2007 (2) TMI 660 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of expenditure paid to Ghaziabad Engineering Co. (P.) Ltd.
2. Alternative contention regarding the nature of expenditure.
3. Allowance of higher rates of depreciation on roads, culverts, storage tanks, and pipelines.
4. Deduction u/s 40A(7) for additional liability for gratuity.

Summary:

Issue 1: Deductibility of Expenditure Paid to Ghaziabad Engineering Co. (P.) Ltd.
The assessee-company entered into an agreement with Ghaziabad Engineering Co. (P.) Ltd. (GEC) to render services for which a consideration of Rs. 5,50,000 per year was payable. The Tribunal disallowed the deduction due to lack of evidence proving performance of the contract. However, the High Court noted the long-standing relationship between the parties and the acceptance of oral advice. The Court emphasized that the agreement was bona fide and that the authorities should be slow in rejecting the contention of the assessee unless a strong case is made against it. The Court held that the expenditure was allowable and answered this issue in favor of the assessee.

Issue 2: Alternative Contention Regarding the Nature of Expenditure
Since the first question was answered in favor of the assessee, the second question, which was an alternative contention, was not addressed.

Issue 3: Allowance of Higher Rates of Depreciation on Roads, Culverts, Storage Tanks, and Pipelines
The Tribunal allowed higher rates of depreciation on roads, culverts, storage tanks, and pipelines. The High Court referred to previous judgments, including CIT v. Motor Industries Co. Ltd. and CIT v. Gwalior Rayon Silk Mfg. Co. Ltd., which treated roads, drains, and storage tanks as 'plant' for depreciation purposes. The Court answered this issue in favor of the Revenue, holding that roads, culverts, storage tanks, and pipelines in the factory are to be treated as 'plant' for depreciation purposes.

Issue 4: Deduction u/s 40A(7) for Additional Liability for Gratuity
The Tribunal allowed a deduction of Rs. 10.48 lakhs for additional liability for gratuity, even though the payment to the fund was made after ten years. The High Court referred to its earlier decision in ITRC 617/1998 and upheld the Tribunal's decision, answering this issue in favor of the assessee.

Conclusion:
1. The expenditure of Rs. 5,50,000 paid to GEC was deductible.
2. The alternative contention was not addressed.
3. Higher rates of depreciation on roads, culverts, storage tanks, and pipelines were allowed in favor of the Revenue.
4. The deduction for additional liability for gratuity u/s 40A(7) was allowed in favor of the assessee.