H.P. State Industrial Corporation ... vs Assessee

H.P. S tate I ndustrial Corporation Ltd. Vs. The ACI T New Himrus Building Circle Cart Road Shimla Shimla PAN No. AACCT03313N

&

ITA No.1308/Chd/2012 Assessment Year:2009-10

ACI T, Vs. H.P. S tate I ndustrial Development Circle Corp. Ltd. Shimla Shimla

PAN No. AACCT0331N

(Appellant) (Respondent)

Appellant By : Sh. Vishal Mohan Respondent By : Sh. Manjit Singh

Date of hearing : 06/07/2015 Date of Pronouncement : 10/07/2015

ORDER

PER T.R.SOOD, A.M.

The appeal by the assessee is directed against the order dated

24/09/2012 passed by the CI T(A) Shimla.

2. In this appeal assessee has raised the following ground which

are as under :

1. That in the facts and circumstances of the case the Ld. CIT(A) is not justified in upholding the disallowance made by ld. A.O. of Rs.

4677792/- on a/c of payment of premium for group gratuity made to LIC 2

holding the same not to be allowable under section 36(1)(v) of the Income Tax Act, 1961.

2. That in the facts and circumstances of the case the ld. CIT(A) is not justified in upholding the addition of Rs. 2129850/- on account of disallowance of premium paid for leave encashment.

3. That in the facts and circumstances of the case the ld. CIT(A) is not justified in upholding the addition of Rs. 6029838/- on account of interest accured on FDRs under ASIDE scheme.

4. That in the facts and circumstances of the case the ld. CIT(A) is not justified in upholding the addition of Rs. 1,11,537/- on account of disallowance of expenses pertaining to CPF trust.

3. Out of the above Ground No. 4 was not pressed and the same is dismissed as not pressed.

Ground No. 1 4. After hearing both the parties we find that during the assessment proceedings AO noticed that assessee has paid a sum of Rs. 68,34,365/- on account of Premium for Gratuity. The assessee was asked to file copy of the order granting approval to the Gratuity Fund. No such certificate was filed but it was claimed that assessee has following the mercantile system of accounting and therefore claim was justified, this claim was not allowed since the funds was not approved. However the alternative submission that amounts already paid to the employees amounting to Rs. 21,56,573/- should be allowed was accepted and disallowance was made for Rs. 46,77,792/-.

5. On appeal the action of the AO was confirmed by the Ld. CIT(A).

6. Before us the Ld. Counsel for the assessee fairly admitted that this issue is covered by the decision of Tribunal in assessee's own case for the earlier year. However he contended that since the amount has been paid to the Life Insurance Corporation which is approved fund and therefore this amount should be allowed. In view of the decision of Hon'ble Supreme Court in case of CIT Vs. M/s Textool Co. Ltd. in Civil Appeal No. 447 of 2003(copy enclosed).

7. On the other hand Ld. DR strongly supported the order of Ld. CIT(A).

8. After considering the rival submissions carefully we find that similar issue came up for consideration before the Tribunal in the earlier year 2005-06 and 3

2007-08 in ITA No. 1226&1227/Chd/2010. This issue was decided vide para 8 which is as under:

"8 We have considered the rival submissions carefully and find that in the earlier round, the matter was referred to the Assessing Officer for verification of the fate of application of the assessee for registration of gratuity scheme. The Assessing Officer enquired from the office of the Commissioner vide letter No. CIT/Tech/SML/Gratuity Fund/2009-10/4140. The Commissioner has clearly informed the Assessing Officer that no such application was pending in that office. In such circumstances in our opinion, the assessee should have taken caution to pursue the matter in the office of the Commissioner or should have produced some evidence before us to show that the application was really pending. In the absence of such evidence only conclusion which can be reached is that the gratuity fund of the assessee is not approved. Hon'ble Delhi High Court has clearly examined this issue and also the contention of the allowability of the claim of the assessee alternatively u/s 37 in case of Sony India P. Ltd V CIT (supra). In that case head note reads as under:

"Section 36 of the Income-tax Act, 1961, provides for deductions that are admissible while computing the income referred to in section 28. One of the deductions which is made admissible under clause (iv) of section 36 is "any sum paid by the assessee by way of contribution towards a recognized provident fund or an approved superannuation fund". Clause

(v) of section 36(1) similarly provides for deduction of "any sum paid by the assessee by way of contribution towards an approved gratuity fund provided the same is under an irrevocable trust". A plain reading of section 36(1)(iv) and (v) makes it manifest that deductions there under are admissible only if the employer pays the contributions towards a recognized provident fund, an approved superannuation fund or an approved gratuity fund.

The provisions of a taxing statute have to be interpreted strictly applying the rule of literal interpretation. Nothing can be added or substituted by implication or intendment. If Parliament has made deductions towards provident fund, superannuation fund or gratuity fund admissible only in cases where such funds are approved, granting deduction of amounts pad into unapproved funds under the cover of section 37 may defeat the legislative intent and frustrate the very purpose underlying the specific provisions made thereunder.

The assessee entered into an agreement with the LIC and made contributions towards gratuity and superannuation funds for the benefit of its employees. The assessee made an application to the Commissioner for approval of the fund under the Employees Group Gratuity Scheme (corporate and factory ) which was approved by the Commissioner with effect from September 30,1998. A similar approval for the superannuation scheme was granted by the Commissioner with effect from October 14, 1998. The assessee claimed that the contributions made by it were admissible deductions for the assessment year 1998-99 for the previous year ended March 31, 1998, which was rejected by the Assessing Officer on the ground that the contribution to an unapproved fund did not qualify for deduction under section 36(1)(iv) and 36(1)(v). The Commissioner (Appeals) affirmed the view taken by the Assessing Officer. The Tribunal also disallowed the deduction towards contribution of a sum of Rs. 4,31,342 made by the assessee to the gratuity fund and a sum of Rs. 35,31,223 contributed towards the superannuation fund on the ground that the said funds were not approved during the relevant period. On appeal:

Held, dismissing the appeal, that it was common ground that the funds to which the assessee had contributed were not approved either during the year under consideration or at any time up to the date of making the contributions. Therefore, the contributions made did not qualify for 4

deduction under section 36. Further the deduction which the assessee claimed was admittedly of the nature described in section 36(1)(iv) and

(v). Therefore section 37 would not come to the aid of the assessee. "

From above it becomes clear that if particular fund is not approved then Section 36(1)(iv) would come into operation and such expenditure cannot be allowed. In such situation Sec 37 is not applicable because Hon'ble High Court has very clearly held that deduction admissible u/s 30 to 36 cannot be claimed u/s 37. Therefore in our opinion, in view of this decision the claim of the assessee has been correctly denied by the authorities below and accordingly we confirm the order of the Ld. CIT(A)."

9. From the above it is clear that issue is covered against the assessee. We are unable to agree that this year different view should be taken in view of the decision of Hon'ble Supreme Court in case of CIT vs. M/s Textool Co. Ltd. (supra) because in that case clearly the fund was approved by the Commissioner of Income tax (as shown in highlighted portion) whereas in case before us the fund is not approved. This becomes clear from following para of the judgment of M/s Textool Co. Ltd.

" For the assessment year, 1983-84, for which the relevant previous year ended on 30th April, 1982, the assessee claimed a deduction of Rs. 92,06,978/- as contribution / provision towards the approved gratuity fund. As per the breakup of the said amount, an amount of Rs. 5,84,754/- was paid as annual premium to the Life Insurance Corporation("LIC" for short); a sum of Rs. 50,00,000/- was paid to the LIC as initial contribution in the group Life Assurance Scheme framed by the LIC for the benefit of the employees of the assessee and the remaining amount of Rs. 36,22,224/- was shown as provision for initial contribution. It is common ground that assessee company's gratuity fund, viz., the Textool Company Ltd. Employees Group Gratuity Fund was approved by the Commissioner of Income Tax, coimbatore, w.e.f. 25th February, 1983. While completing assessment, the Assessing Officer allowed a deduction of Rs. 36,22,224/- under section 40A(7) of the Act. However, deduction for the balance amount was disallowed on the ground that payment towards the gratuity fund was made by the assessee directly to the LIC and not to an approved gratuity fund and, therefore, it was not allowable under Section 36(1)(v) of the Act. "

Therefore following the earlier decision we decide this issue against the assessee.

