2007 (2) TMI 277 - AT - Income Tax

Tribunal Partly Allows Appeal: Upholds Disallowance of Contributions, Supports Capital Incentive Reduction, Allows Dividend Expense Challenge.

The Tribunal partly allowed the appeal, upholding the disallowance of the contribution to Alfa Laval Education Trust under section 40A(9) and the ... Business Disallowance - contractor failed to discharge its liability in respect of the ESI dues - Prior-period expenses - Applicability of Explanation 10 to section 43(1) ''prospectively Or retrospectively'' - Disallowance of Depreciation by reducing Written down value of assets by subsidy received - Special Capital Incentive Scheme - written down value of the plant and machinery - - HELD THAT:- It is a matter of fact that the impugned liability was partly that of M/s. Sakanson Pvt. Ltd., a sister concern and partly that of the assessee. In absence of discharge of the liabilities, enquiries were conducted and finally an order was passed on 29-5-2000. The liability as per that order was to be paid within 15 days, but was actually paid by the assessee on 29-6-2000. It is no doubt true that the assessee made a provision in accounts for the year 1999-2000 on the basis of the enquiry letter received from the competent authority of the ESIC, yet, it cannot be said that the liability was quantified or paid by the assessee in that year. To our mind, the facts of Saurashtra Cement & Chemical Industries Ltd.'s case[1994 (10) TMI 30 - GUJARAT HIGH COURT] are nearer to the facts of the instant case, in which it was held that earlier years' expenses could be allowed in mercantile method of accounting in the year in which the liability is accepted and paid. According to us, that year is not assessment year 2000-01. Same is the case in respect of liability of assessment years 1996-97 and 1997-98. Therefore, we are of the view that the learned CIT (Appeals) was right in holding that the impugned liability was not deductible in computation of income of this year. Insofar as the deducibility of the expenditure in subsequent assessment year 2001-02 (sic) is concerned, the issue is not before us in this appeal. The assessee may take up the matter in the appeal of the appropriate year(s). In the result, this ground is dismissed. Applicability of Explanation 10 to section 43(1) ''prospectively Or retrospectively'' - HELD THAT:- We are of the view that the issue in this case is identical with the issue in the case of Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. This is so in spite of the additional argument taken by the ld. counsel that the incentive accrued in the financial year 1995-96. In that order, it was held that the provision contained in Explanation 10 does not operate retrospectively. It is applicable to the assessment year 1999-2000 and onwards. On the basis of this finding, it was further held that the subsidy received in the previous year relevant to assessment year 1999-2000 only is not to be included in the actual cost. The facts of the instant case are that the incentive of Rs. 24,04,066 was received in the relevant previous year and the book value of the assets was also adjusted in this year on account of the incentives. The depreciation was deducted in earlier years without reckoning the aforesaid incentive and W.D.Vs. were calculated accordingly from year to year. Consequently, the effect of the incentive on cost or the W.D.V. has to be given in this year on receipt of the incentive, the reason being that the cost has been met by the other person in this year. The decision in the case of aforesaid Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. is also against the assessee for assessment year 1999-2000 onwards. Respectfully following that decision, it is held that the learned CIT (Appeals) was right in invoking the provisions of Explanation 10 to reduce the cost or the WDV of the asset and allowed depreciation on the reduced cost or WDV, as the case may be. In result, ground No. 3 is dismissed. In the result, the appeal is dismissed. Issues Involved:1. Deduction of contribution to Alfa Laval Education Trust under section 40A(9).2. Deduction of ESI dues as prior-period expenses under section 37(1).3. Reduction of Special Capital Incentive from the written down value of plant and machinery under Explanation 10 to section 43(1).4. Disallowance of pro rata amortization of lump sum lease rent.5. Ad hoc disallowance of expenditure for earning dividend income under section 115JA.6. Setting off unabsorbed depreciation against current year profits for section 80HHC deduction.Detailed Analysis:1. Deduction of Contribution to Alfa Laval Education Trust:The assessee challenged the disallowance of Rs. 4.25 lakh contributed to Alfa Laval Education Trust, citing section 40A(9) of the Act. The CIT (Appeals) had disallowed this deduction, and the decision was upheld by referring to prior ITAT Mumbai Bench decisions for assessment years 1997-98 and 1998-99, where it was held that such deductions are not permissible under section 40A(9). The Tribunal dismissed this ground, following the precedent set in earlier years.2. Deduction of ESI Dues as Prior-Period Expenses:The assessee sought deduction of Rs. 26,06,513 for ESI dues, arguing that the liability accrued in the financial year 1999-2000 due to contractors' failure to deposit ESI dues. The CIT (Appeals) and the Assessing Officer held that the liability pertained to earlier years (1993-94 to 1995-96) and was not deductible in the current year. The Tribunal upheld this view, referencing the Gujarat High Court decision in Saurashtra Cement & Chemical Industries Ltd. v. CIT and the Bombay High Court decision in CIT v. United Motors (India) Ltd., concluding that the liability should be deductible in the year of acceptance and payment, which was not the year under consideration.3. Reduction of Special Capital Incentive from Written Down Value:The assessee contested the reduction of Rs. 24,04,066 received under the Special Capital Incentive Scheme from the written down value (WDV) of plant and machinery, arguing that Explanation 10 to section 43(1) is prospective and not applicable to incentives accrued in financial year 1995-96 but disbursed in 1999-2000. The Tribunal referred to the ITAT Pune Bench decision in Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. v. Asstt. CIT, which held that Explanation 10 is prospective and applies to assessment year 1999-2000 onwards. Since the incentive was received in the relevant previous year and adjusted in the books, the Tribunal upheld the CIT (Appeals)'s decision to reduce the WDV.4. Disallowance of Pro Rata Amortization of Lump Sum Lease Rent:The assessee did not press this ground as it was previously decided against them by the Tribunal. Consequently, this ground was dismissed as not pressed.5. Ad Hoc Disallowance of Expenditure for Earning Dividend Income:The assessee challenged the ad hoc disallowance of Rs. 25,000 attributed to earning dividend income. The Tribunal relied on the Bombay High Court decision in CIT v. General Insurance Corpn. of India (No. 1), which held that no portion of expenditure on salaries, stamp duty, transfer fee, and safe custody could be directly related to earning dividends. Therefore, the Tribunal allowed this ground in favor of the assessee.6. Setting Off Unabsorbed Depreciation Against Current Year Profits:The assessee did not press this ground. The Tribunal noted that under section 32, unabsorbed depreciation of earlier years is treated as depreciation of the current year. Hence, the ground was dismissed on merits.Conclusion:The appeal was partly allowed, with specific grounds dismissed or upheld based on precedents and legal provisions. The Tribunal provided a detailed analysis of each issue, referencing relevant case laws and statutory provisions to justify its decisions.