1994 (2) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Taxation of capital gains on conversion of debentures into shares.
2. Taxation of relief on price escalation based on coal consumption.
3. Taxation of interest on compensation for sale of a company's undertaking in Pakistan.
4. Allowability of additional gratuity and ex gratia payments to employees.
5. Disallowance of legal fees as capital expenditure.
6. Capitalization of interest on long-term borrowings.
7. Treatment of commitment charges as revenue expenditure.
8. Depreciation on Wadi work.
9. Computation of process escalation amounts.
10. Computation of perquisites under Section 40A(5).
11. Disallowance of contributions to welfare funds under Section 40A(9).
12. Disallowance under Rule 6D.
13. Disallowance of payments to clubs and deduction under Section 80-O.

Detailed Analysis:

1. Taxation of Capital Gains on Conversion of Debentures into Shares:
The first ground of objection by the assessee for the assessment year 1983-84 was against the order of the CIT(A) in taxing the capital gains on conversion of AVB debentures into shares. The IAC taxed the capital gains on conversion of debentures into shares and calculated long-term capital gains and short-term capital gains. The assessee contended that there was no capital gain arising out of the conversion of debentures into shares and cited the retrospective induction of Section 47(x) by the Finance Act (No. 2) of 1991, which exempted such conversions from being treated as transfers. The Tribunal allowed the appeal by the assessee on this ground.

2. Taxation of Relief on Price Escalation Based on Coal Consumption:
The second ground was related to the treatment of Rs. 409.67 lakhs received by way of relief on price escalation based on coal consumption for the assessment year 1983-84. The assessee challenged the inclusion of this amount as income for the year, arguing that income in respect of any item in dispute accrues only after it is finally determined. The Tribunal, citing the Supreme Court's decision in CIT vs. Hindustan Housing & Land Development Trust Ltd., allowed the claim of the assessee and treated the amount as income for the year corresponding to the assessment year 1986-87.

3. Taxation of Interest on Compensation for Sale of a Company's Undertaking in Pakistan:
The third ground was regarding the interest on compensation for the sale of the company's cement factories in Pakistan. The assessee contended that the interest accrued in Pakistan and was not taxable in India. The Tribunal, considering the communication from the State Cement Corporation of Pakistan Ltd. and the final settlement, held that the interest income accrued to the assessee during the accounting year 1982-83 corresponding to the assessment year 1984-85, and allowed the appeal by the assessee on this ground.

4. Allowability of Additional Gratuity and Ex Gratia Payments to Employees:
The fourth and fifth grounds were related to the payment of additional gratuity to daily paid employees and ex gratia payments to the relatives of deceased employees. The Assessing Officer disallowed these payments, considering them as ex gratia and not allowable as business expenditure. The Tribunal, however, held that such payments were made to maintain healthy industrial relations and were allowable under Section 37(1) of the IT Act, 1961. The appeal by the assessee on these grounds was allowed.

5. Disallowance of Legal Fees as Capital Expenditure:
The last ground agitated by the assessee for the assessment year 1983-84 was against the disallowance of legal fees paid for the purchase of a flat, considering it as capital expenditure. The assessee's counsel did not press this ground, and it was rejected as not pressed.

6. Capitalization of Interest on Long-Term Borrowings:
The first ground agitated by the Department for the assessment year 1983-84 was against the deletion of Rs. 1,891.19 lakhs on account of interest capitalized pertaining to a new unit. The Tribunal dismissed the appeal by the Department, following its earlier decision in the assessee's own case for the preceding years.

7. Treatment of Commitment Charges as Revenue Expenditure:
The second ground was regarding the treatment of commitment charges of Rs. 7,62,297 paid to financial institutions as revenue expenditure. The Tribunal confirmed the order of the CIT(A), treating the charges as revenue in nature, and rejected the appeal by the Department.

8. Depreciation on Wadi Work:
The third ground was regarding the direction to allow normal depreciation on Wadi work amounting to Rs. 2,85,27,640. The Tribunal directed the Assessing Officer to give necessary relief and rejected the appeal by the Department on this ground.

9. Computation of Process Escalation Amounts:
The fourth ground was regarding the process escalation amounts to be taken at Rs. 409.67 lakhs and not Rs. 4,66.172. The Tribunal agreed with the CIT(A) that the amount should be Rs. 409.67 lakhs as finally determined by the Supreme Court and rejected the appeal by the Department.

10. Computation of Perquisites under Section 40A(5):
The fifth ground was regarding the computation of perquisites on account of the free use of a car under Section 40A(5). The Tribunal upheld the CIT(A)'s direction to recompute the disallowance based on Rule 3 of the IT Rules and rejected the appeal by the Department.

11. Disallowance of Contributions to Welfare Funds under Section 40A(9):
The third ground agitated by the assessee for the assessment year 1986-87 was regarding the disallowance of contributions to welfare funds under Section 40A(9). The Tribunal, following the decision of the Karnataka High Court in Mysore Kirloskar Ltd. vs. CIT, allowed the appeal by the assessee.

12. Disallowance under Rule 6D:
The next ground was regarding the disallowance under Rule 6D. The CIT(A) had remanded the matter back to the Assessing Officer for correct computation after hearing the assessee. The Tribunal found no reason to interfere with this direction and rejected the appeal by the assessee on this ground.

13. Disallowance of Payments to Clubs and Deduction under Section 80-O:
The last ground agitated by the assessee for the assessment year 1986-87 was regarding the disallowance of payments to clubs and deduction under Section 80-O. The assessee's counsel did not press these grounds, and they were rejected as not pressed.

Conclusion:
The appeals by the assessee were allowed in part, and the appeals by the Department were rejected. The Tribunal provided detailed reasoning for each issue, considering the facts and legal precedents, and ensured that the correct legal principles were applied in each case.