Case Law Details
Advocate Akhilesh Kumar Sah
Tata Motors Ltd. vs. CIT (LTU) (ITAT Mumbai)
If Two Views Are Possible, Revision Under Section 263 of the Income Tax Act Is Not Permissible: Tata Motors Ltd Appeal
Recently, in Tata Motors Ltd. vs. CIT [ITA No. 3802/MUM/2018 AY: 2011-12, decided on 15.04.2019], apart from other grounds/ issues of appeal, the following ground/ issue was considered:
The CIT has erred in law and on facts in directing the AO to disallow the foreign taxes paid in Spain on which no relief u/s. 90 of the Income Tax Act, 1961 (for short ‘the Act’) could be claimed disregarding the fact that the AO has after detailed examination, allowed deduction of Income-tax paid in Spain (in excess of foreign tax credit equivalent to MAT) vide order u/s. 143(3) r.ws. 144C of the Act.
The CIT has erred in not appreciating the fact that the term ‘tax’ used in section 40(a)(ii) of the Act means Income-tax chargeable under the provision of this Act as per section 2(43) of the Act and that since, the said foreign taxes is paid outside India, i.e. in Spain, it is not covered within the ambit of section 40(a)(ii) of the Act.
The CIT ought to have appreciated the fact that the appellant has rightly claimed deduction on account of Income-tax paid in Spain u/s. 37(1) of the Act.
The facts in brief were that during the year under consideration, the assessee-company had paid income tax in Spain in respect of its branch income. As the assessee was liable to tax u/s 115JB of the Act, it restricted the foreign tax credit (with respect to taxes paid in Spain) u/s 90 of the Act equivalent to MAT rate and charged the balance amount of Rs.1,69,48,679/- to profit and loss account. The said balance amount is claimed as deduction u/s 37(1) of the Act, while computing tax as per normal provisions of the Act. In the order u/s 263, the CIT directed the AO to withdraw the above allowance mentioning that the said expense is not covered u/s 28 to 44 of the Act and hence the expenditure is irregular in nature in view of the order of the Tribunal in the case of Elitecore Technologies Pvt. Ltd 165 ITD 153 (Ahd). Similarly, the same was added back while computing book profit as per section 115JB of the Act.
Before Mumbai ITAT, the counsel of the assessee submitted that the CIT was not justified in ignoring the Jurisdictional High Court decision in the case of Reliance Infrastructure Ltd. 390 ITR 271 (Bom) dated 20.12.2016 and following the decision of Tribunal in the case of Elitecore Technologies Pvt. Ltd. (supra). Further, it was stated that the Circular No. 14/2006 dated 28.12.2006 issued by CBDT clarifies the issue to prevent the claim of double benefits by taxpayers on foreign tax credit. Again it was reiterated that no revisionary proceedings u/s 263 can be allowed on debatable issue for which substantial question of law has been admitted.
On the other hand, the DR submitted that the CIT has rightly directed the AO to withdraw the allowance by relying on the order of the Tribunal in the case of Elitecore Technologies Pvt. Ltd. (supra).
The learned Members of the ITAT heard the rival submissions and perused the relevant materials on record and observed that the reasons for our decisions are given below. On identical facts, the Hon’ble Bombay High Court in Reliance Infrastructure Ltd. (supra) has held that the assessee is entitled for deduction u/s 37(1) of the tax paid in Saudi Arabia for which no tax relief could be claimed. The relevant portion of the said order is produced as under:
“(o) Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to deduction u/s 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arisen in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India.
(p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assessee such as the applicant assessee is entitled to a deduction u/s 40(a)(ii) of the Act. This is so as it is a tax which has been paid broad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen/accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of section 40(a)(ii) of the Act.”
Also on the issue of allowability of deduction u/s 37(1) of foreign tax credit on which tax credit is not available u/s 90 of the Act, the matter is also admitted by the Hon’ble Bombay High Court in the case of Tata Sons (ITA No 2024/2011 dated 20.02.2013). The substantial question of law admitted is as under:
“Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that the State taxes paid by the assessee in jurisdictions other than India were not deductible as a business expenditure?”
