TaxTMI 
TaxTMI 
2013 (11) TMI 934
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....ome tax Act, 1961 (the Act). In the P&L account filed along with the said return, the following expenses aggregating to Rs. 15,25,73,928/- were debited by the assessee as extra ordinary expenses:- (a) VRS payments at Boehringer Mannheim India Division Rs.11,00,41,992/- (b) VRS payments at Piramal Health Care Division Rs. 1,69,33,031/- (c) Gratuity payments Rs. 1,45,80,225/- (d) Other terminal benefits Rs. 1,10,18,649/- Total Rs.15,25,73,928/- 4. During the course of assessment proceedings, the above expenses were examined by the A.O. and on such examination, he held that the payments made by the assessee company to its employees on account of gratuity and other terminal benefits not being for the single year services but pertained to the services rendered for several years, the same were not fully allowable in the year under consideration. As regards the VRS payments made by the assessee company to its employees, the A.O. held that the same were also not allowable as deduction in the year under consideration on the basis of following reasons given in the assessment order :- (i) The VRS payment is a payment made by the employer to the emp....
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.... the assessee inter alia by the decision of the Hon'ble Bombay High Court in the case of Commissioner of Income-tax v. Bhor Industries Ltd. (2003) 264 ITR 180 (Bom.) wherein it has been held that payments made under the Voluntary Retirement Scheme was the expenditure incurred by the assessee to save expenses and it was not referable to any income yielding asset. It was held that the said expenditure thus should be allowed in its entirety in the year in which it was incurred and the same could not be spread over a number of years. It was also held that the expenditure incurred by the assessee relating to Voluntary Retirement Scheme as well as on account of gratuity was revenue expenditure and the same was allowable as deduction in the year in which it was actually incurred. Respectfully following the said decision of the Hon'ble jurisdictional High Court, we uphold the impugned order of the ld. CIT(A) allowing the expenditure incurred by the assessee on VRS payments, gratuity payments and the payments on account of other terminal benefits and dismiss ground No. 1 of the Revenue's appeal. 7. In ground No. 2, the Revenue has challenged the action of the ld. CIT(A) in deleting the dis....
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....t. As noted by the ITAT in the case of M/s. JCT Mills the interest once capitalised becomes part of the actual cost and loses the character of interest. There is no question of claiming the same u/s. 36(1)(iii). To reiterate, this is clear from Explanation 8 to section 43(1) as well as the Explanatory Notes presented in para 9.4 which clearly spell out the legislative intent. (b) In the specific facts and circumstances of the assessee's case, the claim is a clear tax avoidance device. This is because the Gujarat Glass division has been spun off as a separate company. The shareholders meeting approving such spun off was held on 20-3-1998 before the end of the previous year in question. At the time of filing the return and making the claim, the assessee was well aware that Gujarat Glass had become a separate company. The result of the assessee's claim if upheld is that the assets of the Jambusar division will come to the new company namely Gujarat Glass while the interest claim will be that Nicholas Piramal to be carried forward and set off against future profits of M/s. NPIL. This is a total anomalous and unacceptable situation. (c) Without prejudice to t....
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....account of interest after having satisfied that the new glass factory at Jambusar in Gujarat was nothing but expansion of the existing business of the assessee company. 10. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the interest paid by the assessee on the loan borrowed for the purpose of its new glass factory at Jambusar in Gujarat was disallowed by the A.O. for the reasons given in para 9.1 of his order which are already extracted in para No. 8 of this order. At the time of hearing before us, the ld. D.R. has strongly relied on the said reasons and submitted that the ld. CIT(A) has not properly considered and appreciated these reasons given by the A.O. while deleting the disallowance made on account of interest. However, as rightly submitted by the ld. Counsel for the assessee, elaborate submissions were made on behalf of the assessee to meet all the objections raised by the A.O. while disallowing the interest and only after having been satisfied himself with the said submissions, the ld. CIT(A) allowed the claim of the assessee for the said interest holding that the new glass factory at Jambusar in Gujarat....
