IN THE INCOME TAX APPELLATE TRIBUNAL
`B' : NEW DELHI
DELHI BENCH `B
BEFORE SHRI H.L. KARWA, HON'BLE PRESIDENT AND
SHRI B.C. MEENA, HON'BLE ACCOUNTANT MEMBER
No.5391/Del/2010
ITA No.
2004-05
Assessment Year : 2004-
Deputy Commissioner of Vs. M/s Engineers India Limited,
Income Tax, Engineers India Bhawan,
Circle-11(1),
Circle-11(1), 1, Bhikaji Cama Place,
New Delhi. New Delhi 110 066.
PAN : AAACE5318C.
(Appellant) (Respondent)
No.158/Del/2011
CROSS OBJECTION No.158/Del/2011
2004-05
Assessment Year : 2004-
M/s Engineers India Limited, Vs. Deputy Commissioner of
Engineers India Bhawan, Income Tax,
1, Bhikaji Cama Place, Circle-11(1),
Circle-
New Delhi 110 066. New Delhi.
PAN : AAACE5318C.
(Appellant) (Respondent)
Appellant by : Smt. Parwinder Kaur, Sr.DR.
Respondent by : Shri Deepak Chopra and
Shri Piyush Singh, Advocates.
ORDER
PER B.C. MEENA, AM :
This appeal by the Revenue emanates from the order of learned
CIT(A)-V, New Delhi dated 17th September, 2010.
2. The assessee is a Government of India undertaking under the
Ministry of Petroleum & Natural Gas and primarily engaged in providing
engineering and technical consultancy services and execution of
contracts on a turnkey basis predominantly in oil, gas and hydrocarbon
sectors. The assessee has submitted the return of income on
28.10.2004 declaring income of `140,04,57,990/-. The return was
2 ITA-5391/D/2010 &
C.O.158/D/2011
revised and income was reduced to `133,76,87,880/- and assessment
was completed under Section 143(3) on 15.12.2006. The notice under
Section 148 of the Act was issued on 6.3.2004 and the assessment
under Section 143(3) read with Section 147 was completed on
25.8.2009 wherein three disallowances were made prior period
expenses `3,25,46,000/-, provision for leave salary `2,29,82,152/- and
disallowance under Section 14A `1,22,68,000/-. In appeal, learned
CIT(A) has deleted the addition for prior period expenses and provision
for leave salary. The addition under Section 14A was reduced to
`25,000/-. Now, the Revenue is in appeal before us by taking the
following grounds:-
"1. The order of ld.CIT(A) is wrong, perverse, illegal and
against the provisions of law, liable to be set aside.
2. The ld.CIT(A) erred in deleting the addition of prior
period expenses of Rs.3,25,46,000/-.
3. The ld.CIT(A) erred in deleting the addition of
Rs.2,29,82,152/- leave encashment.
4. The ld.CIT(A) erred in deleting the addition of
Rs.12,268,000/- as expenditure incurred for earning
interest income exempt u/s 14A.
5. The appellant craves leave to add, alter or amend
any ground of appeal raised above at the time of hearing."
3. The assessee has also filed cross-objection in which
reassessment proceedings initiated under Section 147 of the Act by
the DCIT (AO) are challenged. The grounds taken by the assessee in
the cross-objection read as under:-
3 ITA-5391/D/2010 &
C.O.158/D/2011
"1. That on the facts and in the circumstances of the
case and in law, the learned Commissioner of Income Tax
(Appeals) [`CIT(A)'] erred in holding that the reassessment
proceedings initiated under section 147 of the Act by the
Deputy Commissioner of Income-tax (`AO') were not bad in
law and accordingly, the reassessment order passed under
section 147 of the Act is valid and is thus not liable to be
quashed.
2. That the Respondent craves leave to add, alter,
amend and/or modify any of the cross objections either
before or during the course of the appellate proceedings."
4. Ground Nos.1 & 5 of the Revenue's appeal are general in nature
and require no adjudication.
