1989 (7) TMI 336 - HC - Income Tax

Summary

Issues Involved:
1. Admissibility of fresh evidence by the Tribunal.
2. Allowability of the assessee's claim on account of liability for gratuity.
3. Effect of the absence of an approved gratuity fund on the assessee's claim.
4. Classification of expenditure on reconstruction of the furnace as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Admissibility of Fresh Evidence by the Tribunal:
The Tribunal admitted fresh evidence in the form of a certificate from an actuary, which was neither produced before the Income-tax Officer (ITO) nor admitted by the Commissioner of Income-tax (Appeals). The Tribunal justified its decision by stating that the provision for payment of gratuity, if ascertained by actuarial calculation, is an allowable business expenditure. The High Court upheld this, noting that the certificate's correctness was not disputed, and thus, the assessee should not be deprived of the deduction. The second question was answered in the affirmative and in favor of the assessee.

2. Allowability of the Assessee's Claim on Account of Liability for Gratuity:
The assessee initially did not claim any amount for gratuity liability in its original return but later claimed Rs. 30 lakhs in a revised return. The ITO disallowed this claim, considering it an ad hoc provision without actuarial support. The Tribunal allowed the claim, considering it an ascertained liability based on actuarial valuation. The High Court supported the Tribunal's view, stating that the liability ascertained by actuarial valuation is a present liability and thus allowable. The third question was answered in the affirmative and in favor of the assessee.

3. Effect of the Absence of an Approved Gratuity Fund on the Assessee's Claim:
The ITO also disallowed the gratuity claim because the assessee's gratuity fund was not approved under section 36(1)(v) of the Income-tax Act. The Tribunal, however, allowed the claim, and the High Court upheld this decision, citing the Supreme Court's decision in Metal Box Co. of India Ltd. and other relevant cases. The High Court concluded that the absence of an approved gratuity fund did not invalidate the assessee's claim for gratuity liability. The fourth question was answered in the affirmative and in favor of the assessee.

4. Classification of Expenditure on Reconstruction of the Furnace as Revenue or Capital Expenditure:
The assessee incurred Rs. 40,65,910 for reconstructing its sheet glass furnace and initially capitalized this amount in its accounts. Later, it claimed this expenditure as revenue expenditure in a revised return. The ITO and Commissioner (Appeals) rejected this claim, but the Tribunal allowed it, considering it as current repairs. The High Court disagreed with the Tribunal, noting that the expenditure resulted in an enduring benefit and substantial improvement in production, thus classifying it as capital expenditure. The High Court emphasized that current repairs should be periodic and not result in a new or substantially new asset. Consequently, the first question was answered in the negative and in favor of the revenue.

Conclusion:
The High Court upheld the Tribunal's decisions on the admissibility of fresh evidence and the allowability of the assessee's gratuity liability claim despite the absence of an approved gratuity fund. However, it reversed the Tribunal's decision on the classification of furnace reconstruction expenditure, ruling it as capital expenditure, not current repairs. There was no order as to costs.