NALCO vs ACIT: ITAT Cuttack on Section 43B(f) Leave Encashment and TDS Disallowance

National Aluminium Company Limited (NALCO), a major public sector aluminium producer headquartered in Bhubaneswar, found itself before the Income Tax Appellate Tribunal, Cuttack Bench, defending disallowances across three assessment years — AY 2009-10, AY 2015-16, and AY 2016-17. Among the contested additions, two stand out for their quantum and legal significance: a disallowance of Rs. 43,44,18,199/- under Section 43B(f) of the Income Tax Act in respect of a provision for leave encashment, and a disallowance of Rs. 5,58,82,675/- under Section 40(a)(i) on account of alleged non-deduction of TDS on foreign currency payments. This consolidated order, pronounced on 28 October 2020, is significant for large corporates and PSUs that routinely carry leave encashment provisions and make foreign currency remittances — two areas that have generated recurring litigation under the Act.

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The case at a glance

• Parties: National Aluminium Company Limited vs ACIT, Corporate Circle-1(2)
• Bench: Income Tax Appellate Tribunal - Cuttack
• Date: 28 October 2020
• Court level: Tribunal (ITAT)
• Sections engaged: 43B
• Outcome: Remanded for fresh consideration (Note: Ground No. 4, concerning the TDS disallowance under Section 40(a)(i) on foreign currency payments, was allowed for statistical purposes and remitted to the Assessing Officer for fresh examination. The dispositive tail of the order records that the matter was sent back to the AO for fresh consideration.)

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Facts of the case

National Aluminium Company Limited filed cross-appeals before the ITAT Cuttack Bench, along with cross objections, against the separate orders of the CIT(A)-1, Bhubaneswar dated 30.12.2017, 27.12.2018, and 24.10.2019, for assessment years 2009-10, 2015-16, and 2016-17 respectively. The Revenue also filed counter-appeals for the same assessment years. The six appeals and associated cross objections were heard together and disposed of by a common order, given that several issues were common across the years. The appeal filed by the Revenue for AY 2016-17 (ITA No. 65/CTK/2020) was barred by limitation by 19 days; however, the department filed a condonation application explaining the cause of delay, to which the assessee raised no objection, and the Tribunal condoned the delay.

The principal disputes for AY 2009-10 — which the Tribunal took as the reference appeal for common facts — included: a disallowance of Rs. 76,56,75,884/- on account of interest on disputed government duties (electricity duty and water charges); an enhancement by CIT(A) of the disallowance under "Peripheral Development Expenses" from Rs. 50,42,549/- to Rs. 7,25,83,189/-; a disallowance of Rs. 5,58,82,675/- under Section 40(a)(i) for alleged non-deduction of TDS on foreign currency payments; and a disallowance of Rs. 43,44,18,199/- under Section 43B(f) in respect of a provision for leave encashment.

NALCO's position on the interest disallowance was that the ITAT Cuttack Bench had itself, in an earlier order for AY 2005-06 in the assessee's own case, held that interest on unpaid electricity duty and water charges was fully allowable, and that the CIT(A) had committed judicial impropriety by not following that precedent. On the peripheral development expenses, NALCO contended that the expenditure of Rs. 7,22,76,640/- was incurred through its Corporate Office wholly and exclusively for the purpose of business, consistent with a Government of Odisha notification, and that the CIT(A) had mischaracterised it as donations or charity. On the TDS disallowance, NALCO's case was that the Assessing Officer had not specified on which amounts TDS was required to be deducted and had proceeded on assumptions without any material on record.

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Issues raised

• Whether the disallowance of Rs. 76,56,75,884/- on account of interest on disputed electricity duty and water charges was sustainable, particularly in light of a prior ITAT Cuttack order in the assessee's own case for AY 2005-06 allowing such interest as a deductible expenditure.
• Whether the CIT(A) was justified in enhancing the disallowance under "Peripheral Development Expenses" from Rs. 50,42,549/- to Rs. 7,25,83,189/-, including expenditure of Rs. 7,22,76,640/- incurred through NALCO's Corporate Office.
• Whether the disallowance of Rs. 5,58,82,675/- under Section 40(a)(i) for alleged failure to deduct TDS under Section 195 on foreign currency payments was valid where the AO had not identified the specific amounts on which TDS obligation arose.
• Whether the provision for leave encashment of Rs. 43,44,18,199/- was disallowable under Section 43B(f) of the Act.

