2015 (12) TMI 301 - AT - Income Tax

Disallowance of liability on account of leave encashment crystallized although has not fallen due for payment as on 31st March, 1996 - Held that - The fact in the instant case is similar to the case of Bharat Earth Movers (2000 (8) TMI 4 - SUPREME Court). Now from the above facts, it is clear that liability towards leave encashment is a definite liability which has accrued and arisen during the year ending on March of this year. However, payment of the same does not fall during the relevant previous year but under the mercantile system of accounting this expenditure requires recognition in the books of accounts. - Decided in favour of assessee. Disallowance of liability of Voluntary Retirement Scheme (VRS) - Held that - Once the agreement for severance has been signed by the employee the liability for the VRS amount become crystallized in the year of signing the agreement. Hence the timing of payment for the VRS amount is not relevant. So the liability for the same has to be recognized for the same and assessee prayed for the allowabilty of the VRS amount. As during the year 735 employees had opted for VRS as per the scheme of the assessee. Accordingly the expense to be made towards VRS to those staff has become definite expense. Although the payment of VRS was due in future date. Therefore the AO has disallowed the expenditure and same was confirmed by Ld. CIT(A) as it was not due for payment in the year under consideration. However, we find that this Tribunal has decided in assessee s own case where the expenses for VRS was allowed and keeping a consistent view we reverse the orders of authorities below. - Decided in favour of assessee. Disallowance of excessive depreciation - CIT(A) deleted the addition - Held that - For determining the capital gain, from the full value of the consideration received or accruing as a result of transfer of capital asset, cost of acquisition of asset as well as cost of any improvement of such asset is to be reduced/. If cost of improvement of a particular asset cannot be ascertained than capital gain cannot be computed. While taking this view, we derive support from the decision of Hon ble Apex Court in the case of B.C. Srinivasa Setty 1981 (2) TMI 1 - SUPREME Court ) relied upon by the Ld. Counsel for the assessee. The ITAT Hyderabad Bench in the case of Coromandel Fertilisers Ltd. (2003 (11) TMI 303 - ITAT HYDERABAD-B ) held that it is not possible to determine the cost of improvement of an undertaking, specially when undertaking has so many intangible asset, like trade mark, licence, goodwill etc. We entirely agree with the above conclusion of the ITAT, Hyderabad bench. In view of above, we respectfully following the decision of Hyderabad Bench in the case of Coromandel Fertilisers Ltd. (supra) uphold the order of the Ld. CIT(A) and dismiss the revenue s appeal - Decided in favour of assessee. Treatment to deemed recovery as the actual recovery by CIT(A) - Held that - Recovery from the employees for the use of guest house was allowed in its own case by this Tribunal. Respectfully, following the decision of this Tribunal we decide this issue in favour of assessee Up-gradation cost on account of millennium up-gradation cost - whether treated as revenue expenditure and allowable deduction u/s. 37(1) - Held that - Business of assessee is located in different place of the country and most of the expenditure incurred on making the computer Y2K compliant was in the nature of travelling and no enduring benefit is arising from making of existing computers of Y2K compliant only some small chips are required to upgrade the system. From the above discussion, we find that the major expenses were incurred on travelling to make the computer system of assessee Y2K compliant and no new fixed asset was purchased by assessee. Therefore, we treat the expenses incurred to make computer system Y2K as revenue expenditure - Decided in favour of assessee

Summary

Issues Involved:
1. Leave Encashment Liability
2. Voluntary Retirement Scheme (VRS) Liability
3. Excessive Depreciation
4. Capital Gains on Sale of Undertaking
5. Deemed Recovery of Guest House Expenses
6. Validity of Rectification Order under Section 154
7. Y2K Compliance Expenditure
8. Deduction under Section 43B for PF/Pension Contributions

Detailed Analysis:

1. Leave Encashment Liability:
The assessee claimed a deduction for the provision of leave encashment, arguing that the liability was crystallized even though it had not fallen due for payment by 31st March 1996. The Assessing Officer (AO) disallowed this, treating it as a contingent liability. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. However, the Tribunal found that the liability for leave encashment was definite and crystallized, citing the Supreme Court's decision in Bharat Earth Movers, which allowed such provisions under Section 37(1) of the Income Tax Act. Consequently, the Tribunal allowed the assessee's appeal on this ground.

2. Voluntary Retirement Scheme (VRS) Liability:
The assessee claimed a deduction for the VRS liability, arguing that the liability crystallized when the employees opted for VRS, even though payments were scheduled for future dates. The AO disallowed the claim, allowing only the actual payment made during the year. The CIT(A) upheld the AO's decision. The Tribunal, however, found that the liability was definite and crystallized upon the signing of the severance agreement. Citing consistency with previous Tribunal decisions in the assessee's case, the Tribunal allowed the deduction for the entire VRS liability.

3. Excessive Depreciation:
The AO disallowed excessive depreciation claimed by the assessee, arguing that the sale consideration of undertakings sold in previous years should be adjusted against the Written Down Value (WDV) of the block of assets. The CIT(A) directed the AO to allow depreciation on the WDV of assets used by the assessee, excluding those sold. The Tribunal upheld the CIT(A)'s decision, following its earlier ruling in the assessee's case and the ITAT Hyderabad Bench's decision in Coromandel Fertilisers Ltd.

4. Capital Gains on Sale of Undertaking:
The AO treated the sale of the assessee's agro-chemical undertaking as a short-term capital gain under Section 50, while the assessee reported it as a long-term capital gain. The CIT(A) ruled in favor of the assessee, stating that the sale was a slump sale and not subject to capital gains tax. The Tribunal upheld the CIT(A)'s decision, agreeing that it was a slump sale and citing the ITAT Hyderabad Bench's decision in Coromandel Fertilisers Ltd.

5. Deemed Recovery of Guest House Expenses:
The AO disallowed the deemed recovery of guest house expenses, treating it as not actual recovery. The CIT(A) deleted the addition, stating that the amount was recovered from employees. The Tribunal upheld the CIT(A)'s decision, following its earlier ruling in the assessee's case.

6. Validity of Rectification Order under Section 154:
The assessee argued that the rectification order under Section 154 was issued beyond the time limit and after the commencement of regular assessment proceedings under Section 143(2). The Tribunal quashed the rectification order, citing multiple High Court and Supreme Court decisions that rectification under Section 154 is not permissible once regular assessment proceedings have commenced.

7. Y2K Compliance Expenditure:
The AO treated the Y2K compliance expenditure as capital expenditure. The CIT(A) allowed it as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was primarily for travel and minor upgrades, and did not result in the creation of a new asset. The Tribunal cited ITAT Delhi and Mumbai Bench decisions in Asahi India and Raychem National Stock Exchange, respectively.

8. Deduction under Section 43B for PF/Pension Contributions:
The AO disallowed the deduction for PF/pension contributions not deposited within the due date. The CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's decision in Alom Extrusions Ltd., which allows such deductions if payments are made before filing the income tax return.

Conclusion:
The Tribunal allowed the assessee's appeals on the grounds of leave encashment liability, VRS liability, excessive depreciation, and Y2K compliance expenditure. It dismissed the Revenue's appeals on the grounds of capital gains on the sale of undertaking, deemed recovery of guest house expenses, and deduction under Section 43B. The Tribunal also quashed the rectification order under Section 154.