2010 (12) TMI 952 - HC - Income Tax

Education fund and subscription paid to Haryana State Cooperative Development Federation disallowed - Held that - Details furnished by the assessee before AO clearly are to the effect that the education fund related to assessment year 1992-93 and the subscription related to financial year 1992-93, assessee has claimed expenditure on account of subscription to the extent of 14,12,689. From the details it is noticed that a sum of 25,000 paid to Haryana State Coop. Development Federation for education fund relates to assessment year 1992-93 and an other some of 6,19,671 paid to Haryana State Coop. Development Federation as subscription also relates to financial year 1992-93. Both these amounts are disallowed being not the financial year 1993-94, however, is allowed as deduction. Total disallowance under this head works out to 6,44,672, the assessee followed mercantile system of accounting. In such situation, the deduction claimed could not be allowed in the year of payment but in the year when the amount were due Disallowance of depreciation - auditors of the assessee objected to machinery being kept idle, resulting in loss of interest on investment, the stand of the assessee that the said machinery was installed to increase capacity of the plant, was not taken into account by the Assessing Officer and the CIT(A) Stand of the assessee is that it resulted in increase of capacity of the plant and that on account of technical justification for the said machinery, items of the machines were installed. - Held that - Even though the auditors may not have accepted the said stand, the assessee was entitled to free play in joints in taking a decision to install the machinery if in its view the same was necessary for its business. If the assessee was to install such a machinery on its bona fide business consideration, mere absence of proof of actual use thereof was not enough to deny the claim for depreciation -no ground to interfere with the finding of the Tribunal, holding that the assessee was entitled to depreciation on the machinery, as claimed, the appeal is partly allowed.

Summary

Issues:
1. Allowance of education fund and subscription paid to cooperative body for assessment year 1994-95.
2. Allowance of depreciation on machinery costing 97.20 lakhs for assessment year 1994-95.

Analysis:

Issue 1: Allowance of education fund and subscription:
The revenue appealed against the Tribunal's decision allowing the assessee's claim of 25,000 for education fund and 6,19,637 for subscription paid to a cooperative body, contending that these payments were not allowable in the relevant assessment year. The Assessing Officer disallowed these deductions, but the Tribunal upheld the claim. The Tribunal noted that the payments were made as per the Registrar's instructions received during the relevant year. However, the revenue argued that the Registrar's letter was not on record, and the details provided indicated the payments related to the previous assessment year. The High Court agreed with the revenue, emphasizing that under the mercantile system of accounting, deductions should be allowed in the year when the amounts were due.

Issue 2: Allowance of depreciation on machinery:
Regarding the depreciation claim of 18,24,187 on machinery costing 97.20 lakhs, the revenue contended that since the machinery was reported as unused and not in usable condition, depreciation should not be allowed. The Audit Officer's report highlighted the machinery's idle status. However, the Tribunal considered the engineer's certificate justifying the machinery's installation to increase plant capacity. The High Court observed that the term 'used' in the Income-tax Act had been interpreted broadly to include machinery kept ready for use, even if not actively used. Citing relevant case law and the purpose of allowing depreciation, the Court upheld the Tribunal's decision, stating that the machinery, though not actively used, was necessary for the business and thus eligible for depreciation.

In conclusion, the High Court partly allowed the appeal, upholding the revenue's stance on the education fund and subscription payments but supporting the assessee's claim for depreciation on the machinery.