The order of the Bench was delivered by
PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER:
This appeal in ITA No.1165/Mds./2012 is filed by the Assessee, and the other appeal in ITA No.981/Msds./2012 by the Revenue for the assessment year 2007-08, aggrieved by the order of the Learned Commissioner of Income Tax(A), Large Taxpayer Unit, Chennai, dated 24.02.2012 in ITA No.48/09-10/LTU(A) passed under section 143(3) read with section 250 of the Act.
2.1 The Assessee has raised five grounds in its appeal, however, the crux of the issues is concised as follows:-
1. The Ld. CIT (A) erred in confirming the order of Ld. Assessing Officer who had made an addition of Rs. 81 lakhs towards wage revision for the purpose of computing books profits U/s.115JB of the Act and also for computing the total income as per the normal provisions of the Act.
2. The Ld. CIT (A) erred in confirming the order of the Ld. Assessing Officer who had disallowed the provision for doubtful debts amounting to Rs. 1,42,321/-.
3. The Ld. CIT (A) erred in disallowing 5% of the dividend income U/s.14A of the Act as expenses incurred for earning the exempt dividend income.
2.2 The Revenue has raised three grounds in its appeal, however, the crux of the issues is concised as follows:-
1) The Ld. CIT (A) had erred in deleting the disallowance U/s.14A of the Act by holding that invoking the provisions of Rule 8D is not in order.
3. The brief facts of the case are that the assessee is a public limited company, engaged in the business of manufacturing and trading in petrochemicals, filed its return of income for the assessment year 2007-08 on 25.10.2007, admitting book profit U/s.115JB of the Act of Rs. 22,53,69,497/-. Subsequently, revised return was filed on 16.05.2008 & 29.07.2008 admitting the same book profit. The case was taken up for scrutiny and assessment was made U/s.143(3) of the Act wherein the Ld. Assessing Officer made certain additions.
4.1 Ground No.1 – Provisions for wage arrears
During the course of assessment proceedings, it was observed that the assessee had debited an amount of Rs. 81 lakhs being provisions for wage arrears in the Profit & Loss Account. On query, the assessee had explained that the above provisions was made on estimate basis since negotiations with labour union was in progress. It was further submitted that the actual liability may be much more than what is provided by the assessee. However the Ld. Assessing Officer did not accept the arguments advanced by the assessee. Citing Section 115JB(1)(c) of the Act, the Ld. Assessing Officer disallowed the provisions made for Rs. 81/- lakhs while computing the book profit U/s.115JB of the Act as well as computing the total income as per the normal provisions of the Act.
4.2 On appeal the Ld. CIT (A) confirmed the order of the Ld. Assessing Officer by observing asunder:-
“6.2 I have carefully considered the facts of the case and the submission of the Ld. A.R. I have also gone through the decision relied on by the A.O and the A.R I have already discussed the issue in para 4.2. and held that the above liability was an unascertained liability and did not crystallized during the year. The Ld. A.R. has relied on the decision of the Hon’ble Supreme Court in the case of HCL Comet System & Services (Supra). But the law has since been neutralized by an amendment to section 115JB(2) with retrospective effect from 01.04.2009. In view of the above and for the reasons given in para 4.2 the ground is dismissed.”
Para 4.2 is also reproduced herein below for reference:-
“4.2. I have carefully considered the facts of the case and the submission of the Ld. A.R. I have also gone through the decision relied on by the A.O and the A.R. The decision relied on by the Ld. A.R. are on different facts i.e. on allowability of provision for meeting the liability for encashment of earned leave by the employee and provision for warranty. On the other hand, it is seen that the decision relied on by the A.O in the case of Indian Overseas Bank(Supra) is directly on the subject issue. The CIT(A) had confirmed the addition of Rs. 48 crore towards the provisions made for wage arrears of the staff. On further appeal, the Hon’ble Jurisdictional Tribunal in ITA No.1690/Mds./2006 for A.Y 1999-00 dated 02.06.2006 has confirmed the order of the CIT(A) by holding as under:
“In the present case we find that the liability in question cannot be construed to be a statutory liability. I can only be termed as a contractual l liability, as it emanates out of a contact. The memorandum of understanding is only a prelude to the contract. Actually the contract was entered into in the subsequent year on the basis of the memorandum of understanding. Therefore, in our opinion the liability did not crystallize in the year under consideration. It can be allowed only consequent upon the crystallization within the framework of law. Subject to this remark we uphold the impugned order on this count.”
