M/S Andhra Pradesh Handicrafts ... vs Department Of Income Tax

The DCIT, Circle 1(1) vs. M/s. Andhra Pradesh Hyderabad. Handicrafts Development Corporation Ltd., Hyderabad. PAN AABCA7350D (Appellant) (Respondent)

For Revenue : Mr. R. Clement Ramesh Kumar For Assessee : Mr. Hari Agarwal

Date of Hearing : 28.05.2015 Date of Pronouncement : 29.05.2015

ORDER

PER SMT. ASHA VIJAYARAGHAVAN, J.M.

These two appeals are filed by the Revenue against the common Order of the Ld. CIT(A)-VI, Hyderabad for the A.Ys. 2005-06 and 2006-07. Since common issues are involved in these appeals, the appeals are heard together and are being disposed of by a single consolidated order.

2. Briefly stated, the assessee, a public sector undertaking of State Government of Andhra Pradesh, shown to have been engaged in the business of promotion and development of handicrafts, mainly for upliftment of rural and tribal artisans in Andhra Pradesh and for the years under reference i.e., A.Ys. 2005-06 and 2006-07 the assessee claimed amounts of Rs.30,00,000 and Rs.35,00,000 as expenses being 2 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

the amounts paid as premia to the LIC, towards the Leave Encashment Scheme and the same were allowed in the original assessments. While reopening the assessments u/s.147, the A.O. has computed the total income by disallowing the said amounts by applying the provisions of sec.40A(9) and 43B(f) of I.T. Act, after netting of the same with the actual amounts of leave encashment paid by LIC to the employees, through the assessee. The incomes of the assessee have been assessed at Rs.60,45,960 and Rs.64,61,390, as against the returned total income of Rs.30,45,960 and Rs.30,86,102 for A.Ys. 2005-06 and 2006-07 respectively by DCIT, Circle 1(1). The assessee preferred appeal before the Ld. CIT(A) against the said disallowances as well as on the issue of reopening the assessments without change in facts. During the proceedings before the Ld. CIT(A) the assessee did not press the ground with reference to section 147.

3. It was observed by the assessing officer that the assessee had debited an amount of Rs. 30 lakhs and Rs. 35 lakhs respectively for the asst. years 2005-06 and 2006-07, towards 'contribution to leave fund'. The assessing officer observed that the same is hit by the provisions of Sec. 43B(f) of Income-tax Act. With reference to the application by the assessee before the Addl, CIT u/s. 144A, the Addl. CIT directed the assessing officer to verify the actual payments to employees on account of leave encashment and allow only those amounts, for both the assessment years. The assessee before the assessing officer clarified that for the A.Y. 2005-06, no payment was made to the employees towards leave encashment and hence, the claim was disallowed u/s.43B of the Income-tax Act. As far as assessment year 2006-07 is concerned, the assessee clarified before the assessing officer 3 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

that the assessee had paid Rs.l,24,712 towards leave encashment out of receipts from LIC, but debited Rs. 35,00,000 to Profit & Loss account. Hence, the A.O. had disallowed a sum of Rs. 33,75,288 u/s.43B (Rs.35,00,000 - Rs.1,24,712).

4. Before the Ld. CIT(A), it was further stated by the assessee that the dispute is regarding the allowability of leave encashment of Rs. 30,00,000 for the AY 2005-06 and Rs.35,00,000 for the AY 2006-07, which is a liability ascertained and not a provision. It was contended that the said amounts were paid in order to contain frugality in the expenditure and to look after the employees welfare and to assure them that their due benefits are ensured. It was stated that as per decision of the appellant Board on 14.10.2004, that Group Leave Encashment Scheme with LIC of India was taken for the benefit of the employees, and due to the negotiations with the LIC1 they have calculated the liability on actuarial basis and the amount payable by the corporation is paid and LIC has taken over the liability of paying the leave encashment amounts to employees, accordingly LIC is paying the amount to employees of appellant Company. It was stated that the amount paid to LIC is debitable to Profit & Loss account, as it was an expenditure, to arrive at the correct profits of the business of that year, and that the amount of leave encashment as and when paid by LIC, is not claimed as expenditure by the appellant again. It was stated that whatever interest is accrued on premium paid to LIC is added to the corpus of the fund and is again for the welfare of the employees and 4 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

