1990 (7) TMI 44 - HC - Income Tax

Amalgamation, Business Expenditure, Company, Depreciation, Disallowance, Gratuity, Remuneration, Written Down Value

Issues Involved:
1. Applicability of Section 40A(5) to exempt gratuity under Section 10(10).
2. Computation of written down value of assets post-amalgamation under Section 43.
3. Limit on expenditure for former employees under Section 40A(5)(c)(i).
4. Valuation method for stock taken over from an amalgamated company.

Detailed Analysis:

Issue 1: Applicability of Section 40A(5) to Exempt Gratuity Under Section 10(10)
The question was whether the gratuity exempt under Section 10(10) should be considered for disallowance under Section 40A(5). The court held that "gratuity in excess of the exemption under section 10(10) alone is required to be considered for disallowance for the purpose of section 40A(5)." The court reasoned that the definition of "salary" in Explanation 2 to Section 40A(5) includes "profits in lieu of salary" as defined in Section 17(3), which explicitly excludes amounts covered under Section 10(10). Thus, only the amount of gratuity exceeding the exemption limit should be considered for disallowance.

Issue 2: Computation of Written Down Value of Assets Post-Amalgamation Under Section 43
The court examined whether the unabsorbed depreciation of Rs. 21,42,815 from Lube India Ltd. should be added back for computing the written down value of assets taken over by the assessee-company. The court concluded that "Explanation 3 is not attracted in the present case." It emphasized that the unabsorbed depreciation was not carried forward under Section 32(2) because Lube India Ltd. ceased to exist post-amalgamation. Therefore, the written down value should be the actual cost of the assets to Lube India Ltd. less the depreciation "actually allowed" to it, excluding the unabsorbed depreciation.

Issue 3: Limit on Expenditure for Former Employees Under Section 40A(5)(c)(i)
The court addressed whether the limit for expenditure on former employees should be Rs. 60,000 or Rs. 75,000 given that the previous year was 15 months long. The court reframed the question and held that "the limit available to the existing employees should not be limit in the case of former employees." It reasoned that the legislative intent was to provide a maximum benefit to former employees similar to existing employees. Therefore, in the peculiar circumstances of a 15-month previous year, the limit for former employees should also be Rs. 75,000.

Issue 4: Valuation Method for Stock Taken Over from an Amalgamated Company
The court examined whether the assessee-company could value the stock taken over from Caltex Oil Refining India Ltd. differently from its regular method. The court found that "the Income-tax Officer as well as the Tribunal fell into error in taking the said stock to be the opening stock of the assessee-company." It clarified that the stock was taken over at its book value during the previous year and not as opening stock. Therefore, the assessee-company was justified in valuing the closing stock using its regular method, and the addition of Rs. 10,25,480 for undervaluation was not warranted.

Conclusion
1. Gratuity exempt under Section 10(10) should not be considered for disallowance under Section 40A(5).
2. The unabsorbed depreciation from Lube India Ltd. should not be added back for computing the written down value of assets post-amalgamation.
3. The limit on expenditure for former employees should be Rs. 75,000 for a 15-month previous year.
4. The assessee-company can value the stock taken over from Caltex Oil Refining India Ltd. using its regular method, and no addition for undervaluation is warranted.

← Previous Next →