Depreciation, leave encashment and turnover computation: possession alone did not defeat ownership, and statutory liabilities were deductible.
Depreciation on employee residential quarters was allowed because the company had funded the construction and legal ownership had not passed merely on handing over possession; the later treatment of the transfer as a capital gains event confirmed that title remained with the assessee during the relevant years. The provision for leave encashment was deductible as an ascertained business liability arising under the employees' accrued entitlement. Disallowance of provident fund and ESIC payments required reconsideration by separating employer's and employee's contributions against the relevant payment deadlines, and the issue was restored for limited verification. Sales tax and excise duty were excluded from turnover for section 80HHC computation, so the assessee's claim was accepted.
Issues: (i) Whether depreciation was allowable on residential buildings constructed for employees, where possession was given but legal transfer had not been completed during the relevant years; (ii) whether the provision for leave encashment was deductible; (iii) whether disallowance of provident fund and ESIC payments required reconsideration with reference to the dates of payment; (iv) whether sales tax and excise duty formed part of turnover for computing deduction under section 80HHC.
Issue (i): Whether depreciation was allowable on residential buildings constructed for employees, where possession was given but legal transfer had not been completed during the relevant years.
Analysis: The asset was constructed with the company's own funds and borrowed funds, and the employees' monthly contributions were only toward eventual cost recovery. The transfer of the quarters was not completed in the years under consideration, and the later assessment treatment of the transfer as giving rise to capital gains supported the position that ownership had not passed earlier. Mere handing over of possession, without concluded legal transfer, did not justify treating the company as divested of ownership for depreciation purposes.
Conclusion: Depreciation was allowable to the assessee for the years under consideration.
Issue (ii): Whether the provision for leave encashment was deductible.
Analysis: The liability arose from the employees' accumulated entitlement under the leave encashment scheme and represented an ascertained business liability for the year, falling within the settled principle that such accrued liability is allowable when properly provided for.
Conclusion: The provision for leave encashment was deductible in favour of the assessee.
Issue (iii): Whether disallowance of provident fund and ESIC payments required reconsideration with reference to the dates of payment.
Analysis: Employer's contribution and employee's contribution had to be examined separately under the governing provisions. Allowability depended on whether employer's contribution was paid by the due date for filing the return and whether employee's contribution was remitted within the prescribed time, including the relevant grace period.
Conclusion: The matter was restored for pro tanto reconsideration and was allowed for statistical purposes.
Issue (iv): Whether sales tax and excise duty formed part of turnover for computing deduction under section 80HHC.
Analysis: The issue was treated as covered by binding precedent, under which sales tax and excise duty were not to be included in turnover for the purpose of computing the deduction.
Conclusion: The assessee's claim was accepted.
Final Conclusion: The appeals succeeded on the substantial issues relating to depreciation, leave encashment, provident fund and ESIC, and section 80HHC computation, with the result that the assessee obtained partial relief overall.
Ratio Decidendi: Where legal ownership of an asset has not passed and only possession is handed over pending completion of transfer and recovery of cost, depreciation cannot be denied merely on the basis of possession, and accrued business liabilities supported by the governing scheme are deductible when properly ascertained.