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2005 (7) TMI 303

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....yd./2002 and ITA No. 705/Hyd./2002 are: (i) Allowability of Ad hoc Provision made towards Wages Revision in respect of employees covered under IDA pattern of pay scale: (ii) Computation of deduction under section 80HHC. In ITA No. 1035/Hyd./2003 for assessment year 2000-2001 ground No. 1 is on allowability of ad hoc provision made towards wages revision and second ground is charging of Rs. 3.90 crores to the Profit and Loss Account on account of expenditure incurred on Arki Lime Stone deposits. Third ground in this year is writing-off of miscellaneous losses of Rs. 2,27,46,000. 3. As regards the issue of deduction under section 80HHC, the same has been decided by us in the case of assessee for earlier years in ITA Nos. 688/Hyd./2000, 355/Hyd./2000 and 216/Hyd./2000. However, the ld. Counsel for the assessee wanted to put on record the proposition that according to him, job charges do not fall within the scope of Explanation (baa) to section 80HHC. For this proposition, he has relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Bangalore Clothing Co. [2003] 260 ITR 371. He has also relied on the decision in the case of Alfa Laval India Ltd. v. Dy.....

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....fore the Assessing Officer, the assessee contended that as per accounting policy of the company, stores and spare items which have not moved for more than 5 years are identified individually and declared as non-moving stores and spares and due to depletion in its value, these are valued at 15 per cent of their original value in the books. The remaining 85 percent of the value is written of as these are not found to be useful. This practice is being followed since inception and such writing off had been allowed by Department in earlier year also. However, the Assessing Officer did not allow the above claim, as the inventories which were written off had always been outside the P&L Account. As details of items that have been purchased, the amount of such purchase and mode of the valuation were not furnished by the assessee, the Assessing Officer held that the onus that was on the assessee to prove the allowability of the expenditure has not been discharged. Accordingly, he disallowed the same. Ld. CIT(A) in para-6.1 of his order noted that the Assessing Officer held that the purchases relevant to the above expenditure were never claimed in the P&L Account, nor the stocks/inventories f....

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....sessment years are as under: 1998-99 Rs. 10,13,39,487 1999-2000 Rs. 11,50,64,000 2000-2001 Rs. 12,13,19,000 There are two categories of employees in the Company. The first category of employees are eligible for DA as per Central Government Pattern. The second category of employees are eligible for the DA according to the Industrial Pattern. For the latter category, the agreement between the appellant and its employees expired on 31-12-1996 and, therefore, Pay Revision was due w.e.f. 1-1-1997. The employees/workers submitted a charter of demands as early as 29-12-1997 and continued to demand actual higher payment of wages. After prolonged negotiations between the Management and the Workers' Unions, a new Memorandum of Settlement was arrived at between the Management and the workers on 17-8-2001 covering the period 1-1-1997 to 31-12-2006. As regards the executives, Government of India, Ministry of Industries, Department of Public Enterprises appointed a Pay Commission under the Chairmanship of Justice Mohan vide its Resolution dated 10-12-1996. The Committee was to examine the present structure of the allowances, perquisites and benefits taking into account the total packa....

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....CIT v. Agarwal & Modi Enterprises (Cinema Project) Co. (P.) Ltd. [2003] 86 ITD 214 (Delhi) 5. Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) 6. CIT v. Mahindra Ugine & Steel Co. Ltd. [2001] 250 ITR 843 (Bom.) 7. Thermax Babcock and Wilcox Ltd. v. Dy. CIT [2002] 255 ITR 27 (AT) (Pune). 12. It was also argued by the ld. DR that in the books of account, these amounts have been shown as ad hoc provision only, and thus the same could not have been claimed as an expenditure during the relevant previous years. According to him, this would lead to change in method of accounting which is not permissible. In support of the above proposition, he relied on the following case laws: 1. CIT v. British Paints India Ltd. [1991] 188 ITR 444 (SC) 2. Decision of ITAT, Hyderabad A Bench in the case of Aurobindo Pharma Ltd. v. Dy. CIT [ITA No. 103/Hyd./95 dated 3-12-1997] 3. Decision of the ITAT, Hyderabad B Bench in the case of Vasant Organics Ltd. v. Dy. CIT (Asst.) [IT Appeal No. 1709 (Hyd.) of 1996 dated 21-8-2001] 13. It was also argued by the ld. DR that Notification of Accounting Standard under section 145(2) of the Act has not changed the principle of accrual of expenditure/lia....

