2010 (10) TMI 591 - HC - Income Tax

Deduction - Sales tax - Section 43B of the Act, as the initially enacted, did not allow such deductions but this was changed with insertion of a proviso that allowed such deduction - whether the proviso was with retrospective effect or not - The Supreme Court in Allied Motors P. Ltd. v. CIT has held that the proviso to section 43B is retrospective and it came into operation from the date the section was operative - The Tribunal as well as the Commissioner of Income-tax (Appeals) did not commit any illegality in deleting the addition made by the Assessing Officer - Hence, the question is answered in the affirmative in favour of the assessee and against the Department. Depreciation - The Assessing Officer by his order dated February 18, 1986 had given depreciation of 15 per cent. after deducting subsidy amount from the cost of the generator - Enhanced to 20 per cent. by the Commissioner of Income-tax (Appeals) and confirmed by the Tribunal. The generator is not mentioned in Appendix 1 relating to table of rates and as such award of depreciation at 20 per cent. was incorrect and is on the higher side.

Summary

Issues:
1. Whether relief in respect of sales tax payable, paid after the close of the accounting year, is allowable?
2. Whether subsidy received for a generator set constitutes a contribution towards the cost of the generator, impacting the depreciation rate?

Issue 1: Relief for Sales Tax Payment Timing
The case involved a reference by the Income-tax Department regarding the assessment year 1985-86. The Tribunal raised two questions, one being the allowance of relief for sales tax paid after the close of the accounting year. The assessee, a firm engaged in manufacturing and sale of glass wares, claimed deduction for sales tax collected in March 1985 but deposited in April 1985. The Assessing Officer initially disallowed this deduction, but the Commissioner of Income-tax (Appeals) allowed it. The key contention was whether the proviso allowing such deductions was retrospective. The Supreme Court precedent in Allied Motors P. Ltd. v. CIT clarified that the proviso to section 43B was indeed retrospective. Consequently, both the Tribunal and the Commissioner did not err in deleting the addition made by the Assessing Officer, ruling in favor of the assessee.

Issue 2: Subsidy Impact on Depreciation for Generator Set
The second question revolved around the treatment of a subsidy received for a generator set in terms of depreciation calculation. The Assessing Officer initially granted depreciation at 15% after deducting the subsidy amount from the generator's cost. However, the Commissioner of Income-tax (Appeals) allowed depreciation at 20% without reducing it by the subsidy. The Supreme Court precedent in CIT v. P. J. Chemicals Ltd. established that government subsidy does not qualify as a payment to meet the actual cost under section 43 of the Act. This principle was upheld in various cases by the court, emphasizing that depreciation could be allowed without reducing the cost by the subsidy amount. The Department argued that the generator was not specified in the relevant table of rates, and depreciation at 20% was excessive. The court acknowledged that 20% depreciation was high but noted that the initial 15% depreciation was not challenged by the Department. Consequently, the second question was partially decided in favor of both the assessee and the Department.

In conclusion, the High Court of Allahabad resolved the reference by affirming the decisions of the Tribunal and the Commissioner of Income-tax (Appeals) on both issues, providing detailed legal reasoning and precedent application to support their rulings.