Income Tax Appellate Tribunal – Kolkata
M/S. Bata India Ltd., Kolkata vs Dcit, Circle-2(1), Kolkata, … on 6 September, 2019 IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH KOLKATA BEFORE SHRI A. T. VARKEY, JM &DR. A.L.SAINI, AM आयकरअपीलसं./ITA No.2255/Kol/2014 ( नधारणवष / Assessment Year:2008-09)
M/s. Bata India Ltd. Vs. DCIT, Circle – 2(1) 6A, S.N. Banerjee Road, P-7, Chowringhee Square,
Kolkata – 700 013. Kolkata – 700 069. थायीले खासं . /जीआइआरसं . /PAN/GIR No.: AABCB 1043 Q (Assessee) .. (Revenue) आयकरअपीलसं./ITA No.77/Kol/2015 ( नधारणवष / Assessment Year:2008-09)
DCIT, Circle – 2(1) Vs. M/s. Bata India Ltd. P-7, Chowringhee Square, 6A, S.N. Banerjee Road,
Kolkata – 700 069. Kolkata – 700 013. थायीले खासं . /जीआइआरसं . /PAN/GIR No.: AABCB 1043 Q (Assessee) .. (Revenue) Assessee by : Shri Ajoy Vora, Sr. Adv., Shri Niraj Jain, Adv. & Shri S. Jhajharia, FCA
Revenue by :Dr. P.K. Srihari, CIT (DR)
सुनवाईक तार ख/ Date of Hearing : 27/06/2019
घोषणाक तार ख/Date of Pronouncement : 06/09/2019 आदे श / O R DE R Per Dr. A. L. Saini: The captioned cross appeals filed by the Assessee and Revenue, pertaining
to Assessment Year 2008-09, are directed against the order passed by the ld.
Commissioner of Income Tax (Appeals)-VI, Kolkata, which in turn arise out of an
assessment order passed by the Assessing Officer u/s 143(3)/144C(3) of the
Income Tax, Act,1961 (hereinafter referred to as the ‘Act’), dated 03.02.2012. 2.Since these cross appeals filed by the Assessee and Revenue for A.Y. 2008-09
pertain to the same assessee, identical issues are involved, therefore, these have M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 been clubbed and heard together and a consolidated order is being passed for the
sake of convenience and brevity. 3.The appeal filed by Revenue in ITA 77/Kol/2015, for Assessment Year 2008-09,
is barred by limitation by 1day. The Revenue has moved a petition requesting the
Bench to condone the delay.We heard the party on this preliminary issue. Having
regard to the reasons given in the petition, we condone the delay and admit the
appeal of Revenue for hearing. 4. First we take assessee`s appeal in ITA No. 2255/Kol/2014, for AY 2008-09, the
grievances raised by the assesseeare as follows: 1.The learned Commissioner of Income-tax(Appeals)Vl, Kolkata [hereinafter referred to as the “CIT-(Appeals)”] erred in confirming the decision of learned Assessing Officer in not allowing a deduction of Rs. 82,71,000/- in respect of provision made in book of accounts and debited to Profit & Loss Account towards ascertained leave liability for the AY 2008-09 on the basis of actuarial valuation report following mandatory AS-15 ( Revised 2005 ) prescribed by ICAI, on the ground that such expenditure come within ambit of the provisions of Section 43B(f) of the Income-tax Act,1961(hereinafter referred to as ‘the Act”), having failed to appreciate that provision made in book of accounts towards leave liability is in the nature of general trade liability and therefore, the same was allowable u/s 37 having regard to the ratio of the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT reported in 245 ITR 428 (SC) and decision of the Hon’ble Calcutta High in the case of Excide Industries Ltd. Vs. Union of India reported in292 ITR 470 (Cal. HC). 2. The learned CIT (Appeals) erred in confirming the decision of learned Assessing Officer in not allowing ‘Transitional Liability’ of Rs. 85,34,740/- provided in book of accounts and adjusted against Opening General Reserve as per Para 143 to 145 of AS 15 (Revised 2005), towards ascertained leave liability done by an outside actuary under mandatory AS 15 (Revised 2005) on employee benefits issued by ICAI, on the ground that such expenditure come within ambit of Sec 43B(f) of the Act. 3. For that in view of the facts and circumstances, the learned CIT (Appeals) erred in not holding that provision for leave encashment is neither a statutory nor contingent liability and therefore not to be considered for the purpose of computing disallowance u/s 43B(f) of the Act having regard to the ratio of the decision of Hon’ble Kolkata Tribunal in the case of Universal Cables Ltd. Vs. DCIT, ITA No. 954/Kol/2010, Order dated 29th April 2011 in the same issue which decision was binding upon him. 4 .The learned CIT (Appeals) erred in confirming that total provision towards leave encashment of Rs. 16,805,740/- is covered u/s 43B(f) in view of stay Page | 2 M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09
granted /SLP accepted by Hon’ble Supreme Court against Calcutta High Court
Order in the case of Excide Industries Ltd (supra) without appreciating the fact
that interim order passed in the course of SLP hearing is not law and cannot
supersede law pronounced by High Courts having regard to the ratio of the
decision of the Hon’ble Supreme Court in the case of Kunhaymmed Vs. State of
Kerala reported in 245 ITR 360 (SC) and Jurisdictional Calcutta High Court
Order in the case of PijushKanti Chowdhury Vs. State of West Bengal (2007) 2
CaI LT 577, dated 14.05.2007. 5. The learned CIT (Appeals) erred in confirming the decision of learned
Assessing Officer in not allowing ‘Transitional Liability’ provided in book of
accounts and adjusted against Opening General Reserve as per Para 143 to
145 of AS-15 (Revised 2005), towards ascertained leave liability Rs.
85,34,000/- and towards ascertained gratuity liability Rs.3,32,38,000/- done
by an outside actuary under mandatory AS-15 (Revised 2005) on employee
benefits issued by ICAI, on the ground that such expenditures had not been
debited in Profit and Loss Account for the financial year and cannot be
reduced from current year`s profit for computation of Book Profit u/s 115JB. 6. The learned CIT (Appeals) erred in confirming the decision of learned
Assessing Officer in assessing Rs.37,682,692/- (Consideration Rs.39,190,000
Minus 15,07,308/- VAT deposited) as income chargeable under the head long
term capital gains accruing on transfer of ‘Trade Marks’ without appreciating
that “Trade Mark” being a self generated asset and cost of improvement was
not determinable and hence it could not be brought to tax under the head “Capital Gains” having regard to the decision of the Hon’ble Pune Tribunal in
the case of “lnstitute For Micronutrient Technology Vs. Dy. ClT reported in
43 taxmann.com 426 (Pune. Trib). 7. The learned CIT (Appeals) erred in confirming the decision of learned
Assessing Officer relying upon the CBDT Circular No. 338 , dated 18.02.1998
issued for inserting intangible asset i.e”a right to manufacture, produce, or
process any article or thing “under Sec 55 (2)(a) and under Sec 55(1)(b) by
Finance Act, 1997. 8. The learned CIT (Appeals) erred in not appreciating that in the assessee’s
case there was transfer of “Trade Mark”, CBDT Circular No.14/2001, dated
09.11.2001 was applicable issued for changes made by Finance Act, 2001 in
Sec 55(2)(a) in the “Cost of Acquisition” only and not u/s 55(1)b) relating to “Cost of Improvement”, hence cost of improvement was not determinable and
thus computation provision under head capital gains failed. 9. The learned CIT (Appeals) erred in disallowing 10% of Dividend Income of
Rs.66,464/- on adhoc basis as expenditure incurred for earning dividend
income of Rs. 6,64,638/- without appreciating the fact that in the assessee’s
case dividend income had been earned out of investments made in Mutual
Fund and had been received through ECS with same Banker where the
assessee is maintaining Current Accounts, therefor no disallowance u/s 14A. 10. The learned CIT (Appeals) erred in not allowing expenditure disallowed
u/s 14A Rs. 66,464/- for computation of Book Profit u/s 115JB for Minimum Page | 3 M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 Alternate Tax and in view of the facts and in the circumstances it may kindly be held accordingly.” 11.The appellant dines it self liable to be charged to interest u/s 234B of the Act, which under the facts and in the circumstances of the appellant`s case deserves to be cancelled. Additional Grounds of Appeal: “The Assessee prays for admitting an additional ground for allowing ” Lease Rent Equalization, Rs. 39,718,000/-” disclosed under the head “Prior Period Items” in audited financials being impact on recognition of rent increases over the lease term on a straight line basis for business operating lease agreements entered on or after April, I 2001 and still in force, quantified pursuant to clarification issued by Expert Advisory Committee of ICAI on mandatory AS-19 (Leases -2001), which was neither claimed in Income Tax Return due to misconception/ not properly instructed nor issue of allow ability under the normal provisions of the Act was raised before lower authorities, however issue towards deduction of said amount for computation of book profit u/s 115JB was raised before AO, not allowed and subsequently decided in favour of assessee by CIT (Appeals)”. We note that Revenue is in appeal before us on the same identical issue, vide
ground No. 5 raised by Revenue in ITA No. 77/Kol/2014 for A.Y. 2008-09.
Therefore, we also adjudicate ground No.5 raised by the Revenue along with
assessee`s additional ground under consideration. Now we shall take these grounds one by one:
5. Ground Nos. 1 to 4 raised by the assessee relate to disallowance of provision for
leave liability of Rs.82,71,000/- and disallowance of ‘Transitional Liability’ for
leave provided, in the books of accounts at Rs. 85,34,740/-,and the said leave
liability adjusted in the opening general reserve as per para 143 to 145 of AS-15
(Revised 2005). Thus, not allowing total leave encashment provision to the
assessee at Rs. 1,68,05,740/- (Rs.82,71,000 +Rs. 85,34,740). 6. Brief facts qua the issue are that the assessee in the revised computation filed
with the revised return of income has claimed deduction of Leave encashment at
Rs. 85,34,740/-. The amount has been claimed as deduction, although the same
have not been debited in the Profit & Loss account and the same have been
adjusted against reserve & surplus as per the transitional provisions of Accounting Page | 4 M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 Standard-15 issued by the Institute of Chartered Accountants of India. The
assessee has further submitted that such sum should be allowed by invoking the
provisions of section 43B of the Act. Besides, a sum of Rs. 82,71,000/-, being a
current year leave liability, has been debited in the Profit & Loss account.
Although both the aforesaid sum has not been paid therefore the assessing officer
was of the view that these leave liabilities cannot be allowed u/s 43B(f) of the Act
and therefore, he disallowed the total leave liability of Rs. 1,68,05,740/- (Rs.
82,71,000+ Rs. 85,34,740). 7. Aggrieved by the order of the Assessing Officer, the assessee carried the matter
in appeal before the Ld. CIT(A) who has confirmed the addition made by the
Assessing Officer. Aggrieved the assessee is in appeal before us. 8. Shri Ajoy Vora, Senior Advocate, begins by pointing out that during the
relevant previous year, the assessee debited to the profit & loss account provision
for leave encashment of Rs.82,71,000/- as per the consistent method of accounting
followed therefor. In terms of Accounting Standard AS-15 (revised) on employees
benefit which was made mandatory from accounting period commencing on or
after 7.12.2006, the assessee recognized additional liability of Rs.85,34,740 ( vide
clause-(d) of accounting policy forming part of Notes to financial statement (pg
130 of the paper book). The said additional liability was adjusted against the
general reserve in the Schedule of Reserve & Surplus (pg 121 of the paper book)
and not debited to profit and loss account. The said additional liability was
claimed in the computation of income as deductible expenditure (pg. 62 of the
paper book).
The assessing officer/CIT (A) disallowed deduction for provision for leave salary
as also transitional liability on the ground that since the amount was not paid by
the due date of filing of return of income, the same was hit by section 43B(f) of
the Act.
Ld Counsel pointed out that provision for leave salary is ascertained liability as
held by the Supreme Court in Bharat Earth Movers v. CIT: 245 ITR 248 (SC). The
additional liability provided for during the relevant previous year pursuant to AS- Page | 5 M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 15 (Revised) is, on the same parity of reasoning also in the nature of ascertained
liability. Provision for leave salary as also the additional liability is not hit by
section 43B(f) of the Act. Thereafter, ld Counsel took us to the provisions of
section 43B of the Act, which reads as follows: “Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction
otherwise allowable under this Act in respect of-
…………………………….
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his
employee, shall be allowed (irrespective of the previous year in which the liability to pay
such sum was incurred by the assessee according to the method of accounting regularly
employed by him) only in computing the income referred to in section 28 of that previous
year in which such sum is actually paid by him.
Provided that nothing contained in this section shall apply in relation to any sum referred
to in clause ( a) or clause (c) of clause (d) or clause (e) or clause (f) which is actually
paid by the assessee on or before the due date applicable in his case for furnishing the
return of income under sub-section (1) of section 139 in respect of the previous year in
which the liability to pay such sum was incurred as aforesaid and the evidence of such
payment is furnished by the assessee along with such return.
………………………………………….

