In the case of Paradeep Port Trust, the Orissa High Court (HC) held that interest in the replacement rehabilitation and development fund must be directly taken into Profit & Loss account.
The Revenue challenged the order dated 9th August 2017 of the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) which deleted the addition of Rs.25 Crores under the “provision for Pension Fund” and deleted the addition of Rs.20,86,903/- under the head “Employer’s Contribution to Provident Fund”, the approval for which was not granted at the time when the contributions were made.
The CIT recognized the PPT Employees Pension Fund Trust by an order dated 25th March, 2010 with retrospective effect from the date of its creation i.e. 3rd February2009. The contribution to the Pension Fund was made on 7th May 2008 but at no time an objection was raised by the Revenue that it does not constitute business expenditure.
The CIT (A) accepted the plea of the Assessee that the delay on the part of the CIT granting recognition should not prejudice the case of the Assessee. The order of CIT(A) has been upheld by the ITAT.
It was held that as long as the contributions made have been towards the fund, the mere fact that the approval was granted at a subsequent stage, should not deprive the Assessee ofthe benefit thereunder.
It was pointed out that the Assessee has two statutory reserve funds viz., (i) Replacement, Rehabilitation, Modernization of Capital Assets Reserve and (ii) Reserve for Development, Repayment of Loans and Contingencies. These reserve funds had to be established in terms of Section 90 (1) of the Major Ports Trust Act and the directions of the Ministry of Shipping and Transport.
There is a mandatory requirement that interest should follow the funds so created and it is therefore directly taken to the balance sheet and not shown in the Profit and Loss (P & L) Account. Once there is a diversion at source as a result of there being a statutory obligation on the Assessee to set aside a certain sum, the Assessee was justified in not showing the interest income in its P & L Account and taking it directly to the balance sheet.
In light of judicial precedents, a bench comprising Chief Justice M S Raman upheld the order of the Tribunal and ruled in favour of the Assessee and against the Department.
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