Case Law Details

Case Name : M/s. Rashtriya Ispat Nigam Ltd. Vs. JCIT (OSD) (ITAT Visakhapatnam)
Appeal Number : I.T.A. No. 13/Vizag/2013
Date of Judgement/Order : 22/11/2017
Related Assessment Year : 2004- 05
Courts : All ITAT (4448) ITAT Visakhapatnam (33)

M/s. Rashtriya Ispat Nigam Ltd. Vs. JCIT (OSD) (ITAT Visakhapatnam)

The assessee company has created a provision under the head ’Future Leave Encashment’. During the course of assessment proceedings, the assessee company was asked to explain how the amount debited towards the provision for future leave encashment can be allowed as deduction. In response to which, the assessee company filed its explanation contending inter alia, that the assessee company is following mercantile system of accounting and the amount on account of leave encashment was provided in the accounts are based on the actuarial valuation certificate issued by Consulting Actuary. Therefore, the fact is, it is the liability towards ascertained employee cost for the present services, determined based on actuarial valuation i.e., on a realistic and scientific basis.

However, Assessing Officer was not convinced with the explanation furnished by the assessee company. The Assessing Officer held that the provision is in the nature of contingent liability but not an ascertained liability. The liability is neither accrued nor incurred unless the employees of the company encashed the leave accrued to them. Further, the employees have an option either to avail the leave or to en cash the same and therefore, there is high element of uncertainty whether the said leave would be encashed or availed by the employees whose exact number under either head is not ascertainable. The provision therefore is clearly in the nature of contingent liability and the same is not an allowable expenditure. In this context, Assessing Officer relied on the decision of Karnataka High Court in the case of Mysore Lamp Works Ltd., vs. CIT 185 ITR 96 and added the amount to the income of the assessee.

 On  appeal, the Ld. CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, assessee filed appeal filed before the Tribunal.

During the course of hearing, the learned Counsel for the assessee reiterated the submissions made before the lower authorities. We find that an identical issue was decided by the coordinate bench vide order date 8th January, 2015 (supra) wherein it was held that the claim of the assessee cannot be allowed in view of the specific provisions of S.43B(f) of the Income Tax Act, 1961 which provides for allowance of such claim only in the year of payment.

Full Text of the ITAT Order is as follows:-

These appeals filed by the revenue as well as the assessee are directed against order of the Commissioner of Income Tax (Appeals) {CIT(A)}, Visakhapatnam vide ITA No. 413/04-05/JCIT(OSD),C- 3(1)/VSP/11-12 dated 31.10.2012, ITA No.34/11-12/DCIT/C- 6(1)/VSP/2013-14 dated 29.8.2013 & ITA No.0397/12-13/JCIT,R- 3/VSP/2013-14 dated 23.12.2013 for the assessment years 2004-05, 2008-09 & 2011-12. Since, the facts are identical and the issues are common, they are clubbed, heard together and disposed-off by way of this common order for the sake of convenience.

ITA No. 13/Vizag/2013 (A.Y.2004-05) and

ITA No. 57/Vizag/2014 (A.Y.2011-12)(Assessee’s appeals):

2. Ground No. 1 is related to the depreciation of Railway lines & sidings. The assessee constructed the railway lines and sidings and claimed the depreciation of Rs. 13,428/- @ 15%. The A.O. disallowed the same and added back to the return of income since the asset is owned by the Indian Railways but not by the assessee relying on the decision of Hon’ble Supreme Court in the case of Mysore Minerals Limited 239 ITR 775. On appeal, the Ld. CIT(A) confirmed the addition made by the A.O. Aggrieved by the order of the Ld, CIT(A), the revenue filed the appeal before this Tribunal.

3. We have heard both the parties and perused the materials placed on record. This issue is squarely covered by the decision of this Tribunal in assessee’s own case in ITA No. 9 & 16/Vizag/2013 dated 29.4.2015 against the assessee. The Hon’ble ITAT, Visakhapatnam Bench following its own order for the earlier year in the assessee’s own case dismissed the appeal of the assessee and confirmed the order of the Ld. CIT(A). Respectfully following the view taken by the tribunal we uphold the order of the Ld. CIT(A) and dismiss the appeal of the assesse on this ground.

4. Ground No. 2 is related to the dis allowance of provision towards the Post retirement benefit Scheme. This issue is involved in ITA No. 13/Vizag/2013 for the assessment years 2011-12 & 2004-05. During the assessment proceedings, the A.O. found that the assessee has created a provision for post retirement benefits to the tune of Rs. 22,12,50,151/- for the assessment year 2011-12 and Rs. 4,16,30,119/- for the assessment 2004-05. The assessee company explained the AO that the company provides for medical insurance benefit in the scheme and takes common insurance policy for retired employees and pays the premium and the employee has to pay part premium of meager amount and the retired employees can directly claim insurance benefit, settlement benefits include rail fare, air fare transportation charges, and packing charges etc.. and the Fare well benefit scheme etc. are included in the scheme. The above benefits are provided to the retired employees in accordance with the terms of the employment as well as the scheme framed by the company. An employee shall receive wages, annuity or pension, gratuity, fees perquisites and the family benefit scheme, post retirement benefits, leave salary, etc. for the services the employee agreed to render to the organization. Therefore, the assessee was obliged to recognize the above expenditure as per the accounting standard-15 of ICAI, which is mandatory from the financial year 2006-07. The assessee has valued the liability on actuarial valuation certificate issued by consulting Actuary, after due consideration of provisions/rules of the company for retirement benefit scheme, guidance note issued by the actuarial society of India and accounting standard-15 of Institute of Chartered Accountants of India. The assessee relied on the decision of Hon’ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428. The A.O. not convinced with the explanation of the assessee held that the assessee company has neither created any recognized superannuation fund for providing the post retirement benefits to the employees nor contributed the amount to any such recognized fund, hence, he held that the provision in the first place is contingent in nature. Further, Ld. A.O. observed that the assessee is accumulating the funds under the provisions and spent lesser amounts, which clearly indicate the factual position that the provisions are created over and above the requirement. Since the expenditure is contingent in nature and not contributed for any recognized superannuation fund, the A.O. disallowed the sums provided under the Post retirement benefits and brought to tax. On appeal, the Ld. CIT(A) confirmed the addition made by the A.O.

5. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The issue is squarely covered in favour of the assessee by the order of this Tribunal in ITA No. 9 & 16/Vizag/2013 dated 29.4.2015. For ready reference, we extract the relevant paragraph of the order of this Tribunal cited (supra).

“16. We have heard the submissions of the parties, orders of the revenue authorities and perused the materials available on record. We find that the Coordinate Bench of Visakhapatnam Tribunal in assessee’s own case for assessment year 2006- 07 to 2008- 09 by order dated 08.01.2015 (supra) has extensively discussed the issue and allowed the claim of the assessee, (wherein one of us is the author of the order). Therefore, respectfully following the view taken by us in our order dated 08.01.2015 (supra) in assessee’s own case, we set aside the orders of both the lower authorities in disallowing the claim of the assessee company towards provision for Post Retirement Benefit Scheme and direct the Assessing Officer to allow the claim of the assessee company. Ground No. 3 of the assessee is allowed.”