5. In ground No.2, the issue relates to the deleting of addition of
`3,25,46,000/- on account of prior period expenses. The CIT(A) has
granted relief to the assessee by holding as under:-
"4.2 I have carefully gone through the order of the AO and
the submissions filed by the appellant. The AO has
observed, in the reassessment order, as under:-
"The authorized representative of the assessee has
explained that, in accordance with the method of
accounting/tax assessment adopted since its inception, the
entire amount of `expenditure pertaining to the previous
year' has been fully allowed in the year in which it is
accounted just as income pertaining to the previous year is
taxed in the year the same is accounted for compilation of
4 ITA-5391/D/2010 &
C.O.158/D/2011
the financial statements at the end of each accounting
year".
4.3 However, the appellant contended the aforesaid
explanation as recorded in the reassessment order was
never been given in the assessment proceedings. The
appellant contended that the prior period expenses has
already been added in the income. In this regard, the
appellant produced the return of income along with the
computation of income and showed that the impugned
prior period expenses has already been added back in the
original return of income. On perusal of the computation of
income, it is evident that the prior period expenses had
already been disallowed in the computation of income and
accordingly, the disallowance of such expenses again is not
justified. In view of the discussion, I direct the AO to delete
the addition of Rs.325.46 lacs made on account of prior
period expenses. The assessee's appeal on this ground is
allowed."
6. We have heard both the sides on the issue. We have also
perused the paper book submitted by the assessee. Learned AR drew
our attention to page 12 of the paper book which is the computation of
assessable income of the assessee for AY 2004-05 wherein item No.6 &
7 has been disallowed by the assessee itself in the computation of
income. Keeping these facts in view, we find no merit in ground No.2
of the Revenue's appeal and we uphold the order of learned CIT(A) on
this issue.
7. In ground No.3, the issue is with regard to deleting the addition
of `2,29,82,152/- on account of leave encashment. On this issue also,
learned AR drew our attention to page 12 which is computation of
5 ITA-5391/D/2010 &
C.O.158/D/2011
income of the assessee in the year under consideration wherein the
assessee itself has added back the provision for leave salary under
Section 43B of the Act. The CIT(A) has granted the relief to the
assessee by holding as under:-
"5.2 In this regard, the appellant produced the tax audit
reports and computations of income (along with the return
of income) for the AY 2004-05 and 2005-06. On perusal of
tax audit report for the AY 2005-06, it is evident that sum
of Rs.131,342,282 represents provision for leave
encashment created during the AY 2005-06 and remained
unpaid. Therefore, the same is to be added back in the
computation of income for the AY 2005-06. The
computation of income for the AY 2005-06 produced before
me clearly indicated that such sum was correctly been
added back in the computation of income for the AY 2005-
06.
5.3 Further, tax audit report for the AY 2004-05 shows
provision for leave encashment created during the year
and remained unpaid is Rs.108,360,130/- and, only such
sum is disallowable for the AY 2004-05. The return of
income for AY 2004-05 (i.e. the AY under consideration)
shows that Rs.108,360,130/- had already been added back.
Therefore, no further disallowance is required on account
of provision for leave encashment for the AY under
consideration. Accordingly, I direct the AO to delete the
addition of Rs.22,982,152/- made on account of provision
for leave encashment in the reassessment order. Actually
the assessee is adding back the provisions for leave
encashment suo moto at the end of F.Y. every year. This
ground of appeal of appellant is allowed."
6 ITA-5391/D/2010 &
C.O.158/D/2011
8. After hearing both the sides, we find no fault in the order of
learned CIT(A) and sustain the same.
9. Ground No.4 relates to the deleting of part addition made on
account of invoking the provisions of Section 14A of the Act.
10. We have heard both the sides on this issue. The CIT(A) has
granted part relief to the assessee by holding as under:-
"6.2 I have carefully gone through the order of the AO and
the submissions filed by the appellant. As evident from the
reassessment order, the appellant has earned an exempt
income of Rs.709.84 lakh from tax free bonds of UTI. I
have also noted that no redemption or further investment
was made during the year by the appellant in the bonds.
