1991 (3) TMI 183 - AT - Income Tax

Accounting Year, Additional Depreciation, Advance Tax, Bona Fide, Business Expenditure, Carrying On Business, Investment Allowance, Plant And Machinery, Sales Tax Act, Sales Tax Liability

Summary

Issues:

1. Disallowance of sales-tax provision.
2. Denial of additional depreciation and investment allowance on foreign exchange rate difference.
3. Levy of interest under section 215.
4. Treatment of subsidy for depreciation and investment allowance purposes.

Issue-wise Analysis:

1. Disallowance of Sales-Tax Provision:

The appellant company, engaged in the manufacture of PVC wires and cables, had debited a sum of Rs. 27,25,559 in its profit and loss account as a provision for potential sales-tax liability related to supplies made to a customer during the accounting years 1980-81 and 1981-82. The company had not charged sales-tax on these supplies based on Form No. 17-A submitted by the customer under Gujarat Sales-tax laws. However, based on legal advice, the company believed sales-tax might be levied and thus made a provision. The Income-tax Officer disallowed this provision, stating it was based on doubt and precaution, and the liability never actually accrued, as evidenced by the reversal of entries in subsequent years.

The CIT (Appeals) confirmed this disallowance, noting that the liability was not definite and actual. The Tribunal upheld this view, emphasizing that deductions for statutory liabilities are allowable only if the liability definitely and actually exists. The sales-tax provision was made out of doubt and was not an actual liability, as confirmed by subsequent sales-tax assessments which did not levy any sales-tax.

2. Denial of Additional Depreciation and Investment Allowance on Foreign Exchange Rate Difference:

The assessee claimed additional depreciation and investment allowance on the foreign exchange rate difference related to machinery installed in previous years. The Income-tax Officer denied this deduction, stating that such exchange rate differences are not to be included in the actual cost of assets for these purposes if the machinery was installed in earlier years.

The CIT (Appeals) directed the Income-tax Officer to verify the exchange rate difference related to machinery installed during the year under consideration and allow the deductions accordingly. The Tribunal upheld this decision, stating that the conditions for granting additional depreciation and investment allowance must be fulfilled in the year of installation or the immediately succeeding year. Since the machinery in question was installed in earlier years, the conditions were not met, and the CIT (Appeals) rightly rejected the claim.

3. Levy of Interest under Section 215:

The Income-tax Officer levied interest under section 215 for shortfall in advance tax payments. The CIT (Appeals) confirmed this levy. The assessee contended that the appeal against the levy of interest is maintainable, citing judgments from the Gujarat High Court and the Supreme Court, which allow disputing the levy in appeal if the assessee denies liability entirely.

The Tribunal agreed with the assessee, stating that the provision for sales-tax was based on a bona fide belief and could not have been anticipated as taxable income at the time of submitting the advance-tax estimate. Excluding the disallowed sales-tax provision, there was no shortfall in advance-tax payments. Therefore, the interest under section 215 could not be validly charged, and the Income-tax Officer was directed to verify the figures and delete the interest if the figures were correct.

4. Treatment of Subsidy for Depreciation and Investment Allowance Purposes:

The Revenue's appeal contended that the CIT (Appeals) erred in holding that the subsidy should not be deducted from the actual cost for depreciation and investment allowance purposes. The Tribunal rejected this ground, citing the Gujarat High Court judgment in CIT v. Grace Paper Industries (P.) Ltd., which supported the CIT (Appeals)'s view.

The Revenue also challenged the allowance of additional depreciation and investment allowance on the exchange rate difference. The Tribunal found no merit in this contention, as the CIT (Appeals) had directed that these deductions be allowed only for machinery installed during the year, provided other conditions were met. The Tribunal upheld the CIT (Appeals)'s order.

Conclusion:

The Tribunal dismissed the assessee's appeal regarding the sales-tax provision and the Revenue's appeal on the subsidy and exchange rate difference issues. The appeal concerning interest under section 215 was allowed for statistical purposes, pending verification of figures by the Income-tax Officer.