The tribunal has followed it’s own order in assessee’s case for the A.Y.2006-07, 2007-08 and 2008-09 in ITA No. 94,95,&97/viz/2012 dated 08/01/201. For ready reference we also extract the relevant parts of the ITAT’s order cited (supra) which reads as under:

22. After considering the rival submissions and perusing the materials on record as well as orders of the authorities below, we are of the view that the claim of the appellant deserves to be allowed. It is an undisputed fact that the provision was made on the basis of actuarial valuation and that the provision was made towards the obligation of the appellant arising out of its contract with the employees in the form of a scheme viz., Post Retirement Benefit Scheme. Further, there is no dispute with regard to allowance of the expenditure under the provisions of the Income Tax Act. The short dispute is whether the expenditure has to be allowed in the year of payment or whether the expenditure can be allowed in the year the appellant has made the provision on the basis of actuarial valuation. The case of the Revenue is that the expenditure has to be allowed only in the year of payment as against the case of the appellant that the expenditure has to be allowed on accrual basis. We do not find much force in the contention of the ld DR that the payments made under this scheme are of the kind of gratuity and hence provisions of S.40(A)(7) are attracted. Had it been so, there was no need to include I.T.A. Nos. 94, 95,96,97 & 141/Viz/2012 Assessment Years:2006-07 to2007-08 & 2005- 06 RINL 17 the provisions of S.40(A)(9) which provide for dis allowance of contributions made to funds created for other purposes. Further, we do not find much weight in the contention that a provision made on the basis of actuarial valuation is also to be treated as contribution to a fund. Further, as rightly contended by the learned AR of the appellant this issue is squarely covered by the decision of Chandigarh Bench of the ITAT in the case of Glaxo Smithkline Consumer Healthcare Limited (supra) wherein the tribunal allowed the expenditure on accrual basis and their observations are as under:

“61. In the facts of the present case before us the assessee had recognized and accounted for the post retirement benefit due to its employees, in terms of the scheme of employment and also in terms of the revised/change in Accounting Standard-15 issued by ICAI which was to be followed during the year, is an allowable deduction in the hands of the assessee. The said claim being based on the valuation of the actuary is both scientific and one of the recognized method of accounting and quantifying the said post retiremental medical benefits. In such cases though actual and exact quantification may not be possible, however, the liability so recognized by the assessee could not be said to be unascertained and contingent. The assessee having followed the mercantile system of accounting was compulsorily required to account for the said post retirement medical benefits as the same was quantified and had accrued during the year. The claim of the assessee was thus allowable irrespective of the fact that the assessee had made a provision in the books of account but had claimed the said deduction in the computation of income. It is well settled proposition that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss as held by the Hon’ble Apex Court in Sutlej Cotton Mills Ltd. Vs. CIT (supra). It was further held by the Hon’ble Apex Court that what is necessary to be considered is the true nature of transaction and whether in fact it has resulted in profit or loss to the assessee. Further the said deduction was claimed during the year under consideration and the claim being bonafide is to be allowed in the year in which the same accrues though the said liability is to be discharged at a later date.

62. Identical issue arose in Bokaro Power Supply Co. (P) Ltd. Vs DCIT (supra) of allow ability of claim of deduction of post retirement medical benefits on the basis of actuarial valuation and the same was heldto be not an unascertained liability and was held as allowable, observingas under:

5. We have heard both the sides on the issue. We have also perused the order of authorities below. The assessee company of was liable to pay for medical expenses of its retired employees in accordance with the terms of employment. Prior to this year, the assessee was claiming these expenses in the year of expenditure. Due to the change in the Accounting Standard in respect of the accounting of post retirement benefits, the assessee got done the actuarial valuation of these liabilities and started claiming the same on that basis. It is claimed in view of the Accounting Standard, AS-15. This claim was based on the valuation of liability on actuarial and scientific basis. In such cases, the actual and exact quantification may not be possible, however, liability cannot be said to be a contingent one. Since the provision has been made on scientific basis and the assessee is following mercantile system of accounting, therefore, in our considered view, the CIT (A) was justified in deleting the addition while deciding ITA No. 149/Del/2012. A liability which has already accrued though discharged on a future date would be entitled for deduction. While working out the profit & gain of the business the accrued receipts are brought to the tax, similarly, accrued I.T.A. Nos. 94, 95,96,97 & 141/Viz/2012 Assessment Years:2006-07 to2007-08 & 2005-06 RINL 18 liabilities due would also be entitled for deduction while working out the profit and gain of the business of the year. Computation of taxable profit for a particular year can be worked out only by deducting the actual payments made to the employees and present value of any payment in respect of the services in that particular year to be made in subsequent year. In view of this, we find the order of CIT (A) in ITA No. 149/Del/2012 in order. We set aside the order of CIT (A) in ITA No. 4921/Del/2010. For doing so, we also get support from the following decisions of Hon’ble Supreme Court and Hon’ble Delhi High Court. 5.1 Hon’ble Supreme Court in the case of Metal Box Company of India Ltd. vs. Their Workmen – 73 ITR 53 has held as under :-

“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 consideration. An estimated liability under a scheme of gratuity, if property ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognized in trade circles and there is nothing in the Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a “reserve”. Therefore, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year. Where the fixed assets are revalued and the difference between its cost and the value fixed on such revaluation is credited to the capital reserve, unless the Tribunal finds that the revaluation is mala fide, the interest on the amount of the reserve should be allowed as a deduction from the gross profits.

From the provisions of section 6(c) and section 7 of the Bonus Act, it is evident that the Tribunal must first estimate the amount of direct taxes on the balance of gross profits as worked out under sections 4 and 6, but without deduction bonus, then work out the quantum of taxes thereon at rates applicable during the year to the income, profits and gains of the employer and, after deducting the amount of taxes so worked out, arrive at the available surplus. This will be consistent with the rule laid down by courts and tribunals before the Act was enacted, that the bonus amount should be calculated after provision for tax was made and no

Hon’ble Supreme Court in the case of Bharat Earth Movers Limited vs. CIT – 245 ITR 428 = (2002- TIOL-123-SCrm has held as under:-

“Held, reversing the decision of the High Court, that the provisions made by the assessee company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability.”

Hon’ble Delhi High Court in the case of CIT vs. Insilco Limited -197 Taxman 55 has held as under :-

“Similarly it was held by the Hon’ble Delhi High Court in the case of CIT vs. Insilco Ltd. that where the provisions were estimated on the basis of actuarial calculations, the deduction claimed by the assessee has to be allowed. The relevant extracts of the decision is reproduced below for ready reference:- “6. In the case of Shree Sajjan Mills Ltd (supra), the Supreme Court was examining the provision-made by the assessee towards gratuity under the Income Tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company (supra), crystallized its analysis at page 599 and made the following observations:- “It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as
follows:- 1 xxxx 2 xxxx 3 xxxx 4 xxxx 5. Provision made in the profit and loss I.T.A. Nos.94, 95,96,97 & 141/Viz/2012 Assessment Years:2006-07 to2007-08 & 2005-06 RINL 19 account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under Section 28 or section 37 of the Act. ” ITA 873/2008 & 1156/2008 Page 6 of 25

7. The Division Bench of this Court, while considering deductibility of a provision for warranties made by an assessee, which dealt in computers in the case of CIT vs Hewlett Packard India (P) Ltd, by its judgment passed in Appeal No. ITA 486/2006 dated 31.03.2008, upheld the deductibility of the provision for warranty on the ground that it was made on the basis of actuarial valuation being covered by the principle set out in Metal Box Company (supra). In view of the aforesaid decisions and given the fact that the provision was estimated based on actuarial calculations, we are of the opinion that the deduction claimed by the assessee had to be allowed. We find no fault with the reasoning of the Tribunal. No substantial question of law arises for our consideration.” 5.2 Considering the facts of the assessee’s case and also the decision of Hon’ble Supreme Court and Hon’ble jurisdictional High Court, we sustain the order of CIT (A) in ITA No. 149/Del/2012 on this issue. We allow ITA No. 4921’/Del/2010 and dismiss revenue’s appeal on this ground.

63. In view thereof, we direct the Assessing Officer to allow the deduction of Rs. 11.09 crores on account of post retirement medical benefits. The ground Nos. 5 and 6 raised by the assessee are thus allowed. We are in complete agreement with the view taken by the Chandigarh and Delhi Benches of the Tribunal. We set aside the orders of both the lower authorities in disallowing the claim of the appellant towards provision for Post Retirement Benefit Scheme and direct the assessing officer to allow the claim of the appellant. In the result, this ground of appeal of the appellant is allowed.