Ground No. 2 10. After hearing both the parties we find that during the assessment proceedings it was noticed that assessee has paid certain premium towards leave encashment. After detailed discussion this premium was held to be not allowable.

11. On appeal the action of AO was confirmed by the Ld. CIT(A).

5 12. Before us Ld. Counsel for the assessee submitted that this issue is covered by the order of Tribunal for earlier years in favour of the assessee.

13. On the other hand Ld. DR strongly supported the order of Ld. CIT(A). This issue came up for consideration in the earlier year and the same was decided in ITA No. 1226&1227/Chd/2010 vide para 20 which is as under:

"20 After considering the rival submissions we find force in the submissions of the Ld. Counsel for the assessee. The amount has not be paid by way of provision but by way of premium under a particular scheme under which the Insurance company had computed the leave encashment dues. Therefore it cannot be called a payment towards a provision. In any case once the payment has been made the same is allowable under clause (f) of Sec 43B. Otherwise also the issue stands settled in favour of the assessee in view of the decision of Hon'ble Supreme Court in case of Bharat Earth Movers V. CIT, 245 ITR 428 in which provision for leave encashment was held to be allowable if the same was based on a particular scheme proportionately with the entitlements earned by the employees. Later on effect of this judgment was nullified by insertion of clause (f) to Sec 43B providing that the amount would be allowable only if the same has been paid. Since the amount has been paid, therefore same is, in our opinion, allowable. Accordingly we set aside the order of the CIT(A) and direct the Assessing Officer to allow this amount."

Following the same we delete this addition.

Ground No. 3 14. After hearing both the parties we find that during the assessment proceedings AO noticed that assessee has not accounted for interest on FDRs amounting to Rs. 60,29,838/-. AO after detailed discussion disallowed this amount and the action of the AO was confirmed by the Ld. CIT(A).

15. Before us the Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the order of Tribunal in the earlier years.

16. On the other hand Ld. DR strongly supported the order of Ld. CIT(A).

17. After considering the rival submissions carefully we find that identical issue came up for consideration in earlier year and same was decided in ITA No. 1226&1227/Chd/2010 vide para 25 which is as under:

25 We have considered the rival submissions carefully and find that Government of India, Ministry of Commerce and Industry, Department of Commerce has sanctioned the grant to the assessee vie letter dated 16.7.2002. Clause 4 of the same reads as under:

"4 The release of fund are subject to the following terms and conditions:

6 (i) No administrative expenditure be incurred out of the funds allocated

(ii) The account of the implementing agency be kept open for inspection by the sanctioning authority/audit.

(iii) The amount received from the Government be kept in a separate head of account of the nodal agency.

(iv) No part of the funds be invested except in the scheduled nationalized banks. Any interest accrued be utilized for the scheme.

(v) The nodal agency shall submit the report in the prescribed proforma along with the proposal for release of second installment as prescribed in the guidelines.

(vi) Audited accounts in support of the expenditure incurred for the ASIDE scheme be submitted within 9 (nine) mohths from the closing of the accounts."

Highlighted portion clearly shows that the assessee was required to invest funds in a scheduled bank and the interest if any was required to be utilized for the purpose of scheme. Thus it is clear that the interest never belongs to the assessee. In almost identical situation which arose before the Hon'ble Karnataka High Court where the assessee, the Karnataka Urban Infrastructure Development and Financial Corp, a Government company owned by the State of Karnataka was involved in project development of infrastructure and was provided funds by the Planning Commission for development of urban infrastructure to Bangalore City. The funds received by it from the Government of India were deposited with banks for the period they were not utilized. The interest earned on these deposits was transferred to the mega city account directly. On the question whether the interest on the bank deposits was taxable and it was held as under:

"The assessee, the Karnataka Urban Infrastructure Development and Financial Corporation, a Government company owned by the State of Karnataka, was involved in projects of development of infrastructure and was appointed the nodal agency for the implementation of the mega city scheme worked out by the Planning Commission for development of urban infrastructure to Bangalore city. The funds received by it from the Government of India were deposited with banks for the period they were not utilized. The interest earned on these deposits was transferred to the mega city account directly. On the question whether the interest on these bank deposits was taxable.

