2010 (2) TMI 717 - AT - Income Tax

Regarding disallowance of gratuity - AO noted that assessee company has made a provision of gratuity of Rs. 15,23,120. AO observed that gratuity fund has not been approved by the prescribed authority - Supreme Court of India in the case of Bharat Earth Movers vs. CIT (22000 -TMI - 5816 - SUPREME Court), wherein the apex Court has held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged on a future date Regarding depreciation - assessee has not produced the necessary evidences pertaining to acquisition of the assets before the AO - assessee s counsel before learned CIT(A) has himself submitted that some of the assets were used for less than 180 days - Appeal is partly allowed for statistical purpose

Summary

Issues:
1. Disallowance of gratuity for calculating tax under s. 115JB of the IT Act.
2. Disallowance of depreciation claim on addition to fixed assets.

Issue 1 - Disallowance of Gratuity:
The appeal by the Revenue challenged the direction of the CIT(A) not to include the disallowance of gratuity for tax calculation under s. 115JB of the IT Act for the assessment year 2004-05. The AO contended that the provision for gratuity of Rs. 15,23,120 made by the assessee company was not an ascertained liability as the gratuity fund was not approved by the prescribed authority. However, the CIT(A) referred to a jurisdictional High Court case and held that the provision of gratuity, even without approval by the competent authority, cannot be treated as an unascertained liability. The ITAT, Delhi upheld the CIT(A)'s order, citing a Supreme Court decision that if a business liability arises in the accounting year, the deduction should be allowed even if quantified and discharged in the future.

Issue 2 - Disallowance of Depreciation Claim:
The second issue involved the addition of Rs. 5,99,349 by the AO due to disallowing the depreciation claim on the addition to fixed assets. The AO disallowed the depreciation as the assessee did not provide bills for certain fixed assets. However, before the CIT(A), the assessee submitted evidence supporting the acquisition of fixed assets, which were considered as additional evidence. The CIT(A) found that the AO failed to prove that the assets were not used for business purposes, and noted the evidence provided by the assessee, including ledger accounts and bank statements. The ITAT observed that while the assessee did not present all necessary evidence to the AO, the CIT(A) relied on indirect evidence and ordered a remittance of the issue back to the AO for fresh consideration, ensuring the assessee's right to be heard. The Revenue's appeal was partly allowed for statistical purposes.

In summary, the ITAT, Delhi upheld the CIT(A)'s decision regarding the disallowance of gratuity for tax calculation and remitted the issue of depreciation claim back to the AO for further examination, emphasizing the importance of providing adequate opportunity for the assessee to be heard.