Respectfully, following the orders of this Tribunal cited (supra), we allow the appeal of the assessee on this ground and set aside the order of the lower authorities.
 6. Ground no. 3 is related to the provision for employee family benefits. This issue is involved for the assessment year 2011-12 & 2004-05. For the assessment year 2011-12, the assessee debited expenditure of Rs. 13,70,20,576/- and for the assessment year 2004-05, the amount debited was Rs. 19,62,83,066/-. The A.O. during the assessment proceedings found that the assessee created the provision towards employees family benefit scheme and charged to the profit & loss account. The assessee explained that the provision was towards settlement/ re-settlement of expenses such as transportation and allowances to the retired employees of the company. The provision is similar to the post retirement benefits of the retired employees. The A.O. opined that the provision is contingent in nature and does not arise any definite obligation for the assessee, which can be specifically ascertained and assigned and there was no basis for creating the provision which can be explained by the company. The assessee argued that it is obligatory on the part of the company to provide the benefits under the employees family benefit scheme and mandatory requirement of AS-15 of ICAI and the company has provided the liability on the basis of actuarial valuation certificate issued by the competent consultant for this purpose. The A.O. was not impressed with the explanation of the assessee and held that the provision is not an ascertained liability and the assessee has created the provisions over and above the requirement and has not been adopted any basis and the assessee has spent meager amounts and accumulated the funds under the employees benefit scheme, which is being utilized by the company. The expenditure was not allowable u/s 30 to 38 of the Act , hence disallowed and added back to the income.
7. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed the order of the A.O., hence this appeal.
8. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The same issue has come up for adjudication in the assessee’s own case for earlier years and for the assessment year 2009-10 & 2010-11 the Hon’ble ITAT, Vizag bench in the assessee’s own case in the order cited (supra) allowed the appeal of the assessee following it’s order in assesses own case for the A.Y. 2006-07 to 2008-09 in ITA No. 94,95,&97/Viz/2012 and deleted the additions made by the A.O. For ready reference, we reproduce the relevant paragraph of the ITAT’s order page no.12 para-18 as follows:
“18. The contentions of the Learned Counsel for the assessee and the learned D.R. are similar to the issue of dis allowance of provision towards post retirement benefit scheme. This issue is identical to the one relating to post retirement benefit scheme considered herein above in para 16. Further, similar issue has been decided by the Coordinate Bench of this Tribunal in assessee’s own case for assessment year 2006-07 to 2008-09 by order dated 08.01.2015 in ITA. No. 94,95, 96, 97 & 141/Viz/2012 wherein this issue has been extensively discussed and the claim of the assessee was allowed.  Therefore, respectfully following the view taken by this Tribunal in its order dated 08.01.2015 (supra) in assessee’s own case, we set aside the orders of both the lower authorities in disallowing the claim of the assessee company towards provision for Employees Family Benefit Scheme and direct the lower authorities to allow the claim of the assessee company. Ground No. 4 of the assessee is allowed.”
9. Respectfully following the view taken by this Tribunal in its order dated 29.4.2015, we set aside the orders of the lower authorities and allow the appeal of the assessee.
10. Ground No. 4 is related to the provision for future leave encashment. During the assessment proceedings, the A.O. found that the assessee company has created a provision under the head leave encashment for an amount of Rs. 34,64,82,796/-. The assessee has explained that the liability was created on actuarial basis as per the certificate issued by the competent consultant and debited the expenditure as per accounting standard-15 issued by the Institute of Chartered Accountants of India. Not being impressed with the explanation of the assessee, the assessing officer made the addition holding that the expenditure was purely provisional and not an ascertained liability and the assessee has failed to furnish any factual details regarding outstanding leave of each staff member the eligibility of encashment of leave and the liability related to encashment of leave. Further, the Ld. A.O. observed that the liability is neither accrued nor incurred unless the employees of the company en cash the leave accrued to them and the employees had option either to avail the leave or to en cash the same, hence, there is a high element of uncertainty and therefore, the expenditure was purely contingent in nature, accordingly disallowed.
11. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed order of the A.O.
12. Aggrieved by the order of the CIT(A), the assessee is in appeal before this Tribunal.
13. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. This issue is squarely covered by the order of this Tribunal in ITA Nos. 9 & 16/Vizag/2015 dated 29.4.2015 against the assessee. The relevant part of the order is extracted below which reads as under:
20. The assessee company has created a provision under the head ’Future Leave Encashment’ of Rs. 66,31,68,389 during the F.Y. 2008- 09 relevant to the A.Y. 2009-10 as found in schedule No. 16 of the balance sheet. During the course of assessment proceedings, the assessee company was asked to explain how the amount debited towards the provision for future leave encashment can be allowed as deduction. In response to which, the assessee company filed its explanation vide letter dated 25.10.2010 contending inter alia, that the assessee company is following mercantile system of accounting and the amount on account of leave encashment was provided in the accounts are based on the actuarial valuation certificate issued by Consulting Actuary. Therefore, the fact is, it is the liability towards ascertained employee cost for the present services, determined based on actuarial valuation i.e., on a realistic and scientific basis. However, Assessing Officer was not convinced with the explanation furnished by the assessee company. The Assessing Officer held that the provision is in the nature of contingent liability but not an ascertained liability. The liability is neither accrued nor incurred unless the employees of the company encashed the leave accrued to them. Further, the employees have an option either to avail the leave or to en cash the same and therefore, there is high element of uncertainty whether the said leave would be encashed or availed by the employees whose exact number under either head is not ascertainable. The provision therefore is clearly in the nature of contingent liability and the same is not an allowable expenditure. In this context, Assessing Officer relied on the decision of Karnataka High Court in the case of Mysore Lamp Works Ltd., vs. CIT 185 ITR 96 and added the amount Rs. 66,31,68,389 to the income of the assessee. On  appeal, the Ld. CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, assessee filed appeal filed before the Tribunal.
21. During the course of hearing, the learned Counsel for the assessee reiterated the submissions made before the lower authorities. We find that an identical issue was decided by the coordinate bench vide order date 8th January, 2015 (supra) wherein it was held that the claim of the assessee cannot be allowed in view of the specific provisions of S.43B(f) of the Income Tax Act, 1961 which provides for allowance of such claim only in the year of payment. The findings of the coordinate bench in this regard are contained in para 51 of the order. Respectfully following the view taken by the coordinate bench, we uphold the orders of the lower authorities and confirm the same. Ground No. 5 of the assessee is dismissed.
14. Respectfully following the view taken by this Tribunal in the order cited (supra), we uphold the orders of the lower authorities and dismiss the appeal of the assessee on this ground.
15. Ground No. 5 is related to the provision for Long service award. During the assessment proceedings, the A.O. found that the assessee company has created provision under the head “long service award” to the tune of Rs. 3,03,18,326/-. The assessee explained that the company gives the award to the employee who completes the 25 years continuous service under scheme. The award would be silver medallion weighing 150 gms. with the emblem of RINL, Visakhapatnam Steel Plant embossed on the side “long service award” on the other side. The assessee has created the provision on actuarial basis as per certificate of actuarial valuation issued by the competent consultant for this purpose and the amount was debited following the accounting standard-15 of the guidelines issued by the Institute of Chartered Accountants of India. The A.O. held the expenditure was contingent in nature. After going through the explanation offered by the assessee company, the A.O. observed that the provision created towards ‘Long Service Award’ is not wholly and exclusively laid out for the purpose of business. The provision is in no way related to the day to day running of the business. Entire provision made during the year was remained unpaid at the end of the year. As per the details available from the records of the earlier years, the A.O. observed that it was the provision which has no basis and relied on the Hon’ble Supreme Court judgement in  the case of CIT Vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 where in it was held that where the liability is wholly contingent and does not raise any definite obligation during the time that the business is carried on it cannot fall within the expression ‘expenditure laid out or expended wholly for business purposes’. The mercantile system can never be stretched to embrace all sorts of provisional, notional or contingent payments which the assessee considers that he might ultimately be called upon to pay. In such cases, liability accrues only when the liability crystallizes or becomes ascertained. The AO also relied on the order in case of CIT Vs. Ashok Iron & Steel Rolling Mills reported in 199 ITR 815 and disallowed the same.18. Aggrieved by the order of the A.O. the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed the order of the A.O.
19. Aggrieved by the order of the CIT(A), the assessee is in appeal before this Tribunal. This issue is covered by this Tribunal order in assessee’s own case for the earlier years in appellate order dated 29.4.2015, by this Tribunal in favour of the assessee. For ready reference, we extract relevant para no. 22 of the cited order.

