The assessee had also entered into supplemental Memorandum of Understanding dated 15.04.2004 and bifurcated agreed consideration paid in terms of MoU dated 26.11.2003, into consideration paid for acquiring patents, copyrights, know-how/ formulation and non- compete fees and as per said agreement a sum of Rs.3 crores has been assigned for non-compete trade agreement. In pursuance to above two MoUs’ the assessee entered into a non-compete agreement dated 26.05.2004 and as per said agreement, the seller of Ruchi trademark was prevented from doing any business for a period of 10 years for which a consideration of Rs. 3 crores has been paid. The assessee has treated consideration paid in terms of non-compete agreement as an intangible asset falls under ‘any other business or commercial rights of similar nature’ as envisaged u/s. 32(1)(ii) of Act and claimed depreciation @ 25%. The AO has disallowed depreciation claimed on non-compete fee u/s. 32(1)(ii) of the Act on the ground that non-compete fees paid does not confer upon the assessee any right which would be used for the business, but it only restrains other person from carrying on his business in competition with the assessee business. Therefore, he observed that non-compete agreement between the parties restraining the other party in engaging in a competing business, does not in anyway result in any right which could be treated as an asset. The intangible asset defined in the depreciation table contemplates only rights acquired and capable of being exercised by the owner. Therefore, consideration paid for non-compete agreement is neither asset whether it is tangible or intangible which could be used for the business of the assessee and hence disallowed depreciation claimed on non-compete fees and added back to the total income of the assessee. 5. The Ld. AR for the assessee submitted that the Ld. CIT(A) has erred in sustaining addition made by the AO towards disallowance of depreciation on non-compete fees without appreciating the fact that non-compete fee paid by the assessee in terms of MoU for acquiring trademark Ruchi is part of main agreement of acquiring trademark and other technical know-how, in the nature of any other business or commercial rights of similar 5 ITA No.41/Chny/2021 nature eligible for depreciation u/s. 32(1)(ii) of the IT Act, 1961. The Ld. AR for the assessee further referring to the agreement between the parties submitted that after going through the clauses of MoU and non-compete agreement, the seller acknowledges that the food business intensely competitive and as such, the technical and business information including, but not limited to recipes, secret ingredients, preserving techniques was handed over to the assessee and further craved not to participate in, own, manage, operate or conduct any business or have any interest, either directly or indirectly in manufacturing or marketing or distributing or selling in any packaged food business either in India or anywhere in the world for the period of 10 years from the date of acquiring of assignment of the brand Ruchi which resulted in a kind of right in business similar to intangible asset defined u/s. 32(1)(ii) of the Act. He further referring to the decision of Hon’ble High Court of Madras in the case of Pentasoft Technologies Ltd vs DCIT, [2013] 96 DTR 223 submitted that Hon’ble Jurisdictional High Court has clearly held that non- compete fees paid is in the nature of any other business or commercial rights which is eligible for depreciation u/s. 32(1)(ii) of the Act. 6. The Ld. DR on the other hand strongly supporting the order of the CIT(A) submitted that non-compete fees is in the nature of negative right and it cannot be a commercial right of similar nature and the expression similar nature shall be relatable to patents, copy rights and trademark license or franchise or any other business asset. Therefore, she submitted that this negative right cannot be construed either as the license or as a commercial right to be eligible for deduction u/s. 32(1)(ii) of the Act, 1961. She further referring to decision of the Hon’ble Delhi High Court in the case of Sharp Business System vs CIT in ITA No. 492/12 dated 05.11.2012 submitted that intangibles spelt out in section 32(1)(ii) i.e., know-how, patents, copyright, trademark license/franchise as any other right of a similar kind it confers business or commercial or any other business or commercial right of a similar nature has to be intangible asset. The nature of this rights mentioned clearly spell out an element of exclusivity which ensures to the assessee as a sequel to the ownership. However, in the case of non-compete agreement, the advantage is a restricted one, in point of time and it does not necessarily confer any exclusive right to carry on the primary business activity. Therefore, said negative right cannot be construed as any other business or commercial right of similar nature which qualifies for depreciation u/s. 32(1)(ii) of the Act. 7. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered case laws cited by both parties. Admittedly, the assessee has paid non-compete fees in terms of an agreement which is carved out from main MoU between the parties for transfer of trademark called ‘Ruchi’. The assessee has entered into an agreement for acquiring trademark ‘Ruchi’ along with other bundle of rights and as per said MoU, the parties have entered into a non-compete agreement and restricted the seller of trademark not to have any kind of right in the business activity for a period of 10 years for which the assessee has paid consideration of Rs. 3 crores. The assessee has treated said consideration as intangible asset, being any other business or commercial right of similar nature and claimed depreciation u/s. 32(1)(ii) of the Act. The AO has disallowed depreciation claimed on non-compete fee on the ground that non-compete fee paid by the assessee neither gives rise to any kind of asset whether tangible or intangible which could be owned and transferable to third party. Therefore, he opined that non-compete fee paid by the assessee for restricting other party to restrain from doing similar kind of business activity for a particular period is nothing but a negative right which cannot be treated as intangible asset, know-how, patent, copy rights, trademark, license, franchise or any other business of the commercial right of similar nature. The AO has given his own reasons for denying depreciation claimed on non-compete fees and, according to him non-compete fee paid does not confer upon the assessee any right which would be used for the business. However, it only restrain the other person from carrying on his business in competition with the assessee’s business. Therefore, he opined that definition of 6 ITA No.41/Chny/2021 intangible u/s. 32(1)(ii), i.e., any other business or commercial rights of similar nature speaks about a kind of right which could be owned and transferable to the third party, but not to a negative rights called non-compete fee paid for restraining the other party from doing business. 7.1 We have given our thoughtful consideration to the reasons given by the AO in light of arguments of the assessee and we ourselves do not subscribe to reasons given by the AO, for the simple reason that non-compete fee is generally paid to a person who is in an advantageous position, because the payee is in a position where he can, if he so desires, create a hostile environment for the payer’s business either starting a competing business in the same field or by helping the growth of the payer’s competitor to ensure that such person does not indulge in such competing behavior, and to ensuring that the payer can carry on business without bothering about the competition. Further, non- compete agreement are generally for specific periods and after an expiry of the period, the advantage in the non-compete agreement disappears since the payee is no longer bound by it. Hence, we are of the considered view that non-compete fee paid in pursuant to any agreement for transfer of patents, know-how, copy rights or trademark is in the nature of any other business or commercial rights of similar nature, being intangible asset, which is eligible for depreciation u/s. 32(1)(ii) of the Act. The fact that non- compete fee has not been specifically mentioned in section 32(1)(ii) would not result in a negative right inference that depreciation is not allowable on non-compete fee, because of the presence of the phrase “or any other business of commercial rights of similar nature which shows that the legislature intended clause (ii) of section 32(1) to be an inclusive clause and not an exhaustive once restricted to the assets specifically mentioned therein. Therefore, we are of the considered view that there is a merit in the argument of the assessee that non-compete fee paid for restraining the other party from doing competitive business for a specific period in pursuant to a trademark agreement is intangible in the nature of any other business or commercial rights of similar nature which qualifies with depreciation u/s. 32(1)(ii) of the Act. This legal position if fortified by the decision of the Hon’ble Madras High Court in the case of Pentasoft Technologies Ltd vs DCIT, supra, where the Hon’ble Madras High Court considered relevant fact by following the decision of Supreme Court in the case of Techno Shares and Stocks Ltd vs CIT 327 ITR 323 held that non-compete fee paid by an assessee is in the nature of any other business or