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TMI Blog1997 (8) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The appeal was partly allowed by order dated February 28, 1980. Feeling aggrieved, the assessee filed I. T. A. No. 322/Bang. of 1980 and the Department filed I. T. A. No. 340/Bang. of 1980. The Tribunal by a common order dated October 31, 1981, partly allowed both the appeals. The assessee sought reference of some questions of law in regard to the decision of the Tribunal in I. T. A. No. 322/Bang. of 1980 in R. A. No. 962/Bang. of 1981. The Department sought reference of some questions arising out of the order of the Tribunal in I. T. A. No. 322/Bang. of 1980 and I. T. A. No. 340/Bang. of 1980 in R. A. Nos. 2 and 3/Bang. of 1980. In pursuance of the said applications, the Tribunal by order dated November 30, 1982, has referred the following 12 questions (questions Nos. 1 to 9 at the instance of the Revenue and questions Nos. 10 to 12 at the instance of the assessee) for opinion : " Whether, on the facts and in the circumstances of the case : (1) The Appellate Tribunal is right in law in holding that the assessee was entitled to get higher depreciation on canteen building? (2) The Appellate Tribunal is right in law in holding that the provision for salary and wages payab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to in paragraph 9 has been rejected, apparently by oversight the Tribunal has stated in paragraph 21 that the question referred to in paragraph 9 is also referred. This is ignored. Question No. (5) has been reframed by the Tribunal. Re : Question No. (1) : This relates to a claim for depreciation on canteen buildings at the same rate applicable for factory buildings, on the basis that they formed part of the factory buildings. The Income-tax Officer disallowed the claim. This was confirmed in appeal. The Tribunal, however, upheld the assessee's claim for higher depreciation. The same question arose in regard to the earlier assessment year 1974-75 and this court, following the decision of the Madras High Court in CIT v. Engine Valves Ltd. [1980] 126 ITR 347 answered the question in favour of the assessee holding that canteen building should be regarded as part of factory buildings. Following the said decision relating to the earlier year, in CIT v. Motor Industries Co. Ltd. [1986] 158 ITR 734 (Kar), this question is answered in the affirmative, against the Revenue and in favour of the assessee. Re : Question No. (3) : This question relates to the expenses incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was eligible for weighted allowance under section 35B. The Department challenged the same before the Tribunal on the ground that the claim had not been made before the Income-tax Officer. The Tribunal held that as the material and details were available on record, the Appellate Assistant Commissioner was justified in admitting the additional claim. In this context, the question whether the Commissioner of Income-tax (Appeals) could have entertained the claim of the assessee for weighted deduction under section 35B is referred. Though the assessee had not claimed such weighted deduction before the Income-tax Officer, the Commissioner of Income-tax (Appeals) entertained the claim as the material and details were available in the records. When the necessary material was available and the weighted deduction is permissible under section 35B, the claim cannot be rejected merely on the ground that it was not made before the Income-tax Officer. It is now well settled that when the assessment is not under section 143(1), the appellate authority may permit the assessee to claim a deduction or exemption in appeal, which he had not claimed before the Income-tax Officer, particularly when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and (ii) payment of property tax and ground rent, and (iii) expenditure on repairs. This is subject, however, to a rider in so far as repairs are concerned ; what cannot be added under section 40A(5) is only the amount spent for normal and routine upkeep and maintenance ; and any amount spent in excess to meet the special requirements of the employee in occupation can be added under section 40A(5). Having regard to the modest amount involved in this case, it has to be held that nothing need be added under section 40A(5). Re : Questions Nos. (8) and (9) : Question No. (8) is whether depreciation is admissible on pipelines and sanitary fittings treating them as plant and machinery. The Income-tax Officer held that pipelines and sanitary fittings, tanks, cannot be held to be plant. He allowed depreciation of only five per cent. and held that extra shift allowance was not admissible. The Commissioner of Income-tax (Appeals) held that they should be treated as plant and depreciation should be allowed at 10 per cent. This was upheld by the Tribunal. Question No. (9) is whether extra shift allowance is admissible on storage tanks treating them as part of plant and machinery. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production of any of the articles specified in items Nos. 1 to 24 in the list in the Ninth Schedule ; that item No. 8 enumerated in the said list is "industrial and agricultural machinery" ; the assessee manufactures spark plugs and fuel injection equipment which are fitted in agricultural machines like tractors ; that "industrial and agricultural machinery" will include their components also ; and, therefore, the assessee is entitled to the benefit of initial depreciation under section 32(1)(vi). The Ninth Schedule does not refer to components of industrial and agricultural machinery. Section 32(1)(vi) gives the benefit of initial depreciation in respect of plant and machinery installed for the manufacture or production of any article or thing by a small scale industrial under taking ; but in regard to assessees other than small scale industrial undertakings, initial depreciation is admitted only in regard to manufacture or production of any one or more of the articles or things specified in items Nos. 1 to 24 in the list in the Ninth Schedule. If the legislative intent was to include components or accessories, it would have been specifically mentioned in the list. When the sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en apart from the provisions of this clause, a sum paid as tax on profits or gains of any business cannot be deducted in computing the profits for purposes of income-tax, under the general law of income-tax. This court in CIT v. International Instruments (P.) Ltd. [1983] 144 ITR 936, has held that surtax payable under the Companies (Profits) Surtax Act, 1964, on the chargeable profits is nothing but an additional tax on the profits and gains of an assessee's business and, therefore, surtax cannot be deducted for computing the total income. Hence, question No. (11) is answered in the affirmative, against the assessee and in favour of the Revenue. Re : Question No. (12) : The assessee claimed weighted deduction under section 35B(1)(b)(ii) in respect of insurance premium paid to the Export Credit Guarantee Corporation Ltd. The Income-tax Officer did not allow weighted deduction in that behalf. In fact, he clubbed it with certain other matters in regard to which weighted deduction was claimed and disposed of the matter without any independent consideration of this claim. The Commissioner of Income-tax (Appeals) confirmed the said decision. He also id not consider the matter separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees were also entitled to premium leave depending on the length of their service as also sick leave ; that the assessee had a systematic and regular record of leave earned and utilised during the year in respect of each employee and the liability of Rs. 75,51,000 had been quantified from such records. He, therefore, held that the provision of Rs. 75,51,000 was not a contingent liability, but an expenditure that was allowable. He purported to follow two decisions of the Supreme Court in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and Metal, Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53. The Revenue filed a second appeal before the Tribunal. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), holding that the assessee was entitled to claim the said provision as an expenditure. Feeling aggrieved, the Revenue has sought this reference. Before examining the rival contentions, it is necessary to notice the provisions relating to leave, as applicable to the employees of the assessee. The assessee does not have any "scheme" in regard to leave. The certified standing orders for employees of the assessee provides that an employee shall be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the month immediately preceding his leave, exclusive of any overtime and bonus. The memorandum of settlement for the period 1965-67 provides that the entitlement and availing of annual or earned leave by workmen will be strictly in accordance with the provisions of the Factories Act. The next settlement for the period 1968-70 provides that the workmen will be entitled to accumulate unavailed sick leave to the maximum extent of 18 days in the case of workmen covered under the Employees' State Insurance Scheme and 33 days in the case of others. It also provides that with effect from January 1, 1968, workmen will be entitled to premium days as annual leave (one day for workmen with service of five years and above but below ten years ; two days for workmen with service of ten years and above but below fifteen years ; three days for workmen with service of 15 years and above but below 20 years ; and four premium days for workmen with service of 20 years and above) depending upon the workmen's period of service with the company as on the first of January of the every calendar year in addition to the annual leave. The same leave benefits were continued subsequently. The memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Chhaganlal Textile Mills (P.) Ltd. v. CIT [1966] 62 ITR 274. In the case of Bharat Earth Movers Ltd. [1995] 211 ITR 515 (Kar) also, the question that arose for consideration was whether provision for making the liability for encashment of earned leave is an admissible deduction. This court held that neither leave salary nor leave encashment benefit payable to the employees can be said to be a present liability and it is only a contingent liability and, therefore, the assessee-employer is not entitled to deduction in regard to the provision