“22. Ground No. 6 is on the dis allowance of Rs. 69,92,138 in respect of provision towards long service award. This issue has been decided by the Coordinate Bench of the Visakhapatnam Tribunal in assessee’s own case for assessment year 2006-07, 2007-08 and 2008-09 in ITA. Nos. 94,95 & 97/Viz/2012 dated 08.01.2015 wherein it has been observed that this issue is identical with the issue of Post Retirement Benefit Scheme and the expenses of this nature are to be allowed on accrual basis. Consistent with our view taken in assessee’s own case in earlier years, we hold that provision made by the assessee company towards long service award based on actuarial valuation is to be allowed as expenditure. Accordingly, we allow ground No. 6 of the assessee.”

20. Respectfully following the order of this Tribunal, we set aside the orders of the lower authorities and allow the appeal of the assessee.
21. Ground No. 6 is related to the provision for mines closure. During the assessment proceedings, the A.O. found that the assessee debited a sum of Rs. 18,46,000/- towards mines closure. The assessee explained that as per the Government of India, the Mineral Services and Development Rules, 1998, Government has introduced statutory provisions for preparation and implementation of progressive mines closure plan for operating mines, closure plan for final closure of mines. The company is supposed to close the mined areas and at the time of closure of mines, the expenditure would be huge and would jeopardize the financial results of the company, hence, the assessee is providing for mines closure expenditure every year as at the end of each financial year based on area mined during the year. Accordingly, the amount was provided for financial year 2011-12. The A.O. held that the
expenditure was purely contingent in nature and has no basis for creation of such provision, thus, made the addition of Rs. 18,46,000/- relating to provision for mines closure expenditure.
22. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed the order of the A.O. Hence, the assessee filed this appeal before this Tribunal. This issue has come up for adjudication before this Tribunal in the earlier years in the assessee’s own case and this Tribunal in ITA Nos. 9 & 16/Vizag/2015 cited (supra) decided against the assessee and dismissed the appeal of the assessee as under:
“24. Briefly stated the facts are that the appellant is operating some mines. As per the provisions of the statute governing the operation of these mines, the appellant is required to set apart certain amount, calculated in accordance with the rules prescribed in this regard, for purposes of meeting the expenditure for closure of the mines. The appellant claimed expenditure of Rs. 48,14,204 towards the provision made in accordance with the above rules. The assessing officer disallowed the amount holding that the expenditure is of contingent nature. The learned CIT(A) sustained the dis allowance and aggrieved the assessee is in appeal before us.
25.1. The learned counsel for the assessee, submitted that the appellant is statutorily obliged to close the mines after the completion of the mining operations and for this purpose the appellant has to implement the ‘Progressive Mine Closure Plan. As the appellant is following mercantile system of accounting, provision made in the aforesaid manner is required to be allowed while determining the total income for purposes of the Income Tax Act, 1961.
25.2. Placing reliance in the orders of the lower authorities, the learned DR argued the expenditure did not even accrue during the year and hence the same cannot be allowed.

26. We have carefully perused the materials on record and considered the rival arguments. We are of the considered view that the claim of the expenditure is quite premature. During the previous year relevant to the impugned assessment year, the assessee did not incur any expenditure in this regard. The provision was made merely in terms of the statutory provisions relating to the operation of mines. It is not a case where the expenditure accrues in proportion to the period for which the mines are operated. Therefore, we are in complete agreement with the view taken by the assessing officer and the Ld. CIT(A) and confirm the view taken by them. Ground No. 7 is dismissed.”

23. Respectfully following the view taken by this Tribunal, we uphold the order of the lower authorities and dismiss the appeal of the assessee.
24. Ground No. 7 is related to the addition in respect of provision for leave travel concession amounting to Rs. 1,01,74,000/-. During the assessment proceedings, the assessing officer found that the assessee had made a provision towards LTC and debited to the Profit & loss account. The assessee explained to the A.O. that the company is providing LTC facilities to the employees and according to the benefits extended to the employees, the assessee company has created the liability towards the LTC expenditure. The assessee further argued that the assessee has followed scientific method of ascertaining liabilities towards the expenditure through actuarial valuation done by the concerned actuary after due  consideration of the provisions/ rules of the company for LTC scheme and the expenditure is debited as per the Accounting Standard-15 of the Institute of Chartered Accountants of India. The assessing officer disallowed the expenditure holding that the ascertainment of the liability is not established nor any details were made available in support of the claim such as LTC rules, the operation of LTC account, the amounts actually incurred out of the account and the treatment given to LTC amounts for unutilized amounts, etc. Since the assessee failed to furnish the specific details, the A.O. held that the expenditure is unascertained and accordingly, disallowed and added back to the income. The assessee went on appeal before the CIT(A) and the Ld. CIT(A) held that the provision is created based on actuarial report and cannot be said to be an ascertained liability. Further, the liability arises to the employer only when the tour is commenced or when the claim is made and till then it is merely a contingent liability. Accordingly, the CIT(A) held that the provision created for contingent liability on notional amount would not be eligible for deduction u/s 37 of the Act.

25. Aggrieved by the order of the A.O., the assessee filed appeal before this Tribunal. During the appeal hearing, the Ld. A.R. argued that the assessee has created the liability on actuarial basis as per the valuation certificate issued by the approved consultant. Hence, the expenditure should be treated as ascertained liability and the issue is akin to the employees family benefit scheme and post retirement benefit schemes, which were allowed by the Hon’ble ITAT on the basis of actuarial valuation. Therefore, the Ld. A.R. vehemently opposed for addition of the same.

26. On the other hand, the Ld. D.R. argued that the leave travel concession was based on performing the journey by the employees. The liability arose only when the employees perform the tour. Till such time, the employees undertakes the tour, the company does not incur any liability or the expenditure. The Ld. A.R. further argued that as seen from the assessment order, the assessee has not furnished any details with regard to the details called for by the A.O. Therefore, there is no reason to interfere with the order of the Ld. CIT(A).
27. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The LTC expenditure is allowed as per the scheme of the leave travel concession of the company. The liability commences no sooner the
employee undertakes the tour, without the commencement of the tour, there is no liability accrue or arise under the leave travel concession. In the case of the company, it is evident from the assessment order that the assessee has not furnished the LTC rules, the operation of LTC account, the amounts actually incurred out of the account, treatment given to the unutilized amounts and the amount that cannot be utilized etc. Though the A.O. has called for the specific details, the assessee has not furnished the above details. The expenditure cannot be ascertained on actuarial valuation and the expenditure has to be ascertained and determined on the basis of the LTC rules and the details called for by the A.O. and the journeys undertaken as discussed above. Therefore, we are of the considered opinion that the assessee company required to submit the above details and the issue needs further verification at the end of the A.O. to ascertain the liability accrued. Therefore, this issue is remitted back to the file of the A.O. to examine the details and decide the issue afresh on merits. Accordingly, the appeal of the assessee on this ground is allowed for statistical purposes.

