2005 (12) TMI 210 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of payment under Voluntary Retirement Scheme (VRS) and ex gratia payment.
2. Disallowance on account of unutilized MODVAT credit.
3. Disallowance of entertainment expenses under section 37(2A).
4. Disallowance under section 43B.
5. Disallowance of exchange loss in respect of liability incurred for payment against the import of raw materials.
6. Disallowance on account of shifting of machineries.

Issue-wise Detailed Analysis:

1. Disallowance of payment under Voluntary Retirement Scheme (VRS) and ex gratia payment:
The main issue pertains to the disallowance of Rs. 17,51,91,740 for the assessment year 1996-97 and Rs. 56,55,979 for the assessment year 1997-98, related to VRS and ex gratia payments. The Assessing Officer disallowed these payments, arguing they were linked to the closure of the Kurla unit and thus not allowable as business expenses. The CIT (Appeals) deleted the disallowance, stating the liability crystallized during the year due to the agreement dated 23-1-1996, making it a legally enforceable and irrevocable liability. The Tribunal upheld this view, emphasizing that the liability arose within the financial year 1995-96 and was thus deductible. The Tribunal also noted that the deduction is permissible if the closed unit and the continuing business constitute the same business, necessitating further verification by the Assessing Officer.

2. Disallowance on account of unutilized MODVAT credit:
The Tribunal upheld the CIT (Appeals)'s deletion of the disallowance related to unutilized MODVAT credit, citing the Supreme Court's judgment in CIT v. Indo Nippon Chemicals Co. Ltd., which held that unutilized MODVAT credit cannot be considered as income liable to tax.

3. Disallowance of entertainment expenses under section 37(2A):
The Assessing Officer disallowed Rs. 1,45,000 for each year, estimating that part of the conference expenses included hospitality expenses. The CIT (Appeals) deleted the disallowance, assuming no outsiders attended the conferences. The Tribunal set aside this order, directing the Assessing Officer to re-adjudicate the issue after considering necessary evidence.

4. Disallowance under section 43B:
For the assessment year 1997-98, the CIT (Appeals) deleted the disallowance of Rs. 2,18,847 related to Family Pension Fund contributions, noting the assessee had deposited the amount in the Provident Fund Account within the stipulated period due to a High Court stay. The Tribunal upheld this view. For the assessment year 1996-97, the CIT (Appeals) deleted the disallowance of Rs. 5,94,208, which was initially made while processing the return under section 143(1)(a). The Tribunal upheld this deletion as well.

5. Disallowance of exchange loss in respect of liability incurred for payment against the import of raw materials:
The CIT (Appeals) deleted the disallowance of Rs. 11,11,000, noting the exchange loss was on account of raw material imports and had been consistently allowed in the past. The Tribunal upheld this deletion, referencing the Special Bench decision in Oils & Natural Gas Commission v. Dy. CIT, which allowed such losses as deductible when related to revenue account liabilities.

6. Disallowance on account of shifting of machineries:
The Assessing Officer disallowed Rs. 4 lakhs as capital expenditure for shifting machinery from Kurla to Ankleshwar. The CIT (Appeals) deleted the disallowance, considering the units as part of an indivisible business. The Tribunal found the CIT (Appeals)'s adjudication casual and lacking a basis, thus setting aside the order and directing a fresh adjudication after ascertaining the correct facts and relevant case law.

Conclusion:
The Tribunal's decision involved detailed consideration of the nature of expenses and their connection to business operations. It emphasized the need for factual verification to determine whether the expenses were for the same business and thus deductible. The Tribunal also upheld the CIT (Appeals)'s decisions where appropriate, ensuring compliance with established legal principles.