2009 (12) TMI 17 - HC - Income Tax

Expenditure Capital Expenditure versus Revenue Expenditure - Repairs to Factory Building Replacement of GC Sheets allowance of deduction of bonus on actual payment as well on accrual basis - Writing back of a liability to pay gratuity, whether amounts to cessation of liability held that - The repairs may be small or major. If it is major repair, it may involve considerable amount of money. But the amount of money spent alone cannot be a factor to determine whether the expenditure falls under Current Repairs or not. Expenditure are revenue in nature - that by making entires in the books of account, the assessee has not got any benefit which it had already received deduction in the earlier years for the assessment year 1972-73 mere writing back of a liability is not amount to cessation of liability Amount of bonus paid on cash basis as well as on accrual basis allowed

Summary

Issues Involved:
1. Determination of the nature of expenditure incurred by the assessee for repairs to factory building.
2. Cessation of liability for payment of gratuity and its inclusion in taxable income.
3. Entitlement of the assessee to claim deduction of bonus on actual payment and accrual basis.

Analysis:

Issue 1: Nature of Expenditure for Repairs to Factory Building
The case involved the question of whether the expenditure of Rs.1,66,516 incurred by the assessee for repairs to the factory building was of revenue or capital nature. The Income Tax Appellate Tribunal initially rejected the claim, but the CIT (Appeals) allowed a partial deduction. The Tribunal, relying on relevant case laws, held in favor of the assessee. The High Court analyzed the nature of repairs, emphasizing that the expenditure must be incurred to preserve and maintain an existing asset, not to create a new asset. It was concluded that the replacement of worn-out G.C. sheets constituted current repairs, and the department failed to prove otherwise. Therefore, the first issue was decided in favor of the assessee.

Issue 2: Cessation of Liability for Payment of Gratuity
The Tribunal considered the liability of the assessee for payment of gratuity and its inclusion in taxable income. By examining the trust deed and relevant case law, the Tribunal found no cessation of liability. The High Court upheld the Tribunal's decision, stating that the department did not provide any contrary material to challenge the Tribunal's approach. As a result, the addition of Rs.1,50,723 to the total income of the assessee was deleted, ruling in favor of the assessee on the second issue.

Issue 3: Deduction of Bonus on Actual Payment and Accrual Basis
Regarding the deduction of bonus, the Tribunal allowed the deduction based on actual payment and accrual basis. The High Court noted that the Tribunal's decision aligned with the judgment of the Gujarat High Court and found no illegality or irregularity in the Tribunal's order. The assessee's claim for deduction of bonus was supported by actual payment made, and the Tribunal's decision was deemed reasonable and in line with precedents. Therefore, the third issue was also decided in favor of the assessee.

In conclusion, all three issues raised in the case were decided in favor of the assessee, with the High Court ruling against the Revenue in each instance. The judgments were delivered by Hon'ble Prakash Krishna and Hon'ble Subhash Chandra Nigam.