TaxTMI 
TaxTMI 
2009 (2) TMI 31
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....g Service Award". 2.1 The assessee, on the other hand, had preferred an appeal to the Tribunal against the order of the CIT(A) in rejecting its claim of depreciation amounting to Rs 35,41,123/- on emergency/insurance spares valued at Rs 1,41,64,495/- in its books of accounts. 2.2 The Tribunal by the impugned judgment, rejected the appeal of the Revenue on the issue of allowance of provision for "Long Service Award" payable by the assessee to its employees and consequently confirmed the order of the CIT(A), and also, allowed the appeal of the assessee on the issue of capitalization of emergency/insurance spares and resultantly, reversed the order of CIT(A). 3. As stated above, the Revenue being aggrieved by the impugned judgment, has preferred these appeals on the aforementioned issues. 4. In so far as issue with respect to allowance of provision made by the assessee in the sum of Rs 47,15,782/- with regard to "Long Service Award" payable to its employees is concerned, the following brief facts require to be noted:- 4.1 The assessee, which is in the business of manufacturing of spray dried silica in technical collaboration with a German company, during the relevant pe....
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....s per the Accounting Standards notified by the Central Government u/s 145(2) of the Act, it was incumbent upon the assessee to make provision for all known liabilities on the basis of best estimate in the light of available information. The CIT(A) specifically rejected the contention of the Revenue that since there was some discretion vested with the management with regard to the payment under the "long service award" scheme that would by itself make it contingent and that the deduction should be disallowed on this ground. The Revenue carried the matter in appeal to the Tribunal. The Tribunal after recording the facts noted in the order of the CIT(A) concurred with his view and held; that as per the mercantile system of accounting, provision for liability ascertained during the course of the relevant accounting period, which is payable at a future date, was admissible in view of the decisions of the Supreme Court relied upon by the assessee before the CIT(A) as well as in the light of Circular No. 47 dated 21.09.1970 of the CBDT. 5. Having heard the learned counsel for the Revenue as well as the assessee, we are of the view that no fault can be found with the reasoning of both t....
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....ing the provision made by the assessee towards gratuity under the Income Tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company (supra), crystallized its analysis at page 599 and made the following observations:- "It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows:- 1 xxxx 2 xxxx 3 xxxx 4 xxxx 5 Provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under Section 28 or section 37 of the Act." 7. The Division Bench of this Court, while considering deductibility of a provision for warranties made by an assessee, which dealt in computers in the case of CIT vs Hewlett Packard India (P) Ltd, by its judgment passed in Appeal No. ITA 486/2006 dated 31.03.2008, upheld the deductibility of the provision for warranty on the ground that it was made on the basis of actuarial valuation being covered by the principle set out in Metal Box Company (supra). In view of....
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....uring the relevant period. Curiously, the Assessing Officer also rejected the alternative plea of the assessee that it should be allowed deduction of Rs 31,76,187/- being the cost of emergency spares actually consumed during the relevant period. The Assessing Officer on the contrary allowed depreciation to the assessee in the sum of Rs 5,49,806/- with reference to the cost of spares consumed during the relevant period, that is, on Rs 31,76,187/- 10. The assessee being aggrieved, preferred an appeal to the CIT(A). The CIT(A) while sustaining the order of the Assessing Officer that no depreciation could be allowed on the cost of emergency spares capitalized by the assessee, however, allowed the alternative claim of the assessee, by directing the Assessing Officer to allow the assessee a deduction of Rs 31,76,187/-, being the cost of spares actually consumed by the assessee during the relevant period. 11. The assessee being aggrieved, preferred an appeal to the Tribunal. The Tribunal by the impugned judgment allowed the appeal of the assessee. In the impugned judgment, the Tribunal noted that the Assessing Officer had accepted the claim of the assessee that emergency spares were....
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....7 ITR 12 (Del) and lastly CIT vs Swarup Vegetable Products India Ltd; (2005) 277 ITR 60(All). 15. The learned counsel for the assessee also relied upon the revised Accounting Standard (AS) 2 on „Valuation Of Inventories‟ along with Accounting Standard (AS) 10 on „Accounting For Fixed Assets‟ to buttress his argument that the emergency spares in issue requires to be capitalized. OUR ANALYSIS 16. The accounting treatment, which is prescribed by the Council of the ICAI, clearly stipulates that after the revised Accounting Standard (AS) 2 comes into effect, it shall apply with respect to accounting period commencing on or after 01.04.1999. The revised Accounting Standard has been made mandatory by the Council of the ICAI. 16.1 At this point, it may be helpful to extract the relevant clauses of the Accounting Standards (AS) 2 and (AS) 10. In this regard, clause 4 of the Accounting Standard is of relevance which reads as follows:- "Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories als....