The assessee has the following investment in the bonds of
UTI as per the balance sheet as on March 31, 2004:
Rs in lacs
Investment March 31, 2004
Investment in UTI Bond 12619.42
6.3 The AO held that the provisions of Rule 8D of the
Income-tax Rules, 1962 are applicable in the instant case
and, disallowed/added back Rs.122.68 lakhs as
proportionate management expenditure in the
computation of income, without disclosing the basis of
arriving at the figure disallowed. I note that the AO had
mentioned the same amount of disallowance of Rs.122.68
lakhs in the reasons recorded for re-opening the
assessment proceedings and no basis was given.
7 ITA-5391/D/2010 &
C.O.158/D/2011
6.4 In relation to the applicability of Rule 8D of the Rules,
the Hon'ble Bombay High Court (in case of Godrej & Boyce
v DCIT) has recently held that Rule 8D would apply with
effect from Assessment Year 2008-09. Accordingly, I am of
the opinion that the AO was incorrect in holding that the
provisions of section 8D are applicable. However, even in
the absence of applicability of Rule 8D, as held in case of
Godrej & Boyce v DCIT (supra), the expenditure
incurred/apportioned to earn the exempt income is
required to be disallowed.
6.5 In the instant case, the appellant has submitted that
no expense has been incurred for earning the exempt
income and has contended that the disallowance of
Rs.122.68 lakhs as proportionate management expenses is
an ad-hoc disallowance without disclosing the basis to
compute the said figure of Rs.122.68 lakhs.
6.6 On perusal of the profit and loss account, it is evident
that the appellant has total income of Rs.111,741.71 lakhs
during the subject assessment year which includes exempt
interest income of Rs.709.84 lakhs. The expenditure in
profit and loss accounts consists of Technical
assistance/sub-contracts, consumables/stores R&D Centre,
construction material and equipment, salaries and
benefits, facilities, corporate costs, depreciation and
others. A perusal of the items of expenditure shows that if
at all, only the salaries and benefits could be, said to have
been incurred in part towards earning of the exempt
income. As submitted by the appellant, only effort
required to realize the exempt income is merely to send
8 ITA-5391/D/2010 &
C.O.158/D/2011
some employee to the bank to deposit the cheques
received from UTI. During the subject assessment year,
the appellant has received interest from UTI at two
occasions i.e. 11 cheques at a time. Further, the appellant
did not receive any dividend from its subsidiary
Certification Engineer International Limited. In such a
case, the effort made by him has to be evaluated in
monetary terms and may constitute expenditure incurred
in relation to the earning of the dividend income. There is
also no need to maintain any investment portfolio division
since the investment is in the UTI bonds only. Thus, it
appears to me that a very small and negligible amount of
time, effort and expenditure is required to earn the exempt
interest income. Considering this position, even if the
disallowance is to be upheld in principle, the cost may not
have been incurred in excess of Rs.5,000. In this regard,
reliance is placed on the Hon'ble Delhi Tribunal's ruling in
the case of Jubiliant Enpro Ltd. Vs. DCIT (12 SOT 194)
where-in the Hon'ble Tribunal had restricted the
disallowance to Rs.25,000/- even though the AO in the said
case had disallowed Rs.50,000/- on an adhoc basis.
Accordingly, I hold to disallow Rs.25,000/- u/s 14A."
11. In view of the various decisions of Hon'ble High Courts including
Hon'ble Jurisdictional High Court, we find that the CIT(A) was justified in
granting relief to the assessee. We, therefore, dismiss this ground of
Revenue's appeal.
12. In the result, the appeal of the Revenue stands dismissed.
9 ITA-5391/D/2010 &
C.O.158/D/2011
13. Since we have decided the issue on merits in the Revenue's
appeal, therefore, the cross-objection filed by the assessee remains
academic and we are not deciding this on merits.
14. In the result, the appeal of the Revenue as well as the cross-
objection of the assessee is dismissed.
Decision pronounced in the open Court on 2nd July, 2014.
Sd/- Sd/-
KARWA)
(H.L. KARWA) MEENA)
(B.C. MEENA)
PRESIDENT ACCOUNTANT MEMBER
Dated : 02.07.2014
VK.
Copy forwarded to: -
1. Revenue : Deputy Commissioner of Income Tax,
Circle-
Circle-11(1), New Delhi.
2. Assessee : M/s Engineers India Limited,
India Bhawan,
Engineers India
1, Bhikaji Cama Place, New Delhi.
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar
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