Indian Railway Finance Corporation Ltd., New Delhi V. DCIT (LTU), New Delhi

ITA 4069/DEL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2759 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 12-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 18-07-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KRISHNAN SAMPATH
• Keywords: Depreciation; Earning of tax free income; Tax effect
• Section: 43B; 143(3); 14A; 115JB; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : C , NEW DELHI BEFORE SH. I.C. SUDHIR , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 3992 /DE L/ 2014 ASSESSMENT YEAR: 2010 - 11 DCIT(LTU) , NBCC PLAZA, PUSHP VIHAR, SECTOR - III, NEW DELHI VS. INDIAN RAILWAY FINANCE CORPORATION LTD., EAST TOWER, UG FLOOR, NBCC PLACE, BHISHAM PITAMAH MARG, LODHI ROAD, NEW DELHI PAN : AAACI0681C (APPELLANT) (RESPONDENT) AND C.O. NO. 100/DEL/2015 [IN ITA NO. 3992/DEL/2014 ASSESSMENT YEAR: 2010 - 11 INDIAN RAILWAY FINANCE CORPORATION LTD., EAST TOWER, UG FLOOR, NBCC PLACE, BHISHAM PITAMAH MARG, LODHI ROAD, NEW DELHI VS. DCIT(LTU), NBCC PLAZA, PUSHP VIHAR, SECTOR - III, NEW DELHI PAN : AAACI0681C (APPELLANT) (RESPONDENT) DEPARTMENT BY SMT. RACHNA SINGH, CIT(DR) ASSESSEE BY SH. KRISHNAN SAMPATH, ADV. DATE OF HEARING 12.06.2017 AND 2 ITA NO. 4069/DEL/2014 ASSESSMENT YEAR: 2010 - 11 INDIAN RAILWAY FINANCE CORPORATION LTD., EAST TOWER, UG FLOOR, NBCC PLACE, BHISHAM PITAMAH MARG, LODHI ROAD, NEW DELHI VS. DCIT(LTU), NBCC PLAZA, PUSHP VIHAR, SECTOR - III, NEW DELHI PAN : AAACI0681C (APPELLANT) (RESPONDENT) ASSESSEE BY SH. KRISHNAN SAMPATH, ADV DEPARTMENT BY SH. ATIQ AHMA D, SR.DR DATE OF HEARING 14.06.2017 DATE OF PRONOUNCEMENT 2 4 . 0 7 . 2 0 1 7 ORDER PER O.P. KANT , A. M. : THESE CROSS APPEALS OF THE R EVENUE AND THE ASSESSEE RESPECTIVELY AND THE CROSS OBJECTION OF THE ASSESSEE ARE DIRECTED AGAINST ORDER DATED 31/04/2014 PASSED BY THE COMMISSIONER OF INCOME - TAX ( APPEALS) - LTU, NEW DELHI [IN SHORT THE CIT - (A) ] IN RELATION TO ASSESSMENT YEAR 2010 - 11. THE ISSUES RAISED IN THESE CROSS APPEALS AND THE CROSS OBJECTIONS ARE I NTERCONNECTED , AND THE REFORE , SAME WERE HEARD TOGETHER AND DISPOSED OFF BY THIS CONSOLIDATED ORDER. 2. THE G ROUNDS OF APPEAL RAISED BY THE R EVENUE IN ITA NO. 3992/DEL/2014 ARE REPRODUCED AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED C IT(A) HAS ERRED IN RESTORING BACK THE ISSUE TO THE AO WITH THE DIRECTION TO TREAT THE AMOUNT OF RS.1901.73 CRORES AS FINANCE 3 LEASE INSTEAD OF OPERATIONAL LEASE AFTER VERIFYING THE CHART OF LEASE AS FOR A.Y. 1997 - 98. 2. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND OR VARY FROM THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 3. THE G ROUNDS RAISED BY THE ASSESSEE IN CROSS OBJECTION NO. 100/DEL/2015 ARE REPRODUCED AS UNDER: 1. (A) THE LD. ASSESSING OFFICE R HAS ERRED IN CONCLUDING THAT THE LEASE TRANSACTION OF THE ASSESSEE IS AN OPERATING LEASE, IGNORING THE FACTS AND CIRCUMSTANCES OF THE CASE THAT THE ASSESSEE COMPANY IS ENGAGED IN LEASING ROLLING STOCK ASSETS TO MINISTRY OF RAILWAY, WHEREIN THE RISKS AND REWARDS INCIDENTAL TO OWNERSHIP OF LEASED ASSETS SUBSTANTIALLY VEST WITH THE LESSEE, HENCE THIS IS A FINANCE LEASE AS PER AS - 19. (B) FURTHER THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS. 1901.73 CRORE ON ACCOUNT OF CAPITAL RECOVERY ON LEASED ASSETS TO LEASE INCOME BY TREATING IT AS AN OPERATING LEASE, ON THE BASIS OF SURMISES AND