HIGH COURT OF DELHI
Commissioner of Income-tax
Versus
Bharat Heavy Electrical Ltd.
IT Appeal NOS. 278, 312, 807 And 1578 OF 2010
September 11, 2012
ORDER
S. Ravindra Bhat, J.
These appeals by the Revenue assail the decision/order of the ITAT dated 27.2.2009 (in ITA-2709/Del/92) and the common order dated 30.3.2009 in ITA Nos,3214/Del/93, 7062/Del/92 and 2029/Del/02 dated 20.3.2009.
2. The substantial questions of law which arise are as follows: –
(1) Whether the provisions made claiming deduction for wage revision, allowed by the Tribunal was justified in the circumstances of the case (arising in ITA 312/2010 and 807/2010)?
(2) Whether the interest earned on tax free bonds between the date of their application by the assessee and the date of their allotment could be given the benefit claimed under Section 10 (15) (iv) (h) (arising in ITA 312/2010)?
(3) Whether the expenditure allowed by the impugned order of the Tribunal was justified in respect of the donations made by the assessee and claimed as business expenses under Section 37(1) (arising in ITA-1578/2010 and 278/2010)?
(4) Whether the Tribunal fell into error in holding that loss of one project eligible for deduction under Section-80 HHB could not be set of against the profits of other projects eligible under the same provision (arising in ITA 1578/2010 and 278/2010)?
3. Question No.1 – Whether the provisions made claiming deduction for wage revision, allowed by the Tribunal was justified in the circumstances of the case?
The assessee, BHEL, had during the relevant assessment years 1988-89 and 1998-99 claimed, in its schedule in the balance sheet, addition of its liability on account of wage revision. Accordingly, a provision for wage revision was factored. The assessee submitted that even though the wage revision proposals had been submitted to the competent bodies or authorities, the liability was certain and ascertained on the basis of its past experience and after taking into consideration the previous Pay Commission’s reports, union demands and the ability of the employer to bear the additional burden. These provisions also took into account factors such as price index in adjustment inflation etc. The assessee, a public sector unit, had stated that since the liability being ascertained, even the Comptroller and Auditor General had not communicated them to be contingent liabilities. The Assessing Officer, for both the relevant years, held that the provision could not be allowed and that the claim or deduction was allowable when actually the entire quantum of liability could be calculated. The order of the AO was upheld in appeal. The Tribunal relying the Supreme Court’s decision in Bharat Earth Movers v. CIT [2000] 245 ITR 428 allowed the assessee’s claim. The Tribunal noticed as follows: –
“13. In the assessee’s case also, it is noticed that the provision for the wage revision is factored on the basis of past experience, interim pay commissions of govt. employees, available pay commission reports of public sector employees, union demands and other relevant factors required for a scientific computation. Obviously, when one wage agreement comes to an end and other is executed, there would be a passage of time, but the new wage agreement would come into effect from the end of the earlier wage agreement. This being so, the liability is certain in the assessee’s case though the quantum of such liability is variable and it is further noticed that the assessee has categorically admitted that the provision as done is invariable short of the final agreement and the difference as ultimately emerging are always booked as expenses in the year in which the payment is made. This being so, we are of the view that the provisions made on account of wage revision is not a contingent liability and is allowable in the year of making such provisions made. In the circumstances, this issue is held in favour of the assessee and the addition on this account stands deleted.”
4. Learned counsel for the Revenue contended that the deduction for wage revision allowed by the Tribunal cannot be sustained because the exact liability was unascertainable. The deduction could be allowed only when the liability can actually be counted in discharge, which in this case was on a future date. Furthermore, urged counsel, that even if the assessee’s contention about estimation of the liability were to be accepted, that exercise had to be based on realistic and reasonable calculations, even though actual quantification may not be possible.
5. In the earliest decision on the question of whether such liability incurred towards employees’ services or fulfillment of their terms of employment which may become payable in future but claimed by the assessee in a given previous year is allowable as deduction, the Supreme Court observed as follows in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53: –
“The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account. Contingent rights, if capable of valuation, can similarly be taken into account as trading receipts where it is necessary to do so in order to ascertain the true profits.”
In Bharat Earth Movers (supra) (decided by the Supreme Court), the question which the Court had to consider was whether the provision for meeting earned-leave-encashment by the employee was an admissible deduction in the hands of the employer. The Court reiterated and applied its previous decision in Metal Box Co. of India Ltd. case (supra) and held as follows:
“(I)f a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to quantify and discharge at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”
6. In this case, the Tribunal had noticed that there was no dispute as regards the terms of employment of the workers and officers. The only question was the exact quantification of the compensation or wage revision. The Tribunal also held that provision for wage revision was based on past experience, interim Pay Commission of government employees, previous Pay Commission’s reports of public sector employees, union demands and other relevant factors. The Tribunal also held that with the expiry of one wage settlement or agreement, invariably, there is a time lag when another fresh wage revision agreement is negotiated and entered. The deduction claimed for that period cannot be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer. In this case, BHEL had the benefit of past experience of such pay revisions. Its liability could not be characterized as contingent but was in fact ascertained; the quantification, however, had not happened.
7. In view of these facts, this Court holds that there is no infirmity with the reasoning of the Tribunal about the deduction claimed on account of wage revision being permissible.
8. Question No.2 – Whether the interest earned on tax free bonds between the date of their application by the assessee and the date of their allotment could be given the benefit claimed?
This question arises for consideration only for the assessment year 1988-89. The assessee had earned Rs. 25 lacs which was credited to its interest account. The facts are that the assessee had applied for and was allotted tax free bonds during the relevant period. The interest sought to be taxed was for the period between the date of submission of application along with the money to the issuing agency i.e. the Railways and actual allotment. In the opinion of the AO and the Appellate Commissioner (who affirmed the former’s decision), the character of the income i.e. interest for that period i.e. between the date of application and the date of allotment of bonds was different and it could not claim the benefit of exemption.
9. In support of the appeal, it was argued that the Tribunal fell into error in holding that interest for the brief period when the bonds were not allotted, could not be taxed. It was submitted that in terms of the bonds applied for, interest was payable from the date of allotment. Interest income was exempted from the date of allotment till the date of maturity even though the concerned agency might have paid interest for the period before the allotment, that interest income could not claim the benefit of exemption.
10. The Tribunal by its impugned order reasoned while accepting the assessee’s appeal as follows: –
“50. We have considered the rival submissions. It is noticed that the benefit of deduction u/s 10 (15) (iv) (h) is available to the various specified/notified bonds/debentures. Further, the reading of the Explanation 2 to the said section also shows that the expression interest has been widened so that the benefit of exemption from withholding of tax is also extended to hedging transaction charges on account of currency fluctuation. This clearly shows that the interest on the bonds whether embedded in bonds subsequent to its purchase is also exempt. This being so, we are of the view that the disallowance as made by the AO and as confirmed by the CIT (A) on this ground is not on right footing and is liable to be reversed and we do so. In the circumstances, the AO is directed to grant the assessee the benefit of the deduction of the interest of Rs.25 lakh which has fallen due in connection with the transaction of the purchase of the tax free bonds. In the circumstances, this issue is held in favour of the assessee and stands allowed.”
11. Section 10 lists out all kinds of amounts and income which are not taxable. Section 10(15)(iv) to the extent it is relevant reads as follows: –
“(I) nterest payable –
