2011 (9) TMI 1223 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Disallowance of compensation paid to the Managing Director.
3. Recalculation of deduction under section 80HHC.
4. Disallowance of delayed payments of contributions to Provident Fund, ESIC, and DLIF.

Issue-wise Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The assessee disputed the confirmation of disallowance of Rs. 69,93,000/- as prior period expenses. The AO disallowed this amount, stating that under the mercantile system of accounting, expenses must be incurred in the relevant previous year. The CIT(A) upheld this decision, emphasizing that the appellant failed to demonstrate that these expenses were crystallized during the year. The Tribunal, however, accepted the assessee's contention that the liability was crystallized in the assessment year under consideration due to disputes being settled in that year. Citing the Bombay High Court decision in CIT Vs Phalton Sugar Works Ltd., the Tribunal allowed the deduction of Rs. 69,93,000/-.

2. Disallowance of Compensation Paid to Managing Director:
The assessee claimed Rs. 76,15,000/- as compensation paid to its Managing Director upon resignation. The AO disallowed the claim, treating it as capital expenditure and noting the absence of a contract agreement. The CIT(A) upheld this disallowance, rejecting additional evidence presented by the assessee. The Tribunal restored the issue to the AO for fresh consideration, directing the assessee to furnish requisite details to justify the compensation payment, emphasizing the need for the AO to decide the issue in accordance with the law after providing due opportunity to the assessee.

3. Recalculation of Deduction Under Section 80HHC:
The assessee argued that the deduction under section 80HHC should be recomputed based on the profit after considering the disallowances made. The Tribunal directed the AO to recompute the deduction under section 80HHC if ground No. 2 is decided in favor of the assessee. If ground No. 2 is decided against the assessee, the AO is to recompute the allowable deduction by considering the addition.

4. Disallowance of Delayed Payments of Contributions to Provident Fund, ESIC, and DLIF:
The AO disallowed Rs. 47,563/- towards Provident Fund, Rs. 5,764/- towards ESIC, and Rs. 1,490/- towards DLIF contributions, citing delayed payments. The CIT(A) confirmed the disallowance, relying on the decision in CIT Vs South India Corporation Ltd. The Tribunal, following the decision in CIT Vs Alom Extrusion Ltd., allowed the deduction for DLIF contributions but upheld the disallowance for Provident Fund and ESIC contributions, emphasizing that section 43B does not apply to employees' contributions if not paid within the due date specified in section 36(1)(va).

Conclusion:
The appeal was allowed in part, with the Tribunal providing relief on certain issues while upholding disallowances on others. The Tribunal directed the AO to recompute the deduction under section 80HHC based on the outcome of the fresh consideration of the compensation payment to the Managing Director.