Explanation 3B.-For the removal of doubts, it is hereby declared that where a deduction
in respect of any sum referred to in clause (f) of this section is allowed in computing the
income, referred to in section 28, of the previous year (being a previous year relevant to
the assessment year commencing on the 1st day of April, 2001, or any earlier assessment
year) in which the liability to pay such sum was incurred by assessee, the assessee shall
not be entitled to any deduction under this section in respect of such sum in computing
income of the previous year in which the sum is actually paid by him.”
The ld Counsel pointed out that in the case of the assessee, the said accrued
liability is not payable during the year since the leave policy of the assessee
company does not provide for encashment of leave during service; the same can be
availed only upon separation, such as, resignation of the employee. The ‘provision
of leave of encashment’, represents the amount accrued and standing to the credit
of the employees on account of outstanding leaves, which can be encashed by the
latter only upon separation. Since the provision of leave encashment is in respect
of employees who continue to be in service and have not resigned during the year,
the amount in question, was “not payable” during the year. Accordingly, provision
for leave encashment “not payable” by the assessee to its employees during the
relevant year, does not fall within the ambit of section 43B(f) of the Act. It is
reiterated as a matter of abundant precaution that no part of the provision made Page | 6 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 during the year represents any amount payable to employees as on 31.03.2008. In
other words, allowability of such provision, being in the nature of an accrued
liability was not contingent upon actual payment during the relevant year.
Accordingly, disallowance thereof is not warranted in terms of section 43B(f) of
the Act and for that ld Counsel relied on the judgment of Hon`ble Andhra Pradesh
High Court in the case of S.Subba Rao & Co. vs Union of India: [1988] 173 ITR
708 (Andhra Pradesh ).
However, ld Counsel, without prejudice to the aforesaid, submitted before the
Bench that the Hon ‘ble Calcutta High Court in the case of Exide Industries Ltd.
vs. Union of India 292 ITR 470 (Cal), struck down the provision of clause (f) of
section 43B of the Act, on the ground that the same was ‘arbitrary, unconscionable
and de hors the Hon’ble Apex Court ruling in case of Bharat Earth Movers.
Although the Hon’ble apex Court vide order dated 08.09.2008 in SLP(C) CC
No.12060/2008 “stayed” the judgment of the Hon’ble Calcutta High Court.
Counsel further submitted that the Kolkata Benches of the Tribunal have in the
following cases remanded the matter back to the file of the assessing officer to
decide the issue afresh:
(i)Universal Cables Ltd. vs. DCIT: 68 SOT 307 (Kol-Trib)
(ii) CESC vs. DCIT (ITA 1304 & 1187/Ko1l2014.
9. On the other hand, ld DR for the Revenue submitted before the Bench that issue
under consideration in the case of Exide Industries Ltd. vs. Union of India 292
ITR 470 (Cal) (supra), was the very legality of section 43B(f) of the Act.
Therefore, the stay of Hon`ble High Court order in case of Exide Industries Ltd
(supra) has wider ramification and its scope is not limited only to the parties to the
suit. Therefore, the order of the High Court in case of Exide Industries Ltd (supra)
is at present not operational. Rather, the provision of section 43B(f) of the Act is to
be considered to be in force in view of interim order of Hon’ble Supreme Court.
Considering this legal position, the interim order of Hon’ble Supreme Court
should be followed and thus the addition made by the ld AO should be confirmed.
Page | 7 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 10.We heard both the parties and carefully gone through the submission put forth
on behalf of the assessee along with the documents furnished and the case laws
relied upon, and perused the fact of the case including the findings of the ld
CIT(A) and other materials brought on record. We note that AO made the
disallowance of Rs. 82,71,000/- towards leave liability. We note that a sum of
Rs.82,71,000/- had been claimed towards leave liability, which had not been paid.
Besides, the assessee had also claimed an additional leave liability of
Rs.85,34,740/-, on account of adoption of AS-15 prescribed by ICAI regarding
recognition of liability. We note that the Hon`ble Calcutta High Court has struck
down provision of section 43B(f) of the Act, while deciding the case of Exide
Industries vs. Union of India 292 ITR 470 (Cal).However, Revenue filed SLP
against this order before Hon’ble Supreme Court. The Hon’ble Supreme Court in
the case of CIT vs. M/s Exide Industries Ltd. in SLP(Civil). CC 12060/2008
during hearing on 8.9.2008 gave the following order:-
“Upon hearing counsel the Court made the following order, issue notice, in the meantime. there shall be stay of the impugned judgment, until further orders.”

The Hon’ble Supreme Court during the hearing in the same case further on
8.5.2009 held as under:-
“Upon hearing counsel the court made the following order: Delay condoned, Leave granted, Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty – and – interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its return.”
Therefore, it could be inferred that the Hon’ble Supreme Court had not stayed the
judgment of the Calcutta High Court during Leave proceedings. But the Hon’ble
Supreme Court had only passed an interim order on the impugned issue. We note
that based on the identical facts, the Coordinate Bench of ITAT Kolkata in the
case of SICPA Vs. DCIT 186 TTJ 289 (Kol-trib), has remitted the matter back to Page | 8 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 the file of the assessing officer. Therefore, we deem it fit and appropriate, in the
interest of justice and fair play, to remand this issue to the file of the ld AO.
Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file
of the assessing officer to pass order based on the outcome of the main appeal on
merits by the Hon’ble Supreme Court as stated (supra).
11. Ground No. 5 raised by the assessee is as follows:
“5. The learned CIT (Appeals) erred in confirming the decision of learned Assessing
Officer in not allowing ‘Transitional Liability’ provided in book of accounts and adjusted
against Opening General Reserve as per Para 143 to 145 of AS-15 (Revised 2005),
towards ascertained leave liability Rs. 85,34,000/- and towards ascertained gratuity
liability Rs.3,32,38,000/- done by an outside actuary under mandatory AS-15 (Revised
2005) on employee benefits issued by ICAI, on the ground that such expenditures had not
been debited in Profit and Loss Account for the financial year and cannot be reduced
from current year`s profit for computation of Book Profit u/s 115JB.”
12. The facts of the case which can be stated quite shortly are as follows: The
assessee during the relevant previous year, changed its method of providing for
liability in respect of gratuity payable to employees, based on actuarial valuation
done as per Projected Unit Care Method. Accordingly, the assessee provided for
transitional liability of Rs. 3,32,28,000/- on account of gratuity as per transitional
provisions of Accounting Standard-15, which has been charged to general reserve
forming part of reserve and surplus. The said amount of Rs. 3,32,28,000/- was
claimed deduction in the revised computation of income (page 62-63 of the paper
book) and the same has been allowed by the assessing officer while computing
income under the’ normal provisions of the Income Tax Act.The said amount of
Rs. 3,32,28,000/- was also reduced from net profit as per the profit and loss
account, in terms of section 115JB of the Income-tax Act, 1961, as supported by
the Chartered Accountant certificate in Form No. 29B. Further, the assessee had
also reduced the net profit as profit and loss account by the transitional / additional
liability in respect of leave encashment provided to pursuant to change in the
accounting method basis AS-I5 (Revised) of Rs.85,34,000/-.
However, the assessing officer while computing book profit under section I15JB
of the Act, had rejected the claim for reduction of profit as per the profit and loss Page | 9 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 account in respect of transitional liability in respect of both, (a) gratuity of Rs.
3,32,28,000/- and (b) leave encashment of Rs.85,34,000/-
13. Aggrieved by the stand so taken by the assessing officer, the assessee carried
the matter in appeal before the ld CIT(A), who has confirmed the action of the
assessing officer. Aggrieved, the assessee is in appeal before us.
14.The ld Counsel submitted before us that the additional/ transitional liability of
gratuity of Rs. 3,32,28,000/- and leave encashment of Rs.85,34,000/-, which were
provided by the assessee in the books of accounts pursuant to change in the
method of accounting basis AS-I5 (Revised), which became mandatory from
07.12.2006, therefore, it was a necessary charge on the profits in the year in which
changed method of accounting was adopted. The ld Counsel further submitted that
notwithstanding that the aforesaid amounts were adjusted against general reserve
in the schedule of reserves and surplus appearing in the balance sheet and not
debited to the profit and loss account, the same had necessarily to be reduced from
the net profit shown in the profit and loss account for arriving at the book profit in
terms of section 115JB of the Act.
15. Per contra, ld DR for the Revenue submitted before us that an item of expense
which has not pass through the profit and loss account should not be used for
computation of book profit under section 115JB of the Act. That is, it is mandatory
condition that an item of expense should be debited in the profit and loss account
to be qualified for adjustment to compute the book profit as per the scheme of
section 115JB of the Act. In the assessee`s case under consideration, the assessee
has not debited liability of gratuity of Rs. 3,32,28,000/- and leave encashment of
Rs.85,34,000/- in the profit and loss account. The assessee has adjusted these
liabilities in the general reserve, which is accumulated profit of the assessee in
previous years, therefore, the assessee is not entitled to reduce the book profit
under section 115JB of the Act. The Ld DR also submitted before us that section
115JB of the Act is itself a code therefore, the book profit under section 115JB
must be computed by applying the provisions of section 115JB of the Act. The Page | 10 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 provisions of section 115JB of the Act, nowhere states that transitional liabilities
of gratuity of Rs. 3,32,28,000/- and leave encashment of Rs.85,34,000/-, as per
provisions of AS-15 can be adjusted. The Book profit should be computed as per
the scheme of section 115JB of the Act and not as per the provisions of AS-15.
This way, ld DR prayed the Bench that action of the assessing officer should be
upheld.
16. We heard both the parties and carefully gone through the submission put forth
on behalf of the assessee along with the documents furnished and the case laws
relied upon, and perused the fact of the case including the findings of the ld
CIT(A) and other materials brought on record. The solitary question before us is
that whether transitional liabilities of gratuity of Rs. 3,32,28,000/- and leave
encashment of Rs.85,34,000/-, as per provisions of AS-15, which is debited to
General Reserve in the Balance Sheet, can be adjusted while computing book
profit under section 115JB of the Act?
We note that as per the requirement of AS-15, the assessee is required to ascertain
the liability towards employees’ benefits which should have been recognized till
date and the liability which has already been recognized in the books of accounts.
If the difference i.e. the transitional liability is more than the liability that has been
recognized as per the pre-revised AS-15, the enterprise is mandatorily required to
immediately increase its defined benefit liability on the date on which the revised
AS-15 has been adopted. In terms of revised AS-15, the transitional provision so
provided can be accounted for under any of the following two alternative
approaches:
(a) as an immediate adjustment against the opening balance of revenue reserves
and surplus, or
(b) as an expense on a straight-line basis over / upto five years from the date of
adoption of the Accounting Standard.
The change in the method of accounting pursuant to AS-15 (Revised) was duly
highlighted in the Significant Accounting Policies forming part of the Notes to the
Financial Statement of the assessee company (vide page 130 of the paper book).
Page | 11 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 We note that Hon`ble Calcutta High Court in the case of Kanoi Paper Industries
Ltd. vs. CIT: ITA No. 298 of 2004.(Cal) held that Notes to the Financial Statement
are an integral part of the accounts and have to be read as part thereof and the AO
can compute the book profit under section 115JA of the Act, taking into account
the amount mentioned in the notes to accounts of these financial statements. The
same view has been upheld by the Hon`ble Delhi High Court in the case of CIT vs.
Sain Processing & Weaving Mills (P) Ltd. : 325 ITR 565 (Del).
The Hon`ble Delhi High Court in the case of CIT vs. Khaitan Chemicals &
Fertilizers Ltd: 307 ITR 150 (Del.), allowed adjustment for prior period and extra
ordinary expenses shown separately in the profit and loss account while
computing book profit under section 115JA of the Act. The Court noted that
although the Accounting Standard (AS-5) indicated two approaches for
accounting for prior period expenses, i.e., (i) the normal approach is to include
prior period items in the determination of net profit or loss for the current period,
(ii) the alternative approach is to show such items in the statement of profit and
loss after determination of current net profit or loss. The Hon`ble Court held as
follows:
“11. Paragraph 15 of AS-5, which has been extracted earlier, makes it clear that the nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the “current” profit or loss can be perceived. Two approaches have been indicated in paragraph 19 of the said accounting standard (AS-5). The normal approach is to include prior period items in the determination of net profit or loss for the current period. The alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. As indicated in the accounting standard, in either case, the objective is to indicate the effect of such items on the current profit or loss. It is obvious that because of the prescribed accounting standard which has to be followed by the assessee in view of the provisions of section 115JA(2) read with section 211 of the Companies Act, 1956, the assessee was required to show the prior period items/extraordinary items separately so that their impact on the current profit or loss could be perceived. The fact that the assessee adopted the alternative approach of showing such items in the statement of profit and loss after determination of current net profit or loss, does not mean that these items are not to be taken into account in computing net profit as envisaged in section 115JA of the said Act. Thus what the assessee had done was only to indicate prior period items/extraordinary items separately. This did not mean that the figure of net profit was to be arrived at dehors these items.