CONJECTURE WITHOUT UNDERSTANDING THE SUBSTANCE OF THE LEASE TRANSACTION OF THE ASSESSEE, IGNORING THE FACT THAT THE ASSESSEE HAS ALREADY ADDED RS. 2538.56 CRORE ON ACCOUNT OF DEPRECIATION UNDER COMPANIES ACT, SINCE IT IS A FINANCE LEASE TRANSACTION. (C) THE SIMILAR ADDITION IN A.Y. 2004 - 05, 2006 - 07, 2007 - 08, 2008 - 09, 2009 - 10 86 2010 - 11 IN THE CASE OF ASSESSEE (IRFC) HAS SINCE BEEN DELETED BY HON BLE CIT (A). THE DEPARTMENT H AD APPEALED BEFORE HON BLE ITAT FOR THE ASSTT. YEAR 1997 - 98 TO 2003 - 04, 2005 - 06 TO 2009 - 10 RAISING SIMILAR GROUND OF APPEAL WHICH HAS SINCE BEEN ALLOWED IN FAVOUR OF THE ASSESSEE (IRFC) BY HON BLE ITAT. FURTHER, THE DEPARTMENT HAD APPEALED BEFORE HON BLE DELHI HIGH COURT FOR THE ASSTT. YEAR 2001 - 02, 2007 - 08, 2008 - 09 8& 2009 - 10 RAISING SIMILAR GROUND OF APPEAL WHICH HAS SINCE BEEN ALLOWED IN FAVOUR OF THE ASSESSEE (IRFC) BY HON BLE DELHI HIGH COURT VIDE ITA 1189/2011, ITA 103/2015, ITA 104/2015, ITA 105/201 5, ITA 106/2015. 2. THE ASSESSEE RESERVES HIS RIGHT TO ADD OR DELETE ANY GROUNDS OF APPEAL AT THE TIME OF HEARING. 4 4. THE G ROUNDS RAISED IN APPEAL BY THE ASSESSEE IN ITA NO. 4069 /DEL/2014 ARE REPRODUCED AS UNDER: 1. THE LD. CIT (APPEALS) - LTU HAS ERRED IN UPHOLDING THE ADDITION OF RS. 99,925/ MADE BY THE ASSESSING OFFICER U/S 14A OF THE INCOME TAX ACT 1961 WHILE COMPUTING TOTAL INCOME IGNORING THE FACT THAT NO EXPENSES HAVE BEEN INCURRED FOR EARNING DIVIDEND INCOME ON THE BASIS OF SURMISES AND CONJ ECTURE. 2. THE LD. CIT (APPEALS) - LTU HAS ERRED IN UPHOLDING THE ADDITION OF RS. 99,925/ MADE BY THE ASSESSING OFFICER WHILE CALCULATING THE BOOK PROFIT U/S 115JB COMPUTED U/S 14A OF THE INCOME TAX ACT 1961 IGNORING THE FACT THAT NO EXPENSES HAVE BEEN IN CURRED FOR EARNING DIVIDEND INCOME ON THE BASIS OF SURMISES AND CONJECTURE. 3. THE LD. CIT (APPEALS) - LTU HAS ERRED IN NOT ALLOWING COMPLETE RELIEF OF DISALLOWANCE OF RS. 12,28,000/ - MADE BY ASSESSING OFFICER ON ACCOUNT OF PRIOR PERIOD EXPENDITURE WHILE COMPUTING TOTAL INCOME (INSTEAD ALLOWED PARTIAL RELIEF OF RS. 11.06 LACS) IGNORING THE FACT THAT NO EXPENSES HAVE BEEN CLAIMED IN EARLIER YEAR AND NO BENEFIT HAS BEEN CLAIMED, ON THE BASIS OF SURMISES AND CONJECTURE. 4. THE LD. CIT (APPEALS) - LTU HAS ER RED IN CONFIRMING THE ADDITION OF RS.69,000/ - MADE BY THE ASSESSING OFFICER BEING PROVISION FOR LEAVE TRAVEL ASSISTANCE WHILE CALCULATING BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT, 1961 ON THE BASIS OF SURMISES AND CONJECTURE. 5. THE LD. CIT (APPEALS) - LTU HAS ERRED IN CONFIRMING THE ADDITION OF RS. 6,35,000/ - MADE BY THE ASSESSING OFFICER BEING PROVISION FOR GRATUITY WHILE CALCULATING BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT, 1961 ON THE BASIS OF SURMISES AND CONJECTURE. 6. THE ASSESSEE RESERVES IT S RIGHT TO ADD OR DELETE ANY GROUNDS OF APPEAL AT THE TIME OF HEARING. 5. THE FACTS IN BRIEF OF THE CASE ARE TH AT THE ASSESSEE COMPANY, A GOVT. OF INDIA UNDERTAKING, DEALS IN LEASING AND FINANCE ACTIVITY EXCLUSIVELY FOR INDIAN RAILWAYS. THE ASSESSEE COMP ANY WAS ENGAGED IN LEASING ROLLING STOCK ASSETS TO THE MINISTRY OF RAILWAYS ON A SINGLE CLIENT 5 RELATIONSHIP BASIS. THE ASSESSEE RAISES FUNDS BY WAY OF ISSUE OF TAXABLE/TAX - FREE BONDS AND THROUGH LOANS FROM BANKS ETC. T HE ASSESSEE EARNS INCOME FROM LEASE RE NT AND INCOME ON DEPOSITS AND INVESTMENTS. 