Income Tax Appellate Tribunal - Mumbai
Essr Projects (India) Ltd, Mumbai vs Dcit 5(1), Mumbai on 31 December, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "E" MUMBAI
BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND
SHRI N.K. PRADHAN (ACCOUNTANT MEMBER)
ITA No. 7222/MUM/2014
Assessment Year: 2010-11
Essar Projects (India) Dy. Commissioner of
Limited Essar House, 11 KK Income Tax-5(1),
Marg, Mahalaxmi, Mumbai- Vs. Aayakar Bhavan,
400034. Mumbai-400020.
PAN No. AAACE2358J
Appellant Respondent
Assessee by : Mr. Premal Shah, AR
Revenue by : Mr. Ajay Kumar Keshari, DR
Date of Hearing : 03/10/2018
Date of pronouncement : 31/12/2018
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-9, Mumbai [in short 'CIT(A)'] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the 'Act').
Essar Projects 2 ITA No. 7222/Mum/2014
2. The 1st & 2nd ground of appeals are general in nature. We begin with the 3rd ground of appeal which reads as under:
"The CIT(A) is erred in disallowing the claim of leave encashment of Rs.18,36,601/- u/s 43B of the Act.
a. Without considering the various judgments in favour of the appellant by the honourable High Courts.
b. By misstating the fact that the liability has not been incurred during the year.
The appellant submits that the disallowance of Rs.18,36,601/- should be deleted."
3. During the course of assessment proceedings, the Assessing Officer (AO) noticed from clause 21(B) of the Tax Audit Report filed by the assessee that there is a provision on account of leave encashment of Rs.18,36,601/-, liability for which the expenses have not been incurred on or before filing the return of income. In response to a query raised by the AO, the assessee filed a revised computation of income in which the above amount of Rs.18,36,601/- was added u/s 43B of the Act.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) observed that any provision can only be allowed when the assessee proves with convincing evidence that it is not a contingent liability. In the instant case, the assessee could not file any convincing evidence to prove that the provision in question is an ascertained liability. Therefore, the Ld. CIT(A) confirmed the disallowance of Rs.18,36,601/- made by the AO.
Essar Projects 3 ITA No. 7222/Mum/2014
5. Before us, the Ld. counsel of the assessee submits that the disallowance of Rs.90,96,863/- made by the AO u/s 43B comprises of the following items:
Sr. No. Particulars Amount
1. Super Annuation Fund 4,40,184
2. Gratuity 81,48,739
3. Leave encashment of Previous 5,07,940
Year
Total 90,96,863
Thus it is stated by him that the exact amount of disallowance to be made u/s 43B amounting to Rs.90,96,863/- has been correctly disallowed by the assessee in its computation of income. The Ld. counsel relies on the order of the ITAT 'L' Bench Mumbai in assessee's own case i.e. M/s Essar Projects (India) Ltd. v. ACIT (ITA No. 1844/Mum/2015 and 1845/Mum/2015 for AY 2009-10 and AY 2010-11).
6. On the other hand, the Ld. DR submits that as the assessee has furnished a revised computation of income in which the above amount of Rs.18,36,601/- has been added u/s 43B, the disallowance of the above sum made by the AO be confirmed.
7. We have heard the rival submissions and perused the relevant materials on record. We find that a similar issue arose in assessee's own case (supra), wherein the Tribunal vide order dated 21.06.2017 held :
Essar Projects 4 ITA No. 7222/Mum/2014 "7. We had carefully gone through the order of the Tribunal in case of Birla Sunlife Asset Management Company Ltd., (Supra) wherein matter was restored back by the Tribunal to the AO after having the following observation:-
9. In view of the observations of the Hon'ble Supreme Court, in our view, it will be proper to dispose of this appeal in the light of the order of the Hon'ble Supreme Court dated 08.05.2009 passed in the case of "CIT vs. Exide Industries Ltd." (supra). We therefore dispose of the present appeal with a direction that the assessee will pay the tax as if section 43B(f) is on the statute book, however, till the decision of the Hon'ble Supreme Court in the case of "CIT vs. Exide Industries Ltd."
(supra), the Revenue will not recover the penalty and interest which may accrue till the decision of the appeal by the Hon'ble Supreme Court in the case of "Exide Industries Ltd." It would be open to the Department to recover the outstanding interest demand in case the Civil Appeal of the Department in the case of "Exide Industries Ltd." (supra) is allowed by the Hon'ble Supreme Court. Subject to our above observations, the matter is restored to the file of the AO to be adjudicated afresh as per the decision of the Hon'ble Supreme Court in the case of "Exide Industries Ltd." (supra).
8. As the facts and circumstances in the present case are same, respectfully following the decision of the Tribunal, we also set aside the matter back to the file of the AO to decide afresh as per the directions given by the Tribunal in the above order. We direct accordingly."