made to meet such a liability. In Bengal Enamel Works' case, [1955] ILR 2 Cal 13, the Calcutta High Court considered whether an assessee is entitled to deduction of an amount which was debited to its expense account to meet the liability to the employees on account of holiday wages which would have to be paid to them in the following year. The court held : " It should be clear from what I have stated above that such statutory liability for holiday wages as the Factories Act creates is only a contingent liability which may or may not have to be discharged ; and, secondly, the measure of that liability can never be known in advance. It cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 988] 174 ITR 200 and by the Bombay High Court in CIT v. Rajkumar Mills Ltd. [1971] 80 ITR 244. The assessee contends that the liability for unutilised leave arises in the year in which such leave was earned and not in the year in which it is availed of or encashed ; and the liability for salary for such leave being a component of the remuneration payable to the employee for services rendered during the year, the profits for the year in which the leave is earned, should bear the charge in respect of the salary for such leave. It is pointed out that the employee has an option of either availing of leave in the subsequent year or encashing the leave in certain circumstances ; and if he avails of the leave, he will be paid the salary for the period for which he would not be working and if it is debited to the profits of the subsequent year, the profits of the subsequent year would be understated. Therefore, if an employee avails of leave earned in an earlier year, during the subsequent year, the salary for the period the employee is on leave, is debited to the provision account and not against the profits of the subsequent year in which the leave is availed of. On the other hand, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of retirement benefits is to be accounted for in the period, during which such services are rendered. The assessee relied on Accounting Standard No. 15 relating to "Accounting for Retirement Benefits in the Financial Statements of Employers" from the Statement of Auditing Practices of Institute of Chartered Accountants of India (1995) in this behalf. Learned counsel for the assessee relied on the decision of the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and the decision of the House of Lords in Southern Railway of Peru Ltd. v. Owen [1957] 32 ITR 737 ; [1957] AC 334, which is approved and followed in Metal Box Co.'s case [1969] 73 ITR 53 (SC). He contended that in Metal Box Co.'s case [1969] 73 ITR 53, the Supreme Court following the decision of the House of Lords in Southern Railway of Peru Ltd. [1957] 32 ITR 737, has held that even a contingent liability if properly ascertainable was deductible. He submitted that the decisions of this court in the cases of Hindustan Aeronautics Ltd. [1988] 174 ITR 340 and Bharat Earth Movers Ltd. [1995] 211 ITR 515 and the decisions of the High Courts of Calcutta, Madhya Pradesh, Bombay and Andhra Prades ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate can be accepted as a recognised obligation. The House of Lords also came to the conclusion that even though the liability to pay a lump sum could be avoided on the breach of contract or misconduct on the part of the employee and to that extent the liability of the employer was contingent, such contingency would seem to be too remote which would justify a prudent employer in ignoring the said liability until the day for such payment arrived. On a consideration of the relevant provisions which entitled the employee to such payment, the court came to the conclusion that the lump sum payment was to be regarded as a deferred remuneration in respect of the entire period of service. The following observations of the House of Lords are relevant : " What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit of its employees' services during that year. As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits. Only by such a method, it is said, can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t I do not know enough of the methods of valuing or allowing for this to speak with any confidence about it. And, lastly, there is the contingent obligation to make a future payment, which is our present case. But, whatever the legal analysis, I think that for liabilities as for debts their proper treatment in annual statements of profit depends not upon the legal form but upon the trader's answers to two separate questions. The first is : Have I adequately stated my profits for the year if I do not include some figure in respect of these obligations ? The second is : Do the circumstances of the case, which include the techniques of established accounting practice make it possible to supply a figure reliable enough for the purpose ?" In Metal Box Co.'s case [1969] 73 ITR 53 (SC), the question that arose for consideration was whether a liability under a scheme of gratuity in respect of the accounting year stated in the profit and loss account could be deducted for the purpose of computation of bonus under the Payment of Bonus Act. The Supreme Court held that contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are