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What the court held

The ITAT Cuttack Bench disposed of all six appeals and cross objections by a common order dated 28 October 2020. On Ground No. 4 — the disallowance of Rs. 5,58,82,675/- under Section 40(a)(i) for alleged non-deduction of TDS on foreign currency payments — the Tribunal allowed the ground for statistical purposes and remitted the issue to the Assessing Officer for fresh examination. The AO was directed to re-examine the matter afresh, which means no final determination on the merits of the TDS disallowance was reached at the Tribunal stage; the matter was returned to the first instance.

The principal reasoning on the TDS ground, as reflected in the source order, was that the Assessing Officer had proceeded on a working prepared by himself without any supporting material on record, relying on assumptions, surmises, and conjectures, and had not specified on which particular amounts TDS was required to be deducted under Section 195. The CIT(A) had sustained the disallowance on the basis that NALCO itself had stated that no TDS was deducted on foreign currency payments of Rs. 5,58,82,675/-, a finding NALCO contested as factually incorrect. The Tribunal found these circumstances sufficient to send the matter back rather than decide it on the existing record.

On the leave encashment disallowance under Section 43B(f), the source order records the ground but the text preview captures only the opening of that ground (Rs. 43,44,18,199/-) before the preview ends. The consolidated nature of the order — covering AY 2009-10, 2015-16, and 2016-17 across six appeals — and the recorded outcome of remand for fresh consideration reflects the Tribunal's approach of returning unresolved factual disputes to the AO rather than deciding them on an incomplete or contested record.

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Strategy observations

1. Consolidation of multiple assessment years into a single hearing: The Tribunal noted that the issues involved across the six appeals were mostly common, and accordingly heard and disposed of all appeals together by a single common order. This procedural consolidation allowed the factual matrix for AY 2009-10 (ITA No. 338/CTK/2017) to serve as the reference for the connected appeals, reducing duplication in arguments.

2. Reliance on the assessee's own prior ITAT precedent: On the interest disallowance ground, NALCO relied on a prior ITAT Cuttack Bench order in the assessee's own case for AY 2005-06, where the identical issue of interest on unpaid electricity duty and water charges had been decided in NALCO's favour. The assessee's grounds characterised non-following of this precedent as "judicial impropriety."

3. Challenging the AO's factual foundation on TDS grounds: On the Section 40(a)(i) disallowance, the assessee's grounds specifically attacked the absence of any material on record to support the AO's working — framing the disallowance as based on "assumptions, surmises and conjectures" without identification of specific amounts attracting TDS. This framing contributed to the Tribunal's decision to remand the ground rather than sustain the disallowance.

4. No objection to Revenue's delay condonation: The assessee's representative raised no objection to the Revenue's application for condonation of a 19-day delay in filing ITA No. 65/CTK/2020, which allowed all connected appeals to be heard and disposed of together. This procedural posture enabled the common order to cover AY 2016-17 alongside the earlier years.

5. Cross objections alongside appeals: In addition to its own appeals, NALCO filed cross objections (CO Nos. 11/CTK/2019 and 08/CTK/2020) arising out of the Revenue's appeals for AY 2015-16 and AY 2016-17. The use of cross objections as a mechanism to raise additional grounds in response to Revenue appeals is reflected in the case caption and the Tribunal's framing of the proceedings.

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Why this case matters

This order is a representative example of the recurring litigation that large public sector undertakings face under Section 43B(f) — the provision that denies deduction for leave encashment unless actually paid — and under Section 40(a)(i), which disallows expenditure where TDS obligations on foreign payments have allegedly not been met. The quantum involved (Rs. 43.44 crore on leave encashment alone for a single AY) illustrates why these provisions generate high-stakes disputes for PSUs and large corporates with significant workforce and cross-border payment profiles.

The Tribunal's decision to remand the TDS disallowance to the AO rather than decide it on the existing record underscores a recurring principle in ITAT adjudication: where the AO's original order is founded on an unverified working without identification of the specific transactions attracting withholding tax, the Tribunal's preferred course is restoration for fresh factual examination rather than outright deletion or confirmation. For tax researchers tracking Section 40(a)(i) and Section 195 litigation patterns, this order also illustrates the evidentiary burden the Revenue must discharge at the assessment stage before a disallowance on TDS grounds can survive appellate scrutiny.

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Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals.

Original document: https://indiankanoon.org/doc/161036926/