28. Ground No. 8 is related to the payment made to A.P. Transco towards service line charges. During the assessment proceedings, the A.O. found that the assessee has the made the payments to A.P. Transco a sum of Rs. 14,78,47,000/- and explained that the Company is engaged in the manufacture of steel of 3.1 Million Tonnes and is on the verge of expanding the capacity to 6.3 Million Tonnes. The process of steel manufacture is complex and requires continuous power supply, which is a major requirement in manufacture of steel. Since the assessee is an integrated steel plant, it requires continuous power supply and any interruptions will jeopardize the plant and machinery and company will incur huge losses. In order to ensure continuous power supply for smooth production, the company has entrusted the job of ‘Extension of power supply for CMD of 400 MVA’ to M/s. APTRANSCO. As per the terms and conditions, RINL has to release payments to M/s. APTRANSCO on non- refundable basis. The amount payable by RINL under the agreement is towards service line charges and for development charges for extension of power supply for a CMD of 400 MVA.

The brief nature of work includes

a) Upgrading Kalapaka-VSS 220 KV DC Line with Twin Moose Conductor
b) Erection of 220 KV DC line from VSS to MRS with Moose Conductor
c) Erection of 315 MVA power Transformer, Bray extensions (HV&LV) and laying of 220 KV cable at PGCIL Sub Station.
As per clause No. 5.3.2.2 the services lines created in the execution of the work shall be the property of M/s. APTRANSCO which in turn will maintain the same at its own cost irrespective of the fact that a portion or full cost of the service line has been paid by RINL/VSP. As the payment made by RINL to M/s. APTRANSCO does not create any right to RINL on the assets created in the execution of work, and the payment made is not refundable to RINL, the expenditure incurred by the company is accounted for in the books of accounts as revenue expenditure incurred wholly and exclusively for the for the business
of the Company, hence requested the AO to allow the same as revenue expenditure.
29. The A.O. not being convinced with the explanation disallowed and added back the same to the total income. The AO observed that the expenditure was towards additional power lines to meet the requirements of new unit being set up by the assessee. The said expenditure clearly was prior to setting up of the new unit or prior to expansion of the capacity, thus such expenditure is preoperative expenditure and cannot be treated as revenue.
30. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A). The Ld. CIT(A) confirmed the order of the A.O., but accepted the contention that the expenditure
was in the nature of revenue expenditure. Since the work relating to erection and allowing service lines are not completed and the purported assets having became non- functional, the assessee would not be entitled to claim the expenditure as revenue expenditure for impugned A.Y. and accordingly, confirmed the order for the A.O.
31. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. During the appeal hearing, the Ld. A.R. argued that the assessee incurred the expenditure towards the
service line charges for development and extension of power supply for CMD of 400MVA. While agreeing with the contention of the assessee that service lines are owned by the A.P. Transco and expenditure was revenue expenditure, the CIT(A) was not justified in holding that the same cannot be allowed in the year under consideration. The order of completion of erection of service lines is of no consequence in the hands of the assessee as the assessee has incurred a liability to the extent of the expenditure during the impugned assessment year. Further, the assessee relied on the decision of this Tribunal in Sarvaraya Sugars Limited in ITA No. 367/Vizag/2013 order dated 19.12.2014.
32. On the other hand, the Ld. D.R. relied on the order of the lower authorities.
33. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee had incurred expenditure of Rs.
14.78 crores towards laying electrical lines for power supply of CMD 400 MVA. The amount was incurred for service lines and development charges and the payment was made. There is no dispute with regard to the genuineness of expenditure and there is no dispute that the expenditure incurred was a revenue expenditure as held by CIT(A) in its order. This Tribunal also held that the expenditure in question was revenue expenditure in Sarvaraya Sugars Limited cited (supra), following the judgement of Hon’ble Rajasthan High Court in the case of CIT Vs. Hindustan Zinc Limited 221 CTR 637 (Raj.). The company has incurred the expenditure for the business purpose and following the mercantile system of accounting. The company is not a new unit which has to commence its production and it is going concern and the expenditure is intended for expansion and uninterrupted power supply, which is useful for the capacity utilization of the company. The asset does not belong to the company and the asset belong to the A.P. Transco, and the assesse has no right on the asset thus the same cannot be held as capital asset. The case is squarely covered by the order of this tribunal in Sarvaraya Sugars Limited cited (supra). Respectfully following the view taken by this tribunal we hold that the expenditure is revenue expenditure and allowable in the year under
consideration. Accordingly, we set aside the order of the lower authorities and allow the appeal of the assessee.

34. Ground No. 9 is related to the dis allowance made by the A.O. u/s 14A r.w.s. rule 8D of the Act amounting to Rs. 19,46,250/-. During the year under consideration the assessee made the investment of Rs. 361.60 crores in the shares of various companies. Since the return on the said investment is the dividends which is exempt from the tax as per section 10(34) of the Act, the A.O. invoked the provisions of section 14A r.w. rule 8D of the Act and accordingly, made the dis allowance of Rs. 90,46,215/-. During the appeal hearing, the Ld. A.R. submitted that there was no exempt income in the year under consideration, hence contended that the addition is not justified in the absence of the exempt income. Further, the Ld. A.R. argued that the investments were strategic investments and relied on the order of this Tribunal in the case of D. Veerabhadra Reddy (HUF) 263/Vizag/2014 dated 23.6.2017.

35. On the other hand, the Ld. D.R. relied on the orders of the lower authorities.

36. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. There is no dispute with regard to the Ld. A.R’s contention that the assessee company has no exempt income in the year under consideration. This Tribunal following the judgment of Hon’ble Madras High Court in the case of Redington India Private Limited Vs. ACIT 77 Taxmann.com 257 held in the case relied upon by the assessee that when there is no exempt income, there is no case for making the dis allowance u/s 14A r.w.r 8D of the Act. For ready reference we extract the relevant paragraph of the order of the order of the Tribunal cited (supra) which reads as under:

6. We have heard the rival submissions and perused the material on record. The assessee has rental income from go downs and the business loss. The assessing officer has completed the assessment u/s 143(3) by order dated 04.11.2011. The Ld.CIT has called for the record u/s 263 and issued the notice for revision for incorrect set off of business loss against the rental income. After verification of the material on record, the Ld.CIT has dropped the issue with regard to incorrect set off of business loss against the income from property which was examined by the assessing officer. During the course of revision proceedings, it has come to the notice of Ld.CIT that the assessee has made investments in shares and bonds and did not make dis allowance which was required to be made u/s14A of IT Act. The assessee explained that there were no expenses incurred in relation to the exempt income which was claimed as deduction for the assessment year 2009-10. Hence, the assessee argued before the Ld.CIT that Section 14A is not applicable in assessee’s case. As per the observation of the Ld.CIT, the assessee made the investments to the tune of Rs. 19,90,625/- in shares and bonds from the borrowed funds and the interest expenditure relating to the earning of dividend income is required to be disallowed u/s 14A. Though CIT opined that the expenditure relating to the earning of dividend income required to be disallowed, there was no finding given by the CIT in his order with regard to earning of dividend income. The CIT also did not rebut the explanation offered by the assessee stating that no expenditure was incurred for making the investments. The Ld.DR did not make any clarification with regard to the quantum of dividend income earned by the assessee. The Ld.AR submitted paper book enclosing the copy of statement of computation, return of income, balance sheet and profit and loss account. It is seen from the profit and loss account and the statement of computation of income that the assessee has not derived any dividend income. When the assessee has no exempt income, the question of dis allowance u/s14A r.w.Rule 8D is not called for. The same view is expressed by the decision of Hon’ble Madras High Court in Redington (India) Ltd. Vs. Addl.CIT, 77 taxman.com 257, Hon’ble Delhi High Court in Chem Investments Vs. CIT, 61 taxman.com 118 and the Hon’ble Gujarat High Court in Principal CIT Vs. Sintex Industries Ltd., 82 taxman.com 171 held that no dis allowance is called for when assessee makes small investment from the surplus funds. There was no dividend income earned by the assessee and the case was taken for revision to disallow the business loss claimed against the property income which was examined by the AO and dropped the assessment proceedings and the Ld.CIT also satisfied that there is no case for revision on account of incorrect set off of business loss. With regard to the issue of dis allowance u/s 14A as per the judicial pronouncements no dis allowance is called for when there is no exempt income. Therefore, we are of the considered opinion that there is no case for revision of order u/s 263 and accordingly we set aside the orders of the CIT and allow the appeal of the assessee.”
37. Respectfully following the view taken by this Tribunal in the order cited (supra), we set aside the orders of the lower authorities and allow the appeal of the assessee on this ground.
38. Ground No.10 is related to the entertainment expenditure. The assessee debited a sum of Rs. 1,16,80,899/-, which was disallowed by the A.O. under the head “other expenditure”, which was falling under sundries. On appeal before the CIT(A), the Ld. CIT(A) scaled down the dis allowance to the extent of Rs. 10 lakhs. For the sake clarity and convenience we extract the relevant paragraph of the Ld.CIT(A)’s order which reads as under:

“17.3 I have considered the submissions. I have perused the details filed vide pages 371-529 of the paper-book. At page 371, the breakup for entertainment expenditure of Rs. 1,16,80,299/- was given of which the major item related to Rs. 62,72,501/- classified under the head ‘General Accounts’. The other heads related to expenditure incurred towards tea, snacks, milk and other expenses for customers or official guests at various office locations which, in my view are allowable expenses and accordingly the AO is directed to allow the same. Under the sub-head ‘General Accounts’, substantial expenses have been incurred for various events, to the tune of P5,62,72,501/-. I have perused the break-up details filed in regard to these expenses and noted that some of these expenses cannot be considered to be wholly and exclusively incurred for the purpose of business as laid down in section 37 of the I.T.Act. Some of these expenses such as dinner for Indian Airline officials, Argo forestry Department, food arrangements for Commonwealth Games Team, catering arrangements at cricket stadium, South Zone Volley Ball and Basket Ball Team, PM Trophy visit etc. are substantial and do not satisfy the conditions laid down in section 37 of the I.T.Act. These expenses cannot be said to facilitate sales of the assessee, nor can be said to be incurred for HRD programme as contended in the written submission and cannot be considered for allowance u/s. 37. Hence I am of the view that a round-sum dis allowance of Rs. 10,00,000/- is justified in the facts of the case.. Accordingly, the AO is directed to restrict the dis allowance to Rs. 10,00,000/- under the head ‘entertainment expenses’. Ground No. 13 is partly allowed.”

39. During the appeal hearing, the Ld. A.R. submitted that the expenditure was wholly and exclusively laid out for the purpose of business and there is no lavish expenditure incurred and the same was purely incurred for hosting the lunch to various official teams visited the company and argued that the expenditure is allowable u/s 37 of the Act. The assessee is a public sector undertaking and there is no personal advantage except business consideration for incurring such expenditure. Considering the volume of the business the Ld.AR submitted that expenditure was very much reasonable.

40. On the other hand, the Ld. D.R. supported the orders of the lower authorities.
41. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. On verification of the order of the Ld. CIT(A) the expenditure was incurred towards tea, snacks, milk and other expenses for customers or official guests at various office locations. The expenses were also incurred for dinner for airline officials and agro forest department, food arrangement for common wealth games teams and catering arrangements at cricket stadium, south zone volleyball team, etc. These expenses mainly incurred for the purpose of promoting the sports and games are in the nature of marketing and advertisement expenses related to the business activity of the assessee. On careful verification of the order of the Ld. CIT(A), there is no doubt regarding genuine of the expenditure and no lavish expenditure was incurred by the assessee except the lunch and dinner expenses. Therefore, we do not find any reason to restrict the dis allowance. Accordingly, we allow the appeal of the assessee and set aside the orders of the lower authorities. The appeal of the assessee on this ground is allowed.
42. Ground No. 11 is related to the interest uy/s 234C of the Act. The A.O. charged incorrect interest u/s 234C of the Act. However, the assessee submitted that the A.O. passed the order u/s 154 of the Act and rectified the mistake. Therefore, this ground has been withdrawn by the assessee. Since the issue has already been settled by rectification, the ground No. 11 with regard to interest u/s 234C of the Act has become infructuous. Accordingly, the same is dismissed.
43. In the result, the appeal of the assessee for the A.Y. 2004-05 is allowed & 2011-12 is partly allowed.
ITA 64/Vizag/2014 (A.Y. 2011-12) (Revenue appeal):
44. Ground Nos. 2 & 3 are related to the expenditure incurred for afforestation and horticulture. During the previous year relevant to the assessment year, the A.O. found that the assessee debited sum of Rs. 4,73,07,517/- towards afforestation and horticulture expenses. The A.O. treated the same as capital expenditure and disallowed and added back to the income. On appeal, before the CIT(A), the Ld. CIT(A) deleted the addition. Hence, the revenue is in appeal before this Tribunal.

45. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The same issue has come up for adjudication before this Tribunal in appeal No. 9 & 16/Vizag/2013 dated 29.4.2015 and the coordinate bench of this Tribunal confirmed the order of the Ld. CIT(A) and dismissed the appeal of the revenue. For ready reference, we extract the relevant paragraph of the order of this Tribunal.

“6. Rival contentions were heard. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below, we find that Assessing Officer himself noted in his order that the receipt on sale of trees was considered as revenue receipt for the assessment years 2007-08 and 2008-09 by the Revenue. This view taken by the assessing officer has been upheld by the Ld. CIT(A) also. The view taken by the learned CIT(A) was contested by the appellant before this bench and vide order date 8th January, 2015 in ITA Nos. 94, 95 and 97/viz/2012 the coordinate bench has taken the view that the sale proceeds of the trees is Revenue in nature. When the receipt from sale of trees is assessed as revenue receipt, the expenditure incurred on maintenance of the trees is also to be allowed as revenue expenditure. Further, the expenditure was incurred very much during the course of the business of the assessee and no enduring benefit is obtained on account of the expenditure incurred. Therefore, we find no infirmity in the order of the Ld. CIT(A) on this issue and we confirm the order of the Ld. CIT(A). Accordingly, ground No. 2 of the Revenue is dismissed.”
46. Respectfully following the decision of this Tribunal, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue.
47. Ground No. 4 is related to peripheral development expenditure. During the previous year relevant to the assessment year, the A.O. found that the assessee has debited sum of Rs. 2,95,28,640/- towards peripheral development expenses. The company explained to the A.O. that
“These are the expenditures incurred by the company in the surrounding villages of the Plant where the displaced people are relocated. Some of such expenditures were incurred on repairs of roads, supply of drinking water to villages, renovation/ construction of community center, literacy programs, healthcare, and development of peripheral areas. These expenditures are incurred for the development of surrounding community in accordance with the policies of the Govt. of India relating to PSUs on such activities. Accordingly, during the financial year 2010-11 (AY 2011-12), an amount of Rs. 2,95,28,640/- had been spent by the company on repairs to roads in Vadlapudi Village, construction of schools in Chinnapalem, Peda Gantyada, Aganmpudi, Vadlapudi villages, construction of boundary walls in surrounding villages, supply of drinking water at RH colony, construction of mother blood bank at IRCS premises, construction of Community Welfare Center in Pedagantyada Village, construction of ROB bridge in VSP Gangavaram etc.”
Not being convinced with the explanation of the assessee, the A.O. disallowed the expenses as not due to commercial expediency and added back to the income.
48. On appeal before the CIT(A), the Ld. CIT(A) allowed the appeal of the assessee and deleted the dis-allowance made by the A.O. Aggrieved by the order of the A.O., the revenue is in appeal before this Tribunal

49. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The same issue has come for adjudication before this Tribunal in the assessee’s own case for the assessment year and in the appellate order dated 29.4.2015 in ITA No. 9 and 16 for the A.Y. 2009-10 and 2010-11 confirmed the order of the Ld. CIT(A). For ready reference, we extract the order of this Tribunal.

