2015 (6) TMI 1096 - AT - Income Tax

Disallowance on account of losses due to earthquake - Held that - In the instant case no material has been brought before us to show that any receipt which was received by the assessee in relation to the expenditure in question was treated by the department as revenue receipt. Further in the absence of any material or details brought before us to show that the expenditure was incurred only for repairing of building or asset and not for construction of new building we do not find any good reason to interfere with the order of the CIT(A) which is confirmed. The ground of appeal of the assessee is dismissed. Disallowance of the expenditure being the provision made for employees cost of arrears payable upto 31st March 2008 - Held that - As the Gujarat Government accepted the 6th Pay Commission in December 2008 and therefore following the ratio laid down in the judgement in the case of CIT Vs. Kerala State Financial Enterprises (2008 (2) TMI 383 - HIGH COURT OF KERALA) and CIT Vs. Bharat Heavy Electrical Ltd. (2012 (9) TMI 515 - DELHI HIGH COURT ) disallowance made by the AO was deleted.- Decided in favour of assessee. Excess depreciation claimed on account of capital grant - Held that - The submissions of the assessee before us is that the uniform rate of 15% adopted by the CIT(A) is not justified. As per provisions of section 43(1) of the Act the capital grant should be reduced from the cost/WDV of the relevant asset and thereafter the depreciation is to be calculated. Thus the capital grant receipt in respect of asset on which depreciation is allowable at the rate different from 15% should be worked out as per the applicable rate. The DR could not point out any mistake in the above submission of the assessee which we find is in accordance with law. We therefore set aside the orders of the lower authorities on this issue and restore the matter back to the file of the AO for adjudication afresh MAT - Enhancement of book profit computed under section 115JB - liability towards arrear payable to the employees pending decision of the 6th Pay Commission - Held that - We find that the Tribunal in the case of assessee itself in the Asstt.Year 2006-07 and 2007-08 while deciding similar issue held that enhancement and reduction u/s 115J is limited only to the specific items provided under clauses (a) to (i) and (i) to (viii). The AO has only to satisfy himself that the provisions of the Companies Act have been complied with while preparing the accounts.he assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIY and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence the AO s action in reducing the amount is held to be unjustified. - Decided in favour of assessee. Disallowance of claim of guarantee fees paid to Government of Gujarat - Held that - CIT(A) correctly observed that guarantee fee was an annual recurring expenditure incurred by the assessee. Guarantee fee was payable to Govt. of Gujarat every year in respect of loans taken by the assessee and guaranteed by the Govt. of Gujarat. As held by Hon ble Supreme Court in the case of India Cements Ltd. (1965 (12) TMI 22 - SUPREME Court ) loan cannot be treated as asset or advantage resulting in enduring benefits. Guarantee fees paid to Govt. of Gujarat was in connection with raising of loans and enduring benefit or advantage could not be said to have resulted by taking such loans. Only if the assets acquired out of such loans were not put-to-use till the end of previous year i.e. 31.3.2008 the guarantee fees to such extent i.e. in respect of such loans only could be capitalized as cost of such asset. The assessee has certified that no new project was started or commissioned during the year for which above guarantee was paid and the guarantee fees was in respect of loans for acquisition of capital assets which were already put-to-use prior to 1.4.2007. The guarantee fees of 5, 69, 35, 000/- is directed to be allowed as revenue expenditure subject to verification by the AO of the certificate filed during the appellate proceedings i.e. there was no capital work-in-progress in respect of loans on which guarantee fees was paid. Disallowance of loss of material through pilferage shortage of material-in-transit shortage arising on physical verification etc. - CIT(A) deleted the addition and held that similar issue was decided by the CIT(A) in favour of the assessee in assessee s own case for the Asst.Year 2006-07 and 2007-08 - Held that - The DR relied on the order of the AO. He could not bring any material on record to how that the relief allowed by the CIT(A) in the Asstt.Year 2006-07 and 2007-08 was appealed against before higher forums and the order of the CIT(A) was varied by any higher authority. In the absence of any such material we do not find any good reason to interfere with the order of the CIT(A) on this issue which is hereby confirmed and the ground of appeal of the Revenue is dismissed.

Issues Involved:
1. Disallowance of losses due to earthquake.
2. Disallowance of provision for employees' cost of arrears payable.
3. Transfer of capital grants as income.
4. Enhancement of book profit under section 115JB.
5. Disallowance of guarantee fees paid to the Government.
6. Disallowance of loss of material through pilferage and shortages.

Detailed Analysis:

1. Disallowance of Losses Due to Earthquake:
The assessee claimed a loss of Rs. 62,75,000 due to an earthquake under "Extraordinary items" in the profit & loss account. The AO disallowed this, treating it as capital expenditure. The CIT(A) confirmed this, stating the expenses were for the construction of new buildings, not repairs. The Tribunal upheld this decision, noting no material was provided to prove the expenses were for repairs.

2. Disallowance of Provision for Employees' Cost of Arrears Payable:
The assessee debited Rs. 75,38,35,000 for 6th Pay Commission arrears. The AO disallowed this, stating the liability had not crystallized. The CIT(A) confirmed the disallowance, as no government order was provided. The Tribunal, referencing past decisions, deleted the addition, acknowledging the liability crystallized when the Gujarat Government accepted the 6th Pay Commission in December 2008.

3. Transfer of Capital Grants as Income:
The AO observed the assessee received capital grants but did not reduce these from the cost of assets, leading to excess depreciation claims. The CIT(A) adjusted the disallowance to Rs. 18.93 crores from Rs. 30.97 crores, considering the grants and depreciation rates on different assets. The Tribunal remanded the issue to the AO to verify and apply the correct depreciation rates.

4. Enhancement of Book Profit Under Section 115JB:
The AO added Rs. 75,38,35,000 to the book profit, treating it as a provision for unascertained liabilities. The CIT(A) upheld this. The Tribunal, referencing its own and higher courts' decisions, deleted the addition, aligning with the principle that the provision for wage revision is an ascertained liability.

5. Disallowance of Guarantee Fees Paid to the Government:
The AO disallowed Rs. 5,90,96,000, citing lack of details on the purpose of loans and agreements with the Government. The CIT(A) allowed the deduction, treating the guarantee fees as a revenue expenditure, subject to verification that no new projects were started. The Tribunal upheld this, referencing past decisions where guarantee fees were treated as revenue expenses.

6. Disallowance of Loss of Material Through Pilferage and Shortages:
The AO disallowed Rs. 1,41,15,000 due to lack of substantiation. The CIT(A) deleted the disallowance, following past decisions in the assessee's favor. The Tribunal upheld this, noting no higher authority had varied the CIT(A)'s previous decisions.

Conclusion:
The Tribunal provided a detailed analysis, confirming or remanding various issues based on past decisions and the factual matrix presented. The judgment underscores the importance of substantiating claims with appropriate documentation and aligning with established legal principles.

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