1982 (4) TMI 203 - AT - Income Tax

Actual Cost, Assessment Year, Business Expenditure, Central Excise, Exchange Fluctuation, Plant And Machinery, Provident Fund

Issues Involved:
1. Disallowance of damages paid under Section 14B of the Employees' Provident Funds Act, 1952.
2. Deduction of penalty paid to the Central Excise Department.
3. Claim for enhanced depreciation due to exchange fluctuation under Section 43A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Damages Paid under Section 14B of the Employees' Provident Funds Act, 1952:

The assessee, a public limited company, contested the disallowance of Rs. 4,42,930 paid as damages under Section 14B of the Employees' Provident Funds Act. The Regional Provident Fund Commissioner had imposed these damages due to delayed payments of contributions. The assessee argued that the delay was due to lock-outs, strikes, and RBI restrictions, and claimed these payments as business expenditure deductible under income tax.

Both the Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) denied the deduction, treating the amount as penal interest based on the Gujarat High Court decision in CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167.

Upon appeal, the Tribunal found in favor of the assessee, referencing the Supreme Court's decision in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. The Tribunal concluded that damages under Section 14B are compensatory, not penal, as they are for the delay in payment rather than a penalty for an offense. The Tribunal emphasized that Section 14B does not impose a penalty but compensates for the use of funds due to the provident fund. Consequently, the damages were deemed deductible as business expenditure.

2. Deduction of Penalty Paid to the Central Excise Department:

The second issue involved a penalty of Rs. 5,025 paid to the Central Excise Department under Rule 173(q) of the Central Excise Rules due to a clerical error resulting in a shortfall in the required deposit for excise duty. The authorities below disallowed the deduction, viewing it as a penalty for infraction of law.

The Tribunal, however, held that the penalty was incidental to the business, as it arose from a clerical mistake without any moral culpability. The penalty was considered a statutory impost to enforce compliance rather than a punishment for deliberate default. Therefore, the penalty was deemed an admissible deduction as it was a business loss arising in the course of business operations.

3. Claim for Enhanced Depreciation Due to Exchange Fluctuation under Section 43A of the Income-tax Act, 1961:

The third issue was the assessee's claim for enhanced depreciation due to an additional expenditure of Rs. 19,11,128 incurred from exchange fluctuation on imported plant and machinery. The assessee sought to add this amount to the cost and claim depreciation accordingly.

The ITO and the Commissioner (Appeals) rejected the claim, stating that Section 43A allows for the adjustment of actual cost due to exchange fluctuation, but depreciation must be computed on the written down value, defined as actual cost less depreciation already allowed.

The Tribunal upheld this view, stating that while Section 43A revises the actual cost, depreciation must still be computed based on the written down value. The Tribunal noted that there is no statutory mechanism to allow the difference between depreciation allowable for earlier years and depreciation actually allowed. Therefore, the claim for enhanced depreciation was rightly rejected.

Conclusion:

The Tribunal set aside the orders of the authorities below on the first two issues, directing the ITO to recompute the total income, while confirming the rejection of the claim for enhanced depreciation. The appeal was partly allowed.

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