Gujarat High Court
Pr. Commissioner Of Income Tax - ... vs Gujarat Urja Vikas Nigam ... on 31 July, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
O/TAXAP/549/2017 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 549 of 2017
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PR. COMMISSIONER OF INCOME TAX - VADODARA - 1....Appellant(s)
Versus
GUJARAT URJA VIKAS NIGAM LTD....Opponent(s)
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Appearance:
MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1
MR MANISH J SHAH, ADVOCATE for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
Date : 31/07/2017
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Tax appeal is admitted for consideration of following substantial question of law:
Whether the Income Tax Appellate Tribunal was justified in remanding the proceedings before the Assessing Officer for fresh consideration of disallowance under Section 14A of the Act with a direction that if finally disallowance under Section 14A is to be made then the amount thereof in no case shall exceed the exempt income earned by the assessee during the year under consideration?
2. To be heard with Tax Appeal No. 548 of 2017.
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3. We notice that the Revenue has proposed one more question which reads as under:
Whether on the facts and in the circumstances of the case, the ITAT was right in law and on the facts in dismissing the grounds raised by the revenue, without appreciating the fact that such types of unascertained liabilities are covered by Explanation (c ) of Section 115JB of the Act and therefore the same was required to be added back for computation of book profit of the assessee?
4. Counsel for the Revenue candidly pointed out that such a question was considered against the Revenue by the Division Bench of this Court in case of Deputy Commissioner of Income Tax vs. Inox Leisure Ltd. reported in [2013] 351 ITR 314 making the following observations:
"16. Coming to the question No. 2, we notice that the same arises out of the Tribunals decision to uphold the CIT(A)s view that the provision of Rs. 5,10,000/- made by the assessee towards its gratuity liability cannot be added back for the purpose of computation of the assessees income under Section 115JB of the Act. Section 115JB of the Act as is well known pertains to special provision for payment of tax by certain companies. Sub section (1) of Section 115JB of the Act provides that a minimum alternative tax to be paid by the companies as computed under the said provision.
Sub section (2) of Section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 Page 2 of 5 HC-NIC Page 2 of 5 Created On Mon Aug 21 06:07:43 IST 2017 O/TAXAP/549/2017 ORDER of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by various items specified in Clauses (a) to (i) provided therein. Clause (c) thereof reads as thus:
(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;
In other words, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. Put it differently, if such provision is made for ascertained liability, no such addition back shall be made. In this context, the Tribunal was called upon to decide whether the assessee having made provision of Rs. 5,10,000/- towards gratuity would be covered under Clause (c) to Explanation 1 to Section 115JB of the Act. The Tribunal relied on the decision of the Bombay High Court in case of Commissioner of Income Tax Vs. Echjay Forgings Pvt. Ltd. reported in 251 ITR 15 and confirmed the view of the CIT (A).
17. Having heard learned counsel for the parties and having perused documents on record, we notice that CIT(A) as well as the Tribunal both noted that such provision for payment of gratuity was made on the basis of actuarial valuation method to this aspect. The revenue has not been able to make any dispute. If we proceed on that basis, law to our mind, seems fairly well settled. Bombay High Court in case of Commissioner of Income Tax Vs. Echjay Forgings Pvt. Ltd (supra) in the context of similar provisions made in Section 115JB of the Act examined whether the provision of gratuity liability of a company is required to added back to its book profit. In this context, it was held that the assessee had made the provision for gratuity on the basis of actuarial calculations. He, therefore, cannot be said that the provision for gratuity is not ascertained liability.
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18. In case of Bharat Earth Movers Vs.
Commissioner of Income Tax reported in 245 ITR 428 the Apex Court held that the amounts set apart by an assessee to meet its liability on account of leave encashment of employees is not a contingent liability. It was observed that what should be certain is the incurring of the liability which should also be estimated with reasonable certainty though the actual quantification may not be possible then. Its requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date.
19. Likewise in case of Metal Box Company of India Ltd. Vs. Their Workmen reported in 73 ITR 53, the Apex Court examined the question whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct the same in profit and loss account while working out the net profit of a company and further whether such appropriation amounts to a reserve or provision. The Supreme Court held that an assessee can while working out its net profits, provide from its gross receipts his liability to pay a certain sum towards gratuity liabilities of the employees. If such liability is properly ascertainable and it is possible to arrive at proper discounted present value.
20. In case of Rotork Controls India P. Ltd. Vs. Commissioner of Income Tax reported in [2009] 314 ITR 62 (SC), the Supreme Court in the context of an assessee making provision for estimated expenditure towards warranty observed that provision is a liability which can be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflow of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation.
21. Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunals view that though actual payment of gratuity may be made at a later point of time upon periodical release of the Page 4 of 5 HC-NIC Page 4 of 5 Created On Mon Aug 21 06:07:43 IST 2017 O/TAXAP/549/2017 ORDER employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Explanation 1 to Section 115JB. "
5. This question is therefore not considered in this tax appeal.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) divya Page 5 of 5 HC-NIC Page 5 of 5 Created On Mon Aug 21 06:07:43 IST 2017