Commissioner Of Income Tax, Faridabad v. National Hydro Electric Power Corporation Ltd

ITA No. 385 of 2009 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 385 of 2009Date of Decision: 6.7.2010 Commissioner of Income Tax, Faridabad Versus National Hydro Electric Power Corporation Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1.The revenue by way of present appeal under Section 260Aof the Income Tax Act, 1961 (in short “the Act”) against the order dated21.11.2008 passed by the Income Tax Appellate Tribunal, Delhi Bench'G', Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 1105 (Del)of 2006 for the assessment year 2002-03 has claimed the followingsubstantial question of law:- “Whether, on the facts and in the circumstances ofthe case, the Ld. ITAT was right in law in settingaside the order of the Ld. CIT (A) and directing theAssessing Officer to allow the claim of the assesseein respect of provision for gratuity of Rs.15,49,59,191/-, provision for leave encashment of Rs.6,32,25,125/- and provision for post retirementmedical benefit of Rs.86,41,476/- while computingthe book profit u/s 115 JB of the Income Tax Act,1961 even though these were mere provisions andwere not ascertained liabilities?” 2.Briefly stated, the facts are that the assessee company, aGovernment of India Undertaking engaged in the construction of HydroElectric Power Projects, generation and distribution of electricity filed itsreturn on 30.10.2002 declaring nil income after claiming broughtforward depreciation against current year profit of Rs.3,22,83,73,786/-.The assessment was completed under Section 143 (3) of the Act on30.3.2005 at Rs.1,44,22,885/- and under Section 115JB of the Act atRs.54,14,04,007/-. The Assessing Officer held that provisions forgratuity of Rs.15,49,59,191/-, provision for leave encashment ofRs.6,32,25,125/- and provision for post retirement medical benefit ofRs.86,41,476/- could not be allowed while determining the book profitunder Section 115JB of the Act. The assessee preferred an appealbefore the CIT (A) against the order dated 30.3.2005 passed by theAssessing Officer, who partly allowed the appeal vide order dated2.3.2006 but affirmed that since these were the provisions and were notascertained liabilities, the claim of the assessee that no addition couldbe made was not acceptable. On further appeal by the assessee, theTribunal vide order dated 21.11.2008 set aside the orders of theAssessing Officer as well as of the CIT (A) and directed the AssessingOfficer to allow the claim of the assessee in respect of provision for gratuity, leave encashment and post retirement medical benefit whilecomputing book profit under Section 115 JB of the Act by placingreliance upon the judgments of the Hon'ble Supreme Court in BharatEarth Movers v. Commissioner of Income Tax, [2000] 245 ITR 428;Delhi High Court in Commissioner of Income Tax v. Vinitec Corp. P.Ltd. 278 ITR 337 (Del) and Bombay High Court in Commissioner ofIncome Tax v. Echjay Forgings P. Ltd. 116 Taxman 322. 3.We have heard the learned counsel for the revenue. 4.The issue in the present case is – whether in the facts andcircumstances, addition on account of the provisions for gratuity, leaveencashment and post retirement medical benefit could be made whilecomputing the book profit under Section 115JB of the Act? 5.Learned counsel for the revenue submitted that since theliability had not matured in praesenti and, therefore, the same could nothave been excluded from determining the book profits of the assesseeunder Section 115JB of the Act. 6.We have given our thoughtful consideration to thesubmission of the learned counsel for the appellant and do not find anymerit in the same. 3.We have heard the learned counsel for the revenue. 4.The issue in the present case is – whether in the facts andcircumstances, addition on account of the provisions for gratuity, leaveencashment and post retirement medical benefit could be made whilecomputing the book profit under Section 115JB of the Act? 5.Learned counsel for the revenue submitted that since theliability had not matured in praesenti and, therefore, the same could nothave been excluded from determining the book profits of the assesseeunder Section 115JB of the Act. 6.We have given our thoughtful consideration to thesubmission of the learned counsel for the appellant and do not find anymerit in the same. 7.Section 115 JB of the Act was inserted by the Finance Act,2000 with effect from Ist April, 2001. Under the provisions of thisSection, where an assessee is a company, it is required to pay at least7½% of its book profits as income tax. However, where the tax liabilityof the company under regular provisions is more than this amount, thecompany shall pay income tax according to the regular scheme. “Bookprofits” has been defined by the Explanation added to this Section ITA No. 385 of 2009 whereunder it provides that net profit as shown in the profit and lossaccount for the relevant previous year prepared in accordance with theprovisions of Part II and III of Schedule VI to the Companies Act, 1956shall be increased by amounts specified in Clauses (a) to (g), if anyamount referred therein is debited to the profit and loss account andreduced by the amount mentioned in clauses (i) to (viii) therein. 8.Clause (c) of the Explanation reads thus:- “the amount or amounts set aside to provisions madefor meeting liabilities, other than ascertainedliabilities.” 9.According to the assessee, it had made provisions forgratuity, leave encashment and post retirement medical benefit onactuarial valuation. It is not disputed that the assessee-respondent isfollowing mercantile system of accounting. The claim of the assessee isthat these provisions have been made on actuarial valuation and cannotbe added for determining book profits under Section 115 JB of the Actas it is business liability in praesenti which has arisen during theaccounting year and it is only the quantification and discharge of whichis to take place at a future date. 10.The Apex Court in Bharat Earth Mover's case (supra) whilepronouncing principles regarding difference between accrued andcontingent liabilities, enunciated as under:- “If a business liability has definitely arisen in theaccounting year, the deduction should be allowedalthough the liability may have to be quantified anddischarged at a future date. What should be certain is the incurring of the liability. It should also becapable of being estimated with reasonable certaintythough the actual quantification may not be possible.If these requirements are satisfied the liability is not acontingent one. The liability is in praesenti though itwill be discharged at a future date. It does not makeany difference if the future date on which the liabilityshall have to be discharged is not certain.” 11.The Bombay High Court in Echjay Forging P. Ltd's case(supra) where the assessee had made a provision for gratuity on thebasis of actuarial valuation, had held it to be ascertained liability. DelhiHigh Court in Vinitec Corp. P. Ltd's case (supra) while analyzingwhether provision for future liability under warranty was a contingent orascertained liability, had observed as follows:- 11.The Bombay High Court in Echjay Forging P. Ltd's case(supra) where the assessee had made a provision for gratuity on thebasis of actuarial valuation, had held it to be ascertained liability. DelhiHigh Court in Vinitec Corp. P. Ltd's case (supra) while analyzingwhether provision for future liability under warranty was a contingent orascertained liability, had observed as follows:- “The ratio decidendi of the above cases is squarelyapplicable to the facts of the present case. It is notdisputed that the warranty clause is part of the saledocument and imposes a liability upon the assesseeto discharge its obligations under that clause for theperiod of warranty. It is a liability which is capable ofbeing construed in definite terms which has arisen inthe accounting year. May be its actual quantificationand discharge is deferred to a future date. Once anassessee is maintaining his accounts on themercantile system, a liability accrued, though to bedischarged at a future date, would be a proper deduction while working out the profits and gains ofhis business, regard being had to the acceptedprinciples of commercial practice and accountancy.” 12.The Tribunal while considering the issue in hand hadspecifically recorded that the provision for gratuity, leave encashmentand post retirement medical benefit had been estimated on actuarialbasis and was a liability which was created in praesenti though it was tobe discharged at a future date. It was further recorded that theprovisions which were created in respect of gratuity, leave encashmentand post retirement medical benefit on actuarial basis had beenestimated with reasonable certainty and, therefore, such an estimatecannot be treated to be contingent one. It was also observed that theprovision made by the assessee in respect of gratuity, leaveencashment and post retirement medical benefit on actuarial basiscannot be said to be provisions of unascertained liabilities so as to fallunder clause (c) of the Explanation to Section 115JB (2) of the Act. 13.In view of the above, no substantial question as claimedarises for consideration of this Court. Consequently, finding no merit inthis appeal, the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE July 06, 2010gbs (ADARSH KUMAR GOEL) JUDGE