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.... of agreement, the same was not an allowable liability as per mercantile method of accounting. (iv) Agarwal & Modi Enterprises (Cinema Project) Co. (P.) Ltd's case This is a case where liability on account of disputed licence fee was the issue. After the expiry of the original lease a fresh agreement was signed, by which the annual lease amount was increased substantially. Validity of the agreement was disputed by the assessee by filing suit. Under these circumstances, it was held by the Hon'ble Tribunal that the liability accrued only on settlement of the dispute by the court. The same was upheld by the High Court. (v) Bharat Earth Mover's case This is a case on which reliance has been placed by both the Revenue as well as the assessee. The Apex Court in the above case decided the issue of accrual of liability on account of entitlement of leave salary. Their Lordships held if a business liability had definitely arisen in the accounting year the deduction should be allowed although the liability may have to be quantified and discharged at a future date. "What should be certain is the incurring of the liability. It should also be capable of being estimated with r....

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....ble as per mercantile method of accounting. Both the Ld. Judicial and Accountant Member agreed that the liability was a contingent liability and that it was not allowable under section 37(1) of the Act. The difference was as to whether the above provision was allowable under section 28 itself on commercial or accounting principle. It was held by the Hon'ble Third Member that the issue is not as to whether a claim prohibited by sections 30 to 43C of the Act can be allowed under section 28 or not. It is to be seen whether the claim is allowable as per the scheme of the Act or not irrespective of the other relevant provisions or considerations. As there was no delivery or commissioning of the boilers during the relevant previous year, it was held that no liability towards the same was allowable in the year under consideration. (viii) Metal Box Co. of India Ltd.'s case In this case, the Hon'ble Supreme Court explained the meaning of the words 'provision' and 'reserve'. It was held by the Apex Court "provision made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in the ....

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....was actually received by the appellant in cash, thus making the appellant liable for income-tax on a sum of Rs. 14,300 which had not been received by it during the accounting year, it was hardly open to the Revenue to urge that the sum of Rs. 24,809 should not have been allowed as a permissible deduction before arriving at the profits or gains of the appellant which were liable to tax." It was concluded by the Apex Court "where the assessee was following mercantile system of accounting is entitled to deduct expenditure which is incidental to the business is deductible on accrual basis though it was not actually incurred during the relevant accounting year." (x) VST Co. Ltd.'s case In this case, the Apex Court explained the meaning of provision and reserve. (xi) Mitsubishi Motors New Zealand Ltd.'s case In this case their Lordships was concerned with the allowability of warranty expenditure. It was held that the assessee was entitled to deduct the provision made for costs of its anticipated liability as there was a legal obligation fastened to the sale made. 16. That there is a distinction between profit bonus and wages has been noted by the Apex Court in Swadeshi Co....

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....fit bonus as discussed in the case of Swadeshi Cotton & Flour Mills (P.) Ltd. The liability in that case did not arise out of contract of employment. The cases on warranty liability lay down the principle that the contract of warranty conies into effect as soon as the sale has been made. The true profit from such sale can be arrived at after the estimated expenditure on account of warranty liability is reduced from the same. Same is the ratio in the case of Calcutta Co. Ltd. For determination of true profits, the liability fastened to the receipts accounted for has to be allowed, hi this view of the matter, we are unable to agree with the view expressed by the Tribunal in the case reported in Johnson & Johnson Ltd. It may be pointed out that the fact of notification of accounting standards under the Act has also not been considered in the above case. 18. Considering the facts obtained in the present case, the case laws cited by both the parties, notification of accounting standards under the Act and the concept of real income, we are of the considered view that the appellant is bound to succeed on this ground of appeal. We proceed to give our reasoning in the following paragraph. ....