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2007 (2) TMI 277 - AT - Income TaxBusiness Disallowance - contractor failed to discharge its liability in respect of the ESI dues - Prior-period expenses - Applicability of Explanation 10 to section 43(1) ''prospectively Or retrospectively'' - Disallowance of Depreciation by reducing Written down value of assets by subsidy received - Special Capital Incentive Scheme - written down value of the plant and machinery - - HELD THAT:- It is a matter of fact that the impugned liability was partly that of M/s. Sakanson Pvt. Ltd., a sister concern and partly that of the assessee. In absence of discharge of the liabilities, enquiries were conducted and finally an order was passed on 29-5-2000. The liability as per that order was to be paid within 15 days, but was actually paid by the assessee on 29-6-2000. It is no doubt true that the assessee made a provision in accounts for the year 1999-2000 on the basis of the enquiry letter received from the competent authority of the ESIC, yet, it cannot be said that the liability was quantified or paid by the assessee in that year. To our mind, the facts of Saurashtra Cement & Chemical Industries Ltd.'s case[1994 (10) TMI 30 - GUJARAT HIGH COURT] are nearer to the facts of the instant case, in which it was held that earlier years' expenses could be allowed in mercantile method of accounting in the year in which the liability is accepted and paid. According to us, that year is not assessment year 2000-01. Same is the case in respect of liability of assessment years 1996-97 and 1997-98. Therefore, we are of the view that the learned CIT (Appeals) was right in holding that the impugned liability was not deductible in computation of income of this year. Insofar as the deducibility of the expenditure in subsequent assessment year 2001-02 (sic) is concerned, the issue is not before us in this appeal. The assessee may take up the matter in the appeal of the appropriate year(s). In the result, this ground is dismissed. Applicability of Explanation 10 to section 43(1) ''prospectively Or retrospectively'' - HELD THAT:- We are of the view that the issue in this case is identical with the issue in the case of Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. This is so in spite of the additional argument taken by the ld. counsel that the incentive accrued in the financial year 1995-96. In that order, it was held that the provision contained in Explanation 10 does not operate retrospectively. It is applicable to the assessment year 1999-2000 and onwards. On the basis of this finding, it was further held that the subsidy received in the previous year relevant to assessment year 1999-2000 only is not to be included in the actual cost. The facts of the instant case are that the incentive of Rs. 24,04,066 was received in the relevant previous year and the book value of the assets was also adjusted in this year on account of the incentives. The depreciation was deducted in earlier years without reckoning the aforesaid incentive and W.D.Vs. were calculated accordingly from year to year. Consequently, the effect of the incentive on cost or the W.D.V. has to be given in this year on receipt of the incentive, the reason being that the cost has been met by the other person in this year. The decision in the case of aforesaid Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. is also against the assessee for assessment year 1999-2000 onwards. Respectfully following that decision, it is held that the learned CIT (Appeals) was right in invoking the provisions of Explanation 10 to reduce the cost or the WDV of the asset and allowed depreciation on the reduced cost or WDV, as the case may be. In result, ground No. 3 is dismissed. In the result, the appeal is dismissed.
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