suffici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that deduction in respect of gratuities should be allowed either in the year in which the gratuity is actually paid or in the year in which contributions are made to an approved gratuity fund. A doubt has been expressed that the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation. In order to remove uncertainty in the matter, it is proposed to specifically provide in the law that no deduction will be allowed, in the computation of profits and gains of a business or profession, in respect of any reserve created or provision made for the payment of gratuity to the employees on retirement or on termination of employment for any reason. This restriction will, however, not apply in relation to a provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the relevant account year, or for the purpose of meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be not fulfilled, and there is a possibility of there being a resulting trust in favour of the company, then the money has not been spent, i.e., paid out or away, but the amount must be treated as set apart to meet a contingency. There is a distinction between a contingent liability and a payment depending upon a contingency. The question is whether in the years of account, one can describe the assessee company's liability as contingent or merely depending upon a contingency. The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndar year. Therefore, the entitlement relating to leave with wages cannot be equated to entitlement to a money payment. What is earned as "leave" during an accounting year cannot, therefore, be treated as "money earned" during that year, to be paid later. Having regard to section 79, the period of such leave, if availed of by an employee during the year 1976, shall be deemed to be days on which the employee had worked in the factory during 1976, and he becomes entitled to wages for the said period of leave at the rates applicable during the month immediately preceding the leave and not at the rate that was prevailing in the year 1975 when he earned the said leave. An employee had the option to either avail during the year 1976 of the leave earned in 1975, or accumulate the same in which event, the unused leave gets added to the leave to be allowed in the succeeding accounting year provided, the total number of days of leave that may be carried forward to a succeeding year cannot, however, exceed 30 days (subject to the further proviso that a person who applied for leave with wages but has not been given such leave, shall be entitled to carry forward such leave without any limit). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee will make a provision for payment of salary for 12 days every year, in all a provision for 300 days. If the employee does not utilise any leave, and allows the leave to lapse what could actually be paid as retirement benefit on account of accumulated leave encashment is salary for only 30 days. It would thus be seen that if the provision is to be permitted as an expenditure every year, there is every likelihood that as against a provision made for 300 days, which may be claimed as expenditure during a period of 25 years, the employer may ultimately be paying for only 30 days and the remaining amount equivalent to the salary for 270 days reverts back to the employer. On the other hand, if the employee uses the leave earned in a year, during the next year, he gets paid for the leave period during the next year and there is no possibility of using the provision made for the unutilised leave at all. Let us take another example. If an employee has already accumulated the maximum leave as at the end of December 31, 1974, the leave earned during the period January 1, 1975, to December 31, 1975, will, unless used during the calendar year 1976, lapse ; and the provision if any made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognise such provision is not correct. Accounting Standard No. 15 relied on by the assessee relates to accounting for retirement benefits in the financial statements of employers. It is no doubt true that leave encashment on retirement, is considered as a retirement benefit. Paragraph 12 of the Accounting Standard No. 15 provides that the cost of retirement benefits to an employer, results from receiving services from the employees who are entitled to receive such benefits ; and, consequently, the cost of retirement benefits is accounted for in the period during which such services are rendered. The American Accounting Standard (sec. C44) relating to "Compensation to employees : paid absences" relied on by the petitioner (?) provides that a liability shall be accrued for vacation benefits that employees have earned but have not yet taken. But, that would be only if the leave earned during each year of service, is accumulated without any lapsing and wages therefor become payable on retirement. Where the accumulation permissible is limited and the earned and unutilised leave, in excess of the permissible limit lapses, obviously, the said accounting practice cannot be applied. In fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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