Page | 12 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 17. Our view is fortified by the judgment of the Hon’ble Karnataka High Court in
the case of CIT vs. Karnataka Soaps & Detergents Ltd, 59 taxmann.com 43, who
allowed reduction of deferred revenue expenditure which was not debited to profit
and loss account for purpose of computing book profit under section 115JA of the
Act. The Hon’ble High Court observed as follows:
“16. … … …. When the assessee has actually incurred expenditure and the tax liability is less when compared with the net profit arrived at after giving deduction to the actual expenditure, the tax payable is on that net profit and not on the fancy figure shown in the Profit and loss account for the purpose of showing profit to the shareholders. In other words, to find out what is net profit one has to look into the books of accounts maintained by the company and the profit and loss account prepared on the basis of such books of account. What is shown in the printed balance sheet is for the benefit of the shareholders as it will not reflect the true state of affairs and that cannot be made the basis for levying tax under the Act. This is precisely what the Tribunal has held. Neither under the Companies Act nor under the Income-tax Act, this concept of deferred expenditure is recognized. That is a pathology used by the chartered accountants to show to the shareholders that the company has made profit though it has not earned profits. In other words, it is nothing but a window dressing and the authority should not be misled or guided by this balance sheet which is prepared to satisfy the shareholders. It is the profit and loss account prepared on the basis of the books of accounts as contemplated in Part 11 of Schedule VI which should form and assist to find out what is the profit earned and on that profit, tax is levied. ”
On the identical facts, the Coordinate Bench of Kolkata in the case of J.K.
Lakshmi Cement Ltd. vs. ACIT: ITA No. 1275/Kol/2010, held that brought
forward losses/ unabsorbed depreciation adjusted against share premium amount
pursuant to order passed by the High Court sanctioning the scheme of
restructuring were not obliterated and that the assessee was entitled to deduction in
terms of clause (iii) of Explanation to section 115JB(2) of the Act for lower of
brought forward losses/ unabsorbed depreciation. It was observed by the Tribunal
that the adjustment made for setting of brought forward losses / unabsorbed
depreciation was merely a notional entry made in pursuance of the order of the
High Court and the same, therefore, needed to be ignored for computing book
profit under the said section.
Page | 13 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 18. We note that section 115JB is a code itself to compute the book profit to
determine and levy the correct income tax thereon therefore the Profit and loss
account and Balance Sheet should be read together with notes to accounts. Notes
to account contain off Balance Sheet items and off profit and loss items. Notes to
accounts explain the figures of Profit and loss account and Balance Sheet therefore
these are part of Profit and loss account and Balance Sheet. We note that in the
following cases, it has been held that where an item of capital receipt not liable to
tax was credited to the profit and loss account, the same needed to be reduced for
purposes of computing book profit under section 115JB of the Act:
-J.C.T. Ltd. vs. DCIT: 253 ITR 61 (AT) (Cal)
-Kinetic Motor Co. Ltd. vs. DCIT: 262 ITR 330 (Born) [(SLP dismissed by SC) in 270 ITR (St.) 3]
-CIT v. Rubmain P. Ltd.: 312 ITR 18 (Guj.)
– Hindustan Pipe Udyog Ltd. vs. DCIT: 112 Taxman 66(Mag.) (Del) – affirmed in CIT vs. Hindustan Pipe Udyog Ltd: 360 ITR 437 (All.)
-Bombay Tyres International Ltd. vs. DCIT: 51 ITD 339 (Mum) Following the aforesaid principles, arrears of depreciation charged to the profit
and loss account pursuant to change in the method of providing depreciation was
held to be allowable deduction for computing book profit under sections
115J/JA/JB of the Act by the Hon`ble Supreme Court in the case of Apollo Tyres
Ltd. vs. CIT : 255 ITR 273 (SC) and Malayala Manorama Co. Ltd vs. CIT : 300
ITR 251 (SC).The same identical facts were also discussed in the decision of the
Coordinate Bench of ITAT Pune in the case of K..K. Nag Ltd vs. ACIT: 52 SOT
381, wherein the assessee had disclosed in the notes forming integral part of the
audited financials, liability on account of leave encashment which was not debited
to the profit & loss account. The said liability was, however, claimed as deduction
for the purpose of computation of book profit under section 115JB of the Act. The
Assessing Officer denied the claim of such reduction on the ground that the same
was never debited to the profit & loss account. On appeal, the Commissioner
(Appeals) upheld the order of the Assessing Officer.
Page | 14 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 The Pune Bench of the Tribunal following the law laid down by the Hon’ble Delhi
High Court in the case of CIT vs. Sain Processing & Weaving Mills (P) Ltd. : 325
ITR 565 (Del), reversing the order of the lower authorities held as under:
“12. In view of decision of Delhi High Court in the case of CIT vs. Sain Processing & Weaving Mills (P.) Ltd. [2009) 176 Taxman 448 once it is clear that the information towards incremental liability of leave encashment, which has not been provided in the Profit & Loss account, is otherwise disclosed in the Notes to the accounts, it would clearly fall within the ambit of Explanation 1 of the second proviso to section 115JB which defines ‘book profits’ to mean ‘net profit’ as ‘shown’ in the Profit & Loss account for the relevant previous year prepared under sub-section (2) of section 115JB. Notably, sub- section (2) of section 115JB imposes an obligation on every assessee to prepare a Profit & Loss account in the relevant previous year in accordance with the provisions of Parts II & III to Schedule VI of Companies Act, 1956. At this stage, it would also be pertinent to emphasize the provisions of sub-section (6) of section 211 of the Companies Act, which were referred to by the Delhi High Court in the aforesaid judgment. Sub-section (6) of section 211 provides that any reference to a balance sheet or Profit & Loss account shall include any Notes thereon giving information required by this Act or is allowed by this Act to be so given. Therefore, in view of the aforesaid statutory provision contained in Companies Act 1956, the impact is that the net profit as shown in the Profit & Loss account for the purposes of Explanation 1 to the second Proviso to section 115JB is to be understood with reference to the Notes to accounts accompanying the annual accounts also. In this view of the matter, the use of the expression ‘net profit’ in Explanation 1 to the second Proviso to section 115JB makes it clear that the impugned incremental liability towards leave encashment not debited to the Profit & Loss account but otherwise disclosed in the Notes to accounts will have to be taken into account while determining the ‘book profits’ under section 115JB. In other words, the liability towards leave encashment has to be considered to determine net profit as the information was disclosed in the Notes appended to accounts, which have been held to be part or the accounts or the assessee-company. Therefore, there is ample force in the plea of the assessee which is allowable having regard to the parity or reasoning laid down by the Delhi High Court in the case or Sain Processing & Weaving Mills (P.) Ltd. (supra).”
19. We note that AS-15 is mandatory for the assessee company to make the
compliance with effect from 07.12.2006 therefore, the assessee company has to
make provision in the books of accounts by following the AS-15 for transitional
liability towards gratuity and leave salary. We note that from the aforesaid
decisions referred to herein above, it follows that the net profit as per the profit Page | 15 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 and loss account prepared in accordance with Part II of Schedule VI to the
Companies Act, 1956 is the starting point for computation of book profit under
section 115JB of the Act. Where the profit and loss account is not strictly drawn
up in accordance with Part II of Schedule VI to the Companies Act, 1956, the
same is first to be adjusted to bring the same in line with the relevant provisions of
the Companies Act; thereafter the adjustments enumerated in various clause of
Explanation 1 to section 115JB of the Act are to be carried out. In that view of the
matter, where the adjustment is of the kind to align the net profit as per the profit
and loss account in accordance with Part II of Schedule VI to the Companies Act,
1956, the same has to be carried out, notwithstanding that such adjustment may
not be within the scope of various clauses of Explanation 1 to the said section.
As indicated in the accounting standard, in either case, the objective is to indicate
the effect of such items on the current profit or loss. The fact that the assessee
adopted the alternative approach of showing such items in the statement of profit
and loss after determination of current net profit or loss, does not mean that these
items are not to be taken into account in computing net profit as envisaged in
section 115JB of the said Act. Profit and loss account and Balance Sheet should
be read together with notes to accounts to compute the book profit under section
115JB of the Act. Notes to accounts are part of Profit and loss account and
Balance Sheet. The liability towards leave encashment and gratuity has to be
considered to determine net profit as the information was disclosed in the Notes
appended to accounts, which have been held to be part of the accounts of the
assessee-company. Notes to accounts explain the figures of Profit and loss account
and Balance Sheet and off balance sheet items, therefore these are part of Profit
and loss account and Balance Sheet. Therefore, the ‘Transitional Liability’
provided in book of accounts and adjusted against Opening General Reserve as per
Para 143 to 145 of AS-15 (Revised 2005), towards leave liability Rs. 85,34,000/-
and towards gratuity liability Rs.3,32,38,000/- done by an outside actuary under
mandatory AS-15 (Revised 2005) on employee benefits issued by ICAI, should be
reduced from current year`s profit for computation of Book Profit u/s 115JB of the
Act. Therefore, considering the facts and circumstances narrated above and the
case laws and judicial citations relied upon by the assessee, we note that notes to Page | 16 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 accounts are part of financial statements (Profit & Loss account and Balance
Sheet, cash flow statement etc,) therefore the computation of book profit under
section 115JB of the Act should be done taking into account the figures mentioned
in the notes to accounts. Hence, we direct the assessing officer to allow deduction
in respect of transitional provisions of leave liability of Rs. 85,34,000/- and
gratuity liability of Rs. 3,32,38,000/- while assessing book profit u/s 115JB of the
Income Tax Act.
20. The learned counsel informs the Bench that assessee does not want to press
ground Nos. 6, 7 and 8 therefore, we dismiss ground Nos. 6, 7 and 8, as not
pressed.
21. The learned counsel informs the Bench that assessee does not want to press
ground No.9 due to smallness of amount therefore, we dismiss ground No. 9, as
not pressed.
22. Ground No. 10 raised by the assessee relates to expenditure disallowed u/s
14A of Rs.66,464/-for computation of book profit u/s 115JB of the Act for
minimum alternate tax.
The learned counsel submitted before us that this issue is squarely covered by the
judgment of the Special Bench of the ITAT in the case of ACIT vs Vireet
Investments (P) Ltd. 165 ITD 27 (Del Trib) (SB). Therefore, section 14A
disallowance is not considered while computing book profit under section 115JB
of the Act. However, ld DR for the Revenue nevertheless relied on the stand taken
by the assessing officer.
23. We have given a careful consideration to the rival submissions and perused the
material available on record, we note that the provisions relating to adjustments by
way of increase and decrease to the net profit shown by the assessee in Profit & Loss
Account, are very explicit in section 115JB of the Act. The items which are to be added
to the net profit have been listed out in Explanation 1 to that section. The learned AO
should adhere to that list and cannot travel beyond these items. Since there is no mention Page | 17 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09
of Section 14A in the said Explanation 1 to Section 115JB, the same cannot be added to
re-determine the quantum of “Book Profit”. The provisions of section 115JB relating to
computation of book profit are amply clear and unambiguous. These provisions do not
leave any room for adjustment by the assessing officer other than those mentioned in
Explanation 1 to section 115JB to the net profit reflected in the accounts of any assessee
and adjustment by way of disallowance u/s 14A is not included in the said explanation.
Therefore, such upward revision in the sum of Rs.66,464/- to the book-profit by making
disallowance section 14A read with rule 8D is not permitted.

