| SooperKanoon Citation | sooperkanoon.com/75101 |
| Court | Income Tax Appellate Tribunal ITAT Pune |
| Decided On | Jul-28-2006 |
| Judge | M Shrawat, K Bansal |
| Reported in | (2007)109TTJ(Pune.)350 |
| Appellant | Vanaz Engineers Ltd. |
| Respondent | Deputy Commissioner of Income Tax |
2. The ground No. 1 in respect of both the years is regarding claim of depreciation on residential buildings provided to the staff. For asst.
yr. 1997-98 claim of depreciation amounted to Rs. 1,95,926 and for asst. yr. 1998-99 the amount of depreciation was Rs. 1,86,130. In the ground itself, few arguments have also been raised that the cost of construction of residential buildings was incurred by the appellant out of company's own funds as well as out of loans taken from HDFC. In the ground, it has also been mentioned that the Revenue authorities have erred in invoking the provisions of Section 2(47)(v) of the IT Act, 1961 r/w Section 53A of the Transfer of Property Act.
3. Briefly stated the facts of the case are that the assessee is engaged in the business of manufacturing of valves. During the course of assessment proceedings, it was noticed that the assessee has claimed depreciation on residential buildings. The observation in this regard as made by the AO was that the cost of the residential buildings was met by the employees of the company. In compliance of query raised, the assessee has explained that a land measuring 62,337 sq. mtrs. at Kothrud, Pune was declared surplus under Urban Land Ceiling Act. The assessee company has obtained an exemption under Section 20(1) of ULC Act from the Government of Maharashtra with a condition that out of the said land area of 20,882 sq. mtrs. to be used for the purposes of housing for weaker section of the society or the employees of the company. Accordingly, the assessee has constructed residential flats which were given to the employees. The employees have agreed to pay the cost of construction of flats in instalments. It has also been explained that in the books of account under the head "residential plot" assets have been disclosed and depreciation was claimed being used for the purposes of business.
3.1 The AO has dismissed the above explanation. It was noted in the assessment order that the residential flats on the said land were constructed from 1979 to 1984 for which contribution had been received from the employees. The AO has also mentioned that a loan has also been raised from HDFC. The flats so constructed were handed over to the employees at an agreed sale consideration which was to be recovered from the salaries of the employees. It has also been noted that the employees have accordingly made the contribution and the assessee company had already collected a sum of Rs. 78,47,449. In view of these facts, the AO has arrived at a conclusion that the cost of construction of flats being met by the employees, hence as per provisions of Section 43 of the IT Act, the actual cost to the assessee was to be computed by reducing the portion of the cost which had been met directly or indirectly by any other person or the authority. In his opinion since the cost of construction of the flats was to be met by the employees, therefore, it was "nil" in the hands of the assessee, therefore, not entitled for any depreciation. It has also been mentioned by the AO that in the absence of proper details in respect of HRA payments it could be presumed that the assessee was making the HRA payments to the employees. With this presumption, he has arrived at a conclusion that the ownership of the flats was with the employees and not with the assessee, therefore, not entitled for depreciation. In identical manner in the subsequent year i.e. asst. yr. 1998-99, also under appeal now before us, the AO has reproduced the finding of the AO of 1997-98 and disallowed the claim of depreciation. Being aggrieved for both the years the assessee has preferred first appeals.
4. The learned CIT(A) has justified the action of the AO in view of two reasons, firstly, the registered agreement with the employees proved that the cost was to be recovered from the employees in instalment by the recovery from their salary. The amount so recovered was to be reduced from the actual cost of the asset. His second reason was that considering the applicability of Section 53A of Transfer of Property Act r/w Section 2(47)(v) of the IT Act, the assessee has transferred the property to the employees and in support he has narrated seven conditions as required for "part performance" on the part of the transferor, reproduced below: (c) the contract must be -in writing duly executed by or on behalf of the transfer; (d) the terms of the contract should be clearly ascertainable from the written agreement; (e) the transferee should either already be in possession of the property and be allowed to continue such possession or he must take the possession of the property; (f) the transferee must have acted in furtherance of the contract; and (g) the transferee should have performed or should be willing to perform his promises as per the contract.
5. After narrating the aforementioned conditions, he has held that the property stood transferred in favour of the employees, hence, de facto and de jure, the appellant was not the owner of the property hence not entitled for depreciation.
6. We have considered the rival submissions of both the sides. We have perused the orders of the authorities below. We have also examined the compilation filed before us. The learned Authorised Representative has relied upon the documents and the written submissions forming part of the compilation. The learned Authorised Representative has also cited few case laws to be discussed hereinafter. On the other hand, from the side of the Revenue, the learned Departmental Representative has relied upon the findings of the authorities below.
6.1 As per the statement of facts, the appellant was required to shift its factory from Prabhadevi, Mumbai, accordingly, shifted the factory to Pune. The Government has allotted the plot of land total admeasuring 62,337 sq. mtrs. Out of the total area, the provisions of ULC Act were applied on 20,882 sq. mtrs. of land. On representation, the Government of Maharashtra permitted the assessee to retain the excess land with a condition to build houses for weaker section of the society or the employees of the company. Accordingly, the construction of staff quarters was started. It is mentioned that the first phase of construction was completed in 1975-76 and the second phase of construction was started in 1979 and that was completed in 1984. The facts of the case have also revealed that the assessee has obtained loan from HDFC for construction of flats. This fact has also not been denied by the AO. A proposal was moved from the side of the union of the employees to give option to the employees to buy the flats at cost price. As a welfare measure, the said proposal of the employees' union was accepted with a condition that the transfer of the quarters would take place only after receipt of full cost incurred by the assessee company. It has also been agreed upon that the transfer could be made only on repayment of entire loan raised from HDFC. In view of the said agreement, the employees have started paying the monthly contribution.
It has also been stated that up till 31st March, 2000 the staff quarters were not transferred in the name of the employees. At this juncture, it is worth mentioning that the transfer in fact took place during the previous year relevant for the asst. yr. 2003-04 and accordingly, short-term capital gain under Section 50 was declared by the assessee. A copy of IT return for asst. yr. 2003-04 is placed before us disclosing the short-term capital gain on transfer of residential building at Rs. 34,71,444 vide order dt. 30th March, 2006, asst. yr. 2003-04 under Section 143(3) r/w Section 147. The said disclosed short-term capital gain was assessed as such in the hands of the assessee. It is also pertinent to mention at this juncture, due emphasis given by Mr. Vora, the learned Authorised Representative, on an another development pertaining to the asst. yr. 1986-87. Vide notice under Section 263 dt. 25th Feb., 1991 a query was raised in respect of allowance of depreciation on residential building stated to be constructed for the benefit of employees and eventually to be transferred. Thereafter, an order under Section 263 dt. 21st March, 1991 was passed and the AO was directed to re-examine the allowability of depreciation on said residential building. In compliance an order under Section 143(3) r/w Section 263 for asst. yr. 1986-87 was passed on 23rd March, 1993 and the AO has recorded a finding vide para 5 that on verification it was found that the claim of depreciation was proper.
In the said para it was observed by the AO that he has arrived at the said conclusion on examination of the terms of agreement and the amount received from the employees. Naturally, these two undisputed facts have a direct bearing on the issue in hand. The first contention of the Revenue that in view of the provisions of part performance of Transfer of Property Act, the flats were transferred to employees in the light of Section 2(47) of the Act, however, appears to be incorrect because the transfer was held to have taken place in the asst. yr. 2003-04. As far as the question of allowance of depreciation during this intervening period was concerned, that too has been examined by the AO following the instructions of the learned CIT under Section 263 of the IT Act, however, decided in favour of the assessee by not disturbing the claim of depreciation. In addition to these two reasons now before us, series of other documents have also been placed, stated to be before the Revenue authorities. The paper book contained depreciation chart, list of agreement dt. 24th April, 1979, a CBDT Circular dt. 12th Dec, 1966, 7/12 extract, agreement dt. 24th March, 1984, letter from HDFC regarding lease of mortgage, memorandum of agreement with HDFC, etc. Apart from the above evidences, and view already taken by the Revenue authorities, we have also examined that whether the advances given by the employees as monthly contribution was incurred as a consideration towards cost of the flat. An answer to this limited question is in affirmative because the clauses of the agreement have inadvertently mentioned that the employees have to contribute in instalment towards the cost of the flats. However, the moot question is whether the flats have been transferred by the company in the names of the employees during the years under consideration effecting the claim of depreciation. To answer this question, we have perused few case laws viz. CIT v. Cochin Co. (P) Ltd. (1990) 81 CTR (Ker) 115 : (1990) 184 ITR 230 (Ker), wherein it was held that as per Section 43(1), if the cost of the asset was met directly or indirectly at the time of purchase of the machinery, by any other person or authority, to that extent, the actual cost to the assessee will stand reduced. But it was a far cry to state that though at the time of purchase of the machinery no person met the cost either directly or indirectly and if, long thereafter, a debt incurred in that connection was written off, it could be equated to a position that the financier met part of the cost of the asset. The amount was remitted so held could not be reduced from the cost of the machinery of the assessee for the purposes of depreciation.
6.2 One more case law has been cited of Bombay High Court in the case of Bharat Forge Co. v. CIT wherein the Hon'ble Court has opined that phrase "extinguishment of rights" takes colour from the associated words and expressions and will have to be restricted to the sense analogous to them. The expression "extinguishment of rights therein" will have to be confined to the extinguishment of rights on account of transfer. On the basis of the facts of that case, the Hon'ble Court has held that for the purposes of determination of actual cost, the amount paid by the bank in settlement of breach of contract entered into by the assessee in connection with purchase of dollars in repayment of loan taken to purchase the machinery not to be deducted in computing the actual cost.