5.1 FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN ELECTRONICALLY ON 29/09/2010 DECLARING TOTAL INCOME OF RS. NIL AND BOOK PROFITS OF RS.788,21,03, 248/ - UNDER SECTI ON 115JB OF THE I NCOME - T AX ACT, 196 1 (IN SHORT THE ACT ). THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED AND COMPLIED WITH. THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED ON 28/02/2013 AFTER MAKING VARIOUS ADDITIONS UNDER THE NORMAL PROVISIONS OF THE A CT AS WELL AS UNDER SECTION 115 JB OF THE ACT. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE CIT - (A) , WHO PARTLY ALLO WED THE APPEAL. AGGRIEVED, THE R EVENUE FILED APPEAL, WHEREAS THE ASSESSEE FILED THE CROSS OBJECTION TO THE APPEAL OF TH E R EVENUE, AS WELL AS FILED A SEPARATE APPEAL , RAISING THE GROUNDS AS REPRODUCED ABOVE. ITA NO. 3992/DEL/2014 & C . O . NO. 100/DEL/2015 6. FIRS T WE TAKE UP THE APPEAL OF THE R EVENUE ALONGWITH CROSS OBJECTION OF THE ASSESSEE. 7. THE SOLE ISSUE RAISED IN TH E APPEAL OF THE R EVENUE AS WELL AS IN THE CROSS OBJECTION S IS RELATED TO LEASING ROLLING STOCKS ASSETS BY THE ASSESSEE TO THE MINISTRY OF RAILWAYS. THE ASSESSING OFFI CER HELD THE LEASE TRANSACTION A S OPERATING LEAS E AND MADE AN ADDITION OF RS. 1 901.73 CRORES ON ACCOUNT OF CAPITAL RECOVERY OF THE ASSETS TO LEASE INCOME , TREATING IT AS ON OPERATING LEASE. THE LD. CIT - (A) HELD THAT LEASE TRANSACTION A S FINANCE LEASE AND ALLOWED THE APPEAL OF THE ASSESSEE. 7.1 AT THE OUTSET, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT ISSUE IN DISPUTE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HON BLE DELHI HIGH COURT FOR ASSESSMENT YEAR 2001 - 02, 2007 - 08, 2008 - 6 09 AND 2009 - 10. ON THE OTHER HAND, THE LD. CIT DR, RELIED ON THE ORDER OF THE ASSESSING OFFICER, HOWEVER COULD NOT CONTROVERT THE SUBMISSION OF THE LD. COUNSEL OF THE ASSESSEE. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE LD. CIT - (A) , FOLLOWING THE DIRECTION OF THE ITAT (IN SHORT THE TRIBUNAL ) IN EARLIER YEARS, ACCEPTED THE LEA SE TRANSACTION OF THE ASSESSEE A S FINANCE LEASE TRANSACTION AND RESTORE D THE MATTER TO THE ASSESSING OFFICER FOR VERIFICATION OF FACTS OF LEASE CHARGES . THE RELEVANT FINDING OF THE LD. CIT - (A) IS REPRODUCED AS UNDER: 5.3 FROM THE STATEMENT OF FACTS AND THE APPELLANT S ARGUMENTS, IT IS SEEN THAT THE ABOVE ISSUE HAS BEEN DECIDED BY HON BLE ITAT IN ITA NOS. 699, 359,3357 AND 2109/DEL/2004 FOR THE ASSESSMENT YEAR 1997 - 98, 1998 - 99, 1999 - 2000 AND 2000 - 01 VIDE THEIR ORDER DATED 08.08.2008 BY OBSERVING AS UNDER: ' THE CHART FOR 30 YEARS OF OPENING BALANCE IN THE PRESENT YEAR I.E. A. Y. 1997 - 98 IS SUBMITTED BY THE LD. A.R. OF THE ASSESSEE. AS PER THE SAME, OPENING BALANCE OF LEASED ASSETS IS RS.126,256.37 LACS, RATE OF DEPRECIATION AS PER COMPANIES ACT IS 4.75%, AND RATE OF INTEREST IS 14.97%. THE TOTAL FOR 30 YEARS OF DEPRECIATION IS RS.126,256.42 LACS AND FINANCE INCOME IS RS.157,820.46 LACS. TOTAL OF CAPITAL RECOVERY IS RS.126,256.37 LAKHS AND TOTAL OF LEASE EQUALIZATION IS NIL. SINCE, IN THE PRESENT CASE ALSO, AS PER THIS CHART, EVEN AFTER DEDUCTION OF F INANCE INCOME 14.97% PA., THE FULL VALUE OF THE COST OF ASSETS I.E., RS.162,256.37 LACS IS FULLY RECOVERED IN LEASE PERIOD OF 30 YEARS AND HENCE, IT IS A CASE OF FINANCE LEASE AS PER THE GUIDELINES ISSUED BY ICAI. IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCE MENTS CITED BY LD. A.R. OF THE ASSESSEE, WE FIND NO REASON FOR NOT ACCEPTING THE BASIS AS SUGGESTED BY ICAI IN THESE GUIDELINES FOR