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....busar in Gujarat which was nothing but expansion of the assessee's existing business. In that view of the matter we uphold the impugned order of the ld. CIT(A) on this issue and dismiss ground No. 2 of the Revenue's appeal. 11. Ground No. 3 & 4 raised by the Revenue in its appeal read as under:- "3. Erred in accepting the assessee's devise of not claiming depreciation in respect of assets taken over on amalgamation of BMIL and MPIL ignoring omission of the provisions of section 34 (1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 243 ITR 56 which pertains to the period prior the omission of the section; 4. Erred in accepting the assessee's devise of not claiming depreciation on the assets of PHL taken over on amalgamation ignoring omission of the provisions of section 34(1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 243 ITR 56 which pertains to the period prior the omission of the section." 12. After considering the rival submissions and perusing the relevant material on record, it is observed that an identical issue was ....
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.... or not to claim the same. If he does not claim it, he loses the depreciation. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes." It was further held that: "what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year u/s. 32(2) of the Act. In other words, an assessee who des not claim deduction for the depreciation allowable to him u/s. 32 of the Act in the particular year loses it once for all." ....
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..... (1) and (2) of s. 34 has been done away with and that has altered the effect of the judgment in Mahendra Mills (supra). It is difficult to uphold the contention because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the AO has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars are not, if there is no claim for depreciation, it cannot be allowed by the AO. The debate, therefore, as to whether the omission of s. 34(1) and (2) and r. 5AA of the IT Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The following observations of the Supreme Court in this regard clinch the issue in favour of the position that despite the o....
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.... has observed that even in the absence of the rule, since the return form itself prescribes particulars to be furnished in support of the claim of depreciation, the allowance can be granted on if the assessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the revenue that after the omission of subsec. (1) and (2) of s. 34 and r. 5AA w.e.f. 1st April, 1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Expln. 5 to 32 was introduced by the Finance Act, 2002 w.e.f 1-4-02 and it provides as follows: Explanation 5. - For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; Thus, it can be safely said that omission of section 34 has not affected the assessee's choice to claim depreciation....
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....not claimed by the assessee." 28. In the light of the above observations of the Hon'ble Supreme Court, let us see the decision of the Hon'ble Bombay High Court in the case of Premier Automobiles (Supra). The question before the Hon'ble Court and the circumstances under which it arose were as follows: "Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972-73?" As is evident from the question, the controversy related to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The assessee had substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year's profit in t....
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.... impugned order of the ld. CIT(A) giving relief to the assessee on these issues. Ground No. 3 & 4 of the Revenue's appeal are accordingly dismissed. 14. As regards ground No. 5, it is observed that the issue involved therein relating to assessee's claim for depreciation on assets of bulk drug division of Sumitra Pharmaceuticals & Chemicals Ltd. is also squarely covered in favour of the assessee by the order of the Tribunal dtd. 16-5-2012 for A.Y. 1997-98 wherein a similar issue has been considered and decided by the Tribunal in favour of the assessee following its order for A.Y. 1996-97 wherein an identical issue was decided in favour of the assessee after recording all the relevant facts, submissions of both the sides and the decision thereon as under:- " 3. As regards ground No.1 brief facts of the case are that the assessee company which is engaged in the business of manufacturing of pharmaceuticals products filed its return of income on 30/11/97 declaring a loss of Rs.70,67,21,243/-. Subsequently, assessee filed a revised return of income on 30/3/98 revising the loss figure to Rs.70,66,81,323/-. During the assessment proceedings u/s. 143(3), the AO noticed that d....
