Universal Cables Ltd., Kolkata V. DCIT, C ircle- 6, Kolkata, Kolkata

ITA 954/KOL/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6653 (ITAT-KOLKATA)
• Duration Of Justice: 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 29-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 10-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K PRAMANICK
• Assessee Lawyers: J P KHAITAN; S BHOWMICK
• Keywords: Business income; Revised return
• Section: 43B; 143(3); 14A; 28

Judgement Text

, A , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOL KATA () , , , !' ) [BEFORE HONBLE SRI MAHAVIR SINGH, JM & HONBLE SHR I AKBER BASHA, AM] # # # # / I.T.A NO. 954/KOL/2010 $% &' $% &' $% &' $% &'/ // / ASSESSMENT YEAR: 2006-07 UNIVERSAL CABLES LTD. VS. DEPUTY COMMISSIONER O F INCOME-TAX (PAN-AAACU 3547 P) CIRCLE-6, KOLKATA. ()* /APPELLANT ) (+,)*/ RESPONDENT ) FOR THE APPELLANT: S/SHRI J. P. KHAITAN & S. BHOWMICK FOR THE RESPONDENT: SHRI A. K. PRAMANICK ! / ORDER PER SHRI MAHAVIR SINGH/ : THIS APPEAL BY ASSESSEE IS ARISING OUT OF THE ORDER OF CIT(A)-VI, KOLKATA IN APPEAL NO. 639/CIT(A)-VI/08-09/CIR.-6/KOL DATED 24.03.2010. TH E ASSESSMENT WAS FRAMED BY DCIT, CIRCLE-6, KOLKATA, U/S. 143(3) OF THE INCOME TAX AC T, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR ASSESSMENT YEAR 2006-07 VIDE HIS ORDER DA TED 30.12.2008. 2. THE FIRST ISSUE IN THIS APPEAL OF THE ASSESSEE I S AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN R ESPECT OF DISALLOWANCE OF PROVISION FOR LEAVE LIABILITY OF RS.35,10,435/- IN TERMS OF CLAUSE (F) OF SECTION 43B OF THE ACT. FOR THIS, THE ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.1: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) ERRED IN NOT HOLDING THAT PROVISION FOR LEAVE ENCASHMENT IS NEIT HER A STATUTORY NOR CONTINGENT LIABILITY AND THEREFORE NOT TO BE CONSIDERED FOR TH E PURPOSE OF COMPUTING DISALLOWANCE U/S. 43B(F) OF I. T. ACT, 1961. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSING OFFICER OBSERVED IN ASSESSMENT ORDER THAT THE ASSESSEE HAS MADE A PROVI SION FOR LEAVE ENCASHMENT FOR A TOTAL SUM OF RS.35,10,455/-, WHICH INCLUDED LIABILITY ON ACCOUNT OF EARLIER OPTICAL FIBER GOAL LTD., WHICH MERGED WITH THE COMPANY WITH A SCHEME OF MERGER AS APPROVED BY THE COURT. IN THE REVISED RETURN THE ASSESSEE MADE A FRESH CLAIM FOR ALLOWANC E OF THE SUM FOLLOWING THE JURISDICTIONAL ORDER IN THE CASE OF EXIDE INDUSTRIES LTD. THE DEP ARTMENT AGGRIEVED BY THE SAID ORDER, FILED SLP ON THE ISSUE BEFORE THE APEX COURT, AND NOW BY STAT ING THAT THE ISSUE REMAINS UNSETTLED 2 ITA 954/K/201 0 UNIVERSAL CABLES LTD. A.Y. 06-07 JUDICIALLY, UNPAID PROVISION IS ADDED BACK TO TOTAL INCOME OF THE ASSESSEE. IN APPEAL, THE CIT(A) CONFIRMED THE ACTION OF THE AO. 4. AFTER HEARING RIVAL CONTENTIONS AND GOING THROUG H FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVO UR OF THE ASSESSEE BY THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD. VS. UNION OF INDIA (2007) 292 ITR 470 (CAL), WHEREIN THE HONBLE COURT HAS HELD AS UNDER: THE ORIGINAL ENACTMENT OF SECTION 43B IN THE INCOM E-TAX ACT, 1961, WAS TO CURB UNREASONABLE DEDUCTION ON THE BASIS OF THE MERCANTI LE SYSTEM OF ACCOUNTING WITHOUT DISCHARGING STATUTORY LIABILITIES. IT WAS OBSERVED BY THE LEGISLATURE THAT SUCH ENACTMENT WAS NECESSARY AS THERE HAD BEEN A TREND TO EVADE