We note that same view have been taken by the jurisdictional High Court of
Calcutta in the case of CIT vs. Jayshree Tea & Industries Ltd. vide GA No. 1501
of 2014, ITAT 47 of dated 19.11.2014, holding as under:
“We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 U/s. 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal.”

We note that Coordinate Bench of ITAT Kolkata, in the case of DCIT vs. CBSC
Ltd. ( I.T.A No. 1304 [ 2014] held as under:
“Respectfully following the orders of Hon’ble High Court and Special bench, (supra), We
restore the matter to AO to Calculate the book profit u/s. 115JB of the Act as per the
dictum of Hon ‘b1e High Court. It is reiterated that the disal1wances made under the
Provisions of Sec. 14A r.w.s 8D of the TT Rules, cannot be applied to the Provision of
Sec. 115JB of the Act. Therefore, the AO shall work out disallowances in terms of the
clause (f) to Explanation-1 of Sec. 115JB of the Act independently after considering the
expenses debited in the profit & loss account as mandated under the provisions of law.
Accordingly, this issue of assessee’s appeal is allowed for statistical purpose.”

Therefore, we direct the assessing officer to exclude the expenditure of Rs.
66,464/- while computing book profit under section 115JB of the Act.

24. Ground No. 11 raised by the assessee relates to interest u/s 234B of the Act.
We note that this ground is premature and consequential in nature, therefore, does
not require adjudication.
25. Additional Ground raised by the assessee is as follows:
“The Assessee prays for admitting an additional ground for allowing ” Lease Rent Equalization, Rs. 39,718,000/-” disclosed under the head “Prior Period Items” in audited financials being impact on recognition of rent increases over Page | 18 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 the lease term on a straight line basis for business operating lease agreements entered on or after April, I 2001 and still in force, quantified pursuant to clarification issued by Expert Advisory Committee of ICAI on mandatory AS-19 (Leases -2001), which was neither claimed in Income Tax Return due to misconception/ not properly instructed nor issue of allow ability under the normal provisions of the Act was raised before lower authorities, however issue towards deduction of said amount for computation of book profit u/s 115JB was raised before AO, not allowed and subsequently decided in favour of assessee by CIT (Appeals)”.
We note that Revenue is in appeal before us on the same identical issue, vide
ground No. 5 raised by Revenue in ITA No. 77/Kol/2014 for A.Y. 2008-09.
Therefore, we also adjudicate ground No.5 raised by the Revenue along with
assessee`s additional ground under consideration.
26.The facts of the case which can be stated quite shortly are as follows: This issue
relates to non- allowance of deduction on account of operating tease rent
equalization of Rs.4,06,47,000/-. The issue is not discussed in the assessment
order. As per facts narrated by the assessee, it had, in its computation of income,
inadvertently added sum of Rs. 4,06,47,000/- relating to operating lease rent
equalization included in rent. The said sum was charged in Profit& Loss account
as per requirement of AS-19 (2001) issued by ICAI for accounting of operating
lease in the books of lessee. The assessee company had, in view of theAS-19,
decided to recognize the scheduled rent increase over the lease term on a straight-
lining basis. The total impact of the same for the period up to 31.03.2007came to
Rs.3,97,18,000/- which was disclosed as prior period item and the current year`s
charge for the F.Y. 2007-08 at Rs.4,06,47,000/-. In the return of income filed for
the AY 2008-09 the assessee inadvertently added back both prior period expense
of Rs.39,718,000/- and the current year’s expense of Rs.4,06,47,000/- while
computing income under normal provisions of the Income-tax Act, 1961. In the
course of assessment however the assessee claimed the deduction for the current
year’s expense of Rs.4,06,47,000/- before the Assessing Officer while assessing
profits from the business. The AO however in his impugned order did not take any
cognizance of the assessee’s submissions and ignored the claim made by the
assessee.
Page | 19 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 27. Aggrieved by the stand so taken by the assessing officer, the assessee carried
the matter in appeal before the ld CIT(A) who has admitted the claim of the
assessee and allowed the claim of the assessee.
28. Ld Counsel for the assessee reiterated the submissions made before the ld
CIT(A) and defended the order passed by the ld CIT(A).
29. On the other hand, the Ld. DR for the Revenue has primarily reiterated the
stand taken by the Assessing Officer, which we have already noted in our earlier
para and is not being repeated for the sake of brevity.
30. We heard both the parties and carefully gone through the submission put forth
on behalf of the assessee along with the documents furnished and the case laws
relied upon, and perused the fact of the case including the findings of the ld
CIT(A) and other materials brought on record. The Ld Counsel submitted before
us that during the financial year 2007-08 the Expert Advisory Committee of the
Institute of Chartered Accountants of India had issued a clarification in respect of
mandatory Accounting Standard-19 on accounting of operating lease rent expense.
Pursuant to the said clarification the assessee was required to recognize in its
annual audited accounts the scheduled rent increments over the lease term on a
straight line basis in respect of all existing operating lease agreements remained in
force on or after 2001. The assessee adopted the method prescribed in the
Accounting Standard-19 for accounting of operating leases in the relevant year
under consideration since the relevant clarification to AS-19 was issued by ICAI
only in the relevant year. The assessee therefore had to compute the impact of such
straight-lining of lease rent from 01.04.2001 up to 31.03.2007 which was
determined at Rs.39,718,000/- and the same was accounted under the head ‘Prior
Period Expenses’ in the Profit &Loss account. A further sum ofRs.40,647,000/-
was determined as the current year’s expense on account of straight-lining of lease
rent which was debited to the Profit &Loss account. In the return of income filed
for the A.Y. 2008-09, the assessee inadvertently added back both prior period
expense of Rs.39,718,000/- and the current year’s expense of Rs.40,647,000/-
Page | 20 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 while computing income under normal provisions of the Income-tax Act, 1961. In
the course of assessment however the assessee claimed the deduction for the
current year’s expense of Rs.40,647,000/- before the Assessing Officer while
assessing profits from the business. The AO however in his impugned order did
not even take cognizance of the assessee’s submissions and ignored the claim
made by the assessee.
The ld Counsel further submits before us that assessee made a detailed
submissions during the appellate proceedings about the mandatory Accounting
Standard-19, issued by the Institute of Chartered Accountants of India. AS-19
requires that the operating lease expenses be recognized on a straight-line basis
unless another systematic and rational basis is more representative of the time
pattern in which use benefit is derived from the leased property, in which case that
basis shall be used. Paragraphs 23 and 24 relate to payments of lease rental and
view the matter from the lessee’s perspective. The relevant extracts of Paragraph
23of AS-19 which lays down the accounting guideline for operating lease
expenses from the standpoint of the ‘lessee’ is as follows:
“Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of the user’s benefit.”

