2014 (3) TMI 99 - AT - Income Tax

Deletion of disallowance VRS expenses Held that - The CIT(A) following his appellate order for the assessment year 1998-99 in assessee s own case held that the expenditure was to be treated as revenue expenditure - The provision of section 35DDA providing for amortization of expenditure incurred under VRS have come into Statute by the Finance Act, 2001, effective from 2001 - the tribunal held that the expenditure in the case has to be treated as revenue expenditure it is not applicable to the current assessment year - the order of the CIT(A) upheld Decided against Revenue. Deletion of LTA and medical expenses Held that - Some divisions of the assessee were maintaining books of accounts for medical expenses and LTA expenses on cash basis while some of the divisions were following mercantile system of accounting - The assessee in order to bring uniformity and to comply with the provisions of Companies Act and Accounting Standard accounted for the liability towards these expenses on mercantile basis - The assessee has claimed that the expenses were computed precisely - it was certain liability and not the contingent one Relying upon Hon ble High Court in the case of CIT vs. Dolaguri Tea Company (P) Ltd. 1994 (4) TMI 381 - CALCUTTA HIGH COURT the findings of the CIT(A) upheld that switching over from cash system of accounting to the mercantile system in respect of LTA and medical expenses was on a bonafide change and justified - the computation of liabilities in this regard has not been the subject matter of verification by the AO thus, the matter remitted back to the AO for computation of liability - Decided partly in favour of Revenue. Deletion of disallowance of warranty and option services contract expenses Held that - The assessee has made the provision in the regard on the basis of actuarial valuation as decided in assessee s own case the order of the CIT(A) upheld the AO has not been pointed out any discrepancy and the defect in the actuarial calculation thus, the AO was not justified in making disallowance Decided against Revenue. Disallowance on account of depreciation Held that - As decided in assessee s own case that the assessee cannot be forced to claim depreciation - the amendment in section 32(1), Explanation 5 for making the allowability of depreciation compulsory was prospective in nature and was effective from 1.4.2002 thus, the above amendment is also not applicable for assessment year under consideration - the AO s action for forcing depreciation on the assessee in preceding assessment years and following the same in this year is not sustainable thus, there is no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Deletion of disallowance of VRS expenditure
2. Deletion of addition made on account of switching from cash to mercantile system for LTA and medical expenses
3. Deletion of disallowance of warranty and optional service contract expenses
4. Disallowance of depreciation

Deletion of disallowance of VRS expenditure:
The AO disallowed Rs. 48,25,600/- as VRS expenditure, treating it as capital expenditure to be amortized under section 35DDA. However, the CIT(A) held the expenditure to be revenue in nature, not subject to apportionment under section 35DDA. The Tribunal upheld the CIT(A)'s decision, citing the provision's applicability from April 2001 and considering the expenditure as revenue. The appeal by the Revenue was dismissed.

Deletion of addition made on account of switching from cash to mercantile system for LTA and medical expenses:
The AO added Rs. 20,06,000/- due to a change in accounting method for LTA and medical expenses. The assessee justified the change as necessary for uniformity and compliance with accounting standards. The CIT(A) accepted the assessee's argument, emphasizing the bonafide nature of the change. However, the Tribunal remitted the issue back to the AO for verification of liability computation, while upholding the decision to switch accounting methods.

Deletion of disallowance of warranty and optional service contract expenses:
The AO disallowed Rs. 13,50,33,619/- for warranty and optional service contract expenses, based on actuarial valuation. The assessee cited previous ITAT decisions in their favor, and the CIT(A) ruled in favor of the assessee. The Tribunal affirmed the CIT(A)'s decision, recognizing the provision based on actuarial valuation and following precedent.

Disallowance of depreciation:
The AO added back Rs. 39,99,27,770/- due to a difference in claimed depreciation. The CIT(A) noted the non-compulsory nature of depreciation claims for previous years and directed the AO to recompute accordingly. The Tribunal upheld the CIT(A)'s decision, citing the non-compulsory nature of depreciation claims in prior years and rejecting the forced depreciation action. The appeal by the Revenue was partly allowed for statistical purposes.

This judgment addresses various issues related to expenditure treatment, accounting method changes, provision disallowances, and depreciation claims, providing detailed analysis and legal interpretations for each aspect.