2008 (10) TMI 333 - HC - Income Tax

Business Expenditure- Capital and Revenue Expenditure- The assessee, a company engaged in the business of manufacture of cotton and yarn, claimed deduction of Rs.5,17,280 which was paid towards gratuity. This was disallowed on the ground that the assessee has not paid the same during the previous year relevant the assessment year and that as per section 43B, any sum payable by the assessee could be allowed as a deduction in computing income of that previous year in which the same is actually paid. It also claimed deduction of Rs. 2,31,38,952 being the replacement cost of the machinery as a revenue expenditure. The Commissioner held that it was not capital expenditure and therefore to be allowed as revenue expenditure. Held that- (i) that the amount contributed to the gratuity fund after the close of the previous year but before filing the return of income was deductible. (ii) that in the absence of the requisite details regarding the production capacity remaining constant even after replacement, the matter to be remitted to the Commissioner (Appeals).

Summary

Issues:
1. Disallowance under section 43B on contributions towards gratuity fund.
2. Allowance of a sum claimed as expenditure on account of replacement of machinery as revenue expenditure.

Issue 1 - Disallowance under section 43B on contributions towards gratuity fund:
The assessee, engaged in the manufacture of cotton and yarn, claimed a deduction for the amount paid towards gratuity. The deduction was disallowed as the payment was not made during the relevant previous year. The Commissioner of Income-tax ruled in favor of the assessee, stating that the payment towards gratuity fund was allowable. The Department appealed against this decision, but the appeal was dismissed. The High Court relied on the decision in CIT v. Vinay Cement Ltd., where it was held that the assessee could claim the benefit under section 43B if contributions were made to the provident fund before filing the return. The court concluded that the first question was answered against the Revenue, and the disallowance of payment towards the gratuity fund was deleted.

Issue 2 - Allowance of a sum claimed as expenditure on account of replacement of machinery as revenue expenditure:
Regarding the deduction claimed for the replacement cost of machinery as a revenue expenditure, the Supreme Court's decision in CIT v. Ramaraju Surgical Cotton Mills was referenced. The Supreme Court had remitted a similar matter, stating that various tests needed to be considered to determine if the expenditure was capital or revenue in nature. The court highlighted the need for details on production capacity after the replacement and remitted the matter to the Commissioner (Appeals) for further examination. Both the Department and the assessee presented their arguments on whether the replacement expenditure should be treated as capital or revenue expenditure. The court refrained from expressing an opinion on the contentions raised and remitted the matter to the Commissioner (Appeals) for a decision in accordance with the law. The court allowed the tax case to be remitted for the Commissioner (Appeals) to decide the issue.

In conclusion, the High Court remitted the tax case to the Commissioner (Appeals) for a decision on both issues in accordance with the law. The judgment partially favored the assessee by allowing the deduction for the gratuity fund payment but required further examination on the treatment of the replacement expenditure for machinery.