Held, that there was no profit motive as the entire fund entrusted and the interest accrued on the deposits in the bank, though in the name of the assessee, had to be applied only for the purpose of welfare of the nation as provided in the guidelines. The whole of the funds belonged to the State Exchequer and the assessee had to channelise them to the objects of the Centrally sponsored scheme of infrastructural development for the mega city of Bangalore. The entire money was received for a public purpose and the end scheme was implemented in accordance with the guidelines of the Central Government. Therefore, in computing the total income of the assessee the interest accrued on the bank deposits could not be treated as income."

This decision has been followed by the Chandigarh Bench of the Tribunal in case of H.P. Government Energy Development Agency, Shimla V. ACIT (supra). Therefore following this decision we are of the opinon that the interest income does not accrued to the assessee and the assessee is not liable to be taxed on such interest. Therefore we set aside the order of the CIT(A) and delete this addition.

7 Following the same we decide this issue against the assessee.

18. In the result appeal of the assessee is partly allowed.

ITA No.1308/Chd/2012 The appeal by the Revenue is directed against the order dated

24/09/2012 passed by the CI T(A).

19. In this appeal Revenue has raised the following grounds:

1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the A.O. was not right in apportioning the development cost incurred on 159868 sq. mtrs of marketable land to whole piece of land of 317803 sq. mtrs purchased and developed by the assessee for sale.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the development made by the assessee in the entire land such as construction of road etc. does not hold good for whole of land and only increases the cost of land sold by the assessee.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in reaching to the conclusion without any material on record that no development was carried out on the remaining land measuring 88292 sq. mtrs., because of its juxtaposition with some Government land.

Whereas the assessee had carried out the development of road etc. which connects to the entire land and the cost of which can't be excluded from the whole piece of land.

20. After hearing both the parties we find that during the assessment proceedings AO noticed that assessee has developed plots in Davni Industrial Area situated in Baddi, the total cost incurred was Rs. 22,73,07,500/-. The total area sold during the year was 65051.34 sq, mtr. The assessee has taken average cost at Rs. 2438.77 per sq. mtr. This cost was determined by considering the purchase price + cost of development of the land sold. The assessee had reduced cost of land covered under the tube well which was non marketable and cost of land had been reduced by Rs. 864.36 per sq. mtr. AO did not accepted this proposition and held that development expenses incurred for the plots were required to be apportioned to the whole of the land after reducing only the area under tube well. Thereafter AO recomputed average cost at Rs. 1453.22 per sq. mtr. because AO reduced only the tube well area of 3000 sq. mtr. The development cost of the tube well at Rs. 87,13,155/- was also not included in the total development cost. However net profit from the sale of land was calculated at Rs. 13,27,74,086/- against the profit of Rs. 6,86,63,073/- as 8

declared by the assessee and sum of Rs. 6,41,11,013/- was added to the income of the assessee.