DECIDING THE CHARACTER OF LEASE IN THE PRESENT CASE AS FINANCE LEASE. HOWEVER, THE ASSESSEE COMPANY HAS GIVEN THIS CHART FOR OPENING VALUE OF LEASE ASSETS IN THE ASSESSMENT YEAR 1997 - 98, WHICH IS EXAMINED BY US. SIMILAR CHART FOR ASSETS GIVEN ON LEASE DURING A.Y. 1997 - 98 AND IN SUBSEQUENT YEARS IS NOT FURNISHED TO US. HENCE, THE A.O. SHOULD VERIFY THOSE CHARTS AND IF THIS CONDI TION IS SATISFIED, ALL THOSE TRANSACTIONS SHOULD ALSO BE ACCEPTED AS FINANCE LEASE TRANSACTIONS ' 7 SIMILARLY, IT IS SEEN THAT THIS ISSUE HAS BEEN DEALT BY THE HON'BLE ITAT DELHI BENCH - C IN THE ITA NOS. 982 & 1714/DEL/2011 FOR ASSESSMENT YEAR 2003 - 04 AN D 2005 - 06 WHEREIN THE SIMILAR DIRECTIONS HAVE BEEN GIVEN TO A.O. 5.4 SINCE IN THE CURRENT YEAR, THE FACTS ARE SAME AS IN EARLIER YEARS, HENCE FOLLOWING THE DIRECTIONS OF HON'BLE ITAT IN THE MATTER, I RESTORE BACK THIS ISSUE TO THE FILE OF AO WITH THE DIRE CTIONS TO VERIFY THE CHART OF LEASE AS FOR ASSESSMENT YEAR 1997 - 98 AND IF IT IS SIMILAR, THEN THE TRANSACTION SHOULD BE ACCEPTED AS FINANCE LEASE TRANSACTION. GROUND NO. L IS THEREFORE ALLOWED FOR STATISTICAL PURPOSES. 9. T HE HON BLE DELHI HIGH COURT IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2001 - 02 REPORTED IN 362 ITR 548 (DELHI) CO NSIDERED THE LEASE TRANSACTION A S FINANCE LEASE . THE RELEVANT FINDING S OF THE HON BLE DELHI HIGH COURT ARE REPRODUCED AS UNDER: 6. TO UNDERSTAND AND APPRECIATE THE CON TENTIONS, CERTAIN UNDISPUTED FACTS AND THE LEGAL POSITION MAY BE NOTICED. AS NOTICES IN VIRTUAL SOFT SYSTEMS LTD. (SUPRA), LEASE TRANSACTIONS MAY TAKE VARIOUS HUES AND COLOURS . IN THE PRESENT CASE, WE ARE CONCERNED ONLY WITH FINANCIAL LEASES AND NOT WITH AN OPERATIONAL LEASE. IN SUCH CASES, THE LEASE RENT INCLUDES THE CAPITAL AS WELL AS PURCHASE PRICE AND AT THE END OF THE LEASE TENURE THE LESSEE ACQUIRES/TAKES THE ASSET AS THE OWNER. THE INCOME EARNED BY WAY OF LEASE RENTAL WAS THE INTEREST (REVENUE EARNING) AND THE AMOUNT FINANCED (CAPITAL FI NANCED) BUT DURING THE TERMS OF THE LEASE, AS THE RESPONDENT CONTINUED TO BE THE OWNER HE ALSO ENJOYED AND CLAIMED THE BENEFIT OF DEPRECI ATION (AN UNDISPUTED POSITION AS THE CLAIM OF DEPRECIATION WAS NOT QUESTIONED). DEPRECIATION WAS DULY DEBITED AND ACCOUNTED IN THE PROFIT AND LOSS ACCOUNT. 10. FURTHER , IN PARA - 14 OF THE DECISION, THE HON BLE HIGH COURT HELD THAT LEASE EQUALIZATION CHA RGES SHOULD NOT BE DISALLOWED. THE RELEVANT FINDING OF THE UNABLE HIGH COURT IS REPRODUCED AS UNDER: 14. A PERUSAL OF THE BALANCE - SHEET AND THE PROFIT AND LOSS ACCOUNT FOR THE ASSESSMENT YEAR 2000 - 01 REFLECTS THE SAID POSITION. IN THE SAID YEAR, THE ASSES SEE HAD RECEIVED LEASE RENTALS OF RS. 2,700.48 CRORES, FROM WHICH LEASE EQUALIZATION ACCOUNT OF RS. 142,03 CRORES WAS REDUCED. THE PAID UP CAPITAL OF THE RESPONDENT COMPANY HELD 8 BY THE PRESIDENT OF INDIA AND HIS NOMINEES WAS RS. 232 CRORES . THE ADDITION OF THE FIXED ASSETS IN THE SAID YEAR WAS RS. 2,273 CRORES WHICH IS REFLECTIVE AS THE ADDITION TO THE QUANTUM OF ROLLING STOCK. IF THE PURCHASE PRICE OF THE ROLLING STOCK STANDS SUBJECTED TO REVENUE DEDUCTION, WOULD HAVE ITS OWN CONSEQUENCES AND LEAD TO ABNORMAL FINANCIAL RESULTS AND ABSURDITIES. THE BALANCE - SHEET RECORDS THAT THE TOTAL ROLLING STOCK AGGREGATE WAS RS. 19,771.35 CRORES. THE DEPRECIATION CLAIMED (WHICH MAY INCLUDE CERTAIN FIXED ASSETS ALSO WHICH WERE NOT SUBJECT MATTER OF FINANC E LEASES) WAS RS. 5,352.57 CRORES. CLEARLY, THEREFORE, THE PURCHASE VALUE OF THE LEASED ASSETS DID NOT FIND REFLECTION OR DEDUCTION IN THE PROFIT AND LOSS ACCOUNT. LEGAL RATIO OF VIRTUAL SOFT SYSTEMS LTD. (SUPRA) IS THAT AS LONG AS THE ASSESSEE DOES NOT IN DULGE IN ANY MANIPULATION OF THE FIGURES AND THE CAPITAL COST, IRR, ETC., ARE COMPUTED IN ACCORDANCE WITH THE ACCOUNTANCY STANDARDS AND NO ERROR OR CAN BE FOUND, LEASE EQUALIZATION CHARGE SHOULD NOT BE DISALLOWED. 