The learned Members of the ITAT held that in the present case, the assessment order passed by the AO on the above issue followed the decision of the Hon’ble Bombay High Court in Reliance Infrastructure Ltd. (supra). Further, as the issue of allowability of deduction u/s 37(1) of foreign tax credit on which tax credit is not available u/s 90 has been admitted by the Hon’ble Bombay High Court in the case of Tata Sons (supra), the same being a debatable issue, no revisionary proceedings u/s 263 is tenable.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order u/s 263 passed by the Commissioner of Income Tax (LTU) [in short CIT], Mumbai.
2. The 1st ground of appeal
1.1 The Ld. CIT has erred in law and on facts in holding that order passed by the Assessing Officer (“AO”) u/s 143(3) r.w.s. 144C(13) of the Act dated 22.01.2016 is erroneous and prejudicial to the interest of the revenue without appreciating that the assessment order cannot be said to be erroneous where the AO has taken one of the permissible views. The Ld. CIT ought to have appreciated that if two views are possible, revision u/s 263 of the Act is not permissible.
1.2 The Ld. CIT has erred in law and on facts in holding that the order passed by the AO is not correct without appreciating that the AO has passed the order after enquiring and verifying the facts and documents on record, duly supported by various precedents including the judgements of the Hon’ble Supreme Court which were available at the time of the assessment.
1.3 The Ld. CIT has erred in law and on facts in ignoring the reasons given by the appellant on the proceedings u/s 263 of the Act being invalid and bad in law.
3. It would be apposite to deal with the 2nd, 3rd & 4th ground of appeal along with the 1st ground of appeal separately to appreciate the subject matter in the instant case.
The 2nd ground of appeal
2.1 The Ld. CIT has erred in law and on facts in directing the AO to withdraw the allowance of provision for leave encashment for the year under consideration disregarding the fact that the AO has after detailed examination and placing reliance on various rulings in support of the position taken by the assesses, has allowed deduction of provision for leave encashment vide order u/s 143(3) r.w.s 144C of theAct
2.2 The Ld. CIT ought to have appreciated the fact that the appellant had paid the applicable taxes and had correctly claimed the deduction in respect of provision for leave encashment in return of income.
2.3 The Ld. CIT has erred in law and on facts in treating the assessment order passed u/s. 143(3) r w s. 144C of the Act for the captioned assessment year as erroneous without appreciating the fact that in appellant’s own case for AY 2012-13, the Dispute Resolution Panel vide directions dated 26.12.2016 has allowed the claim of provision for leave encashment.
3.1 During the year, the assessee has claimed a deduction of Rs.39,03,03,000/- in respect of provision for leave encashment for which it made appropriate disclosure in the computation of income and tax audit report. During the proceedings u/s 263 of the Act, the CIT observed that in Annexure 12 of the tax audit report, provision for leave encashment of Rs.39,03,03,000/- was not considered for disallowance u/s 43B on the basis of the decision in the case of Exide Industries Ltd. v. UoI 292 ITR 470 (Cal.), wherein the provisions of section 43B(f) was held as arbitrary and unconstitutional. However, the Hon’ble Supreme Court has stayed the above decision of the Calcutta High Court and the matter is pending for final hearing. Thus the CIT arrived at a finding that the order which prompted the assessee to claim the above deduction has been stayed by the Hon’ble Supreme Court vide its interim order. Therefore, the CIT held that the AO’s action in allowing the above claim is erroneous and prejudicial to the interest of revenue and the omission to do so resulted in under assessment of income of Rs.39,03,03,000/-involving potential tax effect of Rs.12,96,48,899/-.
3.2 Before us, the Ld. counsel of the assessee submits that the AO made specific inquiries pertaining to the deduction for provision for leave encashment vide notice dated 12.09.2014 for which the assessee had replied (i) vide submission dated 23.12.2014, copy of computation of total income along with notes of income was submitted before the AO and the note on deduction for provision of leave encashment was provided in notes to the computation of income, (ii) vide submission dated 10.12.2014, specific attention of the AO was drawn to the relevant disclosures in Annexure-12 of the tax audit report, (iii) further vide same submission, specific note was submitted on deduction for provision for leave encashment along with the decision of the Supreme Court, wherein it was submitted before the AO that provision for leave encashment has been made post payment of taxes in line with Supreme Court decision in Exide Industries Ltd. (supra) and (iv) from the computation of income, it is clear that there is refund of Rs.180.96 crore, whereas tax liability on the aforesaid provision would be Rs.12-15 crore only.
