Making of provision for bad and doubtful debts cannot tantamount to writing off the same in the books of account.

[CA DEV KUMAR KOTHARI]

ASSISTANT COMMISSIONER OF INCOME TAX V. GENERAL FIBRE DEALERS (P.) LTD. 1993 (1) TMI 254 - ITAT KOLKATA

SECTION 36(1)(vii ) OF INCOME-TAX ACT, 1961

Making of provision for bad and doubtful debts cannot tantamount to writing off the same in the books of account

ASSISTANT COMMISSIONER OF INCOME TAX V. GENERAL FIBRE DEALERS (P.) LTD. 1993 (1) TMI 254 - ITAT KOLKATA

Making of provision for bad and doubtful debts cannot tantamount to writing off the same in the books of account.

SECTION 37(1) OF INCOME-TAX ACT, 1961

Foreign tour expenditure incurred for reviving assessee-company’s tea export business, was an allowable business expenditure

The assessee-company claimed deduction on account of foreign tour expenses undertaken by K. The Assessing Officer disallowed the aforesaid expense as not being for business purposes of the assessee-company.

Held that it was to be noted that K undertook foreign tour to U.K. for reviving the company’s tea export business. His tour to U.K. was duly approved by the Board of Directors. It was to be further noted that K was granted foreign exchange by the Reserve Bank of India. After conducting his foreign tour K even furnished a report to the Reserve Bank of India giving the entire details as to the parties with whom business meetings were held and talks were conducted. Considering those documents there remained hardly any doubt that the foreign tour undertaken by K was for business purposes. Thus, the expenditure incurred on foreign tour was allowable as deduction.

SECTION 40A(7) OF INCOME-TAX ACT, 1961

Provision made for gratuity on actuarial basis is not an allowable deduction

The assessee-company claimed deduction in respect of the provision for gratuity claimed to be on actuarial basis in respect of tea growing and manufacturing business and general business respectively. The Assessing Officer disallowed the assessee’s claim.

Held that section 40A(7) was introduced by the Finance Act, 1975, with effet from 1-4-1973 which prohibits deduction of the provision for gratuity. Of course, it does not extend to the provision for contribution to an approved gratuity fund or provision for payment of gratuity for which a liability has arisen during the year. From the materials available in the appeal record, it was clear that the assessee was not contributing to any approved gratuity fund. Had it been so in view of the provisions of section 36(1)(v ) the assessee would have been allowed deduction, but the way in which the assessee had claimed deduction of the provision for gratuity, it could not be allowed under sections 28 and 37, particularly when there was an express prohibition in view of the provisions of section 40A(7).

SECTION 43(3) OF INCOME-TAX ACT, 1961

‘Tea bush’ is to be considered as plant under section 43(3) in hands of tea manufacturing company

From dictionary meanings it is clear that the word ‘plant’ is synonymous and inclusive of the word ‘apparatus’, ‘tools’, ‘equipment’, ‘instrument’ and ‘implement’ defined to be articles or things by which or with the help of which certain function is carried out. To be more specific, it is to be noted that ‘plant’ has got the characteristics of a functional factor or aspect. The word ‘plant’ is not to be confined to the definition within the four corners of section 43(3) alone. The word must be construed more according to its context for which interpretation is sought.

The business of tea growing, manufacturing and selling is an integrated business of agricultural as well as industrial operations. The tea bush is planted in a systematic manner and in fact it is just like installation of plant, apparatus, equipment, tools, etc. The tea bushes are durable and they have a normal economic life of 40 to 50 years. So, the tea bush, though animate, is not merely gross materiality. ‘Plant’ need not be a mere gross materiality or abstract material but it can either be goods and chattels, fixed or movable, live or dead. So, the tea bush being a living thing is very much within the ambit of section 43(3 ).

Therefore, it could be said that tea bush fits itself to all tests as laid down for an object or thing or article, whether live or dead, movable or fixed, to be a plant. The tea bush no doubt is a living thing, it has got durability. It has the character of function and it is an asset in the hands of the businessman and not stock-in-trade and, that apart, the tea bush is also subject to wear and tear.

SECTION 43B OF INCOME-TAX ACT, 1961

Rent or tax of land payable by tenant under provisions of Tenancy Act is a statutory liability and thus covered under provisions of section 43B

The assessee-company claimed deduction in respect of ground rent which was payable to the Assam State Government in respect of tea garden. The Assessing Officer made addition of the aforesaid amount under section 43B.

Held that in the instant case there was no material to come to a definite conclusion as to whether the entire land in which the tea garden was situated was a lease-hold property or a settled land. If it was a lease-hold property and the rent was paid by way of lease rent then the lease rent paid might not be counted as tax or duty because it was a contractual liability on the part of the assessee, but if the assessee was a tenant and the rent or the tax of the land was payable to the Assam State Government, under the provisions of any Tenancy Act of the Assam State Government, in that situation, naturally, it would be a tax and a statutory liability and under such circumstances the applicability of section 43B could not be denied.

 SECTION 2(14) OF INCOME-TAX ACT, 1961

Compensation received on acquisition of a part of the tea garden could not be treated as capital gain as the land acquired would be agricultural land

The assessee-company received certain amount by way of compensation for acquisition of lands, being tea gardens, which were surrendered in 1975-76 and 1978. The Assessing Officer considered the compensation as capital gain and brought it to tax.

Held that the land in question was part and parcel of the tea garden. From the assessee’s side, it had been made clear that the land in question was under cultivation during the relevant period and actually green crops, thatch, bamboo, paddy and other crops were being grown. That apart, the assessee had filed certificates from the Deputy Collector and Gram Panchayat in order to show that the land in question was rural agricultural land. From the revenue side, however, no material had been brought on record to rebut those findings. It had merely been submitted that the land in question was not an agricultural land but there was no positive evidence as to in what way it was not an agricultural land. The assessee had discharged the onus by producing various certificates that the land in question was an agricultural land during the relevant period. Since the land in question was an agricultural land, it could not be said to be a capital asset in view of section 2(14) and the compensation received on acquisition of the land could not be brought to tax.