1987 (1) TMI 487 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction under Section 80J of the Income-tax Act, 1961.
2. Disallowance of provision for gratuity under Section 40A(7) of the Income-tax Act, 1961.
3. Disallowance of vehicle upkeep and repair expenses and depreciation.
4. Assessment of rental income as business income.
5. Charging of interest under Section 217 of the Income-tax Act, 1961.

Detailed Analysis:

1. Eligibility for Deduction under Section 80J:
The primary issue was whether the assessee was entitled to the deduction under Section 80J for the assessment years 1975-76 to 1978-79. The assessee argued that it had set up a new industrial unit with new machinery and substantial fresh capital investment, which resulted in increased sales and profits. The Income Tax Officer (ITO) rejected the claim on the grounds that the assessee maintained composite accounts and did not set up a separate, independent industrial unit. The Commissioner (Appeals) disagreed with the ITO, stating that the new unit was economically viable and distinct from the old business, thus meeting the requirements for Section 80J deduction.

The Tribunal found that the ITO's objections regarding composite accounts and the nature of the new unit were not sustainable in law. The Tribunal cited various judicial pronouncements, including CIT v. Dunlop Rubber Co. (I) Ltd., which held that composite accounts could still allow for the calculation of profits for the new unit. The Tribunal also noted that the new unit was economically viable and distinct, thus qualifying for Section 80J deduction.

However, the Tribunal had to consider the revenue's argument that the new unit was financed entirely by borrowed capital, which was raised for the first time at the appellate stage. The Tribunal ultimately decided that the plea of borrowed capital was valid and should be considered, following the Supreme Court decision in Lohia Machines Ltd. v. Union of India, which held that Section 80J deduction is not allowable on borrowed capital. Therefore, the Tribunal concluded that the assessee was entitled to Section 80J deduction only on the capital invested by the assessee and not on the borrowed capital.

2. Disallowance of Provision for Gratuity under Section 40A(7):
The assessee claimed deductions for gratuity provisions for the assessment years 1974-75 to 1976-77. The ITO disallowed these claims, and the Commissioner (Appeals) upheld the disallowance, stating that the provisions did not meet the requirements of Section 40A(7). The Judicial Member initially allowed the entire claim based on a Patna High Court decision, but the Accountant Member pointed out that this decision was overruled by the Supreme Court in Nickles Engg. Co.'s case, which emphasized compliance with Section 40A(7).

The Third Member confirmed that the provision for gratuity could only be allowed if the conditions of Section 40A(7) were met, following the Supreme Court's decision in Shree Sajjan Mills Ltd. v. CIT. The matter was referred back to the Bench to verify if the conditions were satisfied.

3. Disallowance of Vehicle Upkeep and Repair Expenses and Depreciation:
For the assessment year 1974-75, the ITO disallowed one-fourth of the vehicle upkeep and repair expenses and depreciation, attributing it to personal use by the directors. The Commissioner (Appeals) reduced the disallowance to one-sixth. The assessee argued that the director had his own car and that similar disallowances were not upheld in previous years. The Tribunal found no basis for the disallowance and deleted it for the assessment years 1974-75, 1977-78, and 1978-79.

4. Assessment of Rental Income as Business Income:
For the assessment year 1977-78, the ITO assessed the rental income under Section 22, but the Commissioner (Appeals) treated it as business income. The Tribunal upheld the Commissioner (Appeals)'s decision, following a precedent set in IT Appeal No. 560 (Pat.) of 1983.

5. Charging of Interest under Section 217:
The ITO charged interest under Section 217 for the assessment year 1977-78, which the Commissioner (Appeals) found unjustified as the assessee had filed an estimate. The Tribunal dismissed the revenue's appeal on this issue.

Conclusion:
The Tribunal allowed the assessee's appeals for the assessment years 1975-76 and 1976-77 in full and partly allowed the appeals for the assessment years 1974-75, 1977-78, and 1978-79. The revenue's appeals for the assessment years 1976-77 to 1978-79 were dismissed. The matter regarding the provision for gratuity was referred back to the Bench for verification of compliance with Section 40A(7).