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2006 (5) TMI 508 - AT - Income TaxDisallowance of a provision for leave encashment - HELD THAT - In the light of the observations made by Hon ble Supreme Court in Bharat Earthmovers v. CIT 2000 (8) TMI 4 - SUPREME COURT ; the assessee was entitled for deduction in respect of the provision made for the liability and the liability was held to be not contingent in nature if a provision is made by the assessee for meeting the liability incurred by it under the leave encashment scheme. Therefore following the decision of the apex court we delete the disallowance made by the revenue authorities. Repairs to furniture and fixtures - Tribunal in the assessee s own case for AYs 1994-95 1995-96 and 1996-97 wherein an identical issue came up for consideration and the Tribunal relying upon the decision of the Supreme Court in the case of Madras Auto services (P) Ltd 1998 (8) TMI 1 - SUPREME COURT and the decision of the Bombay High Court in CIT(A) v. Hede Consultancy P. Ltd 2002 (6) TMI 19 - BOMBAY HIGH COURT has allowed these expenses as revenue in nature. Thus we accept the claim of the assessee. The assessee is not the owner of any of these assets and the expenses are only to give a better working atmosphere to its employees and also to give an aesthetic look to its customers. Therefore the expenditure in question is purely revenue in nature and is directed to be allowed. The depreciation granted by the Assessing Officer on these assets in the year under consideration as also in the subsequent years is directed to be withdrawn. Disallowance of aircraft redelivery charges heavy maintenance expenses and major engine repairs - change in the method of accounting - In the light of facts it cannot be said that the claims of the assessee are only contingent in nature and are not the accrued liabilities. In fact in the nature of the assessee s business the assessee has to incur these expenses. The only uncertainly is the actual time of the expenditure But the expenditure itself has to be incurred because of the flying hours completed. Even the quantum of the expenditure provided for in the accounts are based on the opinion of the technical people. The independence of such authorities is not in serious dispute by the revenue authorities. We therefore do not agree with the Assessing Officer that the expenditure to the extent claimed is contingent in nature having regard to the facts of the case and the method of accounting that are required to be followed by the assessee in the line of business in which it is operating. The learned CIT(A) has discussed all the case laws on which reliance was placed by the assessee and we have only avoided repetition by not mentioning of the same. We approve the impugned order not only on the basis of the discussion of the case also but also on the factual aspect of the matter. In other words the case laws discussed by the CIT(A) justifies the claim of the assessee for acceptance as accrued liability. His order on all the three disallowances is therefore confirmed. Disallowance of depreciation - We agree with the view of the CIT(A) that the conditions laid down in the said clause 30 are nothing but more than the routine formalities that are to be performed by the hirer. Such terms and conditions are usually part and parcel of every hire purchase agreement. To avoid these controversies the Board has issued circulars from time to time enabling the hirer to claim depreciation on assets acquired under what is known as hire purchase agreements. The Madras High Court in the case of Tamil Nadu Dairy Development Corporation Ltd. 1998 (3) TMI 61 - MADRAS HIGH COURT has also considered similar agreement and upheld the claim of depreciation on the assets acquired under similar hire purchase agreement. Therefore the CIT(A) was right in law in directing the allowance of depreciation on the two aircrafts acquired by the assessee and we decline to interfere. Addition for frequent flyer expenses - It is not the case of the revenue that the liability provided by the assessee is not in accordance with the scheme operated by the assessee The liability provided is in respect of variable cost of flying the aircraft. That is also based on the minimum cost. In our view these provisions are based on the experience of the airline and the actual miles accumulated by the passengers. If one were to go through the entire scheme it cannot be said that provision made by the assessee is in respect of a contingent liability. The principle laid down by the Hon ble Supreme Court in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT equally applies to the scheme in question and the claim of the assessee has been properly appreciated by the CIT(A) and his order is confirmed. Accordingly this ground of the revenue is rejected for all the years. In the result the departmental appeals are dismissed; the assessee s appeal for A.Ys. 1998-99 and 2001-02 are partly allowed and those for A.Ys. 1997-98 1999-2000 and 2000-01 are allowed.