The Ld. counsel submits that pursuant to the above, the AO has allowed the deduction for the same, after considering submissions of the assessee by adopting one of the possible views. It is further submitted that the CIT has adopted another view and made the disallowance on the basis of stay on the operation of the Calcutta High Court order by the Honb’ble Supreme Court in its first interim order dated 08.09.2008 in the case of Exide Industries (supra). The Ld. counsel further argues that the stay given by the Supreme Court was interim stay till further order and thereafter, the Hon’ble Supreme Court has passed a subsequent 2nd interim order dated 08.05.2009, wherein it has laid down condition for claiming deduction for provision for leave encashment and thereby the stay initially granted by it vide first interim order gets vacated. The Supreme Court held that the assessee can claim deduction by paying tax as if section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its return of income. The Ld. counsel submits that in fact the view taken by the CIT is contrary to the decision of the Supreme Court and hence unsustainable in law.
The Ld. counsel also submits that on the same issue the ITAT, Mumbai in the case of an affiliate of the assessee i.e. TML Distribution Co. Ltd. (2017) (ITA No. 3427/M/2014 dated 13.01.2017) has held that where the assessee has paid tax on provision for leave encashment (as specified in the 2nd order of the Supreme Court dated 08.05.2009) and has made a claim for deduction, then the said claim should be allowed. It is also stated that the Dispute Resolution Panel (DRP) in assessee’s own case for AY 2012-13 has allowed the claim for provision for leave encashment. It is finally argued that no revisionary proceedings u/s 263 can be allowed on debatable issues for which substantial question of law has been admitted. The Ld. counsel refers to the decision in Udaipur Distillery Co. Ltd. (267 ITR 358) by the Rajasthan High Court, where it has been held that when the matter is pending before the High Court and its outcome will decide whether the deduction is to be given or not, is a debatable issue and the same cannot be revised u/s 263 of the Act.
3.3 On the other hand, the Ld. DR submits that since the decision in Exide Industries (supra) has been stayed by the Hon’ble Supreme Court, the AO’s action in allowing this claim has been rightly held by the CIT to be erroneous and prejudicial to the interest of revenue. It is submitted by him that the CIT has rightly directed the AO to withdraw the allowance made in this regard.
3.4 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below.
We find that vide submission dated 10.12.2014, the assessee had filed a specific note before the AO explaining deduction for provision for leave encashment, wherein it was submitted that provisions for leave encashment has been made post payment of taxes in line with Supreme Court decision in Exide Industries Ltd. (supra). It is relevant to mention here that the stay given by the Supreme Court was interim stay till further order and thereafter, the Hon’ble Supreme Court has passed a subsequent 2nd interim order dated 08.05.2011 which reads as under:
“Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has occurred till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed.
We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns.”
In the instant case, as mentioned earlier the assessee vide submission dated 10.12.2014 has filed a specific note before the AO regarding deduction on provision for leave encashment along with the decision of the Supreme Court, wherein it was submitted before the AO that provision for leave encashment has been made post payment of taxes in line with the Supreme Court decision in Exide Industries Ltd. (supra).
In view of the above facts, we allow the 2nd ground of appeal.
4. The 3rd ground of appeal
3.1 The Ld. CIT has erred in law and on facts in directing the AO to disallow the foreign taxes paid in Spain on which no relief u/s. 90 of the Act could be claimed disregarding the fact that the AO has after detailed examination, allowed deduction of Income-tax paid in Spain (in excess of foreign tax credit equivalent to MAT) vide order u/s. 143(3) r.ws. 144C of the Act.
3.2 The Ld. CIT has erred in not appreciating the fact that the term’tax’ used in section 40(a)(ii) of the Act means Income-lax chargeable under the provision of this Act as per section 2(43) of the Act and that since, the said foreign taxes is paid outside India, i.e. in Spain, it is not covered within the ambit of section 40(a)(ii) of the Act.