11. RESPECTFULLY, FOLLOWING THE ABOVE DECISION OF THE HON BLE HIGH COURT AND THE DECISION OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE , WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO ERROR IN THE ORDER OF THE LD. CIT - (A) . WE ORDER ACCORDINGLY . THUS , TH E GROUNDS OF THE APPEAL OF THE R EVENUE A RE DISMISSED AND THE GROUND S OF THE CROSS OBJECTION OF THE ASSESSEE ARE ALLOWED. ITA NO. 4069/DEL/2014 12. NOW, WE TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO. 4069/DEL/2014. 13. THE GROUND NO. 1 IN THE APPEAL OF THE ASSESSEE IS RELATED T O DISALLOWANCE UNDER SECTION 14 A OF THE ACT UNDER THE NORMAL PROVISIONS OF THE ACT. 1 3 .1 BEFORE THE ASSESSING OFFICER , THE ASSESSEE SUBMITTED THAT IT HAS NOT INCURRED ANY EXPENDITURE INCLUDING ANY DIRECT EXPENDITURE FOR E ARNING THE EXEMPT INCOME OF RS.7,53, 960/ - SHOW N I N THE COMPUTATION OF INCOME. THE ASSESSING OFFICER WAS DISSATISFIED WITH THE CLAIM OF THE ASSESSEE AND ACCORDINGLY , HE INVOKED R ULE 8D OF THE INCOME - TAX R ULES, 1962 (IN 9 SHORT THE RULES ) AND COMPUTED DISALLOWANCE OF RS.99,925/ - . THE LD. CIT - (A) UPHELD THE DISALLOWANCE. 1 3 .2 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE RELIED ON THE SUBMISSION MADE BEFORE THE LD. CIT - (A) AND SUBMITTED THAT INVESTMENTS WERE MADE IN EARLIER YEARS AND DURING THE YEAR UNDER CONSIDERATION, NO EXPENSES WERE INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME. THE LD. COUNSEL RELIED ON THE DECISION OF THE HON BLE HIGH COURT OF GUJARAT IN THE CASE OF COMMISSIONER OF INCOME T AX - III VS. GUJARAT NARMADA VALLEY FERTILISERS COMPANY LIMITED , REPORTED IN (2014) 42 TAXMANN.COM 270 (GUJARAT). 1 3 .3 THE LD. CIT ( DR ), ON THE OTHER HAND , RELIED ON THE ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT IN TERMS OF SECTION 14 A(3) OF THE ACT , TH E DISALLOWANCE UNDER SECTION 14 A(2) OF T HE ACT READ WITH RULE 8D OF INCOME TAX R ULES IS REQUIRED TO BE MADE EVEN IN THE CASES WHERE THE ASSESSEE CLAIM S THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME , WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. ACCORDINGLY , SHE SUBMITTED THAT THE DISALLOWANCE MIGHT BE UPHELD. 1 3 .4 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE REL EVANT MAT ERIAL ON RECORD. THE SECTION 14 A(3) OF THE ACT HAS CLEARLY SPECIFIED THAT WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT, THE PROVISIONS OF S UB - SECTION (2) SHALL APPLY. ACCORDING TO SECTION 14 A(2), WHEREVER THE ASSESSING OFFICER IS DISSATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT, HE SHALL DETERMINE THE AMOUNT OF SUCH EX PENDITURE INCURRED IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. THE SAID METHOD HAS BEEN PRESCRIBED IN RULE 8D OF THE INCOME TAX R ULES, 1962. 10 1 3 .5 WE FIND THAT IN THE INSTANT CASE, THE ASSESSING OFFICER HAS RECORDED DISSATISFACTION WITH THE CLAIM O F THE ASSESSEE THAT NO EXPENSES WERE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT 1 3 .6 I N OUR OPINION, ONCE THE ASSESSING OFFICER RECORDED THE DISSATI SFACTION AND INVOKED SECTION 14 A(2) OF THE ACT, HE IS DUTY - BOUND TO COMPUTE THE DISALLOWANCE IN TERMS OF RULE 8D OF THE R ULES. IN THE CASE OF GUJARAT NARMDA VALLEY F ERTILISERS COMPANY LIMITED (SUPRA) THE ISSUE WAS THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WERE MUCH LARGER AS COMPARED TO THE INVESTMENT I N MUTUAL FUNDS AND SHARES AND THEREFORE , THE ASSESSING OFFICER WAS HELD WRONG IN DISALLOWING INTEREST EXPENDITURE UNDER SECTION 14A OF THE ACT. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY FACTS WHICH COULD ESTABLISH THAT THE RA TIO OF THE HON BLE HIGH COURT WOULD APPLY IN THE CASE. IN VIEW OF ABOVE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT - (A) ON THE ISSUE IN DISPUTE AND ACCORDINGLY , THE GROUND NO. 1 OF THE APPEAL IS DISMISSED. 1 4 . IN GROUN D NO. 2 OF THE APPEAL, THE ASSESSEE HAS RAISED THE ISSUE THAT WHILE CALCULATING TH E BOOK PROFIT UNDER SECTION 115JB OF THE ACT , DISALLOWANCE RELATED TO EXEMPT INCOME CANNOT BE MA DE FOLLOWING SECTION 14 A READ WITH R ULE 8D OF THE R ULES. THE ASSESSING OFFICER MADE DI SALLOWANCE OF THE AMOUNT OF RS.99, 925/ - AS COMPUTED UNDER SECTION 14A READ WITH R ULE 8D OF THE R ULES , FOR AMOUNT OF EXPENDITURE RELATED TO EXEMPTED INCOME IN TERMS OF CLAUSE (F) OF E XPLANATION - 1 TO THE SECTION 115 JB(2) OF THE ACT. THE LD. CIT - (A) U PHELD THE DISALLOWANCE FOLLOWING THE DECISION OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF ESQURE PRIVATE LIMITED VERSUS DCIT (ITA NO. 5688/MUM/2011). 1 4 .1 WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE. WE FIND THAT THE ISSUE H AS BEEN DECIDED RECENTLY BY THE SPECIAL 11 BENCH OF THE TRIBUNAL IN THE CASE OF VIREET I NVESTMENT (ITA NO. 502/DEL/2012) IN ASSESSMENT YEAR 2008 - 09, WHEREIN IT IS HELD THAT COMPUTATION UNDER CLAUSE (F) OF EXPLANATION - 1 TO SECTION 115 JB(2) OF THE ACT IS TO BE MADE WITHOUT RESORTING TO THE COMPUTATION A S CONTEMPLATED UNDER SECTION 14 A READ WITH RULE 8D OF THE RULES. THUS , RESPECTFULLY FOLLOWING THE ABOV E DECISION OF THE SPECIAL BENCH OF TRIBUNAL, WE SET ASIDE THE DECISION OF THE LD. CIT - (A) AND DELETE THE DISALLOWANCE. THE GROUND NO. 2 OF THE APPEAL IS ACCORDINGLY ALLOWED. 1 5 . IN GROUND NO. 3, THE ASSESSEE IS AGGRIEVED WITH THE ADDITION SUSTAINED BY THE LD. CIT - (A) OUT OF THE ADDITION OF RS.12, 28,000 / - MADE BY THE ASSESSING OFFICER TOWARDS PRIOR PERIOD EXPENSES. THE LEARNED CIT - (A) ALLOWED RELIEF OF RS.11.06 LAKHS. 1 5 .1 THE ASSESSING OFFICER OBSERVED FOLLOWING PRIOR PERIOD E XPENSES CLAIMED BY THE ASSESSEE : I . BOND SERVICING : RS.3,14,000/ - II . LEGAL & PROFESSIONAL : RS. 20,000/ - III . REGISTRAR FEE : RS. 18,000/ - IV . RATING FEE : RS.2,82,000/ - V . TRAVELLING EXPENSES : RS. 23,000/ - VI . SERVICE TAX : RS.3,12,000/ - VII . ARREAR OF SALARY : RS.7,89,000/ - VIII . SALARY AND EMPLOYEE BENEFIT : RS. 84,000/ - ___ TOTAL : 18,42,000/ - 1 5 .2 T HE ASSESSING OFFICER FURTHER MENTIONED THAT AFTER ADJUSTING RECEIPT OF INTEREST ON BONDS OF RS.6,05,000 / - AND POSTAGE AND TELEGRAPH OF RS.9000 / - , THE ASSESSEE CLAIMED PRIOR PERIOD EXPENSES OF RS.12,28,000/ - IN THE PROFIT AND LOSS ACCOUNT. ACCORDING TO THE A SSESSING OFFICER THESE 12 EXPENSES CRYSTALLIZED IN EARLIER YEARS AND THEREFORE CANNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION . BEFORE THE LD. CIT - (A) THE ASSESSEE CLAIMED THAT THE EXPENSES COMPRISES MAINLY OF ARRE ARS OF SALARY AND SERVICE TAX AND CRYSTALLIZED IN THE YEAR UNDER CONSIDERATION . 