ST ATUTORY LIABILITIES ON THE ONE HAND AND CLAIM APPROPRIATE BENEFIT UNDER THE ACT ON THE OTHER. UNDER CLAUSE (F) OF SECTION 43B, ANY SUM PAYABLE BY THE EMPLOYER TO ITS EMPLOYEES AS LEAVE ENCASHMENT SHALL BE DEDUCTIBLE ONLY IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH THE SUM IS ACTUALLY PAID BY THE EMPLOYER TO I TS EMPLOYEES. WHILE INSERTING CLAUSE (F) NO SPECIAL REASONS WERE DISCLOSED. ALTHOUGH SUC H DISCLOSURE WAS NOT MANDATORY YET THE SUBJECT AMENDMENT WIDENS THE SCOPE OF THE ORIGI NAL SECTION. LEAVE ENCASHMENT IS NEITHER A STATUTORY LIABILITY NOR A CONTINGENT LIAB ILITY. IT IS A PROVISION TO BE MADE FOR THE ENTITLEMENT OF AN EMPLOYEE ACHIEVED IN A PARTICULAR FINANCIAL YEAR. AN EMPLOYEE EARNS CERTAIN AMOUNT BY NOT TAKING LEAVE WHICH HE OR SHE IS OTHERWISE ENTITLED TO IN THAT PARTICULAR YEAR. HENCE, THE EMPLOYER IS OBLIGED TO MAKE APPROPRIATE PROVISION FOR THE SAID AMOUNT. ONCE THE EMPLOYEE RETIRES HE OR SHE HA S TO BE PAID SUCH SUM ON CUMULATIVE BASIS WHICH THE EMPLOYEE EARNS THROUGHOUT HIS OR HE R SERVICE CAREER UNLESS HE OR SHE AVAILS OF THE LEAVE EARNED BY HIM OR HER. THAT DOES NOT HAVE ANY NEXUS WITH THE ORIGINAL ENACTMENT. AN EMPLOYER IS ENTITLED TO DEDUCTION FOR THE EXPENDITURE HE INCURS FOR RUNNING HIS BUSINESS WHICH INCLUDES PAYMENT OF SALARY AND O THER PERQUISITES TO HIS EMPLOYEES. HENCE, IT IS A TRADING LIABILITY. AS SUCH HE IS OTH ERWISE ENTITLED TO DEDUCTION OF SUCH AMOUNT BY SHOWING IT AS A PROVISIONAL EXPENDITURE I N HIS ACCOUNTS. THE LEGISLATURE BY WAY OF AMENDMENT RESTRICTS SUCH DEDUCTION IN THE CA SE OF LEAVE ENCASHMENT UNLESS IT IS ACTUALLY PAID IN THAT PARTICULAR FINANCIAL YEAR. TH E LEGISLATURE IS FREE TO DO SO AFTER IT DISCLOSES REASONS THEREFOR AND SUCH REASONS ARE NOT INCONSISTENT WITH THE MAIN OBJECT OF THE ENACTMENT. WITHOUT SUCH REASONS THE ENACTMENT I S INCONSISTENT WITH THE ORIGINAL PROVISION. THE LEGISLATURE MUST DISCLOSE REASONS WH ICH WOULD BE CONSISTENT WITH THE PROVISIONS OF THE CONSTITUTION AND THE LAWS OF THE LAND AND NOT FOR THE SOLE OBJECT OF NULLIFYING THE SUPREME COURT DECISION. THUS, SECTIO N 43B(F) HAS TO BE STRUCK DOWN BEING ARBITRARY, UNCONSCIONABLE AND DE HORS THE SUPREME C OURT DECISION. NO CONTRARY DECISION WAS BROUGHT TO OUR NOTICE BY L D. DR. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT WE AL LOW THIS GROUND OF APPEAL OF THE ASSES SEE. 5. THE SECOND ISSUE IN THIS APPEAL OF THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS.15,01,665/- UNDE R SECTION 14A BY INVOKING RULE 8D OF THE I. T. RULES, 1962. FOR THIS, THE ASSESSEE HAS RAISED THE FOLLOWING GROUND NOS. 2 AND 3: 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.15,01,665/- ATTRIBUTABLE TO EARNING DIVIDEND INCOME FOR THE YEAR. 3 ITA 954/K/201 0 UNIVERSAL CABLES LTD. A.Y. 06-07 3. THAT WITHOUT PREJUDICE TO GROUND NO.2 ABOVE, THO UGH PRESUMING BUT NOT ADMITTING THAT EXPENSES, IF ANY, INCURRED TO EARN DIVIDEND INCOME WHICH IS EXEMPT U/S. 10(34) IS NOT TO BE ALLOWED, THE LD. CIT(A) FURTHER ERRED IN CONFIRM ING THE DISALLOWANCE MADE BY THE LD. DCIT IN A MECHANICAL MANNER BY APPLYING THE PROVISI ONS OF RULE 8D WHICH IS AT AN EXCESSIVE FIGURES. 6. BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT ASSESSING OFFICER IN THE ASSESSMENT ORDER OBSERVED THAT THE ASSESSEE EARNED RS.5,31,095/- AS DIVIDEND OUT OF ITS HOLDING IN SHARES AS INVESTMENTS. BEFORE HIM THE ASSESSEE CLAIMED THAT IT DID NOT INCUR ANY EXPENDITURE FOR EARNING TAX FREE DIVIDEND INCOME. THE ASSESSING OFFICER FO LLOWING THE DECISION OF SPECIAL BENCH IN ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (2009) 31 2 ITR (AT) 1 DISALLOWED AN AMOUNT OF RS.15,01,665/- ON ESTIMATE BASIS AS INADMISSIBLE DE DUCTION FROM BUSINESS INCOME U/S. 14A OF THE ACT. IN APPEAL, THE CIT(A) CONFIRMED THIS ACTIO N OF THE ASSESSING OFFICER. 7. AFTER HEARING RIVAL CONTENTIONS AND GOING THROUG H FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE EARNED A SUM OF RS.5,31,0 95/- AS DIVIDEND INCOME AND CLAIMED THAT IT DID NOT HAVE INCURRED ANY EXPENSE FOR EARNING SUCH DIVIDEND INCOME. THE LOWER AUTHORITIES FOLLOWING THE DECISION OF SPECIAL BENCH, ITAT IN TH E CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) DISALLOWED THE SUM OF RS.15,01,665/- O N ESTIMATE BASIS AS INADMISSIBLE DEDUCTION FROM BUSINESS INCOME U/S. 14A OF THE ACT R.W. R 8D OF THE I. T. RULES. WE FIND THAT THE PRINCIPLE LAID DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE MFG. CO. LTD. VS. DCIT [2010] 328 ITR 81 (BOM.) AT PAGES 138 & 139 VIDE SUB PARAS (V) TO (VII) ARE AS UNDER: (V) THE PROVISIONS OF RULE 8D OF THE INCOME-TAX RU LES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24, 2008, SHALL APPLY WITH E FFECT FROM THE ASSESSMENT YEAR 2008-09; (VI) EVEN PRIOR TO THE ASSESSMENT YEAR 2008-09, WHE N RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORCE TH E PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFF ICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD; (VII) THE PROCEEDINGS FOR THE ASSESSMENT YEAR 2002 -03 SHALL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICE R SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE ( DIRECT OR INDIRECT) IN RELATION TO DIVIDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH D OES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT REASONABLE BASIS FOR EFFECTING THE APPORTIONM ENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO 4 ITA 954/K/201 0 UNIVERSAL CABLES LTD. A.Y. 06-07 THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT AND GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CAS E IN VIEW OF FACTS OF THIS CASE AND THE PRINCIPLE LAI D DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE MFG. CO. LTD. (S UPRA), THAT RULE 8D IS APPLICABLE FOR AND FROM ASSESSMENT YEAR 2008-09 AND PRIOR TO THAT THE ASSESSING OFFICER CAN MAKE ESTIMATE IN THE GIVEN FACTS AND CIRCUMSTANCES. HEN CE, WE RESTRICT THE DISALLOWANCE TO 1% OF DIVIDEND INCOME AND DIRECT THE ASSESSING OFFI CER TO CALCULATE THE EXPENDITURE ON THAT BASIS. THIS GROUND OF ASSESSEES APPEAL IS PA RTLY ALLOWED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED AS INDICATED ABOVE. 9. ORDER IS PRONOUNCED IN THE OPEN COURT. SD/- SD/- , !' , (AKBER BASHA) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER ( -' -' -' -') )) ) DATED 29 TH APRIL, 2011 ./ $01 2 JD.(SR.P.S.) ! 3 +4 5!4&6- COPY OF THE ORDER FORWARDED TO: 1 . )* / APPELLANT M/S. UNIVERSAL CABLES LTD., BIRLA BUILDIN G, 4 TH FLOOR, 9/1, R. N. MUKHERJEE ROAD, KOLKATA-1. 2 +,)* / RESPONDENT DCIT, CIRCLE-6, KOLKATA. 3 . $ ( )/ THE CIT(A), KOLKATA 4. 5. $ / CIT KOLKATA 4<= +$ / DR, KOLKATA BENCHES, KOLKATA ,4 +/ TRUE COPY, ! $>/ BY ORDER, 1 /ASSTT. REGISTRAR .