2007 (11) TMI 2 - HC - Income Tax

Court rules in favor of Assessee on Income Tax Act Section 115JA, Profit/Loss Account, and Gratuity deductions.

The Court ruled in favor of the Assessee regarding the depreciation claimed under Section 115JA of the Income Tax Act, deletion of certain additions in ... Deduction - AO made addition on account of (i) depreciation claimed in the current year by making retrospective change (ii) depreciation claimed @100% of the assets costing below US $1000 (iii) capital expenditure debited by assessee while computing book profit - Held that AO stand was not justified and allowed assessee appeal Issues:1. Depreciation claimed in the current year under Section 115JA of the Income Tax Act.2. Recomputation of profits in the Profit and Loss Account.3. Depreciation on assets costing below US $1000.4. Capital expenditure debited to the Profit and Loss Account.5. Disallowance of deduction of provident fund.6. Treatment of provision for gratuity as an unascertained liability.Analysis:1. The first issue revolves around the addition of depreciation claimed by the Assessee in the current year under Section 115JA of the Income Tax Act. The Tribunal deleted the addition, prompting the question of whether this deletion was correct in law. The Tribunal's decision was based on a retrospective change in depreciation rates by the Assessee. The second issue questions the AO's power to recompute profits in the Profit and Loss Account by excluding provisions made by the Assessee for arrears of depreciation. The Tribunal's decision to delete this addition is also under scrutiny.2. Moving on to the third issue, the Tribunal's deletion of the addition of depreciation on assets costing below US $1000 is being challenged. The fourth issue pertains to the deletion of the addition of capital expenditure debited to the Profit and Loss Account while computing book profit under Section 115JA of the Act. These deletions are being questioned for their legality and correctness.3. The fifth issue involves the disallowance of a deduction of provident fund by the AO, which was not paid before the due date but within the grace period. However, this issue is deemed settled in favor of the Assessee based on a previous decision by the Court. The final issue concerns the treatment of a provision for gratuity as an unascertained liability. The AO added back this provision to the book profit, arguing it was unascertained. The Tribunal disagreed, stating that the provision was towards an approved gratuity fund and therefore deductible.4. The Court emphasized that the provision for gratuity was an ascertained liability, even if not paid in the same year. Citing relevant case law, the Court clarified that if a business liability has arisen in the accounting year, the deduction should be allowed. Additionally, the Court upheld the Tribunal's decision that Section 40A (7) (b) allowing deductions for contributions to an approved gratuity fund overrides Section 43B. The Court reasoned that specific provisions like Section 40A (7) (b) take precedence over general provisions like Section 43B, especially when the provision is towards an approved gratuity fund.5. In conclusion, the Court admitted the appeal on the four main questions raised, dismissing other questions brought by the Revenue. The filing of a paper book was dispensed with, indicating the readiness to proceed with the appeal based on the substantial legal issues identified.