15.3 THE LD. CIT - (A) DECIDED THE ISSUE AS UNDER: 10.2 ON CAREFUL EXAMINATION OF EACH ITEM OF EXPENSES EMBEDDED IN PRIOR PERIOD EXPENSES, I FIND THAT AN AMOUNT OF RS.3.12 LAKH ON ACCOUNT OF SERVICE TAX IS TO BE ALLOWED U/ 43B, EVEN THOUGH THE SAME PERTAIN TO FY 2007 - 08 AND 2008 - 09, ON ACTUAL PAYMENT BASIS. FURTHER, REGARDING THE CLAIM OF AN AMOUNT OF RS.7.89 LAKH TOWARDS 60% OF THE ARREARS OF SALARY, PERTAIN TO JANUARY, 2006 TO AUGUST, 2008 PAID TO THE OFFICIALS ON DEPUTATION FROM MINISTRY OF RAILWAYS, IN MY VIEW SINCE THESE OFFICIALS WERE NOT POSTED WITH THE APPELLANT COMPANY, NO PROVISION COULD HAVE BEEN MADE IN THE EARLIER YEARS BY THE APPELLANT COMPANY. HOWEVER , SINCE THE ARREARS GOT DUE, WHILE THESE OFFICIALS WERE SERVING WITH THE APPELLANT COMPANY ON DEPUTATION BASIS, THE LIABILITY IN RESPECT OF THE SAME IS HELD TO HAVE BEEN CRYSTALLIZED DURING THE YEAR. LAST LY, AN AMOUNT OF RS.0.05 LAKH TOWARDS REIMBURSEMENT TO THE EMPLOYEES OF THE APPELLANT TOWARDS NEWSPAPER AND ELECTRICITY BILL IS HELD TO HAVE BEEN CRYSTALLIZED DURING CURRENT YEAR AS THE EMPLOYEES HAVE SUBMITTED THE BILLS IN THE CURRENT YEAR. 10.3 HOWEVER, OTHER THAN THIS IS RESPECT OF THE FOLLOWING EXPENSES, I HOLD THAT THE LIABILITIES CANNOT BE HELD TO HAVE CRYSTALLIZED IN THE CURRENT YEAR: (A) PAYMENT OF REGISTRAR FEES TO MCS LTD. NOT PROVIDED IN FY 2008 - 09 - RS.0.18 LAKH. (B) PAYMENT OF SURVEI LLANCE FEES TO STANDARD & POOR'S IN FY 2008 - 09 - RS.3.14 LAKH. (C) RATING FEES TO JCRA FOR FY 2008 - 09 - RS.2.82 LAKH. (D) PAYMENT TO BALMER LAWRIE TOWARDS AIR TRAVEL OF OFFICIALS IN EARLIER YEARS - RS.0.23 LAKH. (E) PAYMENT OF LTC - RS.1.52 LAKH. 13 IN VI EW OF THE ABOVE, THE APPELLANT GETS RELIEF OF RS.11.06 LAKH . 15.4 B EFORE US , THE LEARNED COUNSEL SUBMITTED THAT TAX RATES IN THE EARLIER YEARS AND IN THE YEAR UNDER CONSIDERATION ARE SAME AND THUS FOLLOWING THE FINDING OF THE HON BLE SUPR EME COURT IN THE CASE OF EXCEL I NDUSTRIES LTD., REPORTED IN 358 ITR 295 (SC) , THERE WOULD NOT BE ANY IMPACT ON THE NET TAX PAID BY THE ASSESSEE. 15.5 THE LD. CIT(DR), ON THE OTHER HAND , RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 15.6 WE FIND THAT THE LD. CIT - (A) HAS ALREADY ALLOWED SUBSTANTIAL R ELIEF HOLDING THAT EXPENSES ON SALARY, LEAVE TRAVEL C ONCESSION ETC . RELATED TO EMPLOYEES ON DEPUTATION, WERE CRYSTALLIZE D IN THE YEAR UNDER CONSIDERATION. WE FIND THAT THE REMAINING EXPENSES ARE IN RESPECT OF THE ARREAR OF SALARY AND SERVICE TAX. WE FIND THAT PAYMENT OF SERVICE TAX IS ALLOWED ON THE PAID BASIS IN TERMS OF SECTION 43B OF THE ACT. THUS, ONLY EXPENSE LEFT IS A ARREAR OF SALARY AMOUNTING RS.7, 89,000/ - . THE LD. COUNSEL CLAIMED THAT THE SAID EXPENSE WAS CRYSTALLI ZED DURING THE YEAR UNDER CONSIDERATION SIMILAR TO OTHER EXPENSES ON SALARY WHICH HAVE BEEN ALLOWED BY THE LD. CIT - (A) AND AGAINST WHICH, THE R EVENUE HAS NOT FILED ANY APPEAL. BEFORE US, THE R EVENUE DID NOT BRING ON RECORD ANY EVIDENCE TO C ONTROVERT THE AR GUMENTS OF THE L D. COUNSEL . FURTHER, IN THE CASE OF EXCEL INDUSTRIES (SUPRA), THE HON BLE SUPREME COURT OBSERVED AS UNDER: 32. THIRDLY, THE REAL QUESTION CONCERNING US IS THE YEAR IN WHICH THE ASSESSEE IS REQUIRED TO PAY TAX. THERE IS NO DISPUTE THAT IN THE SUBSEQUENT ACCOUNTING YEAR, THE ASSESSEE DID MAKE IMPORTS AND DID DERIVE BENEFITS UNDER THE ADVANCE LICENCE AND THE DUTY ENTITLEMENT