21. On appeal it was mainly submitted that assessee had acquired total land holding of 426.12 bighas equivalent to 320803 sq. mtrs. for development of Industrial Estate at Baddi. During the process of development of Industrial plots it was found that 88292 sq. mtrs. of land could not be developed because of the existence of small patches of Govt. land in between the plots, because of this reason development of this area could not be undertaken and only the purchase cost was incurred. In the balance sheet cost of this land measuring 88292 sq. mtrs was separately shown in the inventory. Further the land comprising tube well measuring 3000 sq. mtr. could also not be sold and therefore cost of that land was also reduced for working out of cost of land to be sold. Therefore, total balance available areas was only 229511 sq. mtrs. The said area was developed by providing sewerage, roads and other facilities and which also lead to wastage of developed area which was reduced to 69643 sq. mtrs. Thus net saleable area was 159868 sq. mtrs. which gave the average cost of Rs. 2438.77 per. sq. mtr. since the assessee has sold land measuring 65051 sq. mtrs. of land. During the year the profit was reflected accordingly. It was also pointed out that out of the sold area 14148 sq. metrs. was surrendered by the buyers in the immediately succeeding year and loss was booked accordingly which was accepted by the department. The Ld. CIT(A) found force in this submission and decided the issue in favour of the assessee.

22. Ld. DR relied on the contents of the assessment order and vehemently argued that the cost of development was required to be spread in the whole area of land which was available with the assessee and therefore AO rightly spread the cost of whole area.

23. On the other hand Ld. Counsel for the assessee reiterated the submissions made before the Ld. CIT(A).

24. We have considered the rival submissions carefully and find that Ld. CIT(A) has adjudicated this issue vide para 9 which is as under:

" 9. The rival submissions have been carefully considered w.r.t the facts of the case. It is noted that 229511 sq. mtrs. of area was actually developed by the appellant Corporation, although the total land purchased amounted to 320803 sq. mtrs. 3000 sq. mtrs. of area was 9

separately developed as the said area was under the tubewells. The development cost of this area was Rs. 87,13,155/-. No development was carried out on the remaining land measuring 88292 sq. mtrs. as it was not possible to develop the same because of its juxtaposition with some Government land. Accordingly the said land measuring 88292 sq. mtrs. was not a part of the stock-in-trade ready for sale. Therefore the investment in the said land was separately shown by the assessee as a distinct stock(inventory) not yet developed and hence not saleable. The appellant has calculated the cost of the plots ready for sale by dividing the total land cost and development cost incurred on saleable land by the total marketable/saleable area which was 159868 sq. mtrs. The A.O. has not doubted the genuineness of the appellant's claim in respect of the land cost and the development cost and the balance work cost. Therefore it is not understood as to how he has chosen to divide the development cost incurred in respect of 159868 sq. mtrs. of land by 317803 sq. mtrs. of land in order to arrive at the average cost per sq. mtr. of the saleable land.

It is not the A.O.'s case that 88292 sq. mtrs. of land shown as non-marketable by the appellant Coporation was not in need of any development in order to make it marketable / saleable. Nor has the A.O. conducted any independent enquiries or brought anything on record to controvert the appellant Corporation's claim that the land of 88292 sq. mtrs. was not in a position to be developed pending disputes regarding the existence of certain Government land. The appellant's claim, on the contrary, is supported by the site development plans and the lay-out maps of the Davni Industrial Area/Estate which show various patches of land belonging to the Government and not belonging to the appellant Corporation. Even otherwise, as already mentioned, there is found no logic in the method of calculation of cost of the stock-in-trade adopted by the A.O. He is not found justified in apportioning the development cost incurred on 159868 sq. mtrs. of marketable land to 317803 sq. mtrs. of land purchased by the assessee Corporation. Therefore the adjustment made by him in the average cost of plots taking it at Rs. 1453.22 per sq. mtrs. is not found to be sustainable.

The addition of Rs. 6,41,11,013/- on account of the so-called "short profit" is accordingly directed to be deleted."

25. In our opinion Ld. CIT(A) has correctly adjudicated this issue because cost cannot be allocated to the area which could not be sold ultimately. Further AO has nowhere disputed that this portion of land was not saleable. Therefore, we find nothing wrong in the order of Ld. CIT (A) and confirm the same.

26. In the result appeal of the Revenue is dismissed.

27. I n the result appeal of the Assessee is partl y allowed in ITA No.1036/Chd/2012 and appeal of the Revenue is dismissed in ITA No.1308/Chd/2012.

Order pronounced in the Open Court on 10/07/2015

Sd/- Sd/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 10/07/2015 AG

Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR