2006 (7) TMI 299 - AT - Income Tax

Summary

Issues Involved:

1. Claim of depreciation on residential buildings provided to staff.
2. Deduction on account of leave encashment.
3. Disallowance of payment of provident fund and ESIC.
4. Ad hoc disallowance of miscellaneous expenses.
5. Deduction under section 80HHC of the IT Act.

Issue-wise Detailed Analysis:

1. Claim of Depreciation on Residential Buildings Provided to Staff:

The appeals pertain to the assessment years 1997-98 and 1998-99, where the assessee claimed depreciation on residential buildings provided to staff. The amounts were Rs. 1,95,926 and Rs. 1,86,130 respectively. The Revenue authorities invoked the provisions of section 2(47)(v) of the IT Act, 1961 read with section 53A of the Transfer of Property Act, arguing that the cost of construction was met by employees, thus the actual cost to the assessee was "nil" and no depreciation was allowable. The CIT(A) justified the AO's action, citing a registered agreement with employees and the applicability of section 53A of the Transfer of Property Act, indicating that the property was transferred to employees.

The Tribunal examined the facts, including the Government of Maharashtra's condition under the ULC Act, the construction phases, the loan from HDFC, and the agreement with employees. It was noted that the transfer of flats occurred in the assessment year 2003-04, and short-term capital gain was declared then. Previous proceedings under section 263 and the allowance of depreciation in earlier years were also considered. The Tribunal concluded that the flats were not legally transferred during the years under consideration, thus the assessee was entitled to depreciation. The findings of the authorities below were reversed.

2. Deduction on Account of Leave Encashment:

For the assessment years 1997-98 and 1998-99, the assessee claimed deduction for leave encashment. The Tribunal referred to the Supreme Court's decision in Bharat Earth Movers Ltd., which held that provision for leave encashment is deductible. The AO was directed to recompute the claim, allowing the deduction for the provision made for incremental liability under the leave encashment scheme.

3. Disallowance of Payment of Provident Fund and ESIC:

The disallowance of provident fund and ESIC payments was contested. The Tribunal followed the Pune Bench decision in Indian Card Clothing Co. Ltd., outlining three points: section 43B applies only to employer's contribution, deductions for employer's contribution are allowed if paid before the due date of filing the return, and deductions for employees' contribution are allowed if paid within the grace period. The AO was directed to allow the claim if payments met these conditions.

4. Ad Hoc Disallowance of Miscellaneous Expenses:

The assessee did not press the ground regarding the ad hoc disallowance of Rs. 10,000 out of miscellaneous expenses for the assessment year 1997-98. Consequently, this ground was dismissed.

5. Deduction Under Section 80HHC of the IT Act:

The assessee claimed deduction under section 80HHC, which was contested by the authorities on the grounds that sales-tax and excise should be included in the turnover calculation. The Tribunal referred to the Bombay High Court's decision in Sudarshan Chemicals Industries Ltd., which ruled in favor of the assessee, excluding sales-tax and excise from the turnover for deduction purposes.

Conclusion:

Both appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the issues of depreciation, leave encashment, and section 80HHC deductions, while the ad hoc disallowance of miscellaneous expenses was dismissed and the provident fund and ESIC issue was remanded for reconsideration based on specified conditions.