The facts of the appellant are similar to the facts of the above case. As admitted by the appellant the dispute between the appellant and labour unions was referred to Industrial Tribunal. The appellant has filed a SLP before the Hon’ble Supreme Court which is still pending for final disposal. When the order was passed by the A.O, the A.O has rightly held that it was not an ascertained liability. The liabilities had also not crystallized during the year. Hence, respectfully following the decision of the Hon’ble Tribunal, the ground is dismissed.”
4.3 Before us Ld. A.R. submitted that:-
“The Labour Union of the appellant company had been negotiating with the Appellant for wage revision from the year 2000-01. The Labour Union on behalf of the workmen of Plant II submitted a charter of demands for the years from 2001 to 2004. The Appellant made an offer by way of draft wage settlement and the same was referred to i.e. Joint Commissioner of Labour (JCL). The first conciliation was on 3rd April 2006. Union did not agree. The matter was referred to industrial Tribunal vide G.O. No.871 dt.12.12.2006. The issue is still in dispute before the Supreme Court.
In that proposal, the Appellant had indicated the amount of salary increase they are prepared to pay. In the Draft Wage Settlement, the Appellant made the following main proposals:
• Proposed a revised scale of pay to be effective from 1.1.2005
• No increase in wages and allowances shall be payable for the period 1.1.2001 to 31.12.2004 but agreed to pay a one-time lump sum amount of Rs. 21,000/- per employee.
•
Proposal of the Appellant were not accepted by the Union who wanted a higher salary increase. The Union raised the issue before the industrial dispute authorities. The dispute is still pending before SC. The SC in 2008 had as an interim relief directed the Appellant to pay the employees as per the company’s proposal and in 2011 an additional Rs. 50,000/- per employee. As far as the Appellant company is concerned the liability to pay to the employees as per their proposal accrued when they submitted the proposal to JCL in the course of conciliation proceedings. This amount was the minimum amount payable and had accrued when the appellant had sent their signed proposal. This amount was never in dispute.
Provision made for wage arrears: Though the matter was in dispute, the proposal made by the Appellant in the Draft Wage Settlement to that extent is an ascertained liability. There was no dispute on that liability but only on the additional amount over and above the proposal by the Appellant. Accordingly, the Appellant computed the wage arrears for the year 2005 and 2006 as per the proposed revised pay scale in the Draft Wage Settlement and made a provisions of Rs. 81 lakhs in the books of account in the financial year 2006-07(A.Y 2007-08).
To summarise,
1. Reason for making the provision in F.Y 2006-07: The dispute was referred to the Industrial Tribunal by G.O dated 12.12.2006 which is in the F.Y 2006-07 and accordingly, the liability to the Appellant as per the Draft Wage Settlement has crystallized in F.Y 2006-07.
2. Quantification: The amount of as per the revised pay scale proposed for the year 2005 & 2006 in the Draft Wage Settlement was computed and fprs made in the books of account as it is an ascertained liability.
Hence the provision is for an accrued liability and should be allowed both for the normal computation as well as in the computing Book Profits.
| Accounting Standard by CBDT |
218 ITR 1 St. |
Bharath Earth Movers |
245 ITR 428 SC |
Neyveli Lignite Corporation |
93 TTJ 685 Chennai |
IBP Co Ltd |
78 TTJ 158 Cal.” |
Further the Ld. A.R. relied in the decisions of the case of IBP Co. Ltd. Vs. ACIT reported in [2003] 78 TTJ(Cal.) 158 and Neyveli Lignite Corporation Ltd. Vs. ACIT in (2005) 93 TTJ (Chennai) 685 and argued by stating that to the extent of Rs. 81 lakhs the liability is ascertained because the assessee had agreed for paying the aforesaid amount for wage settlement and the same was referred to Joint Commissioner Labour in the course of conciliation proceedings. It was therefore pleaded that the amount of Rs. 81/- lakhs may be treated as ascertained liability and deduction may be allowed while computing the book profit of the assessee U/s.115JB of the Act as well as computing the total income as per the normal provisions of the Act.
4.4 Ld. D.R stoutly opposed to the submissions of the Ld. A.R and argued in support of the orders of the Revenue. He vehemently pointed out that the amount of Rs. 81/- lakhs is not an ascertained liability and is only a proposal made before the Joint Commissioner of Labour and the same has not been reached finality. It was therefore pleaded that the orders of the Revenue may be sustained.