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.... the person who owns it and not with respect to his predecessor. In this connection, assessee placed reliance upon the following decisions: (a) CIT v. Solomon 1 ITR 324 [Rangoon High Court] (b) CIT vs. Groz Packert Saboo Ltd. 116 ITR 135 [S.C] (c) Francis Vallbhyar vs. CIT 40 ITR 426 [Mad] The AO, however, was not satisfied with the assessee's explanation and held that the written down value of the depreciable assets in the hands of the previous owner is to be adopted as the value of assets in the hands of the assessee for the purpose of claim of depreciation. He, accordingly, reworked the depreciation allowable on the basis of written down value at Rs.2,98,85,394/- as against the claim of the assessee of Rs.11,48,96,238/-. Aggrieved, assessee filed an appeal before the CIT[A) who allowed the same holding that the cost of appreciation of the assets of the bulk drugs unit in the hands of the assessee was the market value of the assets entered into the books of the assesee on the basis of the valuation report as approved by the High Courts of Andhra Pradesh and Bombay and also by the shareholders of both the companies and, there....
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....sets acquired in the previous year, the actual cost to the assesse; (b) In the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income Tax Act, 1922 or any Act repealed by that Act, or under any executive orders issued when the Indian Income Tax Act, 1886 was in force (c) In the case of any block of assets [i] in respect of any previous year relevant to the assessment year commencing on the 1 day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted. A........................... B........................... C........................... Explanation 1- When in a case of 'succession in business or profession, an assessment is made on the successor under subsection [2] of section 170 the written down value....
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....escape the definition of amalgamation but the substantial conditions have been fulfilled. He also observed that it is obvious from the scheme that the shareholders of SPCL holding not less than 9/10th in value of shares have to be shareholders of MPIL and that all fixed depreciable assets are secured loans and unsecured loans and most of the current assets and liabilities have been taken over and what is left behind is only a husk of the corporate entity. He has held that a miniscule portion of the assets and liabilities are retained by SPCL and therefore the scheme is nothing but the amalgamation though it does not cover the definition of amalgamation u/s.2[B] of the Act. This observation of the AO cannot be accepted. To consider a transaction as amalgamation, there has to be a complete merger of one or more company with another company or merger of two or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating companies become the properties or liabilities of the amalgamated companies as defined In subsec.[1B) of sec.2 of the Income Tax Act. From the above it can be observed that in the case of an amalgamation the amalgamati....
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....eads to the extent of Rs. 1,54,75,141/- were disallowed by the A.O. for the following reasons:- ("a) These expenses were not incurred to keep the business running but to close down one part of the business operations. The employees who were left at the Thane factory were not engaged in production of any other business activity. The expenses were also not incurred in connection with the relocated items of plant and machinery. (b) The decision of the Gujarat High Court in the case of Nathalal Asharam Vs. CIT (194 ITR 110) supports disallowance of such closure expenses. In this case allowability of deduction of Rs.74,500/-, being the amount set-apart for compensation intended to be paid to retrenched employees consequent to closure of the factory, came up for consideration. The court upheld disallowance of the expenditure relying on many cases, especially the decision of the Supreme Court in the case of Gemini Cashew Sales Corporation (65 ITR 643)." 18. The matter was carried before the ld. CIT(A) and it was submitted on behalf of the assessee before him that despite closure of the Thane plant, the business conducted there from had been shifted to other ma....
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....sing out of statutory compulsion. As further found by him, the business carried on in the said unit was not discontinued but shifted to other places. Having taken note of these facts, the ld. CIT(A) held that the ratio of the decision of Hon'ble Supreme Court in the case of K. Ravindranathan Nair (supra) was clearly applicable to the facts of the assessee's case and accordingly he directed the A.O. to allow the deduction claimed by the assessee on account of expenses pertaining to the closed Thane factory u/s 37(1) of the Act. At the time of hearing, the ld. D.R. has not been able to bring anything on record to controvert or rebut the finding of fact recorded by the ld. CIT(A) on this issue and this being so as well as keeping in view the decision of Hon'ble Supreme Court in the case of K. Ravindranathan Nair (supra), we find no infirmity in the order of the ld. CIT(A) giving relief to the assessee on this issue. The same is therefore upheld and ground No. 6 of Revenue's appeal is dismissed. 20. In ground No. 7, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of interest to the extent of Rs. 1,32,44,720/- made by the A.O. by holding that the sa....
