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2016 (2) TMI 393 - ITAT HYDERABAD

2016 (2) TMI 393 - ITAT HYDERABAD - TMI - Revision u/s 263 - commission paid to the MD to be disallowed - Held that:- The terms of employment was already prescribed in the above resolution, which was for a period of five years with effect from Sept'01, 2007. Hence, the reappointment of the MD was with effect from 01/09/2007. The company can adopt the revised commission of 3% with effect from 01/09/2007 and not from the period 01/04/06 to 31/03/07. We find that the CIT's contention was right part .....

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ets, fans etc. These are electrical fittings which are independent in nature and it does not form part of any assets. Whereas in the present case the electrical installations which are different to electrical fittings as defined in the depreciation schedule in the IT Rules. These include line metering equipment, switch yard, HT motors and auto losses, cable work, lighting equipment etc. are installed as part of the plant & machinery. It cannot be separated from the plant & machinery. Hence, it h .....

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gly. Since, it is categorized as special category and claimed 100% rate of depreciation, the assessee applied the special provision of claiming depreciation, as per the section 32(1)(iia)(D), it cannot again claim the additional depreciation. Even though it has not claimed 100% of the quantum of the value of assets due to the fact that the assets were acquired and utilized less than 180 days, it was eligible for only 50% of the rate of depreciation. Again, it cannot claim the additional deprecia .....

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e claim the balance depreciation in the following year. It was decided affirmative. But in the present case, the facts are different, hence, the said case cannot be applicable to assessee. - Decided against assessee

Disallowance of outstanding liability of leave encashment - Held that:- Following the consistent view taken by the Tribunal in assessee's own cases for earlier years, we find no justification to disallow the claim concluding the provisions made on account of leave encashme .....

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AY 2008-09 dated 25/03/2013. For AY 2009-10, Revenue filed this appeal against the order of CIT(A)-V, Hyderabad. These appeals are consolidated and for sake of convenience, a consolidated order is passed. ITA No. 580/Hyd/2012 for AY 2007-08 2. The assessee is a company engaged in the business of manufacturing and sale of cement. For the AY 2007-08, filed its return of income admitting total income of ₹ 150,53,83,606/-. The case was selected for regular assessment and AO determined the tota .....

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to P&L account under 'Administrative and Selling Expenses' that you had debited an amount of ₹ 5,32,98,365/- towards Director 's remuneration. The Annexure-VI to Form 3CD reveals that a sum of ₹ 5,15,92,000/- was paid as fee or commission to Shri P. Pratap Reddy, Managing Director. This sum of ₹ 5.15 crores comprises of salary of ₹ 6,72,000 and Commission of ₹ 5,09,20,000/-. It is noticed from the assessment record for AY 2007-08 of Sri P. Pratap Red .....

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therefore, requested to show cause why an amount of ₹ 4.05 crores should not be disallowed. (ii) It is noticed from Annexure-II to Form No. 3CD report, depredation schedule, that you' had claimed depreciation of ₹ 1,05,74,877/- on electrical installations @ 15%. As per section 32 of the Act, the eligible depreciation on electrical installations is (q 10% and not @ 15% claimed by you. The Assessing Officer ought to have examined this aspect while completing the assessment. Failure .....

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X item No. 27(b) of 3CD report no tax was deducted. Provisions of section 40a(i) stipulate that any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938) royalty, fees for technical services or other sum chargeable under this Act, which is payable (A) Outside India or (B) In India to a non-resident, not being a company or to a foreign company on which tax is deductable at source under Chapter XVII·B and such tax has not been deducted or, .....

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erred in setting aside the assessment order and directing the AO to complete the assessment fresh. 3. The CIT erred in coming to a conclusion that the commission paid to the Managing Director did not pertain to the Ay.2007-08 and was therefore erroneous and prejudicial to the interests of revenue. 4. The CIT erred in coming to a conclusion that the assessee has wrongly claimed depreciation @ 15% was therefore is erroneous and prejudicial to the interests of revenue. 5. The CIT erred in coming to .....

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.). Ld. CIT noticed in Annual Reports of the company that assessee paid ₹ 5,09,20,000/- as commission to MD Mr. Pratap Reddy based on the resolution passed on 21/08/2003 for a period of five years (30/01/2003 to 29/01/2008). The issue is only relating to commission, will confine only to this payment. The commission authorized by this special resolution was 1% of the net profit. Subsequently on 27th September, 2007, a resolution was passed to appoint Mr. Pratap Reddy as Chairman and revisin .....