Paragraph 24 of AS-19 explains the previous paragraph 23 and states that lease
rental will be accounted on a “straight-line basis”, unless another systematic basis
is more representative of the time pattern of the user, even if the payments are not
on that basis.
31. We note that Hon’ble Supreme Court explained the importance of mandatory
accounting standards in the case of J. K. Industries Ltd. Vs UOI (297 ITR 776)
wherein the Court held that the main object sought to be achieved by Accounting
Standards which are now made mandatory is to see that accounting income is
adopted as taxable income and not merely as the basis from which taxable income
is to be computed. The Supreme Court explained its position by citing examples.
In case of inventories, the valuation rules are laid down in the Accounting
Standards which are followed in the determination of accounting income. Since Page | 21 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 the income-tax law does not lay down any such rules, the tax authorities are not
required to examine the computation of the valuation of inventories and its effect
on computation of income. However, in case of depreciation on assets, different
rules& accounting guidelines are laid down in the Accounting standards vis-a-vis
Income-tax Act, 1961. Accordingly, in such cases the provisions & rules laid
down in I.T Act, 1961 & I.T. Rules, 1962 are to be followed. The Apex Court
observed that under Section 211 of the Companies Act, 1956 every company is
mandatorily required to prepare its accounts in accordance with the Accounting
Standard, presented by the Central Government in consultation with National
Advisory Committee on Accounting Standards and at present the Accounting
Standards prescribed by the Institute is deemed to be the Accounting Standards
which are to be complied by all the companies. The Supreme Court therefore
accorded judicial recognition to the accounting standards issued by ICAI and the
profits determined in accordance with the accounting guidelines laid down by the
prescribed accounting standards was held to be depicting true & fair state of affairs
of a company for tax purposes. Accordingly, the Assessing Officer has to adopt
the profit determined by the assessee company in consonance with the accounting
standards while assessing taxable income if there is no explicit & contrary
provision in the income-tax laws.
We note that this principle was reiterated by the Supreme Court in the case of CIT
Vs Woodward Governor India (P) Limited (312 ITR 254) wherein it was held that
the profits for income-tax purpose are to be computed in accordance with ordinary
principles of commercial accounting unless such principles stand superseded or
modified by legislative enactments concerning assessment of total income.
Applying the ratio laid down by the Supreme Court in the above cited judgments,
we note that the method of accounting followed by the assessee cannot be doubted
unless it is contrary to the generally accepted accounting practices or if the same
has been superseded or modified by a specific legislation brought about in the
Income-tax Act, 1961. In the facts of the present case the assessee being a
company followed mercantile basis of accounting and prepared its accounts in
accordance with Section 211 of the Companies Act, 1956 and the notified
accounting standards. It is by now well settled that matching principle of Page | 22 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 accounting ensures purity of Profit & loss Account and ensures true & fair
ascertainment of income. Accordingly, in light of Guidance Note issued by EAC
of ICAI and the accounting guidelines laid down in Paras 23 & 24 of AS-19, the
assessee had changed its accounting treatment of operating leases expenses. In
consonance with AS-19 the lease rent expenditure was recognized on a straight-
line basis which was considered to be a more systematic and rational basis by
accounting experts. On accounting of escalating rentals in the operating lease
agreements, it led to creation of additional lease rental liability in the relevant year
under consideration which was debited to the P&L A/ c under the head “Rent
Straight-Lining”. This accounting treatment was in sync accounting guidelines laid
down by ICAI which the assessee was required to mandatorily follow. The profits
so determined after accounting for the expense towards straight-lining of lease
rentals reflected a better & accurate picture of the true commercial profits of the
assessee company. In light of the law down by the Apex Court since there are no
contrary or specific provisions in the Income-tax Act, 1961 in respect of
accounting of lease rentals, the expenditure of Rs.40,647,000/- so recognized in
the Profit &Loss account is deductible while computing profits of the business.
We note that ld CIT(A) has rightly held that assessee is entitled to claim deduction
of Rs.40,647,000/- on account of lease rent, observing the following:
“13.4. I have considered the facts of the case. The assessee had taken several assets on operating lease basis. In certain agreements, there was clause for scheduled increase in lease rent. Earlier, the assessee was not taking into account such scheduled increase while debiting the least rent. However, ICAI issued AS-19 for accounting of operating lease and a clarification relevant to the issue was issued in the year under consideration. As a consequence, the assessee had to compute impact of straight-lining of lease rent from 01.04.2001 to 31.03.2007 which was determined at Rs.3,97,18,000/- and the same was accounted under the head ‘ prior period expenses’. For the current year, a further sum of Rs.4,06,47,000/- was determined on such straight-lining. In his computation of return income the assessee added back prior period expenses at Rs. 3,97,18,000/- as well as current year’s expense of Rs.4,06,47,000/-. Since the latter expense pertained to the year under consideration, the assessee was entitled to claim the sum in computation of taxable income. The assessee has claimed to have made such claim before the assessing officer. But the assessing officer has not discussed the same in the assessment order. As explained by the assessee, the clarification regarding AS-19 was issued by ICAI in July, 2007. Thus, the requirement of straight-lining the lease rent arose in the year under Page | 23 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 consideration. The assessee was thus justified to adopt straight-lining of
lease rent during the year. The Karnataka High Court in the case of Prakash
Leasing Limited vs. Dy. CIT (208 Taxman 464) held that as long as Central
Government has not notified anything to the contrary, an assessee was well
within its right to follow AS and to claim lease equalisation charges in
accordance with the same. Similar view was expressed by the Hon’ble Delhi
High Court in the case of CIT vs. Virtual Soft Systems Ltd 341 ITR 593. In
the assessee’s case, it has followed accounting standard issued by ICAI
relating to operating lease. As a result of straight-lining recommended by the
accounting standard, there was a requirement to make provisions for
scheduled rent increase. Such provision relating to the year under
consideration was of Rs. 4,06,47,000/-. The accounting standard was not in
conflict with any provision of the Act or notification made by the Central
Government u/s 145(2) of the Act. It is also not the case of the assessing
officer that the system of accounting followed by the assessee was such that
the correctness and completeness of accounts was to be doubted. Rather, the
assessee has followed accounting standard issued by ICAI. The assessee had
made the claim in the assessment proceedings and the assessing officer has
neither allowed nor given reason for its rejection. In the remand report dated
03.01.2014, the assessing officer has objected to the assessee’s claim on the
ground that such claim was not made by way of filing revised return.
Apparently, he intends to draw strength from the decision of the Hon’ble
Supreme in the case ofGoetze India Ltd. 284 ITR 323, though he has not
specifically mentioned the same. However, in the said decision itself, Hon`ble
Supreme Court has clarified that the bar on claiming a deduction not
claimed in the return does not apply on the appellate authority. In the
decisions in the case of National Thermal Power Co Ltd. (supra) and Jute
Corporation India Ltd. (supra) Hon’ble Supreme Court has held that
appellate authority has power even to admit a claim not made in the
proceedings before the lower authority. Power of CIT(A) to consider claim
not made in the return has also been upheld in the decision of Delhi High
Court in the case of CIT vs Jindal Saw Pipes Ltd. 328 ITR 338 and by
Bombay High Court in the case of CIT vs Pruthvi Brokers and Shareholders
P. Ltd. 349 ITR 336. It is also noted, that jurisdictional bench of tribunal, in
the case of DCIT, Circle-50, Kolkata vs Ramesh Chandra Kedia ITA No.
2072/Kol/2007, has held after considering various decisions, including in the
case of Goetze India Ltd. (supra) that CIT(A) has power to admit additional
ground claiming relief not claimed in the return and without filing revised
return, even if the same results in assessed income going below the returned
income. In his report dated 3.1.2014, the assessing officer has not given any
comment or adverse remark on merit of the claim and not pointed out any
defect or shortcoming in the same. In the light of the facts discussed earlier,
the assessee is entitled for deduction of Rs. 4,06,47,000/-. The assessing
officer is directed to allow the same.”
Page | 24 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 We do not find any infirmity in the order of ld CIT(A) in allowing the claim of the
assessee in respect of lease rent of Rs.4,06,47,000/-, therefore, we decline to
interfere in the order of ld CIT(A), his order on this issue is hereby accepted and
the ground No. 5 raised by the Revenue in ITA No.77/kol/2014, is dismissed.
32. Now coming to the additional ground raised by the assessee about “Lease Rent
Equalization, Rs. 39,718,000/-” disclosed under the head “Prior Period Items” in
audited financials being impact on recognition of rent increases over the lease
term on a straight line basis.
33.We note that the assessee had taken certain assets for operating lease basis. In
lease agreement there were clauses for scheduled increase in lease rentals, which
was not taken into account by the assessee while declaring lease rent. Pursuant to
clarification issued by the Institute of Chartered Accountants of India (“ICAI”) in
the context of Accounting Standard AS-19 for accounting for leases, the assessee
had to compute the impact of straight lining of lease rent from 01.04.2001 to
31.03.2007 which was determined at Rs.3,97,18,000/-. The same was shown as ‘prior period expenses’ in the profit and loss account. Additionally, liability for the
current year was debited to the profit and loss account in an amount of Rs.
4,06,47,000/-. The assessee had inadvertently added back the amount of Rs.
4,06,47,000 in the return of income but the same was subsequently claimed before
the assessing officer during the course of assessment. The assessing officer
omitted to deal with the said claim. The same was, however, allowed on appeal by
the CIT(A) against which the Revenue has come up in appeal (S. No. 5 of Grounds
of Appeal), which we have already adjudicated in para 31 of this order.
In so far as the amount of Rs.39,718,000/- is concerned, assessing officer added
back the same while computing book profit under section 115JB of the Act. The
adjustment made by the assessing officer was deleted by the CIT(A) for which the
Revenue is in appeal before us, vide S. No. 4 of Grounds of Appeal. The amount
of Rs. 39,718,000/- was not claimed deduction while computing income under the
normal provisions of the Act. The same is being raised by way of additional
ground for the first time before this Tribunal.
Page | 25 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 We note that the amount of Rs.39,718,000/- represents liability accrued during the
year on account of change in the method of accounting for lease rentals pursuant
to adoption of AS-19 issued by the Institute of Chartered Accountant of India.
Although, the said amount represents the incremental liability of lease rent payable
for the period 1.04.2001 to 31.03.2007, the same having accrued during the
relevant previous year is allowable deduction notwithstanding that the liability
may relate to earlier years. For this, we rely on the Judgment of Hon`ble Delhi
High Court in the case of CIT vs. Whirlpool of India Ltd.: 242 CTR 245, allowed
deduction for incremental liability for warranty on the basis of actuarial valuation
relating to sales made in the earlier years, holding as under:
“20. The legal principle delineated in the aforesaid judgment would clearly demonstrate that whenever there is a warranty clause in the bulk product sold by the company/assessee to its customers, warranty provision can be made and it would not be treated as contingent liability. There is no quarrel to this proposition and in fact in this very case the assessee has been making the provisions for warranty every year which was accepted by the AO. The question that really calls for an answer is as to whether such a provision which has already been made in the previous years can be revised later on in a particular year as sought to be done by the assessee in the present case. Going by the reasons which justify making of such a provision and treating them as expenditure under s.37 of the Act, more particularly when it fulfils the accrual concept as well the matching concept, we see no reason as to why the assessee could be precluded from revising this provision after taking into consideration that warranty period of the goods sold under warranty was existing provision already provided in a particular year is falling short of the expected claims that may be received. It is, however, to be kept in mind that such a provision is based on scientific study and actuarial basis that is precisely done by the assessee in the instant case and, therefore, we see no reason to differ with the view taken by the Tribunal in the impugned order. ”
34. We note that in the context of change in method of valuation of closing stock,
the Courts have in the undernoted judgements held that the impact of the change
had to be allowed deduction in the year in which the changed method was adopted
for the first time:
– CIT v. Carborandum Universal Ltd. : [1984] 149 ITR 759 (Mad.) – SLP dismissed vide 187 ITR (St) 38;
– Melmould Corporation vs. CIT: [1993] 202 ITR 789 (Bombay) Page | 26 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 We note that Hon’ble Gujarat High Court in the case of Saurashtra Cement &
Chemical Industries Ltd. vs. CIT: 213 ITR 523 held that: “Merely because an expense relates to a transaction of an earlier year it does not
become a liability payable in the earlier year unless it can be said that the liability was
determined and crystallized in the year in question on the basis of maintaining accounts
on the mercantile basis.”
In view of the aforesaid decision in law, the incremental liability on account of
lease rental equalization provided for pursuant to the clarification issued by the
Expert Advisor Committee of the ICAl, accrued during the relevant previous year
and is allowable deduction in computing income for the said year, notwithstanding
that such liability may relate to the earlier years. Therefore, we direct the
assessing officer to allow the claim of the assessee in respect of lease rent of
Rs.3,97,18,000/-.
35. In the result, the additional ground raised by the assessee is allowed.
36. Now we take Revenue’s appeal in ITA No. 77/Kol/2015, for AY 2008-09.
37. Ground No.1 raised by the Revenue is as follows:
“That on facts and circumstances of the case Ld. CIT(A)-VI, Kolkata is not justified
deleting the disallowance of Rs.2,38,21,194/- for delayed contribution to PF with
considering the decision of the Hon’ble Gujarat High Court in the case of CIT vs.
Gujarat Road Development Corporation Ltd., Appeal No. 637 of 2013, which is
favorable to the Department.”
38. We note that issue raised by the Revenue in ground No. 1 above, is no longer
res integra. Regarding disallowance of sum of Rs.2,38,21,194/- being the
employees contribution towards PF which was deposited by the employer after
their respective due dates. The Assessing Officer rejected the assessee’s claim that
the same had been paid beyond due date as envisioned in Section 43B of the Act.
However, the assessee paid the PF and ESI before the due date of filing of return
of income. The Ld. DR for the Revenue has submitted before us that the Assessing
Officer has rightly rejected the assessee’s claim that the sums had been paid before
the due date of filing of return of income but in violation of Section 43B of the Page | 27 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 Act. The Ld. DR for the Revenue has stated that Section 43B does not apply in
respect of employees’ contribution towards ESI and PF.
On the other hand, the Ld. Counsel for the assessee has stated that this issue had
already been covered in assessee’s favour by the judgment of Hon’ble Calcutta
High Court in the case of CIT vs. M/s Vijay Shree Ltd. in I.T.A. No. 245 of 2011
dated 06.09.2011 reported as 224 Taxman 12(Cal)(Mag) wherein it has been held
that there can be no disallowance of even the employees’ share of contribution
towards PF and ESI, if the same is paid before the due date of filing of return
income. Similar view has been taken by the Uttarakhand High Court in the case of
CIT vs. Kichha Sugar company Ltd. (2013). Though the Gujrat High Court in the
case of CIT vs. Gujrat State Road Transport Corporation (2014) has held that the
employees’ share of contribution towards PF and ESI is not governed by Section
43B but it is governed by Section 36(1)(va) of the Act, but this is not the
jurisdictional High Court of the assessee and therefore cannot be followed. Other
High Courts which have held that the employees’ contribution is also covered by
Section 43B of the Act are as follows:
i) CIT vs. Aimil Ltd. (2010) 32 ITR 508 (Del)
ii) CIT vs. Nipso Polyfabriks Ltd. (2013) 350 ITR 326 (HP)
iii) CIT Vs. Sabari Enterprises (2008) 298 ITR 141 (Kar)
iv)EssacTeraoka (P) Ltd. Vs. DCIT (2014) 222 Taxman 170 (Kar) 39. Having heard the rival submissions, perused the material available on record,
we note that the above issue is squarely covered by the Jurisdictional High Court,
Calcutta (supra). Therefore, we are of the view that employees’ share of
contribution towards PF and ESI, if it is paid before filing of return of income then
it would be a sufficient compliance of the Act. Accordingly, we dismiss the
ground No.1 raised by the Revenue.
40.Ground No. 2 raised by the Revenue relates to disallowance of depreciation of
Rs. 78,002/- on account of River Embankment under the block of assets building.
Page | 28 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 41. The brief facts qua the issue are that the assessee has claimed depreciation on a
river bank embankment and renovation thereof. The AO was of the view that a
river bank embankment is neither building nor road, bridge, culvert etc. The
business requirement of such embankment was also not clarified. Consequently,
depreciation of Rs. 78,002/- was disallowed by AO.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in
appeal before the CIT(A) who has deleted the addition made by the AO.
Aggrieved, the Revenue is in appeal before us.
We have heard both the parties and perused the material available on record, we
note that the assessee is engaged in the business of manufacture of footwear. The
factory of the assessee is located on the banks of river Ganges. In order to protect
its factory building from floods, damp, erosion and/or any other forms of water
damages, the assessee incurred expenses for river embankment and its renovation.
Such costs were incurred wholly and exclusively for the business purposes of the
assessee Since the costs incurred on river embankment yielded benefit of enduing
nature, the entire expenditure was capitalized under the block ‘Factory Building’
and depreciation was claimed thereon under Section 32 of the Income-tax Act
1961. The ld Counsel submits that the expenditure on river embankment was
incurred in AY 1997-98 and since then the depreciation has been claimed u/s 32
on the capitalized costs. In none of the earlier Years did the Department dispute
the depreciation claimed by the assessee on the cost of river embankment. For the
first time in AY 2005-06 the Department disputed the claim of depreciation on
river embankment holding that it was neither a ‘road’, ‘culvert’ or ‘bridge’ so as to
fall within the block of ‘Factory Building’ and accordingly disallowed the
depreciation u/s 32 claimed thereon. Following the assessment order passed u/s
143(3) for AY 2005-06, similar disallowance was made by the AOs in AYs 2006-
07, 2007-08 and also the relevant year under consideration AY 2008-09.
We note that this is a recurring issue in the assessee’s case. Similar addition was
deleted by the CIT(A)-, Kolkata in the appellate orders for the assessment years
2005-06 to 2007-08. Orders for the assessment years 2005-06 and 2006-07 have
been upheld by this Tribunal vide order dated 23.05.2013 in ITA Nos. 1826, 1827
& 1828/Kol/2012. Respectfully following the decision of the Coordinate Bench in Page | 29 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 the assessee’s own case, the ld CIT(A) deleted the disallowance of depreciation of
Rs.78,002/-. That being so we decline to interfere on the order passed by the ld
CIT(A), his order on this issue is hereby accepted and grounds of appeals raised by
the Revenue is dismissed.
42. Ground No. 3 raised by the Revenue relates to payment of lumpsum royalty of Rs.
3,87,80,185/- as ‘Capital Expenditure.
43.The brief facts qua the issue are that the assessee has claimed Rs. 3,87,80,185/-
towards payment of royalty. The said sum was paid to following concerns:
i.Wolverine Worldwise INC – Rs. 82,19,725/- ii. Wolverine INC – Rs. 1,02,14,190/- iii. School Ltd. – Rs. 42,97,852/- iv. SSL TTK Ltd. – Rs. 1,57,97,737/- v. Exchange Fluctuation Loss – Rs. 2,50,681/- Rs. 3,87,80,185/- The assessee claimed that the payment made to above concerns is on monthly
and quarterly basis and hence it is a revenue expenditure only. However, the
assessing officer was of the view that mode of payment for the period does not
determine the nature of particular transaction and the relevant transaction can
be considered as capital or revenue from a perusal of the relevant document, in
connection thereof. On a perusal of the agreement with Wolverine Worldwide
INC it was observed that the facility obtained by the assessee from the
technical agreement was to help the assessee to run the business in a more
competent manner. The payment has been made for availing the technical
know-how and technical expertise and the use of the brand so owned by the
provider which is mentioned in detail in sections II, III & IV of the agreement
with such assessee. The AO further noted that since the pronouncement of
technical know-how and technical expertise bestowed upon the assessee an
enduring benefit, hence these expenses of Rs. 3,87,80,185/-should be treated
as capital expenditure.

