TMI Blog2009 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent/assessee respectively pertaining to assessment year 2000-01. 2. The Revenue had filed an appeal before the Tribunal against the order of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the "CIT(A)"] allowing deduction on account of provision made by the assessee in the sum of Rs 47,15,782/- in respect of amounts payable to its employees on account of "Long Service Award". 2.1 The assessee, on the other hand, had preferred an appeal to the Tribunal against the order of the CIT(A) in rejecting its claim of depreciation amounting to Rs 35,41,123/- on emergency/insurance spares valued at Rs 1,41,64,495/- in its books of accounts. 2.2 The Tribunal by the impugned judgment, rejected the appeal of the Revenue on the issue of allowance of provision for "Long Service Award" payable by the assessee to its employees and consequently confirmed the order of the CIT(A), and also, allowed the appeal of the assessee on the issue of capitalization of emergency/insurance spares and resultantly, reversed the order of CIT(A). 3. As stated above, the Revenue being aggrieved by the impugned judgment, has preferred these appeals on the aforementioned issues. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 969) 73 ITR 53, and, upon perusing the provisions of the CBDT Circular No. 47 dated 21.09.1970, came to the conclusion, that a provision for „long service award‟ is akin to a provision for gratuity, and if such a provision is made on a scientific basis, it would be in the nature of an ascertained liability and not a contingent liability as contended by the Revenue. The CIT(A) was also of the view that as per the Accounting Standards notified by the Central Government u/s 145(2) of the Act, it was incumbent upon the assessee to make provision for all known liabilities on the basis of best estimate in the light of available information. The CIT(A) specifically rejected the contention of the Revenue that since there was some discretion vested with the management with regard to the payment under the "long service award" scheme that would by itself make it contingent and that the deduction should be disallowed on this ground. The Revenue carried the matter in appeal to the Tribunal. The Tribunal after recording the facts noted in the order of the CIT(A) concurred with his view and held; that as per the mercantile system of accounting, provision for liability ascertained during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contingent liability and is not a debt under the Wealth-tax Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P. L. Account. It is recognised in trading circles and we find no rule or direction in the Bonus Act which prohibits such a practice." 6. In the case of Shree Sajjan Mills Ltd (supra), the Supreme Court was examining the provision made by the assessee towards gratuity under the Income Tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company (supra), crystallized its analysis at page 599 and made the following observations:- "It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows:- 1 xxxx 2 xxxx 3 xxxx 4 xxxx 5 Provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under Section 28 or section 37 of the Act." 7. The Division Bench of this Court, while considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer, the assessee in the first instance, claimed deduction by way of depreciation on capitalized spares as indicated above to the extent of Rs 35,41,123/- and in the alternative, claimed by way of deduction cost spares consumed amounting to Rs 31,76,187/-. 9.2 The Assessing Officer rejected the claim of the assessee for depreciation on the ground that the assessee had not "put to use" the emergency spares during the relevant period. Curiously, the Assessing Officer also rejected the alternative plea of the assessee that it should be allowed deduction of Rs 31,76,187/- being the cost of emergency spares actually consumed during the relevant period. The Assessing Officer on the contrary allowed depreciation to the assessee in the sum of Rs 5,49,806/- with reference to the cost of spares consumed during the relevant period, that is, on Rs 31,76,187/- 10. The assessee being aggrieved, preferred an appeal to the CIT(A). The CIT(A) while sustaining the order of the Assessing Officer that no depreciation could be allowed on the cost of emergency spares capitalized by the assessee, however, allowed the alternative claim of the assessee, by directing the Assessing Officer to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act brings within its ambit even „passive user‟ for claim of depreciation. The judgments relied upon by the learned counsel for the assessee were CIT vs Pepsu Road Transport Corporation; (2002) 253 ITR 303 (P H), CIT vs Southern Petro Chemical Industries Corporation Ltd; (2007) 292 ITR 362 (Mad), Capital Bus Service (P.) Ltd vs CIT; (1980) 123 ITR 404 (Del), CIT vs Refrigeration Allied Industries Ltd; (2001) 247 ITR 12 (Del) and lastly CIT vs Swarup Vegetable Products India Ltd; (2005) 277 ITR 60(All). 15. The learned counsel for the assessee also relied upon the revised Accounting Standard (AS) 2 on „Valuation Of Inventories‟ along with Accounting Standard (AS) 10 on „Accounting For Fixed Assets‟ to buttress his argument that the emergency spares in issue requires to be capitalized. OUR ANALYSIS 16. The accounting treatment, which is prescribed by the Council of the ICAI, clearly stipulates that after the revised Accounting Standard (AS) 2 comes into effect, it shall apply with respect to accounting period commencing on or after 01.04.1999. The revised Accounting Standard has been made mandatory by the Council of the ICAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether to capitalise a machinery spare under AS 10 or not will depend on the facts and circumstances of each case. However, the machinery spares of the following types should be capitalised being of the nature of capital spares/insurance spares— (i) Machinery spares which are specific to a particular item of fixed asset, i.e., they can be used only in connection with a particular item of the fixed asset, and (ii) their use is expected to be irregular. 4 Machinery spares of the nature of capital spares/insurance spares should be capitalised separately at the time of their purchase whether procured at the time of purchase of the fixed asset concerned or subsequently. The total cost of such capital spares/insurance spares should be allocated on a systematic basis over a period not exceeding the useful life of the principal item, i.e., the fixed asset to which they relate. 