3.3 The Ld. CIT ought to have appreciated the fact that the appellant has rightly claimed deduction on account of Income-tax paid in Spain u/s. 37(1) of the Act.
4.1 The facts are that during the year under consideration, the assessee-company has paid income tax in Spain in respect of its branch income. As the assessee was liable to tax u/s 115JB of the Act, it restricted the foreign tax credit (with respect to taxes paid in Spain) u/s 90 of the Act equivalent to MAT rate and charged the balance amount of Rs.1,69,48,679/- to profit and loss account. The said balance amount is claimed as deduction u/s 37(1) of the Act, while computing tax as per normal provisions of the Act.
In the order u/s 263, the CIT directed the AO to withdraw the above allowance mentioning that the said expense is not covered u/s 28 to 44 of the Act and hence the expenditure is irregular in nature in view of the order of the Tribunal in the case of Elitecore Technologies Pvt. Ltd 165 ITD 153 (Ahd). Similarly, the same was added back while computing book profit as per section 115JB of the Act.
4.2 Before us, the Ld. counsel of the assessee submits that the CIT was not justified in ignoring the Jurisdictional High Court decision in the case of Reliance Infrastructure Ltd. 390 ITR 271 (Bom) dated 20.12.2016 and following the decision of Tribunal in the case of Elitecore Technologies Pvt. Ltd. (supra). Further, it is stated that the Circular No. 14/2006 dated 28.12.2006 issued by CBDT clarifies the issue to prevent the claim of double benefits by taxpayers on foreign tax credit. Again it is reiterated that no revisionary proceedings u/s 263 can be allowed on debatable issue for which substantial question of law has been admitted.
4.3 On the other hand, the Ld. DR submits that the CIT has rightly directed the AO to withdraw the allowance by relying on the order of the Tribunal in the case of Elitecore Technologies Pvt. Ltd. (supra).
4.4 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.
On identical facts, the Hon’ble Bombay High Court in Reliance Infrastructure Ltd. (supra) has held that the assessee is entitled for deduction u/s 37(1) of the tax paid in Saudi Arabia for which no tax relief could be claimed. The relevant portion of the said order is produced as under:
“(o) Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to deduction u/s 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arisen in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India.
(p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assessee such as the applicant assessee is entitled to a deduction u/s 40(a)(ii) of the Act. This is so as it is a tax which has been paid broad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen/accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of section 40(a)(ii) of the Act.”
4.4.1 Also on the issue of allowability of deduction u/s 37(1) of foreign tax credit on which tax credit is not available u/s 90 of the Act, the matter is also admitted by the Hon’ble Bombay High Court in the case of Tata Sons (ITA No. 2024/2011 dated 20.02.2013). The substantial question of law admitted is as under:
“Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that the State taxes paid by the assessee in jurisdictions other than India were not deductible as a business expenditure?”
4.4.2 In the present case, the assessment order passed by the AO on the above issue follows the decision of the Hon’ble Bombay High Court in Reliance Infrastructure Ltd. (supra). Further, as the issue of allowability of deduction u/s 37(1) of foreign tax credit on which tax credit is not available u/s 90 has been admitted by the Hon’ble Bombay High Court in the case of Tata Sons (supra), the same being a debatable issue, no revisionary proceedings u/s 263 is tenable. Thus, the 3rd ground of appeal is allowed.
5. The 4th ground of appeal
4.1 The Ld. CIT has erred in law and on facts in directing the AO lo add back the Income-tax paid in Spain while computing book profit u/s. 115JB of the Act disregarding the fact that the AO has after detailed examination, allowed Income-tax paid in Spain (in excess of foreign tax credit equivalent to MAT) vide order u/s 143(3)r.w.s 144Cofthe Act.
4.2 The Ld. CIT has erred in not appreciating the fact that the term ‘Income-tax paid or payable’ used in Explanation (1) to section 115JB of the Act means Income-lax chargeable under the provision of this Act as per section 2(43) of the Act and that since, the said Income-tax is paid outside India, i.e. in Spain, it is not covered within the ambit of section 40(a)(ii) of the Act.
