TMI Blog2007 (2) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings of the learned CIT (Appeals) that the assessee was not entitled to deduct a sum of Rs. 4.25 lakh in computing the income, being a contribution made to Alfa Laval Education Trust, in view of the provisions contained in section 40A(9) of the Act. It was mentioned that he erred in not following the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Wazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 139 and that of the CIT (Appeals) in assessee's own case for assessment years 1987-88 to 1998-99. In the course of hearing before us, the learned counsel for the assessee fairly conceded that this issue has been decided against the assessee in earlier years by the Hon'ble ITAT, Mumbai Bench 'F', Mumbai, in ITA Nos. 3211 and 3212/Mum./2000 for assessment years 1997-98 and 1998-99, a copy of which was placed in the paper book on pages 6 to 11. Paragraph 14 of the order deals with this issue, wherein it is mentioned that this very issue was considered by the Tribunal in the case of the assessee for assessment year 1995-96. In that order it was held that the deduction is not permissible in view of the provision contained in section 40A(9) of the Act and, consequently, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmissible on payment basis under the provisions of section 43B of the Act. The Assessing Officer did not accept the aforesaid contention on the ground that the relevant demand notices were dated 29-5-2001 and 16-6-2000, the dates falling in the previous years relevant to assessment years 2001-02 and 2002-03 respectively. The expenses had been recognized as previous years' expenses in the audit report. Therefore, the expenses were held not to be deductible in the computation of income of this year. Before the learned CIT (Appeals) it was represented that the Inspector made the enquiry and inspection in the financial year 1999-2000 and the demand was paid in the subsequent financial year. Therefore, it was contended that if the liability was not deductible in this year, it may be, without prejudice to the claim of the assessee for this year, allowed in the next financial year. The learned CIT (Appeals) furnished the details of the liabilities in paragraph 3.3 of his order. It was pointed out that the liability pertained to the years 1993-94, 1994-95 and 1995-96, aggregating to Rs. 15,95,438. Interest of Rs. 6,11,075 was also charged. The assessee had not made any provision in the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly on account of failure of the contract and partly because of the failure of the assessee to deposit the dues in the relevant years. The past liability was fastened on the assessee as principal employer and it depended upon its acceptance by the assessee. The demand was made on 29-5-2000 and paid on 29-6-2000. Both these dates do not fall in the year under consideration. The rest of the liability was demanded in the financial year 2002-03 and paid in that year. Therefore, the ratio of the aforesaid case does not advance the case of the assessee, but goes against the assessee. 3.4 Further, the learned counsel relied on the decision of Hon'ble Bombay High Court in the case of CIT v. United Motors (India) Ltd. [1990] 181 ITR 347. The question in that case was whether on the facts and in the circumstances of the case, the amount of Rs. 76,680 was deductible as expenditure in the assessment for the accounting period relevant to assessment year 1972-73? The terms and conditions of the service of workmen employed by the assessee were governed by the award. The Trade Unions gave a notice to the assessee terminating the award with effect from two months thereafter. This fact was taken n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which it was quantified. 4. As against the aforesaid, the case of the learned D.R. was that the contractor in this case was a connected concern, namely, M/s. Sakanson Pvt. Ltd., as borne out by the order of the Deputy Director on page 2. Therefore, it was pointed out that it cannot be said that the assessee was totally unaware of non-payment by the sister concern. The assessee had not made provisions in earlier years, as borne out by the order of the learned CIT (Appeals) in paragraph 3.3. Therefore, it was his case that either these liabilities were deductible in the years in which the provisions ought to have been made, namely, assessment years 1996-97 and 1997-98 or in the year in which the liability was actually fastened on the assessee, namely, assessment years 2001-02 and 2002-03. 5. We have considered the facts of the case and rival submissions. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sake of ready reference, these paragraphs are reproduced below:- "16.1 The grounds of appeal for this year are also similar to the grounds of appeal in appeal No. 401/PN/05 except for change in the amounts under different points of addition. The assessee has also taken up a new ground that the learned CIT(A) erred in confirming the disallowance of depreciation of Rs. 20,05,480 on buildings and Rs. 1,44,44,830 on machinery, totalling to Rs. 1,64,50,310, in relation to capital subsidy, allegedly pertaining to buildings and machinery on the basis of assumed bifurcation made by the Assessing Officer. This issue has been discussed by the learned CIT(A) in paragraphs 16 to 18 of his order. It is mentioned that the assessee signed an agreement with National Dairy Development Board (hereinafter called the NDDB) on 20-4-1994, for loan to be used for expansion and addition to chilling center. Simultaneously, NDDB granted subsidy by way of agreement signed on 20-4-1994 of an amount of Rs. 16.62 crore. The assessee received subsidy amount of Rs. 7,78,34,115 up to 31-3-1999, as the close of the relevant previous year. As per the agreement of subsidy, it was given for machinery required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in Explanation 10 below section 43(1) of the Act. According to him, this Explanation, inserted by Finance (No. 2) Act, 1998, with effect from 1-4-1999, supersedes the judgment relied upon by the assessee. This Explanation provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement, by whatever name called, then, so much of the cost as is relatable to such subsidy, grant or reimbursement will not be included in the actual cost of the asset to the assessee. Thus, it was only that cost, which was actually paid or payable by the assessee, that forms the cost under section 43(1) and consequently, the cost for the purpose of deduction of depreciation. Accordingly, he upheld the order of the Assessing Officer in this behalf. 16.4 Before us, the learned counsel of the assessee posed a question whether Explanation 10 to section 43(1) was applicable prospectively or retrospectively. It was his view that if it operates prospectively, then, the decision has to go in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision affects rights and liabilities of the person by increasing or decreasing his liability. The application of Explanation 10 leads to reduction in cost of an asset to the assessee, resulting in lowering the amount of deduction by way of depreciation in computation of his income. It is not merely procedural in nature. Therefore, we are of the view that Explanation 10 is substantive in nature and contents. The impact of this decision is that it operates prospectively unless otherwise provided in the Act. The Act provides that this provision shall come into force with effect from 1-4-1999, which means that it is applicable to the assessment for assessment year 1999-2000 and onwards. 16.7 The second question posed by the learned counsel was whether the cost of an asset can change from time to time. We have a statutory provision in section 43A of the Act regarding consequence of a change in rate of exchange on the cost of an asset in respect of a foreign exchange denominated asset. The section provides that the cost shall be increased or decreased depending upon the increase or decrease in the liability on account of fluctuation in rate or rates of foreign exchange. By now law i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanations were inserted by the same Finance Act, but they are quite different in contents. Thus, we are of the view that Explanation 10 does not operate retrospectively. It is applicable to the assessment year 1999-2000. Thus, the subsidy received in the previous year relevant to assessment year 1999-2000 only is not to be included in the actual cost. Thus, the result of this discussion is that this ground of appeal is partly allowed." 6.2 As against the aforesaid, the learned D.R. referred to paragraphs 4.2 and 4.3 of the order of the learned CIT (Appeals). It is mentioned that the special capital incentive had accrued to the assessee in financial year 1995-96 when eligibility certificate was issued by SICOM on 15-9-1995. The amount was received in this year and, therefore, adjustment was made in the book value of plant and machinery in this year. Since the incentive accrued in financial year 1995-96, it was argued that provisions of the aforesaid Explanation 10 were not applicable. The learned CIT (Appeals) pointed out that the assessee made adjustment in the book value of plant and machinery on receipt basis and mercantile basis was not followed for this purpose. In view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d No. 5 is against the finding of the learned CIT (Appeals) in which ad hoc disallowance of Rs. 25,000 was confirmed in respect of expenditure incurred for earning dividend income of Rs. 1,05,86,142, in computation of book profit under section 115JA of the Act. 9.1 Before us, the learned counsel relied on the decision of Hon'ble Bombay High Court in the case of CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203. The decision in that case was that no portion of the expenditure incurred on account of salary paid to staff, stamp duty, transfer fee and safe custody etc., could be directly relatable to earning of the dividend for the purpose of computing deduction under section 80M. In view of this case, it was argued that the ad hoc attributation of expenditure of Rs. 25,000 to the earning of dividend income was not justified. The learned D.R. did not raise any argument in this behalf. Relying on the decision of Hon'ble Bombay High Court in the case of General Insurance Corpn. of India, it is held that no such expenditure could have been attributed to the earning of exempt income by way of dividend. Thus, this ground is allowed. 10. Ground No. 6, regarding setting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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