4.5 We have heard both the parties and carefully perused the materials available on record. As submitted by the Ld. A.R, if the assessee has made a commitment in the draft wage settlement before the Joint Commissioner of Labour, to that extent it will be an ascertained liability of the assessee company because at least to that extent the assessee company will have to make the payment. However, these aspects can be verified only from the draft wage settlement agreement and the same is not before us for our perusal. Therefore, we remit back the issue to the file of Ld. Assessing Officer to examine the draft wage settlement agreement in the light of the decisions relied upon by the assessee and pass appropriate order as per merit and law.
5. Ground No.2 - Disallowing the provision for doubtful debts
During the course of assessment proceedings it was observed by the Ld. Assessing Officer that the assessee had not written off the bad debts in its books of accounts, however claimed deduction on account of the same in the computation statement. Therefore the Ld. Assessing Officer added the same to the income of the assessee. On appeal, the Ld. CIT (A) citing section 115JB(2) Clause-(i) of Explanation-1 confirmed the order of the Ld. Assessing Officer.
5.2. Before us, the Ld. A.R. relied upon the decision rendered by the Hon’ble Apex Court in the case of Vijaya Bank reported in 323 ITR 166 and argued by stating that the provision for bad debts claimed by the assessee should be allowed as deduction. Ld. D.R stoutly opposed to the submissions of the Ld. A.R and argued by stating that the assessee had not written off its bad debts in its books of accounts and therefore the same cannot be allowed as deduction while computing the income of the assessee.
5.3. We have heard both the parties and carefully perused the materials available on record and the decision cited by the Ld. A.R. The decision rendered by the Hon’ble Apex court in the case of M/s.Vijaya Bank (supra) is not applicable considering the facts of the assessee’s case. In that case, the assessee is a bank who draws its account as per the guidelines provided by the Reserve Bank of India (RBI). There are legal implications for writing off the debts in the accounts of bank by crediting the debtor’s accounts. The system of accounting is also different. Various classifications with respect to debtors are drawn in the books of accounts as per the norms specified by the RBI. In such circumstances, the Hon’ble Apex Court had held that it would suffice to reduce the bad debts in the statement of accounts and actual write off bad debts in the books of accounts would not be necessary. With respect to other assessees, the Hon’ble Apex Court had categorically held in the case TRF Ltd. Vs. DCIT reported in 323 ITR 397 that “it is not necessary for the assessee to establish the debt had become irrecoverable. It is enough if the bad debts are written off as irrecoverable in the books of accounts of the assessee.” For the above reasons, we find that the action of the Revenue is appropriate in the case of the assessee which is not a Bank governed by the rules of RBI and accordingly we hereby hold that the amount of Rs. 1,42,321/- shown as provision for bad debts which is not credited to the accounts of the debtors and thus written off cannot be allowed as deduction while computing the income of the assessee. Accordingly, this ground is held against the assessee.
Revenue’s Appeal & Assessee’s Appeal
6.1. Ground No.1 & 3 : Addition U/s.14A of the Act
The assessee is aggrieved by the order of the Ld. CIT (A) who had sustained the addition U/s.14A of the Act being 5% of the dividend income attributed as expenditure for earning exempt income while as the Revenue is aggrieved by the order of the Ld. CIT (A) who had rejected the computation U/s.14A of the Act read with Rules 8D of the Rules. On this issue we find the finding of the Ld. CIT (A) to be in order because Rule-8D of the Rules has come into effect from 24.03.2008 relevant to the assessment year 2008-09. Therefore, the aforesaid rules will not be applicable to the case of the assessee, since the relevant assessment year is 2007-08. Moreover on this issue, this Bench of the Tribunal has been consistently taking a view that 3% of the exempt income can be treated as the expenditure incurred for earning such income and accordingly such amount has to be disallowed. Therefore in the case of the assessee also, we hereby hold that 3% of the dividend income which is exempt from tax shall be treated as the expenditure incurred for earning such dividend income and the same shall be disallowed as allowable deduction. It is ordered accordingly.
7. In the result, the appeal of the assessee is partly allowed for statistical purposes, while as the appeal of the Revenue is dismissed.
The order pronounced in the open court on 10th July, 2015 at Chennai.