1988 (2) TMI 116 - AT - Income Tax

Issues Involved:

1. Eligibility of set-off for brought forward business losses and unabsorbed depreciation under Section 72A.
2. Weighted deduction under Section 36(1)(iia) for contributions to provident fund and ESI.
3. Taxation of interest income earned on oversubscribed share issue.
4. Applicability of Section 80VV to retainership fees and expenses.
5. Determination of actual cost for depreciation and investment allowance.

Issue-wise Detailed Analysis:

1. Eligibility of Set-off for Brought Forward Business Losses and Unabsorbed Depreciation under Section 72A:

The CIT(A) erred in holding that the brought forward business losses and unabsorbed depreciation of M/s. Aravalli Svachalit Vahan Ltd. would be eligible for set-off under Section 72A only in the assessment year 1984-85 and not in the current assessment year. The appellant company, a manufacturer of refrigerators and other products, had amalgamated with Aravalli Svachalit Vahan Ltd., which had losses and unabsorbed depreciation amounting to Rs. 1,58,57,904. The ITO referenced Section 72A, which allows for the carry forward and set-off of accumulated losses and unabsorbed depreciation under certain conditions. The IAC noted that the specified authority had not issued the required certificate and, therefore, did not allow the set-off in the year 1982-83.

The CIT(A) noted that the High Courts of Rajasthan and Delhi sanctioned the amalgamation scheme in May 1982, with the specified date being 1st July 1980. The Ministry of Finance made a declaration under Section 72A(1) on 15th October 1982, and the specified authority issued a certificate on 22nd September 1983, stating that adequate steps for rehabilitation were taken in the previous year relevant to the assessment year 1984-85. The CIT(A) held that the set-off could only occur in the year 1984-85 when adequate steps were taken.

The Tribunal found that under Section 72A(1), the accumulated loss and unabsorbed depreciation of the amalgamating company should be deemed as the loss or depreciation of the amalgamated company for the previous year in which the amalgamation was effected. The Tribunal concluded that the set-off should be allowed in the year of amalgamation, which is the current year (1982-83), and reversed the CIT(A)'s order on this issue.

2. Weighted Deduction under Section 36(1)(iia) for Contributions to Provident Fund and ESI:

The assessee claimed a weighted deduction on Rs. 2,45,378, which is one-third of the salary and wages paid to physically handicapped employees. The CIT(A) accepted the plea but restricted the deduction to the salary as defined in Explanation 1 to Section 36(1)(iia), which includes pay, allowance, bonus, or commission. The assessee argued that contributions to ESI and provident fund should be considered part of the salary for this purpose. The Tribunal held that Section 17, which defines salary for Sections 15 and 16, is not relevant for Section 36 and upheld the CIT(A)'s order, declining to interfere.

3. Taxation of Interest Income Earned on Oversubscribed Share Issue:

The assessee incurred Rs. 12,02,358 as expenditure for issuing shares and earned Rs. 6,35,714 as interest on the oversubscribed amount placed in banks. The CIT(A) held that the expenditure was capital in nature and could not be allowed as revenue expenditure. The interest income was to be taxed as income from other sources. The assessee argued that the interest should reduce the capital expenditure. The Tribunal, relying on various court decisions, upheld the CIT(A)'s order, stating that the interest earned on investments should be assessed as income from other sources and cannot be adjusted against capital expenditure.

4. Applicability of Section 80VV to Retainership Fees and Expenses:

The CIT(A) held that retainership fees and expenses paid to Shri S.S. Bhandari for income-tax matters related to the pre-amalgamation period fell within the purview of Section 80VV. The assessee argued that Bhandari also performed other duties not covered under Section 80VV. The Tribunal found some merit in the assessee's submission and directed that Rs. 9,000 should be considered for representation before the Income-tax authorities, with the balance estimated for other services, and the assessing officer should work out the disallowance accordingly.

5. Determination of Actual Cost for Depreciation and Investment Allowance:

The assessee incurred Rs. 31,35,867 for reinstating or replacing machinery damaged in a fire and received Rs. 26,25,249 from the insurer, including Rs. 7,26,769 as salvage value. The CIT(A) deducted Rs. 26,25,249 from the cost for depreciation and investment allowance purposes. The assessee argued that only Rs. 18,98,480 was paid in cash by the insurer, and the salvage value should not be deducted from the new machinery's value. The Tribunal upheld the CIT(A)'s order, agreeing with the Revenue that Rs. 26,25,249 should be deducted for calculating depreciation and investment allowance.

Conclusion:

The appeal was allowed in part, with the Tribunal reversing the CIT(A)'s order on the set-off issue under Section 72A and upholding the CIT(A)'s decisions on other issues.

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