the same is not the income to the assessee and due to this practice the liability of the company getting reduced in the coming years. It was averred that if the assessee fails to make the payment to LIC on behalf of the employees, the LIC's assurance for leave encashment gets lapsed, which is detrimental to the welfare of the employees. It was stated that the amount was claimed on actual payment made to LIC and not on provisional basis, since the amount payable to LIC is ascertained liability and it is actually parted With it and is an allowable expenditure u/s.36(1)(va) alternatively under sec. 37(1), as it is for the business of the assessee. For the Proposition that the payment is an allowable deduction u/s.37 the assessee relied on the decision of the Hon'ble High Court of Kerala at Ernakulam in M/s. Hindustan Latex Ltd, for the proposition that the payment of premium of LIC for the policy under group leave encashment scheme is eligible u/s.37, wherein the High Court have held that the claim is allowable treating the same as an expenditure exclusively incurred for the purpose of business. The assessee further stated that the claim was not a provision for future liability which was claimed as a deduction. The assessee further enclosed copy of the GO in Ms.No.232 dt. 16.09.2005, issued by the Government of Andhra Pradesh in respect of leave encashment wherein it was clearly reflected that the statutory duty of Corporation to ensure proper payment of leave encashment to all the employees on their retirement or resignation irrespective of the liquidity or financial position of the Corporation. The assessee stated that as a precaution and to fulfil the request and satisfaction of 5 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

union for smooth and peaceful function of Corporation, and that the corporation is forced to take the insurance policy to avoid any uncertainty in future payments and reflect true surplus of revenue over expenditure. It was clarified that the policy was taken on regular yearly premium payments basis and hence, it is an allowable expenditure according to Sec. 37(1) of Income Tax Act, 1961. The Ld. CIT(A) elaborately discussed at paras 5.3 to 5.5 of his order and concluded as follows :

"..... the expenses which are related to business and which were not prohibited by the Act are, allowable as expenses for computing the profits of business and profession. Thus, the premia paid to LIC are eligible to be claimed as business expenses u/s.37(1) of the I.T. Act and the decision of Kerala High Court on similar facts upheld the allowance of premium paid to LIC for Leave Encashment Scheme, in the case of CIT vs. Hindusthan Latex Ltd. [209 Taxman 0042 (2012)], wherein the Hon'ble High Court held as under:

"The object of section 438 was to prevent assessee from making provision for statutory liabilities, without actually discharging the same. Leave encashment is not a statutory liability and even in the case of provisions being made, the deduction was allowed as business expenditure, when the liability was not aCtually incurred in the previous year. It was not a provision which was disallowed but an actual liability towards premium paid on insurance policy and the liability was allowable as

-, deduction u/s. 37, being an expenditure incurred for the purpose of business .... "

Following the ratio of the decision of Kerala High Court, on the similarity of facts, I am of the considered opinion that the amounts paid by appellant company as premia to the LIC, towards the encashment of scheme for AY 2005-06 and 2006-07 are the expenses allowable u/s. 37(1) of I.T. Act. Accordingly, the additions of Rs.30,00,000/- for AY 2005-06 and Rs.

6 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

33,78,285/for AY 2006-07 are not sustainable, accordingly, the grounds of appeals are allowed."

5. We have heard both the parties and also perused the relevant material available on record. We find that the issue is covered by the decision of Coordinate Bench of this Tribunal in the case of DCIT, Circle 1(1), Hyderabad vs. M/s. Andhra Bank, Hyderabad in ITA.No.167, 168 & 169/Hyd/2014 and ITA.No.244,245 & 246/Hyd/2014 dated 18th July, 2014, in which one of us was the party. The relevant portion of the order is reproduced hereunder :

"29. The next effective grievance of the assessee in this appeal relates to disallowance of premium of Rs.148,36,49,516 paid to Life Insurance Corporation of India towards leave encashment policy taken by the assessee for its employees.

30. Facts of the case in brief relating to this issue are that the assessee claimed deduction in the computation of income of Rs.124.82 crores towards payment made to LIC group leave encashment scheme. During the course of assessment, the claim was revised to Rs.148.36 crores, as the claim for deduction of Rs.10.576 crores for Assessment year 2006-07 and Rs.12.97 crores for assessment year 2007-08 were not allowed by the Assessing Officer in those respective assessment years . The entire amount of Rs.148.36 crores was said to have been paid during the relevant previous year. The Assessing Officer did not allow the deduction claimed by the assessee for the following reasons-

a) The payment was not made directly by the assessee, rather the payment was made to LIC Group Leave Encashment Scheme and therefore, such payment is not allowable under S.43B(f) of the Act.

b) The payment made is not debited to Profit & Loss Account, but was made out of General Reserves 7 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

c) The LIC Group Leave encashment Scheme is not recognized/approved as per S.36(1)(vi)/(v) of the Act, and therefore, it is in violation of provisions of S.40A(9) of the Act.