4.3 The Ld. CIT ought to have appreciated the fact that the appellant has rightly claimed Income-tax paid in Spain while computing book profit u/s 115JB of the Act.
5.1 During the proceedings u/s 263, it was the contention of the assessee that foreign tax paid is not the income tax payable under the Act and hence it is not required to be added back while calculating tax liability u/s 115JB of the Act. The CIT observed that in respect of foreign sourced income on which taxes have been paid abroad, government provides relief by treating them as income tax paid under the Act by incorporating foreign tax paid in the Income Tax Act by virtue of section 90 and 91 and CBDT has notified Rule 128 for claiming foreign tax credit vide Notification S.O. 2213E dated 27.06.2016. Accordingly, the CIT directed the AO to withdraw the allowance made in this regard as the aforesaid claim was held to be erroneous and prejudicial to the interest of revenue.
5.2 Before us, the Ld. counsel of the assessee submits that as per clause (a) to Explanation 1 to section 115JB(2) of the Act, income tax paid or payable, which is debited to the profit and loss account is to be added back while computing book profits. The relevant portion of the Explanation is reproduced as under:
“Explanation 1. – For the purposes of this section, “book profit” means the [profit] as shown in the [statement of profit and loss] for the relevant previous year prepared under sub-section (2), as increased by –
(a) the amount of income-tax paid or payable, and the provision therefore; or”
Further, the Ld. counsel refers to Explanation-2 to section 115JB as added by the Finance Act, 2008 (with retrospective effect from 01.04.2001) to explain what the amount of income tax specifically includes. Also reference is made by him to the Circular No. 1/2009 dated 27.03.2009 issued by CBDT containing Explanatory Notes on amendment to provisions by the Finance Act, 2008.
Thus the Ld. counsel submits that even after amendment what is covered for disallowance is only specified tax as listed in (i) to (v) and does not include foreign tax credit debited to the profit and loss account and hence the same should be allowed as deduction, while computing book profit as per section 115JB of the Act. Further, it is stated that expenditure allowable under normal provision should also be allowed under MAT.
Stating that incorrect reliance on Rule 128 of the Income Tax Rules, 1962 (inserted from 01.04.2007) has been made, it is stated that the above Rule has been inserted to provide mechanism for allowability of foreign tax credit and it does not deal with allowability of foreign tax credit on which credit is not allowable either under normal provisions of the Act or u/s 115JB of the Act for the computation of book profit.
5.3 On the other hand, the Ld. DR submits that a resident is liable to pay income tax on the global income. However, in respect of foreign source income on which taxes have been paid abroad, government provides relief by treating them as income tax paid under the Act by incorporating foreign tax paid in the Income Tax Act by virtue of section 90 and 91 of the Act. Therefore, the Ld. DR supports the order passed by the CIT.
5.4 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below.
As mentioned earlier, as per clause (a) to Explanation 1 to section 115JB(2) of the Act, income tax paid or payable, which is debited to the profit and loss account is to be added back while computing book profits u/s 115JB of the Act. Further, in terms of Explanation 2 to section 115JB as added by the Finance Act 2008 (with retrospective effect from 01.04.2001) the amount of income tax specifically includes the following components:
i. Any tax on distributed profits u/s 115-O or on distributed income u/s 115R;
ii. Any interest charged under this Act;
iii. Surcharge, if any, as levied by the Central Acts from time to time;
iv. Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and
v. Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.
5.4.1 Thus as per section 115JB of the Act, only taxes specified in Explanation 2 can be added back while computing book profits. In this regard we may refer to the decision in Rashtriya Chemicals & Fertilizers Ltd. (ITA 3625/M/17) dated 14 February 2018, Reliance Industries Ltd. (ITA 5769/M/13) dated 16 September 2015, Vintage Distilleries Ltd. (130 TTJ 79) (Delhi ITAT).
The CBDT Circular No. 1/2009 dated 27.03.2009 containing Explanatory Notes to Finance Act, 2008 clarifies the above issue. Therefore, the 4th ground of appeal is allowed.
6. In the result, the appeal is allowed.