“8. Rival contentions were heard. The contention of the Revenue is that the learned CIT(A) granted relief by observing that the assessing officer made the addition only by doubting the entries contrary to the fact that the assessing officer examined the entire evidence on record before making the dis-allowance. We do not find much force in the contention of the Revenue. The learned CIT(A) appraised the entire evidence on record and came to the conclusion that the expenditure incurred by the appellant as a part of the corporate social responsibility is to be allowed as 8 ITA. No. 9, 14, 15 & 16/Vizag/2013 M/s. Rashtriya Ispat Nigam Limited, Visakhapatnam. expenditure and that the assessing officer is not justified in doubting the expenditure merely on the ground that the expenditure was accounted on the basis of a journal entry at the end of the year. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below, we find no infirmity in the order of the Ld. CIT(A) and accordingly we confirm the same.”
Respectfully following view taken by this Tribunal, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.

50. Ground No. 5 is related to the community development expenses. The A.O. found that the assessee has incurred a sum of Rs. 3,39,00,000/- as community development expenses, which was claimed as a deduction. The assessee explained that the expenditure was incurred towards many community development activities undertaken by Visakhapatnam Steel Plant for the development of the down trodden people and community as a whole. VSP incurred expenditure on Visakha Vimala Vidyalayam, a school located in the surrounding places of Steel Plant which imparts education in Telugu and the wards of VSP employees and other poor children living in the nearby colonies and villages are benefited. Apart from the above, VSP has been conducting medical camps in many villages, conducting other welfare activities for the benefit of the needy and downtrodden.

51. The A.O. not being convinced with the explanation of the assessee held that the entire expenditure was gratuitous and has no connection with the business and do not qualify for the business expenditure. Accordingly, disallowed holding that the expenditure was not incurred in connection with the commercial expediency of the business.
52. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee holding that the expenditure was business expenditure and followed the decision of Hon’ble High court of Madras in CIT Vs. Madras Refineries Limited.
53. Aggrieved by the order of the CIT(A), the revenue is in appeal before this Tribunal.
54. During the appeal, the Ld. D.R. supported the order of the A.O. and the Ld. A.R. relied on the order of the Ld. CIT(A).
55. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The company has incurred expenditure on community development activities for the development of downtrodden people and community as a whole. It has incurred expenditure on school located in the surrounding places and imparting education in Telugu to the wards of the Visakhapatnam Steel Plant employees and poor people living in nearby colonies and conducting medical camps in many villages. The company has a corporate responsibility and company required to spend certain amount towards corporate responsibility. As per the judicial rulings relied upon by the assessee in the case of Madras Refineries Limited 266 ITR 170, the Hon’ble Madras High Court held as under:
CIT v. Madras Refineries Ltd. [2004] 266 JTR 1701138 Taxman 261 (Mad).

‘The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Monies spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business is situated cannot be regarded as actually outside the ambit of the business concerns of the assessee, especially when the undertaking owned by the assessee is one which is to some extent a polluting industry. Hence, expenditure incurred by the assessee for establishing drinking water facilities to the residents in the vicinity of its refinery and for providing aid to the school run for the benefit of the children of those residents was allowable as deduction.’

The ratio decided on the expenditure incurred on schools also speaks in favour of the company as submitted below.
(i) ITAT VS. Hill(B) and Co.(P) Ltd. (1983) 142 1TR 0185, It is held that an expenditure to give facilities to the labourers and their children was motivated by considerations of commercial expediency. The donations made to a school were rightly held to be allowable expenditure.
(ii) In the case of CIT Vs. India Radiators Ltd., (1999) 236 ITR 0719, Madras High Court and in the case of Chambal fertilizers & Chem. Ltd. Vs. ACIT, Tax world, December Vol.XUV Part C.P.195, the Income Tax Appellate Tribunal,Jaipur Bench also held that expenditure on school where children of the employees are studying is allowable.

57. The Ld. CIT(A) allowed the appeal of the assessee placing the reliance on Madras Refineries Limited. There was no dispute with regard genuineness of the expenditure. Since the company has spent the sums towards the educational medical camps for the people who are re-located the same is allowable expenditure. It is obligation on the part of the company to give support to the people who are displaced due to setting up of the industry by losing their landed property and assets. The company is discharging its obligation for the same purpose. Therefore, following the decision of Hon’ble Madras High Court in the case of CIT Vs. Madras Refineries Limited, we hold that the CIT(A) has rightly allowed the appeal of the assessee and accordingly uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue.

58. In the result, the appeal of the revenue is dismissed.
ITA 664/Vizag/20123 (A.Y. 2008-09) (Revenue appeal):
59. All the grounds of appeal are related to charging of interest u/s 201 & 201(1A) of the Act for non-deduction of tax at source. The assessee- company M/s Rashtriya Ispat Nigam Limited RINL), Visakhapatnam has entered into the following agreements with M/s Bharat Heavy Electricals Limited (BHEL) for indigenous supply and services:
 (i) Indigenous design, & engineering and supply of plant, machinery and equipment including commissioning spares and insurance pares for Turbo Blower & Auxiliaries
(TB-4) including pipe work, electricals and instrumentation (Agreement No.VSP-6.3 MTPA EXPN/TB-4/INDS/BHEL/M735/2007 date 11.07.2007)
(ii) Storage, handling, erection, commissioning and PG tests of plant, machinery and equipment including insurance, inland transportation etc, for Turbo Blower & Auxiliaries (TB-4) including pipe work, electrics and instrumentation (Agreement No.VSP-6.3 MTPA EXPN/TB4/ERC/BHEL/M-736/2007 date 11 07.2007).
Contract No. (i) above has been entered for supplying all ‘indigenous plant, machinery and equipment with auxiliaries Including insurance spares and commissioning spares for the above work and also supply of drawing & documents in conformity to the contract specification and the value of the contract as per copy of agreement produced in this office is Rs. 63,33,36,000/ –
Contract No (ii) above has been entered for storage, handling, erection, commissioning and PG tests of plant, machinery and equipment including insurance, inland transportation etc., for Turbo Blower and Auxiliaries (TB-4) including pipe work, electrics and instrumentation and the value of the contract as per copy of agreement produced in this office is Rs. 6,44,00,000/-.
60. The A.O. held that the works contract covered by the two agreements are nothing but composite contracts for supply and erection of the machinery, interdependent and falls within the purview of chapter XVVIIB for deduction of tax at source. The assessee is of the view that first contract is for the supply of the machinery and second contract is for commissioning of equipment and both are independent contracts but not interdependent. Therefore contract-I constitute purchases and the provisions of TDS is not applicable whereas the contrat-II is works contract and the TDS was made. The AO not convinced with the explanation treated the assessee as assessee in default and imposed the interest u/s 201 & 201(1A) of the Act.
61. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) verified both the contracts and held that both are independent contracts and contract no.(i) is a supply contract and contract no.(ii) is a works contract and the assessee required to deduct tax at source on the works contract i.e. contract no.(ii) and assessee need not require to deduct tax at source on the supply contract i.e. contract no.(i). The Ld. CIT(A) relied on the order of this Tribunal in the case of ITAT, Visakhapatnam in the case of NTPC Limited Vs. ITO (2013) 36 CCH 359. For ready reference, we extract relevant paragraph of the Ld. CIT(A) order as under:
6.2 I have considered the various contentions raised, the written submissions and the decisions relied on. A copy of the two agreements entered with BHEL was also filed as part of the paper-book which was also considered. The various grounds raised are against the levy of demand u/s.201(1) of Rs. 14,35,159/- and interest u/s.201(1A) of Rs. 6,52,987/- and are dealt together. I find that the primary issue to be resolved is to ascertain whether the contract-I entered with BHEL for indigenous design, inquiry, supply of plant & machinery and equipment for Turbo Blower would constitute a works contract or a supply contract.
6.3 From the perusal of contract-I, it is seen that its recitals read as under :-
“AND WHEREAS the Employer has entrusted to the Principal Contractor the work covering Design, Manufacture and Supply of indigenous Plant, Machinery and Equipment with Auxiliaries including Insurance Spares and Commissioning Spares for “Turbo Blower & Auxiliaries (TB#4)”, hereinafter referred to as “Equipment” for the said work.