Page | 30 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 44. Aggrieved by the order of the Assessing Officer, the assessee carried the
matter in appeal before the Ld. CIT(A) who is deleted the addition. Aggrieved, the
Revenue is in appeal before this Tribunal.
45. At the outset, the ld Counsel submits that similar disallowance on the identical
grounds and reasoning was made in AYs 2005-06 & 2006-07. In the orders of both
these years royalty payments were disallowed by the AO treating it to be capital in
nature. In appeal before the Tribunal, the assessee filed copies of the relevant
licensing agreements and explained the manner in which royalty was calculated
and paid. Taking into account the relevant clauses of the agreements and the facts
involved in the assessee’s case, the Tribunal held that the royalty paid was not in
the capital nature but it was revenue in nature and thereby deleted the
disallowances made in both the years. Copies of the relevant orders of the Tribunal
are enclosed page 223 to 231 of paper book. It is also material to note that in the
immediate preceding year i.e. AY 2007-08 the assessee had made similar royalty
payments. The assessment for AY 2007-08 was framed u/s 143(3). In that year the
Assessing Officer himself did not dispute that the expenditure on royalty payments
was revenue in nature and no disallowance was made. Accordingly, even the AO,
in the immediate preceding year, accepted that the royalty payments were not
capital in nature and allowable as deduction from the profits of the business. The
ld Counsel submits that during the relevant year it made royalty payments to the
very same parties pursuant to same agreements or arrangements prevailing earlier.
In this factual background, following the orders of the ITAT in assessee’s own
case for AY 2005-06 & 2006-07 and the Department’s own stand in AY 2007-08,
we note that the disallowance of royalty of Rs. 3,87,80,185/- made by the
Assessing Officer in AY 2008-09 deserves to be deleted.
Now, we deal with submissions of ld Counsel based on the consistency principle.
It is a well settled legal position that factual matters which permeate through more
than one assessment year, if the Revenue has accepted a particular’s view or
proposition in the past, it is not open for the Revenue to take a entirely contrary or
different stand in a later year on the same issue, involving identical facts unless
and until a cogent case is made out by the Assessing Officer on the basis of change Page | 31 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 in facts. For that we rely on the order of the Hon’ble Supreme Court in
Radhasoami Satsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows:

“We are aware of the fact that, strictly speaking, res judicata does not apply to
income tax proceedings. Again, each assessment year being a unit, what is decided
in one year may not apply in the following year but where a fundamental aspect
permeating through the different assessment years has been found as a fact one
way or the other and parties have allowed that position to be sustained by not
challenging the order, it would not be at all appropriate to allow the position to be
changed in a subsequent year. On these reasoning, in the absence of any material
change justifying the Revenue to take a different view of the matter – and, if there
was no change, it was in support of the assessee – we do not think the question
should have been reopened and contrary to what had been decided by the
Commissioner of lncome-tax in the earlier proceedings, a different and
contradictory stand should have been taken.”

We are of the view that the above cited precedents on principle of consistency are
squarely applicable to the assessee under consideration. We note that in the
immediate preceding year i.e. AY 2007-08 the assessee had made similar royalty
payments. The assessment for AY 2007-08 was framed u/s 143(3),in that year the
Assessing Officer himself did not dispute that the expenditure on royalty payments
was revenue in nature and no disallowance was made. That being so we decline to
interfere on the order passed by the ld CIT(A), his order on this issue is hereby
accepted and grounds of appeals raised by the Revenue is dismissed.
46. Ground No. 4 raised by the Revenue relates to AO`s stand of not reducing the
amount of Rs.5,02,54,168/- on account of ‘prior period items’ on computation of
book profit u/s 115JB of the Act.
47. The brief facts qua the issue are that the assessee has claimed deduction of ‘prior period item’ of Rs. 5,02,54,168/-,in the computation u/s 115JB of the Act and
have also claimed deduction on account of adjustment of leave and gratuity of Rs.
85,34,000/- and Rs. 3,32,38,000/- respectively. AO noticed that in the computation
of 115JB, the adjustment allowed are only as per Explanation to Section 115JB and
no other adjustments whatsoever in nature is allowed. Further, such adjustment is
only be made to the P&L A/c as prepared as per part II & III of Schedule VI of the
Companies Act, 1956, therefore, Rs. 5,02,54,168/- relating to prior period item does Page | 32 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 not fall under any of the items in the Explanation of Section 115JB and hence such
amount cannot be reduced as claimed by the assessee. As regards the expenses
adjusted through reserve & surplus being leave and gratuity since such items have
not been passed through P&L A/c, there does not arise any question of reducing
such sums as these also do not fall within the deduction items as provided in Section
115JB. Even otherwise, the claim has not been made in revised computation.
Hence, these sums were not being allowed in computation of book profit u/s 115JB
of the Act.

48. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried
the matter in appeal before the Ld. CIT(A) who has deleted the addition made by
the AO. Aggrieved, the Revenue is in appeal before us.
49. We have heard both the parties and perused the material available on record, we
note that this issue relates to the action of the assessing officer not reducing the
amount of Rs. 5,02,54,168/- on account of prior period item from book profit u/s
115JB of the Act. The assessee had, in its return, claimed adjustment of Rs.
5,02,54,168/- in respect of prior period items. The assessing officer did not allow
the same on the ground that the same was not permissible as per explanation to
section 115JB of the Act. We note that assessee claimed adjustment of Rs.
5,02,54,168/- in respect of prior period items comprising of impact of lease rent
equalization of Rs. 3,97,18,000/- and gratuity expenses of earlier years of
Rs.1,05,36,000/- ,while computing book profit u/s 115JB of the Act.
We note that assessing officer did not allow adjustment of the said sum of Rs.
5,02,54,168/- while computing book profit under section 115JB of the Act on the
ground that the said amount was not debited to the profit and loss account. We
note that ld CIT(A) held that the net profit was worked out after debit on account
of prior period items and no adjustment to the profit as per the profit and loss
account could be made unless specifically provided under any of the clauses of
Explanation to section 115JB of the Act as held by the Hon’ble Supreme Court in
the case of Apollo Tyres Ltd. vs. CIT: 225 ITR 273 .
Page | 33 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 We note that this issue is covered in favour of the assessee by the decision of the
Hon’ble Delhi High Court in the case of CIT vs. Khaitan Chemicals & Fertilizers
Ltd: 307 ITR 150 (Del.) and it is also covered by the judgment of Hon`ble
jurisdictional Calcutta High Court in the case of Kanoi Paper Industries Ltd. Vs.
CIT: ITA No. 298 of 2004 (Cal), wherein the Court reversed the decision of the
Tribunal with regard to deduction of prior period expenses charged to profit and
loss account while computing book profit under section 115JA of the Act, holding
as under:
“The second question which has been raised by the assessee, is with regard to the following findings of the learned Tribunal. “16. The next grievance of the assessee related to not allowing deduction of prior period expenses of Rs. 1,28,986/-charged to the profit and loss account, while arriving at book profit Section 115JA.
17. We have heard the rival contentions. There is no adjustment as provided in Explanation to Section 1154JA which empowered either the A. O. or the assessee to tinker the profit with regard to the prior period of expenses charged to the profit and loss account. ”

Mr. Khaitan submitted that this point is equally covered by a judgment of the Delhi High
Court in the case of CIT vs. Khaitan Chemicals and fertilizers Ltd. reported in 307 ITR
150…. ….. ….
The prior period expenditure amounting to a sum of Rs.1,28, 986/- was already shown in
the profit and loss account as per accounting standards. The learned Tribunal purported
to disallow the aforesaid expenditure on the basis of a mistaken belief that the assessee
was seeking adjustment of the aforesaid sum in computing the book profit but missed the
fact that the expenditure had already been taken into account in computing the net
profit…..”
50. We further note that ld CIT(A) deleted the addition on account of adjustment
made by the Assessing Officer on the ‘prior period items’ observing the following: “16.2. It is seen, that in the P & L A/c prepared by the assessee, there is a debit on
account of prior period items and net profit has been worked out thereafter. Thus, the net
profit in the P & L a/c prepared by the assessee is after prior period items. In the light of
the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra), no
adjustment to the profit as per P & L A/c can be made unless specifically provided under
any of the clauses of the explanation to section 115JB. Therefore, it is held that the
Assessing Officer was not correct in disallowing such debit. The adjustment made by the
Assessing Officer on the prior period items is accordingly deleted.”

We do not find any infirmity in the order of ld CIT(A), his order on this issue is
hereby upheld and grounds of appeals raised by the Revenue is dismissed.
Page | 34 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 51. Ground No. 5 relates to deduction of Rs. 4,06,47,000/- on account of operating
rent equalization amount. The additional ground raised by the assessee in his
appeal in ITA No. 2255/Kol/2014 is identical to the ground No. 5 raised by the
Revenue in its appeal, ITA No. 77/Kol/2015, therefore we have already
adjudicated this ground along with additional ground of assessee`s appeal, vide
para No. 30 and 31 of this order.
52. Ground No. 6 raised by the Revenue relates to exemption of Rs. 6,64,638/- on
account of dividend income ignoring the fact that the assessee has never claimed
such amount in its return of income.
We heard both the parties and perused the material available on record we note
that the assessee had credited dividend income Rs. 6,64,638/- on which exemption
u/s 10(34) of the Act had not been claimed. However, the said income was exempt
from tax in view of section 10(34) of the Act. As per explanation 1 to section
115JB of the Act, profit shown in P&L A/c is to be reduced by the amount of
income for which any of the provisions of section 10 (other than the provisions
contained in clause (38 thereof) of section 11 or section 12 apply, if any such
amount is credited to the P&L A/c. Therefore, the assessee is correct in claiming
reduction in respect of dividend income. However, it may be mentioned, that as a
logical consequence, expenditure relating to such exempt income is also to be
added in view of clause (f) of explanation 1 to section 115JB. The expenditure
pertaining to dividend income was taken by CIT(A) at 10% of dividend.
Considering this, the Ld CIT(A) directed the assessing officer to reduce profit
shown in the P&L account by 90% of dividend income, i.e. Rs. 5,98,174/-.
We note that dividend income exempts in terms of section 10(34) of the Act
therefore it should be excluded under normal computation provisions. It should
also be excluded in computing book profit in terms of clause (ii) of Explanation 1
to section 115JB of the Act. Therefore, we direct the AO to exclude dividend
income from normal computation as well as computation of book profit under
section 115JB of the Act.
Page | 35 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 53. Ground No. 7 raised by the Revenue relates to exemption/deduction on
dividend/operating rent equalization without appreciating the fact that and settled
legal position that the deduction/exemption are to be allowed by the respective
assessee’s and cannot be granted automatically.
We have already adjudicated this issue in ground No. 5 and 6 raised by the
Revenue, therefore it does not require separate adjudication.
54. Ground No. 8 relates to contribution to Bata Workers Sickness Benefit Society
of Rs. 59,54,147/-
55.We heard both the parties and perused the material available on record we note
that this issue relates to disallowance of Rs.59,54,147/- on account of
contributions to Bata Workers’ Sickness Benefit Society. The assessing officer
observed that Bata Workers’ Sickness Benefit Society was not a body referred to
section 36(1)(iv) or (v) of the Act and hence the expenditure was not allowable u/s
40A(9) of the Act. He therefore, disallowed the said contribution. On appeal, ld
CIT(A) deleted the addition made by AO. Aggrieved, the Revenue is in appeal
before us.
At the outset the ld Counsel submits that this issue stands squarely covered in
favour of assessee by the decision of the jurisdictional Kolkata Bench of ITAT in
assessee’s own case in various earlier assessment years. One of the orders of the
Kolkata Bench in assessee’s case on the issue of allowability of contribution to
BWSBS is reported in 85 ITD 257. Copy of which is also placed before the bench.
It is further material to mention that the Department’s appeal against the order of
the Kolkata Tribunal has been dismissed by the Calcutta High Court which is
reported in 167 CTR 14. In the circumstances and following the orders of the
jurisdictional High Court and ITAT, Kolkata in assessee’s own case, we note that
the disallowance of Rs.59,54,147/- deserves to be deleted. Therefore, we do not
find any infirmity in the order of ld CIT(A) in deleting the aforesaid addition,
hence we confirm the order passed by the ld CIT(A) and dismiss the ground raised
by Revenue.
Page | 36 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 56. Ground No. 9 raised by the Revenue relates to transfer pricing adjustment of
Rs. 4,50,658/-
57. We heard both the parties and perused the material available on record, we note
that ground No.9 raised by the Revenue is related to addition of Rs.4,50,658/- on
account of downward adjustment made by the TPO. The assessee had entered into a
number of international transactions within the meaning of section 92B of l. T. Act,
1961. Reference was made by the assessing officer to the TPO. In her order, the
TPO analysed the international transaction in the segment for export spare parts,
import of chemicals and TSA fee. The average of comparable PLI cited by her was
7.4% (percentage of sales), whereas the PLI for the assessee company was 6.55%.
According to the working made by the TPO, the ALP cost of goods and services
came to Rs.2,44,31,005/- as against the transaction amount of Rs.2,48,81,663/-.
Hence, vide her order dated 31.10.2011, the TPO recommended downward
adjustment of Rs.4,50,658/-(Rs.2,48,81,663- Rs.2,44,31,005).
On appeal, ld CIT(A) deleted addition. Aggrieved, the Revenue is in appeal before
us.
58. We note that in the course of transfer pricing assessment, details/explanations
in respect of international transactions were furnished by assessee. In the segment
of export of spare parts, import of chemicals & ISA fees the assessee had
benchmarked the value of the transactions with reference to Transactional Net
Margin Method which is one of the prescribed method in I.T. Rules. The details of
the transactions are as follows:
Description Amount (in Rs.) Import of Chemicals 23,65,657 Fees for Technical Support Services paid 2,25,00,000 Export of Spare Parts 16,006 TOTAL 2,48,81,663 Page | 37 M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 The assessee had used Operating Profit/Operating Cost (‘OP/OC’) as the Profit
Level Indicator (PLI’). The OP/OC for the relevant year under consideration was
determined at 7.02% and the PLI of the comparables was calculated at 6.40%
using multiple year data. The TPO however rejected the use of multiple year data
for determining the PLI of the comparables and required that single year data
should be used. As required by the TPO, the assessee filed the computation of PLI
of the comparables based on single year data which was computed at 8.22%. It
was the assessee’s contention that the PLI of the comparables was within the
permitted range of +/ – 5% of the PLI of the assessee and therefore no adjustment
was warranted. The assessee further submitted that the PLI of the comparables
were subject to various adjustments on account of working capital, risk etc and
once these factors are applied there shall be no difference in the PLI of the
assessee vis-a-vis the comparables.
59. We note that the TPO however rejected both the contention and working of
PLI, as made by the assessee. The TPO proceeded to make independent
computation of the PLI of the comparables and also that of the assessee. On
perusal of the Transfer Pricing Order dated 31.10.2011, it will be noted that the
TPO determined the PLI of the comparables at 7.47% and that of the assessee at
6.55%. Based on the PLI of the comparables, the arm’s length value of the
transactions was determined at Rs.2,44,31,005/-. In the TPO’s view the arm’s
length value of payments made to AEs on account of import of chemicals, TSA
fees and spare parts is at Rs.2,44,31,005/- and not the actual transaction amount of
Rs.2,48,81,663/-. Accordingly, the difference of Rs.4,50,658/ – was the downward
adjustment proposed by the Transfer Pricing Officer.
We note that the downward adjustment of Rs.4,50,658/ – proposed by the TPO
was in gross violation of the provisions of second proviso to Section 92CA of the
Income-tax Act, 1961. Without prejudice to the assessee’s claim for use of
multiple year data for determining PLI of the comparables, making functional &
working capital adjustments to the PLI and the manner in which PLI was worked
out by the Transfer Pricing Officer, at the very onset it is submitted that going by Page | 38 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 TPO’s own computation of the arm’s length value of the transactions, the arm’s
length price was within the prescribed range of +/- 5% of the actual transaction
amount. Attention in this regard is invited to the second proviso of Section 92CA
of the Income-tax Act, 1961 which reads as follows:
“Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price.”

