1992 (8) TMI 129 - AT - Income Tax

Accounting Year, Assessable Value, Assessing Officer, Business Expenditure, Deduction In Respect, Excise Duty, High Court, Investment Allowance Reserve

Issues Involved:

1. Disallowance of investment allowance on plant and machinery.
2. Disallowance of provision for excise duty.
3. Proportionate disallowance of depreciation due to change in the previous year.

Detailed Analysis:

1. Disallowance of Investment Allowance on Plant and Machinery:

The primary issue here is the disallowance of the investment allowance on the cost of plant and machinery amounting to Rs. 28,92,595. The Assessing Officer disallowed the claim because the appropriate reserve was not created in the year under appeal. The CIT(Appeals) upheld this disallowance, interpreting that the Explanation to section 32A(4) applies only when a reserve is created but found inadequate upon assessment, not when no reserve is created at all in a year of loss.

The assessee argued that since it declared a loss, no reserve was created for the year under appeal, but a reserve was created in the subsequent year when there was income. The assessee relied on explanatory notes to the Finance Act of 1976 and a Supreme Court decision, arguing that the creation of a reserve in the year of income suffices.

The Tribunal considered the rival contentions and concluded that the creation of an investment reserve is necessary for claiming the deduction under section 32A. However, it noted that the Assessing Officer did not provide the assessee an opportunity to create the reserve as contemplated by the Explanation to section 32A(4). The Tribunal emphasized that the Explanation allows the assessee to adjust the reserve upon being given an opportunity based on higher income computed on assessment. The Tribunal directed the Assessing Officer to allow the assessee an opportunity to create the necessary reserve, thus enabling them to qualify for the deduction under section 32A.

2. Disallowance of Provision for Excise Duty:

The next issue pertains to the disallowance of a provision of Rs. 43,87,416 made by the assessee on account of excise duty. The assessee manufactures fans and is liable for excise duty. A dispute with the Excise Department led to orders directing the assessee to pay excise duty on the assessable value. The assessee obtained stay orders from various High Courts, subject to furnishing bonds/bank guarantees for the differential amount of duty.

The Assessing Officer disallowed the claim because no demand was received from the Excise Department, and the orders were stayed. The CIT(Appeals) confirmed the disallowance.

The Tribunal examined whether the liability for excise duty had accrued. It noted that under the Central Excise & Salt Act, 1944, the liability accrues upon manufacture, and the dispute was only regarding quantification. The Tribunal referred to various judicial precedents and concluded that in the case of mercantile accounting, deduction is permissible on the basis of accrual of liability, not just on the happening of a taxable event.

The Tribunal found that the liability for excise duty had accrued as the Excise Authorities had ruled against the assessee, and the assessee had furnished bonds/bank guarantees for the differential amount. The Tribunal allowed the deduction for the provision made for excise duty, notwithstanding the absence of a demand notice, as the provisions of section 43B were inapplicable for the year under appeal.

3. Proportionate Disallowance of Depreciation:

The final issue is the proportionate disallowance of depreciation due to the change in the previous year from ending 31st March to ending 30th September. The Assessing Officer allowed the change subject to the condition that depreciation for the period would be allowed on a proportionate basis for six months only. The assessee claimed full depreciation, arguing that the condition imposed was invalid.

The Tribunal considered whether the condition imposed by the Assessing Officer was in accordance with the law. It noted that under section 32 of the IT Act, 1961, depreciation is allowable at prescribed rates irrespective of the period of use. The Tribunal found that the condition imposed was contrary to section 32 and therefore invalid. It relied on judicial precedents, including a Supreme Court decision, holding that parties cannot contract out of a statute. The Tribunal directed that full depreciation be allowed in accordance with the law, rejecting the proportionate disallowance.

Conclusion:

The Tribunal allowed the assessee's appeal in part, directing the Assessing Officer to provide an opportunity to create the necessary reserve for investment allowance, allowing the deduction for the provision made for excise duty, and permitting full depreciation for the year under appeal.

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