7.1 Facts being identical, we follow the above order of the Co-ordinate Bench and restore the matter back to the file of the AO to decide the issue afresh as per the direction given by the Tribunal in the above order. Thus the 1st ground of appeal is allowed for statistical purposes.
Essar Projects 5 ITA No. 7222/Mum/2014
8. The 4th ground of appeal " The CIT(A) is erred in disallowing the claim of Rent expenditure of Rs.3,15,00,000/- as prior period item:
a. Without considering the fact that the same is incurred and paid during the year.
b. It is genuine business expenditure u/s 30 read with section 37(1). The appellant submits that the disallowance of Rs.3,15,00,000/- should be deleted."
9. The background facts are that in the profit and loss account the assessee has claimed rent expenses of Rs.4,70,01,888/- as against last year figure of Rs.16,29,942/-. The AO vide order sheet entry dated 11.07.2012 asked the assessee to furnish complete details of rent expenses claimed. In response to it the assessee vide reply dated 14.02.2013 submitted that:
"We have used works space allotted to Essar Oil Ltd. (EOL) during the year for our Engineering purposes, hence EOL has raised a debit note in relation to this. This is the major reason for increase in rent expenses."
Further, in response to the query raised by the AO vide order sheet entry dated 22.02.2013, the assessee submitted the following details:
"Rent paid to persons specified in Sec. 40A(2)(b) read with Sec. 30 of the Income Tax Act, 1961 ("the Act") - AY 2010-11 Particulars A.Y. 2010-11 A.Y. 2009-10 Rent debited to profit and 4,70,01,888 16,29,942 Essar Projects 6 ITA No. 7222/Mum/2014 loss account Less : Rent paid to Essar 3,15,00,000 Oil Limited (EOL) pertaining to AY 2009-10 Less : Rent paid to Essar 1,48,92,000 Information Technology Ltd. (EITL) pertaining to AY 2010-11 Rent paid to Others 6,09,888 16,29,942 During the previous year pertaining AY 2009-10, we had carried out major project planning for the construction of the refinery site at Jamnagar, Pellet plant at Orissa and power plants at Salaya and Tori. For these purposes, we had occupied the space allotted to EOL at out Kurla Complex by EITL. Hence the rent paid by EOL has been debited to us. Since we received the debit note after the end of the previous year relevant to AY 2009-10, we have accounted the expenditure in the previous year relevant to AY 2010-11. During the previous year of FY 2009-10 pertaining to AY 2010-11, we had sent all our PMC consultants to the sites and therefore entered into fresh agreement with EITL which has already been provided for your verification......."
9.1 However, the AO was not convinced with the above explanation because the assessee was following mercantile system accounting; it should have made provision in the relevant accounting period for the expenses based upon the bills/vouchers/statement of expenses received subsequently. The AO thus observed that the prior period expenses could not be considered in the current assessment year since they did not pertain to this year. As per him, the above practice also violates the Essar Projects 7 ITA No. 7222/Mum/2014 principle of matching of cost with revenue and also results in hybrid system of accounting which is not at all permitted. With the above reasons, the AO disallowed prior period expenses of Rs.3,15,00,000/- debited to the profit and loss account under the head 'rent expenses'.
10. In appeal before the Ld. CIT(A), it was submitted by the assessee that there has been some dispute of the liability of rent with the group concern EOL. and the final debit note regarding this rent was received during the year under consideration i.e. after the closure of the accounts of earlier year to which it pertains. However, the Ld. CIT(A) was not convinced with the above explanation of the assessee on the ground that
(i) it was not claimed before the AO that there was a dispute between the assessee and its group concern EOL. regarding the quantum of rent and (ii) the assessee has not filed any documentary evidence in the form of any rent agreement between the two group companies to proof that it has actually utilized the space/premises of EOL.
Referring to the provisions of section 40A(2)(b) of the Act, the Ld. CIT(A) observed that in the absence of any agreement between the two group companies, it cannot be ascertained as to whether the payment in question is reasonable and wholly and exclusively for the purpose of business. It is also observed by the Ld. CIT(A) that such a huge payment by the corporate entities are always made as per the written terms and conditions of tenancy. In absence of it in the present case, the Ld. CIT(A) confirmed the disallowance of Rs.3,15,00,000/- made by the AO.
11. Before us, the Ld. counsel of the assessee submits that the appellant had occupied the premises of EOL for the period July 2008 to Essar Projects 8 ITA No. 7222/Mum/2014 March 2009. As per the contract between the assessee and EOL for project management consultancy services for the expansion of refinery at Vadinar, EOL is obliged to provide accommodation for expats at project site. Hence, the assessee was under a bonafide belief that it would not have to pay any amount as rent for occupying the office premises of EOL. However, in the current year the assessee received debit notes from EOL. The assessee disputed the said debit notes and requested for waiver of rent from EOL. It is stated that the assessee was under bonafide belief that the same would be waived off. However, vide letter dated 01.10.2009 addressed by EOL to the assessee, it was clarified that it would not be able to waive or reduce the rent expenditure since the same was reimbursement of actual rent paid by EOL. Further, EOL requested the assessee to settle the debit notes immediately.
