The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that where an assessee actually pays an amount to an insurer under a leave encashment scheme and the liability thereafter stands assumed by the insurer, the payment constitutes actual business expenditure and cannot be equated with a mere provision. Therefore, such contribution is allowable and is not liable to be disallowed merely by invoking section 43B(f) of the Income Tax Act.
The ITAT further held that where income has been duly recognised in the books on mercantile basis and a part of such income is thereafter capitalised in accordance with the contractual terms governing the transaction, no separate addition can be made merely because that portion has been capitalised; however, factual reconciliation may be verified by the Assessing Officer. Similarly, where an amount realised on demolition of assets is reduced from the block in the succeeding year, the issue may be one of timing and cannot result in double adjustment.
CSR expenditure incurred prior to insertion of Explanation 2 to section 37(1) with effect from A.Y. 2015-16 is allowable under section 37(1), particularly where such expenditure is incurred pursuant to binding governmental guidelines and has nexus with the operational and statutory framework of the assessee’s business, added the Tribunal.
The ITAT explained that under the doctrine of real income, enhanced estate rentals that remain under serious dispute and whose recoverability is uncertain do not accrue as taxable income merely because bills are raised under the mercantile system. Further, port assets such as docks, sea walls, piers, wharves, railway sidings and rolling stock are to be treated as plant and machinery on the functional test, and where the foundation of a section 40(a)(ia) disallowance is an order under sections 201(1)/201(1A) that has itself been set aside, the consequential disallowance cannot survive.
Further, expenditure classified as “donations and contributions” is allowable if, on its true nature, it is staff welfare or business-related expenditure incurred on grounds of commercial expediency, added the Tribunal.
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On the leave encashment issue, the Division Bench comprising Anikesh Banerjee (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that the lower authorities had overlooked the distinction between a mere provision and an actual expenditure incurred through an insurance mechanism. It recorded that the assessee had not claimed deduction on the basis of a provision in its books, but had actually paid Rs.80 crore to SBI Life Insurance Co. Ltd., resulting in actual outflow of funds and cessation of control over the amount. Thus, the Bench observed that where the liability is assumed by the insurer and premium is actually paid, such payment is not a provision for future liability but an actual liability allowable under section 37.
On depreciation relating to demolished assets for A.Y. 2012-13, the Tribunal observed that the legal position requiring reduction of demolition receipts from the block of assets was not disputed. However, if the assessee had in fact reduced Rs. 87.06 lakhs from the written down value in the immediately succeeding year, the matter would be one of timing and not of allowability, and sustaining disallowance in one year while giving effect to reduction in the next year could result in unintended double adjustment.
On interest on Inter Port Loan, the Tribunal observed that the I-T authorities had proceeded on a fundamentally incorrect factual premise. It found that the issue was not recognition of income on receipt basis despite mercantile accounting, nor whether the loan was sticky or irrecoverable, but whether the capitalised interest had already been recognised in the books. The accounting entries and schedules prima facie demonstrated that the entire interest of Rs. 8.14 crores had been recognised and credited to income, and that Rs. 4.07 crores merely represented subsequent capitalisation of part of that interest as per the loan terms.
On CSR expenditure, the Tribunal observed that the contribution was not made voluntarily or as an act of charity disconnected from business, but pursuant to Ministry of Shipping guidelines requiring major ports to formulate CSR policy, earmark funds, create a CSR Fund, and undertake projects connected with port functioning and surrounding communities. It held that the authorities below had wrongly treated the expenditure as if it were a mere social donation, whereas the guidelines themselves showed integration with the business plan and operational framework of the Port.
On estate rentals, the Tribunal observed that the concept of income under the Act is founded on the doctrine of real income and that book entries or billing on mercantile basis do not by themselves create taxable income unless there is corresponding real accrual. It noted that the enhanced rentals remained the subject matter of prolonged litigation and adjudicatory proceedings, and that the test is whether there existed a real and enforceable accrual capable of realistic realisation. It also accepted that the accounting treatment was in consonance with AS-9, which permits postponement of revenue recognition where ultimate collection is uncertain.
On depreciation for port infrastructure, the Tribunal observed that docks, sea walls, piers, wharves, railway infrastructure and rolling stock are not passive structures but the very operational apparatus through which the Port performs its statutory functions. Hence, it held that such assets qualify as plant and machinery and not buildings.
On section 40(a)(ia), the Tribunal observed that the very TDS demands which formed the basis of the disallowances had already been deleted in appellate proceedings in the assessee’s own case, where it was held that the relevant payments were covered by section 194C and not sections 194J or 194-I. Consequently, once the orders under sections 201(1)/201(1A) did not survive, the consequential disallowances under section 40(a)(ia) also could not be sustained independently. On donation/contribution expenses, it observed that nomenclature in the books is not decisive; the real nature of the expenditure showed that it was connected with employee welfare, labour relations, staff recreation and industry bodies, and therefore had nexus with business.
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Briefly, the assessee, a statutory body engaged in rendering port services, challenged the disallowance of contribution to Leave Encashment Fund for A.Y. 2009-10, and for A.Y. 2012-13 challenged disallowance of depreciation on demolished assets, addition on account of interest on Inter Port Loan, and disallowance of CSR expenditure. The Revenue challenged the relief granted by the CIT(A) on estate rentals, depreciation on port infrastructure and rolling stock, section 40(a)(ia) disallowances, and donation/contribution expenses.
For A.Y. 2009-10, the reassessment resulted in additions including Rs.80 crore towards contribution to Leave Encashment Fund, Rs.104.90 crore towards unrecovered estate rentals, depreciation disallowance, donation and contribution expenses, Amnesty Scheme receipts, capital expenditure, and section 40(a)(ia) disallowance. For A.Y. 2012-13, the assessment included additions/disallowances towards estate rentals, depreciation, Amnesty Scheme income, interest on Inter Port Loan of Rs.4.07 crore, CSR expenditure of Rs.5.01 crore, and section 40(a)(ia) disallowance.
On the Leave Encashment Fund issue, the assessee had actually paid Rs.80 crore to SBI Life Insurance Co. Ltd. under a leave encashment scheme, while the Assessing Officer and CIT(A) treated the claim as hit by section 43B(f). On Inter Port Loan, the dispute concerned whether 50% capitalised interest of Rs.4.07 crore had not been offered to tax, though the assessee contended that the entire interest had already been recognised in its books and only thereafter a portion was capitalised under the loan terms. On CSR, the contribution was made to a separate CSR Fund pursuant to Ministry of Shipping guidelines and Board Resolution No.163 dated 28.02.2012.
The Revenue’s principal challenge on estate rentals was that, since the assessee followed the mercantile system, the entire enhanced estate rentals billed should have been recognised as income notwithstanding disputes and uncertainty of recoverability. The Revenue also contended that docks, sea walls, piers, railways and rolling stock were buildings eligible only for lower depreciation, that section 40(a)(ia) disallowances should survive on the basis of TDS default orders, and that “donations and contributions” were not business expenditure.
