2005 (2) TMI 762 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of salary and leave travel allowance (LTA) paid to service engineers.
2. Claim of depreciation on plant and machinery.
3. Disallowance of value of obsolete inventory and non-recoverable debts while making a prima facie adjustment under section 143(1)(a).

Issue-wise Detailed Analysis:

1. Disallowance of Salary and LTA Paid to Service Engineers:
The first issue pertains to the disallowance of Rs. 11,87,763 paid towards salary and LTA to service engineers deputed to M/s. Alacrity Electronics Ltd. The assessee argued that these engineers were on its payroll before the transfer of the Electronics Division to Alacrity Electronics Ltd. The company entered into a manpower transfer agreement, requiring it to train and depute engineers to Alacrity Electronics Ltd., which would pay their salaries during deputation. The assessee retained the engineers to avoid heavy retirement benefits and claimed the expenditure as commercially expedient. The assessee cited the Supreme Court's judgment in CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 and the Madras High Court's judgment in CIT v. Associated Electrical Agencies [2004] 266 ITR 63 to support its claim.

The Departmental Representative (D.R.) countered that the assessee had transferred all assets and liabilities of the Electronics Division to Alacrity Electronics Ltd., including personnel, and thus had no activity related to the Electronics Division during the assessment year. The D.R. argued that the new company confirmed taking all personnel on deputation, and hence, the assessee had no justification for paying salaries and LTA.

The Tribunal found that the Electronics Division, including its personnel, was transferred to Alacrity Electronics Ltd., which undertook to pay the salaries and other benefits. The Tribunal concluded that there was no merit in the assessee's claim, as the personnel were absorbed by the new company, and the assessee had no further requirement for electronic service engineers. Therefore, the disallowance of Rs. 11,87,763 was upheld.

2. Claim of Depreciation on Plant and Machinery:
The second issue involved the disallowance of depreciation on plant and machinery. The assessee claimed depreciation on machinery leased to M/s. Alacrity Housing Ltd. The lower authorities disallowed the claim, stating that no matching income was shown by the assessee. The assessee argued that the lease consideration was included in the total payment of Rs. 320 lakhs received when the Housing Division was transferred to Alacrity Housing Ltd., and this amount was treated as revenue receipt.

The D.R. contended that the consideration of Rs. 320 lakhs did not relate to the use of plant and machinery, and the assessee allowed the machinery to be used without payment of any lease rent. The Tribunal noted that the assessee should be the owner of the machinery and it should be used for the assessee's business to claim depreciation. The Tribunal found that the receipt of Rs. 320 lakhs was claimed as capital receipt by the assessee, and the matching income was not a pre-condition for allowing depreciation. However, the Tribunal remanded the issue back to the Assessing Officer to reconsider the classification of the receipt and whether the lease rental for the machinery was included in the Rs. 320 lakhs, and to determine if leasing out machinery was part of the assessee's business.

3. Disallowance of Value of Obsolete Inventory and Non-recoverable Debts:
The third issue was the disallowance of Rs. 13,24,424 towards the value of obsolete inventory and non-recoverable debts returned by Alacrity Electronics Ltd. The assessee argued that the inventory and debts were included in its income for the assessment year 1992-93 and were written off in the books of account for the current assessment year. The assessee claimed that these were in the nature of sales returns and should be allowed.

The D.R. stated that the assets were taken over by Alacrity Electronics Ltd. on 1-11-1992, and the deduction claimed by the assessee did not belong to it. The Tribunal noted that the issue required detailed investigation and was debatable. The Tribunal held that the Assessing Officer should not have disallowed the claim while making a prima facie adjustment under section 143(1)(a) without giving the assessee an opportunity. Therefore, the Tribunal set aside the disallowance of Rs. 13,24,424 and allowed the claim.

Conclusion:
- ITA No. 369 (Mad.)/98 was partly allowed.
- ITA No. 370 (Mad.)/98 was allowed.