The Ld. counsel submits that the relevant contents of the said letter read as under:
"Sirs, Sub: Debit Notes - EPMCL 2008-09/mar 09/1 & 2 dated 31.03.2009 Rs.3,15,00,000/-
We refer to the contract between EOL and EPMCL towards Project Management Consultancy services for the expansion of Refinery at Vadinar. As per this contract, EOL is obliged to provide office accommodation for the expats at the project site.
However at the request of EPMCL, EOL has allotted certain office accommodation at the premises located at BKC, Mumbai and debited an Essar Projects 9 ITA No. 7222/Mum/2014 amount of Rs.3,15,00,000/- vide the above debit notes as rental for the said accommodation for the period July 2008 to March 2009. In response to your specific query, we clarify that EOL has debited only the actual rent incurred by it for the said accommodation and hence would not be able to reduce or waive the same.
Kindly arrange to account for the debit notes and settle the same immediately."
The Ld. counsel submits that ultimately in the current year, the assessee accepted the liability and paid rent to EOL, therefore, the liability crystallized in the current year. It is further submitted by him that since TDS was deducted and paid to the government in the current year, the said expenditure would be allowable in the current year as per the provisions of section 40(a)(ia) of the Act. Also it is stated that there is no tax benefit to the assessee for claiming expenditure in the current year since the assessee is paying tax at the maximum marginal rate in both the years under normal as well as MAT provisions. Referring to the decision in CIT v. Nagri Mills Co. Ltd. 33 ITR 681 (Bom), the Ld. counsel submits that if the genuineness of expenditure is not in doubt and it is ultimately a question of year of allowability of an expenditure, the department should not agitate the same since there is no tax benefit to the assessee. Referring to the order of the Ld. CIT(A), the Ld. counsel submits that the provisions of section 40A(2)(b) would not apply in the present case, since there is no common shareholding between both the companies.
12. On the other hand, the Ld. DR submits that the assessee ought to have recorded the expenses in the relevant accounting year 2008-09, Essar Projects 10 ITA No. 7222/Mum/2014 wherein the liability to incur such expenses had crystallized. It is stated by him that the accounts of the assessee are mandatorily audited both under the provisions of Companies Act as well as the Income Tax Act, therefore, the assessee should have made provision in the relevant accounting period for the expenses based upon the bills/vouchers/statement of expenses received subsequently. The assessee has not done so. The Ld. DR thus supports the order passed by the Ld. CIT(A).
13. We have heard the rival contentions and perused the relevant materials on record. To recapitulate the facts, during the previous year relevant to the assessment year under consideration, the assessee debited an amount of Rs.3,15,00,000/- on account of rent expenditure paid to EOL. As per the AO, the said expenditure pertains to rent for the period July 2008 to March 2009 i.e. AY 2009-10. Therefore, the AO held that the liability crystallized in AY 2009-10 and the rent expenditure pertaining to AY 2009-10 was claimed the current year.
We have perused the letter dated 01.10.2009 addressed by EOL to assessee which clarifies that it would not be able to waive or reduce the rent expenditure since the same was reimbursement of actual rent paid by EOL. Further, EOL requested the assessee to settle the debit notes immediately. It is seen that ultimately in the current year, the assessee accepted the liability and paid the rent to EOL. We also find that TDS was deducted and paid to the government in the current year. Further we find that there is no tax benefit to the assessee for claiming the expenditure in the current year since it is paying tax at the maximum Essar Projects 11 ITA No. 7222/Mum/2014 marginal rate in both the years under the normal as well as MAT provisions. The reference made by the Ld. CIT(A) to section 40A(2)(b) is misplaced because the conditions laid down therein are not fulfilled in the instant case.
In the present case, the genuineness of expenditure is not in doubt and it is ultimately a question of year of allowability of the said expenditure. As there is no tax benefit to the assessee, the ratio laid down in Nagri Mills Co. Ltd. (supra) squarely applies to the present case.
In view of the above factual scenario and position of law, we delete the disallowance of Rs.3,15,00,000/- made by the AO.
14. In the result, the appeal is partly allowed.
Order pronounced in the open Court on 31/12/2018.
Sd/- Sd/-
(MAHAVIR SINGH) (N.K. PRADHAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai;
Dated: 31/12/2018
Rahul Sharma, Sr. P.S.
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A)-
4. CIT
5. DR, ITAT, Mumbai
6. Guard file.
BY ORDER,
//True Copy//
(Sr. Private Secretary)
ITAT, Mumbai