2017 (3) TMI 1383 - AT - Income Tax

Disallowing deduction of leave encashment claimed on provision basis - Held that - The parties before us agreed that in view of the pendency of the constitutional validity of section 43B(f) of the Act before the Hon ble Supreme Court, it would be just and proper to direct the AO to follow the ultimate decision that might be taken in the said proceedings and decide the grievance projected by the assessee in Gr.No.1. Thus Gr.No.1 is treated as allowed for statistical purposes. Addition u/s 14A - Held that - The Hon ble Calcutta High Court in the case of CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd. 2013 (7) TMI 260 - Calcutta High Court held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper. In view of the aforesaid decisions, we are of the view that the order of CIT(A) does not call for any interference. MAT - Computation of book profit u/s 115JB - assessee excluded excise duty exemption - Held that - Hon ble Jammu & Kashmir High Court in the case of Balaji Alloys (2011 (1) TMI 394 - Jammu and Kashmir High Court ) on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax.. The admitted factual and legal position in the present case is that subsidies in question is not in the nature of income. Therefore they cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard. In light of the aforesaid discussion, we are of the view that the subsidies in question should be excluded for the purpose of determination of book profits u/s.115JB of the Act. Depreciation @ 10% on landscaping & development charges which is capitalized in nature of land - Assessee has incurred the landscape expenses on the leasehold land situated at Sikkim Unit to level the uneven land for construction of factory building. Since the same has been disallowed as capital in nature, the same should be included in the block of building and the assessee would be entitled for depreciation @10%. The said expenditure has been incurred to level the land and make it suitable of construction of factory. Expenditure incurred on land development is a separate thing as compared to the cost of the land. Reliance is placed in the decision of CIT -vs.- Herdilia Chemicals Ltd. (1983 (6) TMI 1 - BOMBAY High Court ) wherein held that expenditure incurred on levelling and development of land for erection of machinery and building formed part of cost of machinery and building and is therefore entitled for depreciation.

Summary

Issues Involved:
1. Deduction of leave encashment on a provision basis.
2. Disallowance under Section 14A of the Income Tax Act.
3. Treatment of excise duty exemption as capital receipt and its inclusion in book profits under Section 115JB of the Income Tax Act.
4. Depreciation on landscaping and development charges.

Detailed Analysis:

1. Deduction of Leave Encashment on a Provision Basis:
The Assessee claimed a deduction for leave encashment on a provision basis amounting to ?18,97,435/-. The AO disallowed this deduction citing Section 43B(f) of the Income Tax Act, which allows such deductions only when the sum is actually paid. The Assessee argued that Section 43B(f) was declared unconstitutional by the Calcutta High Court in Exide Industries Limited vs UOI, but the AO noted that the Supreme Court had stayed this decision. The CIT(A) upheld the AO's decision. The Tribunal directed the AO to follow the ultimate decision of the Supreme Court on the constitutional validity of Section 43B(f). Thus, this ground was treated as allowed for statistical purposes.

2. Disallowance under Section 14A:
The Assessee and Revenue both appealed against the CIT(A)'s decision regarding the disallowance under Section 14A. The Assessee had earned exempt dividend income and the AO computed disallowance using Rule 8D, which was applicable from AY 2008-09 onwards. The CIT(A) held that Rule 8D was not applicable for the relevant AY and disallowed 1% of the exempt income as reasonable. The Tribunal upheld the CIT(A)'s decision, referencing several ITAT Kolkata Bench decisions and the Calcutta High Court's judgment in CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd., which supported the 1% disallowance for AYs prior to 2008-09. Both the Assessee's and Revenue's grounds were dismissed.

3. Treatment of Excise Duty Exemption as Capital Receipt:
The Assessee received excise duty exemption for its unit in Sikkim, which was treated as a capital receipt and excluded from book profits under Section 115JB. The AO included this amount in the book profits, but the CIT(A) disagreed, holding that the exemption was a capital receipt meant for industrial development and employment generation, referencing the Supreme Court's decision in Ponni Sugars and Chemicals Ltd. The Tribunal upheld the CIT(A)'s decision, citing the Jammu & Kashmir High Court's ruling in M/S.Shree Balaji Alloys, which treated similar subsidies as capital receipts. The Tribunal concluded that such subsidies, not being income, should be excluded from book profits under Section 115JB.

4. Depreciation on Landscaping and Development Charges:
The Assessee claimed landscaping expenses on leasehold land as revenue expenditure. The AO treated it as capital expenditure, and the CIT(A) agreed but allowed depreciation at 10%, treating it as part of the building block. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT -vs.- Herdilia Chemicals Ltd., which allowed depreciation on land development expenses incurred for erecting machinery and buildings. Thus, the Revenue's ground was dismissed.

Conclusion:
- The appeal by the Assessee was partly allowed for statistical purposes.
- The appeal by the Revenue was dismissed.