AND WHEREAS the Principal Contractor has agreed to supply all indigenous Plant, Machinery and Equipment with Auxiliaries including Insurance Spares and Commissioning Spares for the above Work and also supply of drawing & documents in conformity to the Contract Specification.

AND WHEREAS the Principal Contractor confirmed all aforesaid indigenous Equipment/ Items and drawings & documents shall be supplied by the Contractor were included and covered by the Contract Price”.

6.4 The scope of work under the said contract-I is defined in schedule 2 of the agreement as follows:

SCHEDULE 2

SCOPE OF WORK
2.1 GENERAL
The Contract Specification No.BHEL/MT/TB-4/JULY 2007 submitted by the Contractor and accepted by the Employer in conjunction with various clauses of this Contract shall be binding for the purpose of determining the scope of work under this Agreement and shall form integral part of this Contract.
2.2 SCOPE OF WORK

In consideration of the payments to be made by the Employer the Principal Contractor shall be responsible for the following:

2.2.1 Design, supply of drawing & documents procurement of materials, manufacture/ fabrication, inspection, testing and supply of all indigenous Equipment on F.O.T. works basis within the time stipulated in Schedule 4 (DELIVERY).

The Equipment/Items are to be suitably and securely packed for road transport in India and for storage under tropical conditions.

2.2.2 Supply of all equipment foundation bolts including bolts of special design, if any and those made of alloy/special steels, if an and indigenous special embedment, if any that may be required for the Equipment on F.O.T. works.

2.2.3 The Principal Contractor shall supply with the Plant, Machinery and Equipment sufficient quantity of commissioning spares that may be required upto PAC and during Performance Guarantee Test. The prices for the same included in the total supply price of equipment. The list of commissioning spares included, with quantities, indicated in the Contract Specification. If the quantities supplied are found to be inadequate, further quantity as required shall be supplied without any extra cost and without affected the Work. Commissioning Spares shall be the commissioning and during PG Tests. Left out spares, if any, after Provisional Acceptance, out of those indicated in the list, shall be handed over to the Employer.

2.2.4 Supply of Insurance Spares as per the agreed items and quantity along with the equipment.

2.2.5 Supply of initial fills and consumables on F.O.T. works basis as per the Contract Specifications and General Condition of contract. These initial Fills shall be delivered along with the equipment.

2.2.6 The Principal Contractor shall supply special operation & maintenance tools and tackles including, special instruments required for calibration, Programming etc., as per the Contract Specification. The Principal Contractor also undertakes that supply of necessary operation maintenance tools will be made available at any time later during the life of the Plant and reasonable cost.

2.2.7 The scope of supply of the Principal Contractor shall include special tools & tackles including special instruments required for Erection, Testing and Commissioning as per the Contract Specification”.

6.5 A perusal of the recitals and above clauses of the contract-I, clearly show that the contract is primarily one of supply of machinery, equipment and spares. Further, it is noted BHEL vide letter dated 26.03.2010 has confirmed that no separate ‘Design & Engineering’ activity is involved under the contract-I and as the job involves supply of plant, machinery and equipment, and there are no separate charges forwards ‘design & engineering’ on the subject supply covered of under Contract-I. On this aspect, the appellant also relied on the CBDT circular which clarifies as under:

“Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section.”

6.6 Considering the above, I am of the opinion that the contract-I pertain to supply of machine, equipment and spares. Besides, it is noted that under the terms of contract-TI, BHEL is required to render certain services such as the work of inland transportation including insurance till delivery at site of imported and indigenous items and storage, handling, erection, testing, commissioning, demonstration of performance guarantee of complete plant as a whole and other related site work conforming to the contract specifications] From the perusal of both the contracts, it is not possible to come to a conclusion that due to the services required to be rendered under contract-TI, the terms of contract-I would be in the nature of works contract.

6.7 Further, it is noted that the Hon’ble 1TAT, Visakhapatnam Bench dealt with a similar issue in the case of NTPC Ltd. In that case M/s. NTPC a PLU invited bids for different packages of work which included design, engineering, manufacture, forwarding, erection and commissioning of 1000MW expansion of SSTPP Stage -II and the contract was split into two parts ie., First contract (Supply Contract) relating to design, engineering, manufacture and supply of equipment and Second contract relating to installation, supervision and commissioning, etc. aspect. The Assessing Officer took a view that both the contracts are composite contract in nature and TDS shall be deductible on the payments made under the First Contract and this was upheld by the CIT(A).

However, Hon’ble Tribunal referring to the decision of Hon’ble Supreme Court in the case of Kone Elevators (India) Ltd and the decision of Hon’ble ITAT, Hyderabad in the case of Power Grid Corp of India Ltd held that supply contract is in the nature of Contract of sale’ and hence the provisions of Sec.194C shall not apply to it.

6.8 It is noted that the Hon’ble ITAT, Visakhapatnam in the NTPC case has discussed the applicability of the various decisions relied on by the AO, and it is seen that the very same decisions were relied on by the AO in this case. The Hon’ble ITAT after discussion of the case-laws relied on by the AO came to the conclusion that the contract is one of supply and not a contract of work. I find that the ratio laid down in the case of NTPC is applicable to the present case in view of similar facts and issues and in view of the discussion therein of the various decisions which were also relied on by the AO in the impugned order. Respectfully following the decision of the jurisdictional Tribunal, it is held that the assessee is not liable to deduct TDS on the payments made under the Contract-I to BHEL, as the terms of contract indicate it is one for supply of machinery and equipment and hence does not fall within the ambit of section 194C of the I.T. Act. As it is found that the appellant is not liable to deduct TDS u/s.194C, the AO is directed to delete the impugned demand raised u/s.201(1) and 201(1A) of the I.T. Act.”

62. Aggrieved by the order of the CIT(A), the revenue is in appeal before us.

63. We have considered the submissions of both the parties and perused the materials placed on record. The contract-I is a supply contract primarily for supply of the machinery equipment and spares and contract-II is works contract for commissioning the equipment. The Ld. CIT(A) after verification of the recitals of the contract given a finding that both are independent contracts and held that it is not possible to come to conclusion that due to services required to be rendered under contract no.(ii), the terms of the contract no.(i) would be in the nature of works contract. The Ld. DR did not bring any other evidence to show that the finding given by the Ld. CIT(A) is incorrect and also did not place any other decision to support the view of the department. The facts are identical to the decision of this Tribunal in the case of NTPC Limited cited (supra). Since the CIT(A) has allowed the appeal of the assessee, following the order of this Tribunal, we do not find any infirmity in the order of the Ld. CIT(A) and the same is upheld.

63. In the result, the assessee’s appeals for the assessment year 2004-05 is allowed and for the assessment year 2011-12 is partly allowed. The revenue’s appeals for the assessment years 2008-09 & 2011-12 are dismissed.

The above order was pronounced in the open court on 22nd Nov’ 17.

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Tags : ITAT Judgments (4628) section 43B (76)

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