5 x x x x 6 x x x x 7 x x x x 8 x x x x 9 Machinery spares of the nature of capital spares/insurance spares are capitalised. Capital spares/insurance spares are meant for occasional use. Since they can be used only in relation to a specific item of fixed asset, they are to be discarded in case that specific fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have no difficulty in accepting the submissions of the learned counsel for the assessee that it was obliged to capitalize the entire cost of spares in consonance with the mandatory provisions of Accounting Standards (AS) 2 and (AS) 10. 16.6 It is not disputed that the assessee is maintaining the accounts based on a mercantile system. Under sub-section (1) of Section 145 of the Act the assessee‟s income which is chargeable under the head "profits and gains of business or profession" is required to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. 16.7 As indicated above the assessee has been maintaining a mercantile system of accounting, therefore, the treatment of emergency spares in accordance with the revised Accounting Standard (AS) 2 and (AS) 10 would be in consonance with the mercantile system of accounting which under the Act the Revenue is required to look at for computing income of the assessee chargeable under the head "profits and gains" from business. The submission of the learned counsel for the Revenue that the accounting treatment to be meted out to a transaction in accordance with the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Revenue relied upon the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. vs CIT; (1997) 227 ITR 172 to buttress her submission that accountancy principles cannot override the provisions of the Act. This proposition is unassailable. One cannot take resort to a principle or rule of accountancy when the Act provides specifically for the situation at hand. But when the situation is one where there is no definitive provision, a Court can take resort to well accepted accountancy rules and principles. The Supreme Court in Tuticorin Alkali Chemicals (supra) has not derogated from this principle enunciated in Challapalli Sugar Mills Ltd (supra). See observation in Tuticorin Alkali Chemicals (supra) at pages 183-186, in particular, observations at page 185(H) to page 186(D). 16.10 The applicability of the principles of accountancy by the courts has also found favour in the judgments of the Supreme Court in the cases of CIT vs Indo Nippon Chemicals Co ltd; (2003) 261 ITR 275 at page 277 (D - E) CIT vs U.P. State Industrial Development Corporation; (1997) 225 ITR 703 and also the judgment of a Division Bench of this Court in CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ultimate test is, whether, without the particular user of the machinery relied upon, the profits sought to be taxed could have been made; and as I read the agreement in the case, the profits of the assessee during the year under assessment could not have been earned except by his maintaining his factory in good working order, and that involves user of the factory and the machinery." 17.2 This was also considered by the Madras High Court in CIT vs Vayithri Plantations Ltd; (1981) 128 ITR 675. In the said judgment of the Madras High Court, the word "used" was interpreted to mean and this includes even forced idleness, whereby a machinery even though ready for use, could not be used in a given year due to labour unrest. The court held that machinery which is kept ready for use would come within the expression "used" for the purposes of business as contemplated under the provision at hand. 17.3 The aforesaid judgments were noticed by the a Division Bench of the Madras High Court in the case of Southern Petrochemical Industries Corporation (supra). The issue which the Madras High Court was called upon to consider as extracted in the judgment of this Court, is as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncept of depreciation would lead to several anomalies and difficulties, for a machinery cannot be used throughout the day and night or even throughout the working hours or even during the days when the business is in full scale operation. Thirdly, there will be no strain on the statutory language by interpreting it widely and not limiting it to the actual working or actual employment of the machinery in the business. On the other hand, it would be more appropriate to envisage the expression as comprehending cases where the machinery is kept ready by the owner for its use in the business and the failure to use it actively in the business is not on account of its incapacity for being used for that purpose of its non-availability. In the present case, e.g., the four buses in question were admittedly in working order and the assessed was keeping them ready for being operated upon if an when some tourist contract materialised. They were not actually run on the road not because they were under repair or were unfit for use for one reason or the other, but only because there were not enough contracts during the year to ply the buses for more than 30 days each. This does not mean that so f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on account of any factor known to the prevailing accounting or commercial practice. 17.6 In view of the ratio of the judgments referred to hereinabove we are of the considered opinion that the expression 'used for the purposes of business‟ appearing in Section 32 of the Act also takes into account emergency spares which even though ready for use are not as a matter of fact consumed or used during the relevant period, as these are spares specific to a fixed asset and will in all probability be useless once the asset is discarded. In that sense, the concept of passive user which is applied by the aforementioned cases to standby machinery will be applicable to emergency/insurance spares. 17.7 In the instant case, the Assessing Officer has even while accepting the stand of the assessee that the spares in issue were emergency spares and that they were capital assets limited the depreciation to a sum of Rs 5,49,806/- by referring it to the cost of spares actually consumed during the relevant year, i.e., Rs 31,76,187/- as against the total cost of spares capitalized by the assessee amounting to Rs 1,41,64,495/-. 18. In our opinion, the Assessing Officer misdirected h ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