PASS BOOK AND PAID TAX THEREON. THEREFORE, IT IS NOT AS IF THE REVENUE HAS BEEN DEPRIVED OF ANY TAX. WE ARE TOLD THAT THE RATE 14 OF TAX REMAINED THE SAME IN THE PRESENT ASSESSMENT YEAR AS WELL AS IN THE SUBSEQUENT ASSESSMENT YEAR. THEREFORE, THE DISPUTE RAISED BY THE REVENUE IS ENTIRELY ACADEMIC OR AT BEST MAY HAVE A MINOR TAX EFFECT. THERE WAS, THEREFORE, NO NEED FOR THE REVENUE TO CONTINUE WITH THIS LITIGATION WHEN IT WAS QUITE CLEAR THAT NOT ONLY WAS IT FRUITLESS (ON MERITS) BUT ALSO THAT IT M AY NOT HAVE ADDED ANYTHING MUCH TO THE PUBLIC COFFERS. 15.7 IN VIEW OF THE FACTS AND CIRCUMSTANCES AND ALSO IN VIEW OF THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF EXCEL INDUSTRIES (SUPRA), WE DIRECT THE ASSESSING OFFICER TO DELETE THE BALANC E ADDITION OUT OF ADDITION ON PRIOR PERIOD EXPENSES OF RS.12, 28,000/ - . THE GROUND OF THE APPEAL IS ALLOWED. 16. IN GROUNDS NO. 4 AND 5 , THE ASSESSEE HAS RAISED THE ISSU E OF ADDITION UNDER SECTION 115 JB OF THE ACT FOR PROVISION OF LEAVE TRAVEL ASSISTANCE AMOUNTING TO RS. 69,000/ - AND ADDITION FOR PROVISION OF GRATUITY AMOUNTING TO RS. 6, 35,000/ - RESPECTIVELY. 16.1 ACCORDING TO THE LD. CIT - (A) PROVISIONS OTHER THAN A ASCERTAINED LIABILITIES ARE TO BE ADDED TO THE BOOK PROFIT, ACCORD INGLY HE UPHELD THE DISALLOWANCE OF BOTH THE ITEMS UNDER SECTION 115 JB OF THE ACT. 16.2 BEFORE US , THE LD. COUNSEL SUBMITTED THAT BOTH THESE PROVISIONS HAVE BEEN ASCERTAINED AS PER THE ACTUARIAL VALUATION AND THEREFORE BEING ASCERTAINED LIABILITY , ARE ALLOWABLE IN VIEW OF THE DECISION OF THE HON BLE SUPRE ME COURT IN THE CASE OF ROTORK C ONTROLS INDIA PVT. LTD. VS. CIT, 314 ITR 0062 16.3 T HE LD. CIT (DR), ON THE OTHER HAND , RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 16.4 WE HAVE HEARD THE RIVAL S UBMISSION AND PERUSED THE RELEVANT MATERIAL ON THE RECORD. WE FIND THAT ANY AMOUNT OF PROVISION S MADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES IS REQUIRED TO BE ADDED TO THE BOOK PROFIT IN TERMS OF CLAUSE (C) OF EXPLANATION - 1 TO SECTION 115 JB(2) OF THE ACT. NOW, THE ONLY QUESTION BEFORE US IS WHETHER THE 15 PROVISION MADE BY THE ASSESSEE FOR L EAVE TRAVEL CONCESSION AND GRATUITY ARE ASCERTAINED LIABILITY. THE ASSESSEE HAS CLAIMED THAT PROVISION HAVE BEEN MADE ON THE ACTUARIAL VALUATION, HOWEV ER WE FIND THAT NO DOCUMENTARY EVIDENCE IN SUPPORT OF THE CLAIM HAS EITHER BEEN MADE BEFORE THE LOWER AUTHORITIES OR BEFORE US. IN ABSENCE OF ANY SUCH DOCUMENTARY EVIDENCE FURNISHED, THE CLAIM OF THE ASSESSEE THAT SAME ARE ASCERTAINED LIABILITY CANNOT BE A CCEPTED. IN T HE DECISION OF THE HON BLE SUPREME COURT RELIED UPON BY THE ASSESSEE , THE PROVISION MADE FOR WARRANTY CLAIM ON THE BASIS OF PAST EXPERIENCE , WAS HELD TO BE ALLOWAB LE UNDER SECTION 37(1) OF THE ACT . THUS, THE SAID DECISION IS NOT RELEVANT IN THE INSTANT CASE. ACCORDINGLY , WE FIND NO ERROR IN THE ORDER OF THE LD. CIT - (A) ON THE ISSUE IN DISPUTE AND THE GROUND S NO. 4 AND 5 OF THE APPEAL ARE ACCORDINGLY DISMISSED. 17. IN THE RESULT , APPEAL OF THE R EVENUE IS DISMISSED AND CROSS OBJECTION OF THE A SSESSEE IS ALLOWED, WHEREAS THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 2 4 T H JULY , 201 7 . S D / - S D / - ( I.C. SUDHIR ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 2 4 T H JULY , 201 7 . RK / - (D.T.D) COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT - (A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI