THE issues before the Bench are - Whether when assessee requests other companies to pay for scientific research and makes payment to them in the subsequent year but claims deduction in return, such benefits u/s 35(1)(ii) can be denied by Revenue; Whether deduction sought in respect of the expenses made towards designing and lay out as well as other temporary partition and construction made for making the office functional is capital in nature; Whether when the assessee is in negotiations with the parties in respect of consultancy charges and professional fees, for reducing them, and finality on the quantum could not be reached even at the time of closing the accounts, whether the assessee is entitled to make a provision for the same based on the original claims made by those parties and Whether provision can be made
for the entire amount of liability, although it is contingent in nature and negotiations are ongoing with the third party. And the verdict goes against the Revenue.
for the entire amount of liability, although it is contingent in nature and negotiations are ongoing with the third party. And the verdict goes against the Revenue.
Facts of the case
Deduction u/s 35(1)(ii) for donation
The assessee is a company engaged in Insurance Broking business. The assessee had claimed deduction u/s 35(1)(ii) on a sum of Rs.70,00,000 made as donation to M/s.Chennai Mathematical Institute. The AO observed that the donation was made by two companies Shriram Chits Tamil Nadu Private Limited ("SCTPL") and Shriram Investment Ltd., ("SIL"), and donation receipts were originally issued only in the name of these two companies and it was only later a receipt was issued in the name of the assessee. The AO also found that only journal entries were made by the assessee at the end of the AY whereby the donations were credited to the party's account. It was also found by the AO that the accounts submitted by the assessee to the Insurance Regulations and Development Authority ("IRDA") did not figure in the said donation payment of Rs. 70 lakhs. Consequently, the claim for deduction was disallowed by the AO. On appeal, the CIT(A) allowed the deduction. Aggrieved, the Revenue filed an appeal before the Tribunal, which only confirmed the order passed by the CIT(A).
Still aggrieved, the Revenue filed an appeal before the High Court.
The Counsel for the Revenue supported the observations made by the AO and submitted that the assessee did not have sufficient funds and the donation was made by two other companies, and not by the assessee itself. He further submitted that the transaction was reflected by a mere journal entry, and there exists no formal agreement between the assessee and the two other companies. He also pointed out the there was no board resolution passed by the company, which only proved that there was no donation made by the assessee.
In the counter argument, the Counsel for the assessee submitted that assessee is an institution approved by Government of India as contemplated u/s 35(1)(ii) of the Income Tax Act. He argued that while the assessee was not having sufficient funds for making such donation at the relevant point of time, the request was made to those two companies only because of the reason that the Chairman of those two companies also happened to be the Founder Director of the assessee company and also Founder Director of the CMI. He further submitted that Section 43(2) does not say that the assessee should pay directly, on the other hand, the word incurred used in Section 43(2) means the actual liability. Thus, according to the Counsel, even though the amount was not actually paid by the assessee still as it was a liability incurred by the assessee. Regarding the issue of non reporting of the expenditure in the returns sent to IRDA for the first half year, the same was rectified in the second half year's return.
Deduction for repairs and maintenance
The assessee had claimed deduction for repairs and maintenance incurred on a premises taken on lease, which was disallowed by the AO on the ground that the same was capital in nature. On appeals, the contentions of the assessee were concurrently accepted both by the CIT(A) and the Tribunal.
Still aggrieved, the Revenue filed this appeal before the High Court.
Provision towards consultancy charges and professional fees
The assessee had several branches and received bills from various consultants. The assessee had made certain provisions towards consultancy charges and professional fees, which were found excessive by the AO and thus, were disallowed. The AO further observed that the assessee had debited excessive expenses in the books not corresponding to the actuals. On appeal, both the CIT(A) and the Tribunal came to this factual conclusion that at the time of closing the accounts, negotiations with some consultants were still going on and therefore, the assessee had to necessarily create a provision for those charges. Further, it was observed that subsequently, when the amounts were settled for a lesser figure, the excess provision created had been reversed and offered as income in the subsequent year. Therefore, the claims of the assessee were concurrently allowed by the CIT(A) and the Tribunal.
Still aggrieved, the Revenue filed an appeal before the High Court.
The Revenue submitted that there was no scientific method adopted by the assessee in making the provision towards consultancy and professional charges.
Having heard the parties, the High Court held that,
Deduction u/s 35(1)(ii) for donation
++ going by the factual findings rendered by both the appellate authorities, it is seen that the assessee requested the other two companies to make the expenditure on its behalf by way of scientific research as it was not having sufficient funds at that time. This fact is not disputed by the Revenue or disproved by them. Therefore, the payment was made by the other two companies to the CMI. Even though they made the payment and obtained receipts in their name, the fact remains that they have not claimed any deduction nor shown those expenditure in their books of accounts. On the other hand, it is only the assessee which had shown expenditure in the journal entry and claimed deduction. It is also stated that the assessee had paid the money subsequently to those two companies in the subsequent year. Therefore, the fact remains that what was paid to the CMI by the other two companies was not actually paid by them and it was paid only on behalf of the assessee. When the payment, receipt and the status of the CMI as notified under Section 35(1)(ii) by the Government of India were not disputed, we fail to understand as to how the assessee can be disallowed deduction under Section 35(1)(ii). May be it is an understanding between the asessee and other two companies, in view of the shortage of funds at the hands of the assessee at the relevant point of time. That itself cannot be taken to reject the claim of the assessee, when admittedly the assessee had shown the said amount as an expenditure by way of journal entry and also obtained receipt in their name. Even the said expenditure was shown in the accounts placed before the IRDA in the second half of the assessment year. Therefore, it cannot be stated that the assessee had not shown the said expenditure in the IRDA accounts. Both the first appellate authority as well as the Tribunal had gone into the issue in detail on the factual aspect of the matter and given a finding on such factual aspects to hold that the assessee is the actual payer to the CMI for its scientific research and consequently entitled to deduction under Section 35(1)(ii). In the absence of any other contra materials placed before us or before the authorities below by the Revenue, we are not inclined to interfere with such factual finding rendered by both the appellate authorities. Accordingly, this question of law is also answered against the Revenue;
Deduction for repairs and maintenance
++ the counsel for the Revenue relied on the decision of the Supreme Court reported in Commissioner of Income Tax Vs Sri Mangayarkarasi Mills P. Ltd., to reject the claim of the assessee in this aspect. A perusal of the said judgment of the Apex Court only shows that the same was rendered, while dealing in respect of the expenditure of replacement of parts of a textile machinery. The Apex Court found that replacement of such an old machine part with a new one would constitute the bringing into existence of an asset in the place of the old one and not repair of the old existing machine. Therefore, the Apex Court found that such textile machinery repair of a machine can at best said to be current repairs within the meaning of Section 31 of the Income Tax Act. The Apex Court also pointed out in the said judgment that Sections 31 and 37 of the Act operate in different spheres and the tests applicable to Section 31 cannot be read into section 37 of the Act. When that being the position, we are unable to appreciate the contention of the Revenue as to how Mangayarkarasi case can be applied to the case on hand when the facts are totally different and distinguishable and the deduction sought to be made by the assessee is not the one under Section 31 of the Act and on the other hand, as rightly contended by the counsel for the assessee, the deduction was sought in respect of the expenses made towards designing and lay out as well as other temporary partition and construction made for making the office functional. When that being the factual position, in our considered view, the decisions of this Court reported in Commissioner of Income Tax Vs.Ayesha Hospitals P.Ltd.,Commissioner of Income Tax Vs Sanco Trans Ltd., and Thiru Arooran Sugars Ltd., Vs. Deputy Commissioner of Income Tax wherein identical issues were considered, would cover the case of the assessee also in its favour. In all the above decisions, this Court considered similar expenses made by the respective assessees therein in the leased premises and found that such expenses made by the assessee was deductible as revenue expenditure. We find that those decisions of this Court squarely apply to the facts and circumstances of this case. Accordingly, the said question of law viz., the third question of law is answered in favour of the assessee;
Provision towards consultancy charges and professional fees
++ even though the Standing Counsel for the Revenue submitted that there was no scientific method adopted by the assessee in making the provision towards consultancy and professional charges, the factual findings rendered by the first appellate authority as well as the Tribunal show that the assessee was left with no other option except to make the provision of those expenses in view of the fact that negotiations were going on even at the time of closing the accounts. Such factual findings of both the appellate authorities are not disputed or controverted by the Revenue. In fact even a perusal of the assessment order passed by the Assessing Officer shows that he is not disputing the above said fact except to say that the provision was made without having any correlation with the actuals. When the expenses is in respect of consultancy charges and professional fees, certainly the assessee is entitled to have negotiations with the parties for reducing the same and when such finality on the quantum could not be reached even at the time of closing the accounts, the assessee is certainly entitled to make a provision for the same based on the original claims made by those parties. Therefore, we find every justification on the part of the assessee in making an excess provision based on the original claim made by the parties. We cannot lose sight of the fact that the assessee had subsequently shown the amount so reduced as income in the next year in respect of the amount which has been in excess of the provision;
++ thus, from the perusal of the above decision of the Division Bench it could be seen that the facts of that case are totally different and distinguishable one. First of all that is a case of warranty provision. Admittedly, the assessee therein made the warranty provision and the service charges were payable to the dealers only as and when a claim was made by the service provider. Therefore, considering the nature of the provision as a contingent liability, the Division Bench disagreed with the assessee's contention. But, here in this case, it is a provision for professional fees and consultancy charges. The payment liability of such charges or fees by the assessee was certain. Though the liability was certain, only the quantum was not certain at the time of filing the return, in view of the continuous negotiations with the parties. Therefore, the assessee was left with no other option to make provision based on the original claim made by the parties. When such being the factual position, the decision reported in T.C.A.No.148 of 2005 is not helpful to the Revenue in this case. Equally, in the other T.C.A.No.324 of 2010 dated 18.2.2013 it is the specific finding of this court that the Tribunal rendered factual finding of such liability as a contingent liability with uncertainty and therefore, this Court did not intervene with the factual finding of the Tribunal in that aspect. Consequently, the said decision relied on by the Revenue in this aspect is also not helpful to them. Thus, we answer the second question of law also in favour of assessee.
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