60. Applying the above provisions to the facts involved in the present case, the
arm’s length price of the transaction and the permitted range is as follows:
Description Amount(in INR) Actual Value of the international transactions with AEs 2,48,81,663 Arm’s Length Value as determined by the TPO 2,44,31,005 +5% of the Actual Value of Transaction 2,61,25,746 -5% of the Actual Value of Transaction 2,36,37,579 Whether the arm’s length price is within the range Yes, within range On perusal of the above table it is evidently clear that the arm’s length value the
transactions as computed by the TPO at Rs.2,44,31,005/- is within the permitted
range for variation of +/ -5% of the actual value of the transaction. However in the
order passed u/s 92CA(2) and the impugned order u/ s 143(3) neither the TPO nor
the AO took into consideration the provisions of Section 92C of the Income-tax
Act, 1961 and failed to appreciate that since the actual value of the transactions
was within the permitted variation from the arm’s length price so determined, the
downward adjustment of Rs.4,50,658/- was totally unwarranted.
It is important to note that the benefit of variation of +/ -5% of the price at which
transaction was actually conducted is available to each and every tax payer, for
that we rely on the judgment of the Coordinate Bench of Mumbai in the case of
Tecnimont ICB (P) Limited Vs Dy. CIT (37 taxmann.com 475).
In view of the above we that the PLI i.e. OP/OC of the assessee was determined by
the TPO at 6.55% whereas the PLI of the comparable was 7.47%. Out of the total Page | 39 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 operating cost, the value of the transactions with the AEs was Rs.2,48,81,663/-.
The arm’s length value as determined by the TPO was Rs.2,44,31,005/-. Applying
the benefit accorded to the assessees in the second proviso to Section 92CA, it is
clearly evident that the arm’s length price is within the permitted variation of + (-)
5% from the actual value of transactions and therefore the impugned addition of
Rs.4.50,658/- has rightly been deleted by the ld CIT(A) observing the following:
“7.2. I have considered the facts of the case. The ALP for cost of goods and services computed by the TPO was of Rs. 2,44,31,005/- on the basis of arithmetical mean of PLI of eight comparables, whereas the transaction amount was of Rs.2,48,81,663/-. The computation of ALP is to be made in accordance with the provision of section 92C of the Income Tax Act, 1961. The provision, as it stood in the year under consideration, stipulates that:- “where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.”

Consequently, if the variation between the arithmetical mean and the transaction value was less than 5%, no adjustment was required to be made to the transaction value. It can be seen that the variation between arithmetical mean determined by the TPO and the transaction value is less than 5%. Considering this, no adjustment was to be made in the assessee’s case. Considering this, the addition of Rs.4,50,658/- is deleted.”
We do not find any infirmity in the order of ld CIT(A). That being so we decline
to interfere in the order passed by ld CIT(A), his order on this issue is hereby
accepted and grounds of appeal raised by the Revenue is dismissed.
61. Ground No. 10 relates to allowance value added tax from sales consideration
while computing capital gain.
62. The facts of this issue may be stated quite shortly as follows: The assessee had
sold its trade-mark known as ‘Hawaii’ during the year. In computation of capital
gain arising from the same, the assessee had reduced VAT charged on the same.
The assessing officer was of the view that since the cost of the asset sold was nil
and the expenditure on VAT was not connected with transfer of assets per se, the Page | 40 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 same was not a deductible expenditure. He accordingly disallowed the same. On
appeal ld CIT(A) deleted the addition. Aggrieved, the Revenue is in appeal before
us.
63. Ld. DR for the Revenue has primarily reiterated the stand taken by the
Assessing Officer, which we have already noted in our earlier para and is not
being repeated for the sake of brevity.
64. On the other hand, ld Counsel for the Assessee submitted that during the year
under consideration, the assessee sold one of its registered trademark ‘Hawaii’ for a
consideration of Rs. 3,91,90,000/- and paid VAT of Rs.15,07,308/- to the State
Government on sales consideration. Since, VAT was paid wholly and exclusively
in connection with the transfer of the trademark, the said amount was claimed as
deduction under section 48 of the Act from the full value of consideration while
calculating taxable capital gains. In terms of the provisions of section 48(i) of the
Act, expenditure incurred wholly and exclusively in connection with the transfer
of the capital asset is required to be reduced from the sales consideration for the
purpose of computing capital gains. The payment of VAT was imperative in the
transaction for sale of the trademark; without payment of VAT, the transfer of
trademark could not be effected. In that view of the matter, such payment being
expenditure incurred wholly and exclusively in connection with the transfer of
trademark was required to be deducted from the sale consideration. In view of the
aforesaid, it is submitted that the CIT(A) was right in allowing deduction of V AT
paid in connection with transfer of a capital asset. In view of the aforesaid, the
order passed by the CIT(A) deleting the aforesaid disallowance deserves to be
upheld.
65. We heard both the parties and carefully gone through the submission put forth
on behalf of the assessee along with the documents furnished and the case laws
relied upon, and perused the fact of the case including the findings of the ld
CIT(A) and other materials brought on record. We note that in the year under
consideration the assessee had sold one of its registered trademark’ Hawaii’ for a Page | 41 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 consideration of Rs. 3,91,90,000/- and paid VAT of Rs.15,07,308/- to the State
Government on the sale consideration. Since the VAT was paid wholly and
exclusively in connection with the ‘transfer’ of the trademark ‘Hawaii’, the said
amount ofRs.15,07,308/- was claimed as deduction u/s 48 of the Act from the full
value of consideration of the brand sold. The Assessing Officer however failed to
correctly appreciate the nature of claim of the assessee and disallowed the same
while assessing the capital gains on sale of brand/trademark. The AO observed
that the brand which was sold had been developed in-house by the assessee and
therefore did not have any ‘cost of acquisition’. The AO held that cost of such
capital asset was to be deemed as ‘NIL’ and therefore expenditure on VAT could
not be allowed as deduction while computing capital gains. The AO alleged that
the VAT payment was neither an expenditure to improve the title of the asset nor
expenditure was incurred in connection with transfer of capital asset.
We note that the AO had rightly observed that the ‘cost of acquisition’ of the in-
house built brand was NIL. The AO however erroneously concluded that since the
cost of acquisition is NIL, the VAT payment was not permissible as deduction
from the full value of consideration. The assessee submits that the deeming fiction
created by Section 55(2)(a) was applicable only to the ‘cost of acquisition’ of the
capital asset and the same could not be extended to the ‘expenditure wholly
incurred in connection with transfer of the capital asset ‘. Section 48 of the
Income-tax Act, 1961 clearly states that the ‘full value of consideration’ received
or accrued in respect of a capital asset shall stand reduced by the expenditure
incurred wholly and exclusively in connection with such transfer’. Section 55
defines only the manner in which ‘cost of improvement’ & ‘cost of acquisition’ has
to be computed in relation to certain capital assets but not ‘expenditure incurred
wholly and exclusively in connection with the transfer’ of any capital asset. Even
in the provisions of Section 55, only clause (2) provides that the ‘cost of
acquisition’ in respect of trademark/ brand name which has been developed in-
house shall be taken at ‘NIL’. However, no such provisions are contained in
clause(1) of Section 55 which deals with ‘cost of improvement’. Meaning thereby
an assessee is entitled to claim deduction in respect of both ‘cost of improvement’ Page | 42 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 and ‘expenditure incurred wholly and exclusively in connection with transfer’ of
brand name whose ‘cost of acquisition’ is taken at NIL under the provisions of
Section 55(2)(a) of the Income-tax Act, 1961.There is no provision in the Chapter
– IV ‘Computation of Capital Gains’ which prohibits the assessee to claim
deduction in respect of ‘cost of improvement’ and ‘expenditure incurred wholly and
exclusively in connection with transfer’ whose cost of acquisition is deemed to be
NIL. It is therefore submitted that the basic premise of the Assessing Officer based
on which he alleged that the assessee was not entitled to claim deduction in respect
of VAT paid as ‘cost of improvement’ and/ or ‘expenditure incurred wholly and
exclusively in connection with transfer’ is found to be false.
We note that in terms of the statutory provisions of State Value Added Tax Act,
assessee was legally obliged to pay VAT Rs.15,07,308/- which it had paid. Levy
of VAT was a direct incidence against the vendor of the trademark. Since in the
present case, assessee was the transferor/seller of the said trademark, the assessee
alone had legal obligation to pay the VAT and which the assessee discharged. The
assessee submits that it was a statutory & compulsory charge imposed by the
State Government which was required to be discharged in order to ensure proper
transfer of title in the trademark sold to the transferee. It is submitted that sale of
intangible assets are also subjected to State VAT laws wherein Valued Added Tax
is levied on the gross sale value of the intangible. The assessee did not have an
option to pay or not to pay the VAT on sale of intangible. The VAT payment has
to be compulsorily made by each person who sells or transfers any “goods”
including corporal rights and the duty of making compliance with the taxing
statute under the VAT is on the seller/ vendor or the transferor. As stated in the
foregoing, the VAT is levied at the time of sale. Meaning thereby the assessee has
to pay the statutory levy at the time of “transfer” of intangible to the transferee.
Therefore, the said expenditure was incurred wholly and exclusively in connection
with the transfer of capital asset and was hence allowable as deduction under
Section 48 of the Income-tax Act 1961. For that we rely on the Judgment of the
Hon’ble Bombay High Court in the case CIT Vs Smt. Shakuntala Kantilal (190
ITR 56) which explained the scope of the phrase ‘expenditure incurred wholly and Page | 43 M/s. Bata India Ltd.
ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 exclusively in connection with transfer’ used in Section 48 of the Income-tax Act,
1961. The Court held that so far as clause (i) of section 48 is concerned, the
expression used by the Legislature in its wisdom is wider than the expression ‘for
the transfer’. The expression used in the section is ‘expenditure incurred wholly
and exclusively in connection with such transfer’. The expression ‘in connection
with such transfer’ is certainly wider than the expression ‘for the transfer’. We note
that ld CIT(A) has passed the order, observing the following:
“11.2. I have considered the facts of the case. The assessee had, during the year, transferred its registered brand / trade-mark ‘Hawaii’ for a consideration of Rs.3,91,90,000/- on which VAT of Rs.15,07,308/- had been paid to the state government. Since the said brand has been developed by the assessee itself, its cost of acquisition was nil. However, in its computation of capital gain the assessee had, from the consideration received, reduced the amount of VAT. It is clear that VAT have been paid in respect of sale of the assessee’s trade-mark. The assessee was statutorily required to pay VAT on the sale consideration received. Therefore, the expenditure was directly related with transfer of the asset namely trade-mark. I do not agree with the assessing officer’s view that the expenditure on VAT was not related to transfer of trade-mark. Rather, the VAT was directly related to sale of trade-mark and was to be necessarily paid. Thus, this is an expenditure directly related to transfer of asset and hence deductible from sale of consideration in view of clause (i) of section 48. The disallowance of Rs.15,07,308/- is accordingly deleted.”
That being so, we decline to interfere in the order passed by ld CIT(A), his order
on this issue is hereby accepted and grounds of appeal raised by the Revenue is
dismissed.
66. In the result the appeal filed by the Assessee is allowed and the appeal filed by
the Revenue is dismissed. Order pronounced in the Court on 06.09.2019 Sd/- Sd/- (A. T. VARKEY) (A.L.SAINI) या यकसद य / JUDICIAL MEMBER लेखासद य / ACCOUNTANT MEMBER दनांक/ Date: 06/09/2019
(Biswajit, Sr.PS) Page | 44 M/s. Bata India Ltd. ITA Nos.2255/Kol/2014 & 77/Kol/2015 Assessment Year:2008-09 Copy of the order forwarded to:
1. M/s. Bata India Ltd.
2. DCIT, Circle – 2(1), Kolkata.
3. C.I.T(A)- 4. C.I.T.- Kolkata.
5. CIT(DR), KolkataBenches, Kolkata.
6. Guard File. True copy By Order Assistant Registrar ITAT, Kolkata Benches Page | 45

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