commercial right which is eligible for depreciation u/s. 32(1)(ii) of the Act. The Hon’ble High Court while deciding the issue, has laid down the ratio and held that under non-compete agreement the transferor had transferred all its rights in respect of the trademark and such right strengthen those rights under the said non-composite agreement which includes a non-compete clause by virtue of which, the transferor restrains from using the same trademark, copyrights etc. Therefore, the Hon’ble High Court held that non-compete clause under the agreement should be a supporting clause to the transferor of the copy rights and patents rather to strengthen the commercial right, which was transferred in favour of the assessee. A similar view has been taken by a Hon’ble Bombay High Court in the PCIT vs Ferromatic Milacron India Pvt Ltd, 2018, 99 Taxmann.com 154, where it has considered identical issue and held that non-compete fee is in the nature of any other business or commercial right of similar nature used in explanation to section 32(1)(ii) of the Act and thus, eligible for depreciation. As regard the case laws cited by the Ld. DR in the case of Sharp Business System s CIT 492/2012, although, the Hon’ble Delhi High Court taken a different view and held that non-compete fees is a kind of negative right which does not give rise to any kind of right which could be owned or transfer to third person similar to rights of any other kind of similar nature as mentioned in section 32(1)(ii). Although divergent views are expressed by two different High Courts, but because the Hob’ble Jurisdictional High Court of Madras has taken a view in favour of the assessee in the case of Pentasoft Technologies Ltd vs DCIT, we prefer to follow the Jurisdictional High Court decision which is binding in nature. 7 ITA No.41/Chny/2021 7.2 In this view of the matter and considering the ratio of various case laws, we are of the considered view that non-compete fee paid by the assessee in terms of Memorandum of Understanding for acquiring trademark is nothing but an intangible asset in the nature of any other business or commercial rights of similar nature which qualifies for depreciation u/s. 32(1)(ii) of the Act. Hence, we direct the AO to delete the additions made towards disallowance of depreciation claimed on non-compete fee’’. We find that the facts of the earlier years are similar to the facts of this year also. Hence, respectfully following the order of the Tribunal in assessee’s own case for AYs 2005-06 & 2006-07 in ITA Nos.1597 & 1598/Chny/2018 dated 08.10.2021 we also direct the AO to delete the additions made towards disallowance of depreciation claimed on non-compete fee. 6. Ground Nos.4 & 5: Disallowance u/s 14A:- At the outset, the ld. counsel for the assessee pointed out that this issue is covered by the order of the Tribunal in assessee’s own case for AYs 2005-06 & 2006-07 in ITA Nos.1597 & 1598/Chny/2018 dated 08.10.2021. This factual assertion of the ld. counsel is not disputed by the ld.CIT DR. The Tribunal in assessee’s own case referred supra held as under: ‘’10. The next issue that came up for our consideration from Ground No.7 of assessee appeal is disallowance of expenditure relatable to exempt income. The assessee has earned exempt income by way of dividend from mutual funds to the tune of Rs.11,31,040/-, but did not made any disallowance of expenditure relatable to exempt income. Therefore, the AO has determined disallowance of expenditure relatable to exempt income by disallowing 5% of exempt income as expenditure relatable to exempt income. 10.1 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining addition made by the AO towards disallowance of expenditure relatable to exempt income u/s.14A of the Act, @ 5% of exempt income without appreciating the fact that disallowance made by the AO is excessive. In this regard, he relied upon the decision of ITAT, Chennai in the case of TIL Healthcare Pvt. Ltd., vs. DCIT, ITA No.1808/Mds/2014. 10.2 The ld.DR on the other hand supporting order of the ld.CIT(A) submitted that when assessee is not maintaining separate books of accounts for investment activity, the AO has to determine expenditure relatable to exempt 8 ITA No.41/Chny/2021 income on estimation basis and thus, there is no error in disallowance computed by the AO. 10.3 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, prior to assessment year 2008-09, the provisions of Rule 8D was not applicable for determining disallowance of expenditure u/s.14A of the Act. It is also an admitted fact that prior to assessment year 2008-09, various Courts and Tribunals have directed the AO to estimate 2 - 3% of exempt income towards expenditure relatable to exempt income u/s.14A of the Act, depending upon facts of each