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considering the fact that in respect of commission as remuneration did not contain the time of accrual of the commission to MD. In the special resolution passed on 21/04/03 by the shareholders in EGM/AGM also, there was no time of accrual of the commission to the MD. The commission to MD increased from 1% to 3% on 27/09/2007. Thus, the terms of employment of MD were silent in respect of time of accrual of commission. He also raised the question at what point of time the expenditure accrues in th .....

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ber, 2007, the commission was revised from 1% to 3%. Since the services rendered by MD for the period 01/04/2006 to 31/03/2007, the same has to be accounted in the FY 2006-07 by considering the matching principles of accounting to the expenses relating to the period to which the income accrues. Since the service was rendered for the period 2006-07, the same has to be provided for the commission in the same relevant period. He also submitted that CIT cannot reject the above commission adopted on .....

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has to be recognized based on accrual and matching principles. He relied on the following case laws: a) CIT Vs. Dinesh Kumar (Del) b) J.K. Industries, 297 ITR 176 (SC) c) CIT Vs. Nagari, 33 ITR 681 (SC) d) Amar Raja Batteries Vs. ACIT, 272 ITR (AT) 17 (ITAT) 6. Ld. DR relied on the order of CIT. 7. Considering the submissions of both the counsels and perusing the material facts on record, we observe that the ld. AR submitted that the commission has to be recognized on the basis of accrual and t .....

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ld in the month of Sept'07, the same was applied to arrive the commission for the same FY. Based on the accrual system adopted by the assessee, the commission was recognized in the financial statement for the period April'06 to March'07. Whereas the ld. DR submitted that the resolution was passed in the month of Sept.'07 and the terms of employment of the MD was silent in respect of accrual of commission, the same cannot be applied during this FY and it can be adopted for the sub .....

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ect from September 01, 2007 on the following terms and conditions" From the above resolution, it is clear that the terms of employment was already prescribed in the above resolution, which was for a period of five years with effect from Sept'01, 2007. Hence, the reappointment of the MD was with effect from 01/09/2007. The company can adopt the revised commission of 3% with effect from 01/09/2007 and not from the period 01/04/06 to 31/03/07. We find that the CIT's contention was righ .....

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ith effect from AY 2006-07, the electrical fittings or electrical installations are brought under the heading "Furnitures and Fittings". The stipulated rate of depreciation is 10% on Furnitures and Fittings. The electrical fittings have been defined in the depreciation schedule itself. It includes electrical wiring, switches, sockets, other fittings and fans etc. Hence, it is inclusive definition of electrical fittings in depreciation schedule from AY 2006-07 onwards. It is clear that .....

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line equipment, vi) cable work and vii) lighting equipment. These are electrical installation and part and parcel of plant & machinery. 10. Ld. DR submitted that he relies on the order of CIT. 11. Considering the submissions of both the counsels and perusing the material facts on record, we are of the view that the definition of electrical fittings given are electrical wiring, switches, sockets, fans etc. These are electrical fittings which are independent in nature and it does not form part .....

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& machinery alone has to be adopted not of the rate of 'Furnitures and Fittings'. Considering the above discussion, we allow the grounds of the assessee. 12. On the last issue of non-deduction of TDS on the payment of consultancy charges in foreign currency, CIT found in the 3CD report that no tax was deducted at source on this payment. The assessee had submitted that these payments were made only after following the TDS provisions and filed the details of TDS payments. The same was .....

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ismiss the grounds raised by assessee. It may be mentioned here that the findings of CIT are partly found to be correct, the CIT cannot hold that the whole assessment made u/s 143(3) is erroneous and prejudicial to the interests of revenue. Hence, we direct the AO to carry out the findings of this Tribunal. 15. In the result, appeal of the assessee is partly allowed. ITA No. 795/Hyd/13 for AY 2008-09 16. In this AY, the CIT found the following reasons to revise the order u/s 263: A. The assessee .....

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, the assessee is entitled for additional depreciation of 20% of actual cost of machinery provided that the deduction of additional depreciation shall not be allowed u/s 32 (1)(iia)(d), when whole of the actual cost is already allowed as deduction in computing the income chargeable under the head 'profits and gains of business or profession' - In this case, the A.O. has allowed depreciation i.e. 100%. As the asset had been put to use for less than 180 days, the AO has restricted the depr .....

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ed 29.12.2010 and on this count, the order has become erroneous and prejudicial to the interests of the revenue. B. Further, it is seen that the assessee admitted the outstanding liability as on 31.3.2008 for payment of leave encashment for ₹ 1,09,24,528/- and the same was debited to P&L account. However, only an amount of ₹ 22,733/- was paid by the assessee on 7.4.2008. Balance amount was remained outstanding to the extent of ₹ 1,09,01,795/- till the filing of return of in .....