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.... any disallowance on account of interest. We therefore find no infirmity in the order of the ld. CIT(A) deleting the disallowance made by the A.O. on account of interest and upholding the same, we dismiss ground 7 of Revenue's appeal. 23. In ground No. 8, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 10.60 crores made by the A.O. on account of debenture redemption reserve while computing the book profit u/s 115 JA of the Act. 24. In the original return filed by the assessee, book profit u/s 115JA of the Act was computed at Rs. 15,11,76,495/- which was subsequently recomputed by the assessee at Rs. 11,92,36,595/- in the revised return. During the course of assessment proceeding, the assessee filed a further revised computation of book profit showing the same at Rs. 8,58,23,427/-. In this regard, it was noted by the A.O. that the amount of Rs. 10.60 crores transferred to debenture redemption reserve was debited by the assessee in the P&L account. According to him, the said amount set aside for redeeming the debentures, which constituted loan of the assessee, was nothing but a reserve and the same therefore was liable to be added while compu....
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....ld. CIT(A) in deleting the additions made by the A.O. on account of VRS expenses amounting to Rs. 15,25,73,927/-, Thane factory closure expenses amounting to Rs. 3,50,36,634/- and loss on termination of lease amounting to Rs. 3,02,33,000/- while computing the book profit u/s 115JA of the Act. 27. The VRS expenses and Thane factory closure expenses debited by the assessee to the P&L account were added by the A.O. while computing the book profit u/s 115JA of the Act on the ground that the same were of capital nature which could not be allowed. As regards the loss on termination of lease debited to the P&L account, the A.O. held that the assessee company itself had agreed that the relevant leases were not genuine and losses arising out of such leases therefore could not be allowed as deduction while computing the book profit. On appeal, the ld. CIT(A) held that the VRS expenses and Thane factory closure expenses were debited by the assessee to the P&L account and even if they were capital in nature, the same could not be added back or disallowed while computing the book profit as per section 115JA of the Act. As regards the loss on termination of lease, the ld. CIT(A) held that even ....
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....ub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company". 29. Respectfully following the decision of the Hon'ble Apex Court in the case of Apollo Tyres Ltd. (supra), we uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. on account of VRS expenses, Thane Factory expenses and loss on termination of lease expenses while computing the book profit u/s 115JA of the Act and allow ground No. 9,10 & 11. 30. Now, we shall take up the C.O. of the assessee, ground No. 1 of which relates to the disallowance of Rs. 14,42,654/- made by the A.O. and confirmed by the ld. CIT(A) on account of community development expenses. 31. The following expenses incurred by the assessee during the year under consideration were claimed under the head community development expenses:- (i) Providing street lights on the road which leads to the assessee's factory Rs. 4,01,040.00 (ii) Providing ambulance for meeting medical Emergencies for residents of village Tarsadi Rs. 2,41,614.00 (iii) Cost of public garden developed Rs. 8,00,000.00 Total Rs.14,42....
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....n of mere provision was not enough and the amounts should have been actually written off by crediting the same to the individual accounts of the debtors in order to satisfy the requirements of section 36(1)(vii) r.w.s. 37(2) of the Act. On appeal, the ld. CIT(A) confirmed the disallowance for the same reasons as given by the A.O. 35. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. Counsel for the assessee has contended that specific amounts were identified by the assessee as bad and doubtful debts and the relevant entries made by it in the books of accounts are sufficient to show that the bad debts were written off as required by the provisions of section 36(1)(vii) of the Act. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT & Ano., (2010) 190 Taxman 257 (SC). The ld. D.R., on the other hand, submitted that the stand of the assessee needs verification in the light of the decision of Hon'ble Supreme Court in the case of Vijaya Bank (supra) and the matter therefore may be sent back to the A.O. for such verification. We find merit in the....