case. The ITAT, Chennai in the case of TIL Healthcare Pvt. Ltd., supra, has considered an identical issue and restricted disallowance to the extent of 2% of exempt income instead of 5% as computed by the AO. Therefore, considering facts and circumstances of this case and also consistent with view taken by the Co-ordinate Bench in the case of TIL Healthcare Pvt. Ltd., we direct the AO to restrict disallowance of expenditure relatable to exempt income u/s.14A of the Act, to the extent of 2% of exempt income earned for the year’. We find that the facts of the earlier years are similar to the facts of this year also. Hence, respectfully following the order of the Tribunal in assessee’s own case for AYs 2005-06 & 2006-07 in ITA Nos.1597 & 1598/Chny/2018 dated 08.10.2021 we also direct the AO to restrict disallowance of expenditure relatable to exempt income u/s 14A of the Act, to the extent of 2% of exempt income earned for the year. 7. Ground Nos.8 & 9: Denial of weighted deduction u/s 35 claimed on motor car depreciation:- The ld. counsel for the assessee, at the outset, pointed out that this issue is covered by the order of the Tribunal in assessee’s own case for AYs 2005-06 & 2006-07 in ITA Nos.1597 & 1598/Chny/2018 dated 08.10.2021. The ld. counsel for the assessee also filed paper book containing (Pg 2-38) on the issue of claim weighted deduction u/s 35. Per contra, the ld.CIT DR placed reliance upon the order 9 ITA No.41/Chny/2021 of the Mumbai Tribunal as referred in the order of the ld.CIT(A) at para 16 has tried to distinguish the factual assertion of the ld. counsel. The Tribunal in assessee’s own case referred supra held as under: ‘8. The next issue that came up for our consideration from Ground No.5 of assessee appeal is disallowance of deduction claimed u/s.35 of the Act, towards expenditure incurred for Research & Development (R&D) purpose. The assessee has claimed 100% deduction towards two motor cars purchased and given to two staffs, who are working for R&D unit. The AO has denied deduction claimed u/s.35 of the Act, on the ground that the assessee has failed to prove exclusive use of vehicles for R&D purpose. 8.1The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining additions towards disallowance of deduction claimed u/s.35 of the Act, in respect of two motor vehicles given to staff of the assessee who are working for &D unit without appreciating the fact that once cars are given to staff, the purpose of use of such vehicle is immaterial. 8.2 The ld.DR on the other hand supporting order of the ld.CIT(A) submitted that in order to claim deduction for any expenditure u/s.35 of the Act, it is a precondition that such expenditure should be exclusively incurred for R&D purpose. Since, the assessee has failed to file necessary evidences to prove use of car for R&D purpose, the AO has rightly denied deduction u/s.35 of the Act. 8.3 We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The admitted fact was that the assessee had given cars to two staff who are working for R&D unit. In fact, the AO has not disputed claim of the assessee that cars were given to staff who are working at R&D unit. The only reason for denial of deduction is that the assessee has not furnished log book maintained by the R&D division to prove that vehicle has been exclusively utilized for R&D purpose. We have gone through reasons given by the AO, but could not subscribe to reasons given by the AO for the simple reason that, once having accepted the fact that cars were given to staff who are working for R&D unit, then the AO is erred in denial of deduction only for the reason that log book was not filed to prove use of vehicle exclusively for R&D purpose, because it is irrelevant whether vehicles are exclusively used for R&D purpose or other than R&D purpose, but as long as the staff are working for R&D unit, then it is as good as expenditure was incurred for R&D purpose. Therefore, we are of the considered view that the AO as well as the ld.CIT(A) were erred in denying deduction claimed u/s.35 of the Act, towards motor cars provided to staff and hence, we direct the AO to delete addition made towards disallowance of depreciation’. We find that the facts of the earlier years are similar to the facts of this year also. We have also perused the paper book filed (Pg 2-38) which supports the contention 10 ITA No.41/Chny/2021 of the ld.Counsel for the assessee. The facts of the Mumbai Tribunal order are different. In addition, respectfully following the order of the Tribunal in assessee’s own case for AYs 2005-06 & 2006-07 in ITA Nos.1597 & 1598/Chny/2018 dated 08.10.2021 we direct the AO to allow weighted deduction u/s 35 of the Act for this year also. 8. Ground No.12: Addition to the book profits u/s 115JB being