Income Tax Appellate Tribunal - Cochin
The Travancore Cochin Chemicals ... vs Acit, Ernakulam on 21 June, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM
I.T.A. No.647/Coch/2013
Assessment Year : 2007-08
The Travancore Cochin Vs. The Assistant Commissioner of
Chemicals Ltd., Income-tax, Circle-4(2), Kochi.
Udyogmandal,
Kochi-683 501.
[PAN:AAACT 6207B]
(Assessee-Appellant) (Revenue-Respondent)
Assessee by Shri Raja Kannan, Adv.
Revenue by Shri A. Dhanaraj, Sr. DR
Date of hearing 21/06/2018
Date of pronouncement 21/06/2018
ORDER
Per CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order of the CIT(A)- II, Kochi dated 26/07/2013 and pertains to the assessment year 2007-08.
2. The assessee has raised the following ground:
(1) The CIT(A) has erred in upholding the action of the Assessing Officer disallowing Rs.67,24,835/- being provision for leave encashment determined on the basis of actuarial valuation and debited to the accounts as required under Accounting Standard 15 treating the same as unascertained liability while computing book profit u/s. 115JB of the Income Tax Act.
I.T.A. No.647/C/2013
3. The facts of the case are that the Assessing Officer found that actuarial valuation is vague and is based on subjective assumption and hence the provision made for the leave encashment is not an ascertained liability and disallowed the same. For this proposition, the Assessing Officer relied on the judgment of the High Court of Andhra Pradesh in the case of CIT vs. Sileman Khan (174 ITR 200) and the judgment of the High Court of Karnataka in the case of CIT vs. Motor Industries Co. Ltd. (229 ITR 137).
4. On appeal, the CIT(A) sustained the disallowance of leave encashment amounting to Rs.67,24,835/- which cannot be considered as contingent liability which was quantified by actuarial valuation and is to be disallowed as deduction while computing the book profit u/s. 115JB of the Act. The CIT(A) observed that the assessee placed reliance on the ratio pronounced by the Supreme Court in Bharat Earth Movers vs. CIT, (245 ITR 428), however, the Supreme Court held that section 43B(f) is very much on the statute book and it should not be treated as the same is not in existence. The CIT(A) also relied on the decision of the ITAT, Bangalore Bench in the case of Mysore Sales International vs. CIT in ITA No. 1402(Bangalore)2010 dated 30/03/2012 wherein it was held that unpaid leave encashment cannot be allowed as deduction and hence justified the revision order u/s. 263 by the CIT. Further, according to the CIT(A), the Department had not accepted the stand taken by the Calcutta High Court in the case of Exide Industries Ltd. and Another vs. Union of India and Others (292 ITR 2 I.T.A. No.647/C/2013
470) and it has still been held that provision for leave encashment is nothing but merely an expense and not incurred and which are set aside, only to meet future liability, as and when they occur. According to the CIT(A), the liability thus claimed to have arisen, is not a certain liability. Further, the Supreme Court has given a stay order against the Calcutta High Court decision (supra). Thus, the CIT(A) held that the provision for leave encashment was rightly disallowed by the Assessing Officer and added to the total income.
5. Against this, the assessee is in appeal before us. The ld. AR submitted that the company had made provision for leave encashment in the accounts on the basis of actuarial valuation. According to the Ld. AR, this is not a contingent liability but an ascertained liability determined in a scientific manner and only because of the specific provision of section 43B(f) of the I.T. Act, this has to be disallowed in the computation of total income under the normal provisions of the I.T. Act, but it is not to be added back while computing book profit u/s. 115JB of the Act. The Ld. AR relied on the judgment of the Supreme Court in the case of Bharat Earth Movers vs. CIT (245 ITR 428) where it was held that if a business liability has arisen during the previous year under consideration, deduction should be allowed, albeit the liability may have to be quantified and discharged at a future date; that it should also be capable of being estimated with reasonable certainty, though actuarial valuation may not be possible and as such 3 I.T.A. No.647/C/2013 it cannot be considered as contingent liability and it is to be allowed. The Ld. AR also relied on the following judgments:
` 1) Pacific Shipping Pvt. Ltd. vs. CCIT & Others (245 ITR 433) (Delhi)
2) Exide Industries Ltd. and Another vs. Union of India and Others (292 ITR 470) (Cal.)
3) CIT vs. Modi Spinning and Weaving Mills Co. Ltd. (292 ITR 479)(Del)
4) ITO vs. H.P. Tourism Development Corporation Ltd. (2013 SCC OnLine HP 1771).
5) ACIT vs. M/s. Jaiprakash Hydro Power Ltd. (2013 SCC OnLine ITAT 3281 : (2013) ITAT 1950) (ITAT, Chandigarh)
6) ACIT vs. NHPC Ltd. (ITA No.2449(Del)/2008 dt. 30/09/2014) (ITAT, New Delhi).
6. The Ld. DR relied on the order of the CIT(A).
7. After considering the rival submissions and perusing the relevant material on record, it is noticed that Supreme Court in the case of Bharat Earth Movers (cited supra) has held that the liability incurred by the assessee under the Leave Encashment Scheme determined on actuarial valuation is an ascertained liability and cannot be considered as contingent liability. However, it is significant to note that the legislature has stepped in by inserting clause (f) to section 43B mandating that any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee cannot be allowed as deduction unless this amount is paid by the assessee on or before the due date for furnishing the 4 I.T.A. No.647/C/2013 return of income u/s. 139(1) of the Act. In view of this legislative amendment, nullifying the ratio of the decision in the case of Bharat Earth Movers (supra), the amount of such provision can be claimed as deduction only on actual payment and not on the simple creation of provision. However, when we peruse the mandate of Explanation 1 to section 115JB, it becomes clear that clause (c) talks of making addition to book profit for 'the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or'. If we consider the judgment of the Supreme Court holding such a provision as an ascertained liability and clause (f) of section 43B on one hand and clause (c) of Explanation 1 to section 115JB on the other, it becomes vivid that computation of income under the normal prpovisions debars deduction for the ascertained liability towards provision for leave encashment etc., unless the amount is actually paid before the due date. However, in the computation of book profit u/s. 115JB, deduction is available for such provision of ascertained liability. As the ground raised by the assessee is only against the addition in the computation of book profit u/s. 115JB, the impugned order needs to be revised. It is however, made clear that if the income under the normal provisions of the Act turns out to be more than the book profit u/s. 115JB and the total income is to be computed as per the normal provisions, then no deduction for such provision would be admissible unless the amount of such provision is paid before the due date u/s. 139(1) of the Act. Thus, this ground of appeal of the assessee is allowed.
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I.T.A. No.647/C/2013
8. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on this 21st June, 2018.
sd/- sd/-
(GEORGE GEORGE K.) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place:
Dated: 21st June, 2018
GJ
Copy to:
1. The Travancore Cochin Chemicals Ltd., Udyogmandal, Kochi-683 501.
2. The Assistant Commissioner of Income-tax, Circle-4(2), Kochi.
3. The Pr. Commissioner of Income-tax(Appeals)-II, Kochi
4. The Pr. Commissioner of Income-tax, Kochi
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin 6