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on electrical installations. By allowing the same, the order has become erroneous and prejudicial to the interests of the revenue." The assessee submitted the objection to the above review and the same was rejected by the CIT. 17. Aggrieved with the above order, assessee is in appeal before us and raised the following grounds of appeal: "1. The order of CIT-IV, Hyderabad is contrary to law, facts and circumstances of the case. 2. The CIT erred in revising the assessment order and direc .....

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by the CIT on additional depreciation claimed on Air Pollution Equipment u/s 32(1)(iia), the ld. AR submitted that the assessee has claimed depreciation including additional depreciation of ₹ 34,41,24,692/- on new plant and machinery (Air Pollution Equipment) eligible for 100% depreciation of ₹ 57,35,41,154/- acquired and installed as per the provision of section 32(1)(iia) for the AY 2008-09. It is submitted that the said plant and machinery is installed and used for less than 180 d .....

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ompany has not fully depreciated the said plant and machinery in one previous year. 18.1 Without prejudice to what have been stated above, the ld. AR submitted that the pollution control equipments are entitled for special rate of depreciation of 100% having special identity. In this context it is relevant to mention the principle of interpretation contained in the legal maxim "generalia specialibus non derogant". A special provision normally excludes the operation of general provision .....

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pment is placed, applied to the pollution control equipment installed by the assessee. Its eligibility for higher amount of depreciation will not be shadowed by the general rate provided for plant and machinery. Accordingly, ld. AR submitted that even though the asset is put to use for less than 180 days still qualifies for 100% depreciation as per the legal maxim "generalia specialibus non derogant" referred above. 18.2 Further, the ld. AR referred to the decision of Adar Tea Products .....

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KKSK Leather Processors (P) Ld. Vs. ITO wherein the Tribunal held as under: "The Tribunal, after examining the Explanation 5 to sub-sec.(1) of sec.32, held that the provisions of sub-section (1) of sec.32 was applied whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income. The Tribunal held that the Assessing Officer is duty bound and under obligation to allow the deduction of depreciation as per the provisions of sec.32(1). When such a .....

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t, we refer to section 32(i)(iia), which is as under: 32. (1) …. 32(1)(iia) In the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed a .....

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cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;" From the above definition, it is clear that the assets, on which the whole of the actual cost of which is allowed as a deduction denotes to those assets which was allowed as depreciation @ 100%. These rates are categorized for the special category of assets which are similar .....

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of the value of assets due to the fact that the assets were acquired and utilized less than 180 days, it was eligible for only 50% of the rate of depreciation. Again, it cannot claim the additional depreciation u/s 32(1)(iia). Assessee also relied on the case of Cosmo Films Ltd. (supra). Reliance placed by the assessee on the said case is on the subject whether the assessee can claim the whole additional depreciation which is as incentive to the assessee, who are in the manufacturing sector and .....

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lity of leave encashment of ₹ 109,01,795/-, the ld. AR submitted that the disallowance made by the CIT was wrong and the provision made on the leave encashment without actual payment as per section 43B(f) was allowable as deduction by relying on the case of AP State Seeds Development Corporation Ltd. in ITA No. 1530/Hyd/2012 of the coordinate bench of this Tribunal. 22. Ld. DR, on the other hand, relied on the CIT's order. 23. Considering the submissions of both the counsels and facts .....

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riginal section 43B in IT Act 1961, the intention of which was to curb unreasonable deduction on the basis of mercantile system of account without discharging statutory liability. It was observed by the legislature, that such enactment was necessary as there had been trend to evade statutory liability on one hand and claim appropriate benefit under the Act on the other. Under clause (f) of 43B, any sum payable by the employer to his employees as leave encashment shall be deductible only in compu .....

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n amount by not taking leave which he or she is otherwise entitled during the particular year. Hence, the employer is obliged to make appropriate provision for the said amount. Once the employee retires he/she has to be paid such sum on cumulative basis with the employee 3 earns throughout his/her service career unless he/she avails of the leave earned by him or her. That does not have any nexus with the original enactment. An employer is entitled for deduction for the expenditure he incurs for .....

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sistent with the main object of the enactment. Without such reason the enactment is inconsistent with the original Provision. The legislature must disclose reasons which would be consistent for the provision of the constitution and the laws of the land and not for the sole object of nullifying the judgment in the case of Bharat Earth Movers vs. CIT (245 ITR 428) (SC). 6. As discussed above, Section 43B(f) already struck down by the Calcutta High Court in the judgement cited supra and as per judg .....

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