2019 (8) TMI 735 - HC - Income Tax

Depreciation @10% on residential flats used for its employees - flats are situated outside factory premises - CBDT Circular dated 12.12.1996 - HELD THAT - As in DELHI CLOTH AND GENERAL MILLS CO. LTD. 1965 (2) TMI 110 - PUNJAB HIGH COURT after referring to the Circular issued by the Board as published in Page 447 of the Income Tax Manual Part III, 10th Edition, held that the premises where the employees were housed, for which, they paid rental the company were in the near vicinity of the mills, that the rental of those premises were fixed and did not change with the change of the occupant, that the rental deducted from the wages of the employee or employees occupying the premises, that those employees were engaged in the main business of the company and their residence in the buildings in dispute was incidental to the main occupation i.e. the carrying on of the business of the company and that in true perspective, those buildings were part of the business equipment of the owner or in other words, it was the business asset of the owner. The above legal position will squarely apply to the facts of the present case. Tribunal rightly held that there was no such restriction in the Circular issued by the Board stating that the benefit would accrue to the assessee only if the residential accommodation is situated within the factory premises. Furthermore, the said Circular does not restrict the benefit only if the accommodation is provided to all the employees, which, obviously, is a business expediency and it is not for the AO to sit in the arm chair of the assessee to decide as what would be best for their employees. Deduction u/s 80HHC - Tribunal allowing deduction on the basis of book profits u/s 115JA and not on the basis of eligible profits under Section 80HHC as per normal computation - HELD THAT - An identical question was considered by us in the case of CIT Vs. Sundaram Brake Linings 2018 (10) TMI 368 - MADRAS HIGH COURT . In this decision, we referred to the decision rendered by us in the case of CIT Vs. Bannari Amman Sugars Limited 2018 (7) TMI 1845 - MADRAS HIGH COURT the decision of the Hon'ble Supreme Court in the case of Ajanta Pharma Ltd. Vs. CIT 2010 (9) TMI 8 - SUPREME COURT and the decision of the Hon'ble Supreme Court in the case of Bhari Information Technology Systems Private Limited 2011 (10) TMI 19 - SUPREME COURT and answered the question against the Revenue.

Summary

Issues:
1. Depreciation on residential flats used for employees.
2. Deduction under Section 80HHC on the basis of book profits.

Analysis:

Issue 1: Depreciation on residential flats used for employees
The appellant, engaged in vehicle manufacturing, claimed 10% depreciation on 5 residential flats for employees, which the Assessing Officer restricted to 5%. The appellant also claimed relief under Section 80HHC based on book profits under Section 115JA, not on actual profits. The Tribunal, relying on a 1996 circular, allowed 10% depreciation, considering employee quarters as used for business. The Revenue argued that the circular applied only to quarters within the factory premises. The Court referred to the circular's spirit, stating it didn't limit benefits based on location or number of accommodations provided. Citing a Punjab High Court case, the Court held that employee accommodation near business premises qualifies for depreciation, rejecting the Revenue's arguments.

Issue 2: Deduction under Section 80HHC on the basis of book profits
The second issue involved whether deduction under Section 80HHC should be based on book profits under Section 115JA or eligible profits under normal computation. Referring to a previous case and Supreme Court decisions, the Court held that under Section 115JA, deductions like Section 80HHC should be based on adjusted book profits. Citing precedents, the Court concluded that the deduction claimed by the assessee should be calculated based on book profits under Section 115JA, not regular provisions. The Court dismissed the appeal, answering both substantial questions against the Revenue.

In conclusion, the Court upheld the Tribunal's decision, allowing 10% depreciation on residential flats used for employees and deduction under Section 80HHC based on book profits. The judgment emphasized interpreting tax laws in line with circulars and legal precedents, ensuring fair treatment for taxpayers based on established principles.