Issues Involved:
1. Disallowance of Provision for Leave Encashment 2. Disallowance of Repairs to Furniture and Fixtures 3. Disallowance of Aircraft Redelivery Charges, Heavy Maintenance Expenses, and Major Engine Repairs 4. Disallowance of Depreciation on Aircraft Taken on Hire Purchase 5. Disallowance of Guest House Expenses 6. Disallowance of Presentation Articles under Rule 6B of the I.T. Rules 7. Disallowance under Section 43B in respect of Provident Fund and ESIC 8. Disallowance of Lease Rent under Section 40(a)(i) for Non-Deduction of Tax at Source 9. Disallowance of Frequent Flyer Expenses 10. Disallowance of Provision for Spares Obsolescence 11. Disallowance of Depreciation on Computer 12. Disallowance of Consultancy Fees Paid 13. Treatment of Interest Income from Short Term Deposits 14. Disallowance of Provision for Bad and Doubtful Debts 15. Treatment of Provision for Obsolescence under Section 115JB Issue-wise Detailed Analysis: 1. Disallowance of Provision for Leave Encashment: The assessee's appeal for A.Y. 1997-98 involved disallowance of provision for leave encashment. The Assessing Officer considered it a contingent liability. The CIT(A) endorsed this view. However, the Tribunal, following the Supreme Court's decision in Bharat Earthmovers v. CIT (245 ITR 428), held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed. The Tribunal found the facts identical to Bharat Earthmovers and deleted the disallowance. 2. Disallowance of Repairs to Furniture and Fixtures: The Assessing Officer considered certain repair expenses as capital in nature and granted depreciation instead. The CIT(A) restored the matter for fresh consideration. The Tribunal, following its earlier decision in the assessee's own case and the Supreme Court's decision in Madras Auto Services (P) Ltd. (233 ITR 468), held the expenses as revenue in nature and directed to allow them, withdrawing the depreciation granted. 3. Disallowance of Aircraft Redelivery Charges, Heavy Maintenance Expenses, and Major Engine Repairs: The Assessing Officer disallowed these expenses, considering them contingent liabilities. The CIT(A) allowed the claims, recognizing them as accrued liabilities based on industry standards and guidelines issued by IATA. The Tribunal upheld the CIT(A)'s decision, emphasizing the strict regulatory requirements in the airline industry and the scientific basis for the provisions made. 4. Disallowance of Depreciation on Aircraft Taken on Hire Purchase: The Assessing Officer denied depreciation on aircraft taken on hire purchase, citing the conditional nature of ownership transfer. The CIT(A) allowed the claim, referencing CBDT Circular No. 9 and judicial precedents. The Tribunal upheld this decision, noting the routine nature of the conditions in the hire purchase agreement and the consistency with the Indian Hire Purchase Act. 5. Disallowance of Guest House Expenses: The CIT(A) deleted the disallowance of guest house expenses, following the appellate order for A.Y. 1994-95. The Tribunal, noting the identical facts and earlier Tribunal decision in the assessee's favor, upheld the CIT(A)'s order. 6. Disallowance of Presentation Articles under Rule 6B of the I.T. Rules: The Tribunal found that the presentation articles did not bear the assessee's name or logo, following the Bombay High Court's decision in Allana Sons Pvt. Ltd. (216 ITR 690). The Tribunal upheld the CIT(A)'s deletion of the disallowance. 7. Disallowance under Section 43B in respect of Provident Fund and ESIC: The CIT(A) deleted the disallowance of provident fund and ESIC payments made within the grace period. The Tribunal upheld this decision, referencing its earlier order for A.Y. 1994-95 and relevant judicial precedents. 8. Disallowance of Lease Rent under Section 40(a)(i) for Non-Deduction of Tax at Source: The Assessing Officer disallowed lease rent payments for non-deduction of TDS. The CIT(A) deleted the disallowance, noting the authorization under Section 195(2) for nil deduction. The Tribunal upheld the CIT(A)'s decision, emphasizing compliance with the authorization and relevant DTAA provisions. 9. Disallowance of Frequent Flyer Expenses: The Assessing Officer disallowed the provision for frequent flyer expenses as contingent. The CIT(A) allowed the claim, recognizing it as an ascertained liability. The Tribunal upheld this decision, likening it to the provision for leave encashment and following the Supreme Court's principle in Bharat Earth Movers. 10. Disallowance of Provision for Spares Obsolescence: The Assessing Officer disallowed the provision for spares obsolescence, considering it contingent. The Tribunal, recognizing the scientific basis and industry standards, allowed the claim, directing the Assessing Officer to ensure no excess deduction beyond actual cost. 11. Disallowance of Depreciation on Computer: The CIT(A) disallowed depreciation on computers not put to use. The Tribunal confirmed this, noting the allowance in the subsequent year. 12. Disallowance of Consultancy Fees Paid: The Tribunal allowed the consultancy fees paid for interior designing, treating them as revenue expenses related to repairs and maintenance. 13. Treatment of Interest Income from Short Term Deposits: The Assessing Officer treated interest income from short-term deposits as income from other sources. The Tribunal, recognizing the business connection and purpose of the deposits, directed to treat it as business income. 14. Disallowance of Provision for Bad and Doubtful Debts: The learned counsel for the assessee did not press this ground. The Tribunal confirmed the CIT(A)'s findings. 15. Treatment of Provision for Obsolescence under Section 115JB: The Assessing Officer treated the provision for obsolescence as contingent while computing book profit under Section 115JB. The Tribunal, following its earlier finding and the Supreme Court's decision in Apollo Tyres (255 ITR 273), allowed the assessee's claim, recognizing it as an ascertained liability.
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