THE issue is – Whether deduction on account of provision for leave encashment is allowable which is claimed on basis of actual incurring of liability and paid as per Sec 43B(f). YES is the answer.
Facts of the case
A) The Assessee is a company engaged in the business of Manufacture and sale of dry cell batteries, flashlights etc. besides manufacture and sale of tea. Assessee had claimed exclusion of an amount from its profit as per the profit and loss account on account of “Provision for leave encashment” payable by the Assessee to its employees. AO held that Section 43B specifically states that deduction shall be allowed in computing the total income when “such sum is actually paid’. According to the AO, the Leave Encashment was not actually paid by the Assessee but the liability was written back. Any waiver or write back or allowing benefit to the party could not be called payment. The claim of reduction from the computation of income towards write back of Provision for leave encashment was not allowed by the AO. CIT(A) deleted the addition made by AO.
B) The assessee submitted before the AO a list of the items with quantity and value which were written off along with justification for write off of the said goods. The Assessee claimed that it was carrying in its books stock of raw materials and finished goods which had become obsolete and/ or damaged, having no realizable value. These stocks were lying at plants and depots situated at different factories/ depots across the country. The Assessee submitted that during the previous year particulars of such obsolete, non-serviceable & useless stocks were obtained from the factories/depots and the same were written off from Revaluation Reserve account. The same were lying in stock and had already been offered for taxation in the respective years. Since the obsolete, non-serviceable & useless stocks have been written off the same was claimed as business expenditure for the year. AO however disallowed the claim of the Assessee for deduction for the reason that no provision or write off for such obsolete stock, has been made in profit & loss Account by the assessee, therefore claim of current Assets outside the P&L Account could not be considered. Hence the claim for deduction in the revised return of income was denied.
C) Assessee had two manufacturing plants in Chennai city. Assessee decided to shift its manufacturing operation at one place so that the management could exercise greater unified control, increase efficiency and improve productivity & profitability by avoiding duplication of cost. The Assessee claimed that the expenditure was incurred in the course of business and for improving the efficiency and increase profitability, therefore revenue in nature. AO held that the object of assessee to shift plant was not for reducing expenditure or increase of profit, but to develop the property at Guindy for construction of commercial complex for new business adventure. He also held that shifting plant from one place to another and cost incurred for such shifting were in the nature of Capital Expenditure. He also held that the expenditure was not claimed as revenue expenditure in profit & Loss Account, but the same was adjusted through revaluation reserve and thereby claim in computation as revenue expense is not in accordance to law. Hence, this claim was denied.
D) In respect of the land over which the Guindy plant was located, the Assessee had entered into a Joint Development Agreement with a builder. In the Return of income filed for the A.Y.2005-06 the assessee claimed that income from transfer of the land at Guindy, Chennai gave raise to income chargeable to tax under the head “Capital Gain”. AO held that the income from sale of land and development right of the Assessee is nothing but an adventure in the nature of trade and the income from which is to be assessed as income from business. CIT(A) deleted the addition made by the AO and held that the income in question had to be assessed under the head “Capital Gain”.
Having heard the parties, the ITAT held that,
A) ++ Generally a provision is a liability which is contingent in nature. Liability which is contingent in nature and which has not crystalized into actual liability will not be allowed as deduction while computing Total Income. When Provision for leave encashment is created and debited in the profit and loss account it goes to reduce the profit as per the financial statement. When the Assessee files return of income for any Assessment year, he has to add back the provision for leave encashment and declare income from business for the purpose of determining total income, because it is not actual liability but contingent. The Assessee has not claimed any deduction while determining its profit from business on account of Provision for leave encashment but has claimed such deduction only on the basis of actual incurring of liability which is paid in accordance with Sec.43B(f) of the Act. That has got nothing to do with the write back off excess provision for leave encashment. The CIT(A) has clearly brought out these aspects in his order. The order of CIT(A) confirmed. (para 10)
B) ++ AO has not disputed the fact that the Assessee conducted physical inspection of its stock upon which obsolete, non-moving and damaged stocks were identified having no realizable value. The fact that the expenditure in question was written off against revaluation reserve and not charged to profit and loss account cannot be the basis to disallow a legitimate revenue expenditure and that entries in the books of accounts are not always conclusive in the matter of deciding whether a claim for deduction has to be allowed or not. The assessee created a value for its brand “Eveready” and disclosed in the Asset side of the Balance Sheet and reduced therefrom the value of obsolete stock instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of legitimate revenue expenditure. Write off in the profit and loss account of the previous year is not a condition for allowing deduction under Chapter IV D of the Income Tax Act, 1961. Any expenditure which is otherwise to be allowed in computing income from business under Sec.28 to 43 has to be allowed as a deduction. As held by the Supreme Court in the case of Sutlej Cotton Mills Ltd. entries in the books of accounts is not decisive or determinative of the question whether the Assessee is entitled to a deduction or not while computing income from business. The deduction on account of write of obsolete stock is also allowable as held by the Cuttack Bench of the ITAT in the case of National Aluminium Co. Ltd. Vs. DCIT 101 TTJ 948 (Cuttack). Impugned order of the CIT(A) upheld. (para 22)
C) ++ The reasons for shifting the Guindy Plant to Tiruvottiyur Plant was a business decision and taken keeping in view four factors, viz., completion from Chinese battery makers as a result of free economy, Centralizing operations with a view to reduce costs and better control and location of the Plant being in a residential area and the industrial waste in the process of manufacture creating environmental issues for the Assessee. By shifting of Guindy plant there was no increase in the overall production capacity but it was a decision to reduce costs, improve productivity and profitability and eliminate duplication of processes and costs besides environmental considerations. Hence, it cannot be said that either there was acquisition of new asset or deriving of any enduring benefit to the Assessee. Nor can it be said that the expenditure in question was not for the purpose of business but for the purpose of selling the land over which Guindy Plant was located. (para 23);
D) ++ Ownership of land by itself is not a trade. And so a person may purchase property, hold and enjoy it, derive income from it and, when there is appreciation in its value, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, while buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them. Sales of land, in those circumstances, are no more than a realisation of capital or conversion of one form of it into another. (para 32);
++ the intention at the time of acquisition was to hold the property as capital asset. A factory building was put up over the property and manufacturing activities were carried on for over 33 years before entering into the development agreement. The intention at the time of entering into agreement for development of the property was also to hold 20% of built up area and undivided share of land. Construction over the property took place in the year 2004-05 and 2005-06. The sale by the Assessees of their share of 20% of built-up area, undivided share of land, open terrace, car park etc., took place only in the previous year relevant to AY 2006-07. In the sale deed, the reason for the sale has been mentioned as betterment and other reasons. It was case where the Assessee wanted the best returns for its investment. Had the property been sold outright, probably the Assessee would not have got the price it got when it sold constructed area. By bargaining for constructed area, it cannot be said that the Assessee plunged into waters of trade. They have assumed little or no risk in the process. They never indulged in any adventure. Assessee never intended to plunge into the waters of trade. The order of the CIT(A) whereby he held that the income from sale of the property by the Assessees was to be assessed under the head “Capital Gain” upheld. (para 35)
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