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....irregular. 4 Machinery spares of the nature of capital spares/insurance spares should be capitalised separately at the time of their purchase whether procured at the time of purchase of the fixed asset concerned or subsequently. The total cost of such capital spares/insurance spares should be allocated on a systematic basis over a period not exceeding the useful life of the principal item, i.e., the fixed asset to which they relate. 5 x x x x 6 x x x x 7 x x x x 8 x x x x 9 Machinery spares of the nature of capital spares/insurance spares are capitalised. Capital spares/insurance spares are meant for occasional use. Since they can be used only in relation to a specific item of fixed asset, they are to be discarded in case that specific fixed asset is disposed of. In other words, such spares are integral parts of the fixed asset." 16.4 It is clear upon reading the provisions of Accounting Standards (AS) 2 and (AS) 10 that, the opinion of the Council of the ICAI in respect of treatment of machinery spares is briefly that; machinery spares which are not specific to any fixed asset and can be used generally should be treated as part of inventory and charged to profit and loss acc....
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....head "profits and gains of business or profession" is required to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. 16.7 As indicated above the assessee has been maintaining a mercantile system of accounting, therefore, the treatment of emergency spares in accordance with the revised Accounting Standard (AS) 2 and (AS) 10 would be in consonance with the mercantile system of accounting which under the Act the Revenue is required to look at for computing income of the assessee chargeable under the head "profits and gains" from business. The submission of the learned counsel for the Revenue that the accounting treatment to be meted out to a transaction in accordance with the Accounting Standard has no relevance for the purposes of the Income Tax Act, 1961 is a submission which does not commend to us. 16.8 In the past, Courts have applied rules and principles of accountancy where words and expressions used in the Act have not been given a definitive meaning. The Supreme Court in the case of Challapalli Sugars Ltd vs CIT; (1975) 98 ITR 167 was called upon to interpret the meaning of the expression „actual cost‟....
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.... is no definitive provision, a Court can take resort to well accepted accountancy rules and principles. The Supreme Court in Tuticorin Alkali Chemicals (supra) has not derogated from this principle enunciated in Challapalli Sugar Mills Ltd (supra). See observation in Tuticorin Alkali Chemicals (supra) at pages 183-186, in particular, observations at page 185(H) to page 186(D). 16.10 The applicability of the principles of accountancy by the courts has also found favour in the judgments of the Supreme Court in the cases of CIT vs Indo Nippon Chemicals Co ltd; (2003) 261 ITR 275 at page 277 (D - E) & CIT vs U.P. State Industrial Development Corporation; (1997) 225 ITR 703 and also the judgment of a Division Bench of this Court in CIT vs Woodward Governor India P Ltd; (2007) 294 ITR 451 at page 463-464 (paras 15-16). The observations of UPSIDC being apposite are extracted hereinbelow:- "In our opinion, this contention is devoid of force. The accounting practice followed by the assessee in the instant case was in consonance with the general principles of accountancy governing underwriting accounts. It is a well accepted proposition that "for the purposes of ascertaining profits and g....
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.... Plantations Ltd; (1981) 128 ITR 675. In the said judgment of the Madras High Court, the word "used" was interpreted to mean and this includes even forced idleness, whereby a machinery even though ready for use, could not be used in a given year due to labour unrest. The court held that machinery which is kept ready for use would come within the expression "used" for the purposes of business as contemplated under the provision at hand. 17.3 The aforesaid judgments were noticed by the a Division Bench of the Madras High Court in the case of Southern Petrochemical Industries Corporation (supra). The issue which the Madras High Court was called upon to consider as extracted in the judgment of this Court, is as follows:- "Whether on the facts and circumstances of the case the Tribunal was right in holding that the depreciation should be allowed on stand by spares parts even though they were not taken for use during the year." 17.4 The Division Bench of the Madras High Court after noting the judgment of the Bombay High Court in Viswanath Bhaskar Sathe (supra) and of its own court in Vayithri Plantations Ltd (supra) held that the assessee was entitled to depreciation on spare pa....
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.... expression as comprehending cases where the machinery is kept ready by the owner for its use in the business and the failure to use it actively in the business is not on account of its incapacity for being used for that purpose of its non-availability. In the present case, e.g., the four buses in question were admittedly in working order and the assessed was keeping them ready for being operated upon if an when some tourist contract materialised. They were not actually run on the road not because they were under repair or were unfit for use for one reason or the other, but only because there were not enough contracts during the year to ply the buses for more than 30 days each. This does not mean that so far as the assessed was concerned he did not employ the trucks for the purposes of the business. They were kept ready for operation and they were there only in the business and for use in that business. In these circumstances, in our opinion, it can be said, without straining the language of the statute and the context in which it is employed, that the buses were used for the purposes of the business throughout the year though they were not actually plied on the roads for more than....