31. On appeal, the CIT(A) sustained the disallowance made by the Assessing Officer. Hence, assessee is in second appeal on this issue.

32. We heard both sides and perused the impugned orders of the Revenue authorities and other material available on record. We find that on this issue, the decision of the Tribunal in assessee's own case for the assessment year 2006-07, viz. in ITA Nos.95 to 97 & 218/Hyd/2013 dated 4.4.2013, is in against the assessee, and the impugned order of the CIT(A) on this issue is in consonance with the said order of the Tribunal for the assessment years 2006-07. However, the recent decisions of the Uttarakhand High Court in the case of CIT V/s. Nainital Bank Ltd. (2014)8 Tax Corp(DT)56471; and of the Kerala High Court in the case of CIT V/s. Hindustan Latex Ltd. (2012)22 Taxmann.com 332, relied upon by the learned counsel for the assessee before us, duly furnishing copies thereof in the paper-book, are in favour of the assessee. It has been held by the Uttarakhand High Court in the case of Nainital Bank Ltd. (Supra) as follows-

"4.It is not in dispute that the payment of the premium in question is not an expenditure of the nature described in Sections 30 to 36. In order to show that the expenditure was not in the nature of capital expenditure or personal expenses of the assessee and had been spent wholly and exclusively for the purpose of business or profession, reference was drawn to Section 43B(f) of the Act. Inasmuch as, Section 43B contains non- obstante provision and there in Clause (f) payment by the assessee as employer in lieu of any leave to the credit of its employees has been recognized as a revenue expenditure and has been certified as an expenditure not for personal expenses of the assessee and that the same is wholly and exclusively for the purpose of business or profession of the assessee. A 8 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

cover obtained to discharge such recognized obligation will not come under Section 37 of the Act is not accepted.

33. In the case of Hindustan Latex Ltd.

(supra), which in fact was in the context of order of the Commissioner passed under S.263 of the Act, dealing with eligibility of deduction in respect of premia paid towards insurance cover, the Kerala High Court has held that what is intended by clause (f) of S.43B was to deny deduction for liabilities not actually incurred and to exclude provisions made against future liabilities from being granted as deduction. In the case of insurance premia paid, it was observed, the same was not a provision for future liability which was claimed as a deduction. The assessee had insured itself against the liabilities that may arise on account of the claims made by the employees towards leave encashment. The assessee being covered by a valid insurance policy and premium being regularly paid, incurs no liability towards leave encashment. The liability being covered by a valid insurance policy, is solely that of the insurer. Therefore, it was held that even if 43B (f) stands, in the case of the assessee, where the liability is borne by the insurer, there can be no situation wherein assessee could make a valid claim for deduction u/s 43B(f) since the actual liability is not incurred in any of the years. The premium paid towards the renewal and continued validity of the insurance policy necessarily becomes business expenditure wholly and exclusively incurred for the business purpose and allowable as a deduction u/s 37.

34. In view of the above, respectfully following the recent decisions of the Uttarakhand High Court in the case of CIT V/s. Nainital Bank Ltd. (supra); and of the Kerala High Court in the case of CIT V/s. Hindustan Latex Ltd. (supra), in preference to the earlier decision of the Tribunal in assessee's own case for assessment year 2006-07, we accept the contentions of the assessee on this issue, and delete the addition made by the Assessing Officer in this behalf. Assessee's grounds on this issue are allowed."

9 ITA.No.915 & 916/Hyd/2014 M/s. A.P. Handicrafts Development Corpn. Ltd.,

6. We find that the issue is covered by the aforesaid decision of the Coordinate Bench of this Tribunal in the case of M/s. Andhra Bank, Hyderabad (supra) and respectfully following the same, we uphold the order of the Ld. CIT(A) for both the assessment years under consideration and dismiss the appeals of the Revenue.

7. In the result, appeals of the Revenue are dismissed.

Order pronounced in the open Court on 29.05.2015.

Sd/- Sd/- (INTURI RAMA RAO) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated 29th May, 2015

VBP/-

Copy to

1. The DCIT, Circle 1(1), 4th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad.

2. M/s. Andhra Pradesh Handicrafts Development Corporation Ltd., Hasthakala Bhawan, Opp. Telephone Exchange, Musheerabad, Hyderabad - 500 020.

3. CIT(A)-VI, Hyderabad.

4. CIT-I, Hyderabad

5. D.R. I.T.A.T. "B" Bench, Hyderabad.

6. Guard File