1980 (6) TMI 41 - AT - Income Tax

Issues Involved:
1. Disallowance of provision for gratuity.
2. Disallowance of remuneration and perquisites to managing directors.
3. Disallowance of triple shift depreciation allowance.
4. Disallowance of development rebate on machinery.
5. Non-consideration of additional education cess liability.

Detailed Analysis:

1. Disallowance of Provision for Gratuity:

The assessee made a provision of Rs. 8,43,405 for gratuity in its books, including Rs. 1,06,667 paid during the previous year. The remaining Rs. 2,34,507 was not paid to the approved gratuity fund and was disallowed by the ITO and confirmed by the CIT (A). The assessee contended that the amount should be allowed under sections 28 and 29 of the IT Act.

Section 40A(1) states that its provisions override other sections related to income computation under "profits and gains of business or profession." Clause (a) of sub-section (7) of Section 40A disallows any provision for gratuity unless it meets certain conditions specified in clause (b). The assessee fulfilled the first two conditions (actuarial valuation and creation of an approved gratuity fund) but had time until 1st April 1976 and 1st April 1977 to fulfill the third condition (payment to the gratuity fund).

The Tribunal referred to the Allahabad High Court decision in Swadeshi Cotton Mills Co. Ltd vs. ITO, which allowed a similar claim based on actuarial valuation despite non-compliance with future conditions. Consequently, the Tribunal held that non-fulfillment of the third condition within the specified time frame could not justify disallowing the provision for the relevant year and deleted the addition of Rs. 2,34,507.

2. Disallowance of Remuneration and Perquisites to Managing Directors:

The assessee paid remuneration and perquisites to two managing directors, including commission, medical expenses, motor car expenses, and other benefits. The ITO allowed Rs. 72,000 for each managing director, disallowing Rs. 1,08,918. The CIT (A) reduced the disallowance to Rs. 1,08,216.

The assessee argued that only Section 40(c) applies to directors, not Section 40A(5). However, the Tribunal noted that Section 40A(5) applies to employees, and the first proviso to clause (a) of sub-section (5) of Section 40A applies to directors who are also employees. The Tribunal held that the commission is included in the definition of "salary" under Explanation II of Section 40A(5) and upheld the disallowance of Rs. 1,08,216.

The Tribunal also addressed the argument that certain expenses should not be treated as perquisites, concluding that they fall within the definition of "perquisite" under Explanation II. The perquisite value for motor car expenses was maintained at Rs. 1,800 for each director.

3. Disallowance of Triple Shift Depreciation Allowance:

The assessee claimed triple shift depreciation allowance for 298 days. The ITO disallowed Rs. 6,945, calculated proportionally to the total working days. The assessee provided a letter from the CIT (Central), Calcutta, and the CBDT's response supporting a different calculation method.

The Tribunal restored the matter to the ITO to recalculate the triple shift depreciation allowance in accordance with the law and the CBDT's direction.

4. Disallowance of Development Rebate on Machinery:

The assessee claimed development rebate on air-conditioning machines, ladders, lighting points, and electric fans valued at Rs. 20,390. The ITO disallowed the claim.

The Tribunal found that these items were installed in the cloth department and should be considered part of the factory machinery for development rebate purposes. The Tribunal directed that the value of these items be included in the development rebate calculation.

5. Non-consideration of Additional Education Cess Liability:

The assessee claimed an additional education cess liability of Rs. 45,580 for the years 1970 to 1973, notified by the Municipal Authorities. The ITO did not consider the claim, and the CIT (A) rejected it, citing the absence of the claim letter in the assessment file.

The Tribunal believed the assessee's claim and restored the matter to the ITO for reconsideration in accordance with the law and the Tribunal's findings.

Conclusion:

The appeal was allowed in part, with the Tribunal deleting the disallowance of Rs. 2,34,507 for gratuity provision, upholding the disallowance of Rs. 1,08,216 for managing directors' remuneration and perquisites, and directing the ITO to reconsider the triple shift depreciation allowance, development rebate on machinery, and additional education cess liability.

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