provision for the contingent liabilities reversed:- At the outset, the ld. counsel for the assessee pointed out that the ld.CIT(A) has remanded back this issue to the file of the ld. AO to verify the Schedule filed alongwith the return of income. The ld. CIT(A) while remanding to AO held as under: ‘’26. I have perused the facts of the case and submission made by the appellant. The appellant has contended that the impugned provision reversed in the year under consideration has actually been included in the P&L and has produced copy of the Schedule of other income as per which one of the line items in the Schedule is provisions no longer required/bad debt written back amounting to Rs. 44,22,000/- comprising the impugned sum of Rs. 41,42,500/- and the excess provision of bad debts of Rs. 2,90,895/-. On careful consideration, there is prima-facie force in the contention of the appellant that the AO's addition results in subjecting the said sum to double taxation. In the circumstances, the AO is required to verify the Schedule filed along with the Return of income and to allow appropriate relief on being satisfied after providing opportunity to the appellant for that would meet the ends of justice both for the Revenue and for the appellant’’. Therefore, we find that the ld.CIT(A) is right in remanding back this to the AO for verification of the Schedule filed alongwith the return of income, hence we do not interference in the order of the ld. CIT(A) on this issue. 11 ITA No.41/Chny/2021 9. Ground No.11: Addition to book profits u/s 115JB without appreciating that the provision for performance linked incentive represents provision for ascertained liability: - The ld CIT(A) in its order stated as under: ‘’21.The AO in the assessment order observed as under: \"In the enclosure to Form 3CD under clause 21(1)(B), a sum of Rs. 47,70,078/- was reversed before the due date of filing the return and the same is added back in the memo of computation of total income. However, in the computation of book profits this amount was not considered for taxation. The performance linked incentive determined for the yar is Rs. 2,08,62,349/- and the amount pald out is Rs. 1,60,92,272/-. Therefore, to the extent of Rs. 47,70,078- the liability was unascertainable and in view of the same the balance provision was reversed. Hence the said amount of Rs. 47,70,078/- is considered for the purpose of computation of book profit u/s. 115JB 22. The AO during the appeal proceedings filed written submissions as under: \"Addition of sum of Rs 47.70.078 to book profits as unascertained liability The said amount constituted amount payable but not paid hence disallowed under section 43B for computation of total income. However no such disallowance is called for in computation of book profit u/s 115JB as the said sum of Rs 47,70,078/- is ascertained liability. PLI is part of CTC for all eligible employees It will be calculated as a percentage of basic salary. It is a kind of variable pay, which can vary depending upon the performance of the company and the employee. Provision for performance linked incentive will be made by 31st March of every year estimated at 80% of the sales target achieved for the respective year. Individual performance appraisal for the previous year will be done by April of the subsequent year. After the performance appraisal, the actual PLI will be determined on the following manner and declared and paid in June of the subsequent year Determination of actual quantum of Incentive (a) Sales Growth Factor (SGF): (Actual Sales/Targeted Sales) 100 (b) Profitability Factor (PF):-(Actual Profits/Targeted Profits) x 100 Individual Performance Rating (IPR): (Actual Rating/Maximum Rating)x (c) 100 Actual Incentive G grade ((a)+(0)+(c))/300 x (maximum eligible incentive) MN grade (d) 2) ((a)+(b))/2 ((c)+(d))/200 x (maximum eligible incentive) 12 ITA No.41/Chny/2021 For Assessment year 2007-08, provision made on 31.03.2007 hased on ascertained liability of Rs.2,08,72,349/- and the amount actually paid on 28.06.2007 was Rs. 1,60,92,271/-based on the amount declared by the board . The Assessing Officer has erroneously added the above sum wrongly treating the same as unascertained The word 'ascertain' has been defined in the Black's Law Dictionary Vith Edition 'to estimate and determine; to clear of doubt or obscurity. To ensure as a certainty It is important to note that the performance linked incentive is a known liability arrived at on the basis of performance of the eligible employees. In this regard we draw reference to the judgement of the Supreme court in the case of Bharat Earth Movers v CIT [2000] 245 ITR 428 (SC) wherein it was held as follows: So is the view taken in Calcutta Co. Ltd. vs CIT (1959) 37 ITR 1 (SC) wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one, it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability.\" Based on the above decision Honourable Income Tax Appellate Tribunal, Mumbai, in the case of Dresser Valve India Pvt. Lid. v. ACIT ITA No. 6464/Mum/2007 (copy enclosed) held as follows: Thus, although the provision are not allowable as deduction, certain provisions which are capable of estimation with reasonable certain without quantification are allowable as they are ascertainable. On finding that the actual quantification is not a legal necessary in matters of ascertainment of the gratuity', we are of the opinion that the provision of gratuity in the assessee's case is capable of being estimated with reasonable certainty and therefore, it is not a contingent or unascertained liability. Thus, it is an ascertained liability and the same falla outside scope of the provisions of clause (c) of the Explanation 1 to section 115JB warranting no addition to the 'book profits. In this regard we also draw inference to the judgement of Hon'ble Hyderabad Tribunal in the case of DCIT vs My home Cement Industries Ltd in ITA No. 1249/Hyd/2011 wherein it was held as follows: \"15. We have have both the parties and perused the record as well as gone through the Orders of the authorities below. We find that the issue is covered in favour of the assessee in the following decisions: 13 ITA No.41/Chny/2021 (1) CUT vs Eschjay Forgings P Ltd 251 ITR 15wherein the Apex Court held that the accounts prepared in accordance with the provisions of the Companies Act cannot be disturbed by the AO (ii) Apollo Tyrpes Ltd vs CIT 255 ITR 273(SC) wherein the Apex Court held that the accounts prepared in accordance with the provisions of the Companies Act cannot be disturbed by the AO. (iii)) CIT vs Helwett Packard India, 314 ITR 55 wherein it was held that the provision for gratulty cannot be added for the purpose of arriving at the books profit\" 6. ITA NOS. 932,933,934& 1032 & 1033/H11 and C.0.73/H/12 My Home Industries Lad (iv) CIT vs ILPEA Paramount Pvt. Ltd 336 ITR S4 wherein it is held that the provision for gratuity cannot be added. 16. In view of the ratios laid down in the aforesaid courts, we hold that the provision for gratuity and provision for bonus cannot be added for the purpose of arriving at the book profit u/s. 115.JB of the IT Act\". The provision for performance linked incentive payable is a definite liability which is provided for on the basis of an estimate arrived at based on performance of eligible employees as on 31.03.2013 and actual quantification and payment is done at a later date. Applying the ratio of the above decisions, such a provision is beyond doubt, an ascertained liability and cannot be added to book profits under explanation(c) of Section 115JB as unascertained liability. It is most humbly prayed that this respected authority may be pleased to direct the Assessing Officer to delete the addition of said sum of Rs 47,70,078/-\". Reasons for Decision:- 23.1 have gone through the facts of the case. The appellant has contended that the provision for performance linked incentive payable is not a contingent liability but is a definite liability that has been estimated on the basis of sales growth factor, profitability factor etc. However, the appellant has not demonstrated the reasonableness of the provision and the estimate said to have been made on the basis of certain factors was done scientifically. It is apposite to mention that the Hon'ble Supreme Court in the case of Apollo Tyres Ltd vs CIT 255 ITR 273(SC) has not prohibited adjustments to Sec. 115JB and in fact has ruled that only adjustments that do not fall within the Explanation to Sec. 115JB should not be made. In the instant case, as I am of the view that the provision is unascertained liability, I do not find any infirmity in the decision of the AO. Accordingly, the appellant's ground is dismissed’. Having gone through the entire reasons of the ld.CIT(A), we do not find any infirmity calling interference in the order of the ld. CIT(A) where the appellant has not demonstrated the reasonableness of the provision and how on the basis certain 14 ITA No.41/Chny/2021 factors estimate was done scientifically. Hence, we upheld the addition on this account. 10. In result, we partly allow the appeal of the assessee in terms of our above order. Order pronounced in open Court on 31st day of January, 2025 at Chennai. Sd/- Sd/- (मनोज क ुमार अŤवाल) (मनु क ुमार िगįर) (MANOJ KUMAR AGGARWAL) लेखा सद˟ / ACCOUNTANT MEMBER (MANU KUMAR GIRI) Ɋाियक सद˟ / JUDICIAL MEMBER चेɄई Chennai: िदनांक Dated : 31-01-2025 KV आदेश कȧ ĤǓतͧलͪप अĒेͪषत /Copy to : 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3. आयकरआयुƅ/CIT, Chennai. 4. िवभागीयŮितिनिध/DR 5. गाडŊफाईल/GF "