1997 (8) TMI 101 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of audit fees liability.
2. Depreciation of machinery taken from Zodiac Rubbers.
3. Deduction under Section 80G of the IT Act.
4. Deduction of salary payment to directors.
5. Deduction for payment to the group gratuity insurance scheme.
6. Granting investment allowance under Section 32A of the IT Act.

Detailed Analysis:

1. Deduction of Audit Fees Liability:
The assessee argued that the CIT(A) erred in not allowing the deduction of Rs. 2,000 for audit fees liability, asserting it was an ascertained liability under the mercantile system of accounting. The CIT(A) had disallowed it, viewing it as a mere provision without a bill. The Tribunal agreed with the assessee, recognizing the liability as ascertained and allowable in computing the income of the previous year, directing the AO to allow the deduction.

2. Depreciation of Machinery Taken from Zodiac Rubbers:
The assessee contested the disallowance of depreciation on machinery acquired from Zodiac Rubbers at revalued figures. The AO had allowed depreciation based on the written down value in the books of Zodiac Rubbers, suspecting inflated costs for higher depreciation claims. The Tribunal upheld the assessee's claim, referencing its earlier decision for the assessment year 1985-86, allowing depreciation on the enhanced value of the assets.

3. Deduction under Section 80G of the IT Act:
The assessee claimed a deduction of Rs. 8,250 under Section 80G for donations made to local committees. The AO denied the claim due to lack of receipts. The assessee then argued for the entire amount as business expenditure under Section 37(1), citing commercial expediency. The Tribunal, however, found no nexus between the donations and the business, ruling out deduction under Section 37(1) but allowed consideration under Section 80G, subject to receipt verification by the AO.

4. Deduction of Salary Payment to Directors:
The Revenue appealed against the CIT(A)'s deletion of a Rs. 45,000 disallowance from the directors' remuneration of Rs. 1,20,000, which the AO had made based on the previous year's decision. The Tribunal upheld the CIT(A)'s decision, consistent with its earlier ruling for the assessment year 1985-86, allowing the entire remuneration.

5. Deduction for Payment to the Group Gratuity Insurance Scheme:
The AO disallowed Rs. 47,860 for payment to the group gratuity insurance scheme, citing lack of approval for the gratuity fund. The CIT(A) deleted the disallowance, noting the scheme's compliance with legal stipulations. The Tribunal confirmed the CIT(A)'s decision, referencing the CIT's approval of the fund effective from 1st June 1985, and found no valid reason for the AO's disallowance.

6. Granting Investment Allowance under Section 32A of the IT Act:
The AO denied investment allowance, arguing the assessee did not qualify as an industrial company. The CIT(A) allowed the claim, following a Tribunal decision. The Tribunal confirmed the CIT(A)'s order, aligning with the Kerala High Court's judgment in CIT vs. Kanam Latex Industries (P) Ltd., affirming the assessee's qualification for the allowance.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to allow the audit fees deduction and reaffirming the depreciation on revalued assets. It allowed the consideration of donations under Section 80G, subject to receipt verification, and upheld the deductions for directors' remuneration, group gratuity insurance, and investment allowance. The Revenue's appeal was dismissed.