6.3 An another case of Rajshree Roadways v. Union of India and Ors.
has also been referred wherein the facts were not directly connected with the issue in hand. However, the ratio laid down in the said decision was stated to be applied in the instant appeal. In that appeal the Hon'ble Rajasthan High Court was of the view that considering the lease agreement though the sale was to be executed to the lessee after the expiry of lease but during the said period the depreciation of the trucks held to be allowed to the lessor and the lease rent was held to be deductible as revenue expenditure.
6.4 An another decision was heavily relied upon by the learned Authorised Representative as decided by the Delhi High Court in the case of CIT v. Reliance International Corporation (P) Ltd. . In this decision, the Hon'ble Court has considered the definition of "transfer" as prescribed under Section 2(47) of the Act. The Hon'ble Court has considered the amendment of 1985 and 1988 and held that the same were substantive in nature and not clarificatory. The Court has observed that the Sub-clause (v) was introduced in respect of transaction falling within the situation contemplated by Section 53A of the Transfer of Property Act and can be treated as "transfer" in relation to capital asset. The Court has held that mere allowing possession in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act could not be by mere force of the said section be a transfer as defined in Section 2(47)(v) of the Act.
Section 53A of the Transfer of Property Act, 1882, deals with the doctrine of part performance. That section does not confer any title on the transferee in possession but merely imposes a statutory bar on the transferor. The doctrine of part performance is a defence. It is a shield and not a sword. It is a right to protect the transferee's possession against any challenge to it by the transferor contrary to the terms of the contract (see p. 671A-C).
7. In the light of the above case law cited and few proceedings already taken place in assessee's own case, such as proceedings under Section 263 and the disclosure of short-term capital gain in the asst. yr.
2003-04, we have also perused some of the clauses of the relevant agreement. The employees have agreed to pay the cost of the flat allotted to them in instalment which was to be recovered from the salaries of the employees. Pending the recovery, the said asset was disclosed as "residential block of building" as per the balance sheet.
The contribution of the employees has also been reflected in the balance sheet, appearing as unsecured loan account. The process of transfer was not concluded during the years under consideration though the possession was handed over. Since the admitted position was that the buildings/flats were agreed to be constructed by the company by raising loan as well as by utilizing the company's own funds, the asset was disclosed in the balance sheet. Both the situations i.e. investment in acquisition of asset by the company and mere handing over of possession for which legal transfer yet to take place; has duly been considered by the Hon'ble Court as we have discussed supra.
Respectfully following the view already taken by the Hon'ble Court as well as considering the totality of the facts and circumstances of the case, we are of the considered view that the assessee is entitled for the depreciation for the years under consideration. The findings of the authorities below are hereby reversed and the ground is allowed.
8. The ground No. 2 for asst. yr. 1997-98 and ground No. 5 for asst.
yr. 1998-99 is in respect of deduction claimed by the assessee on account of leave encashment. This issue stands covered in favour of the assessee by the decision of the Supreme Court in the case of Bharat Earth Movers Ltd. . So it can be held that the provision made by the company for meeting the incremental liability of this year incurred by it under the leave encashment scheme, proportionate with the entitlement earned by the employees of the company, subject to the ceiling on accumulation, as applicable on the relevant date is entitled to deduction. The AO is directed to recompute the claim and this ground is decided accordingly.
9. The ground No. 3 for asst. yr. 1997-98 and ground No. 2 for asst.
yr. 1998-99 is in respect of disallowance of payment of provident fund and ESIC. In respect of this ground, we hereby follow a decision of Pune Bench in the case of Indian Card Clothing Co. Ltd. (ITA No.214/Pune/1998) and direct to consider the following three points before deciding the issue of disallowance.
(i) The Section 43B would apply only to employer's contribution while the deduction in respect of employee's contribution would be governed by the provisions of Section 36(1)(va); (ii) The deduction in respect of employer's contribution is to be allowed if the payment has been made by the assessee before the due date of filing of return; (iii) The deduction of employees' contribution, the deduction is to be allowed if the payment is made within the grace period of the due date as specified in Section 36(1)(va).
10. On examination of above mentioned requirement of law, the AO can allow the claim if the payment is within the ambit of following two conditions: (i) Insofar as the employer's contribution is concerned, the same shall be allowed if it has been paid upto the date of the filing of the return, as provided under Section 43B; and (ii) Insofar as the employee's contribution is concerned, the same shall be allowed if it is paid within the period allowed under the relevant rules including the grace period reckoning from the date of payment of wages/salary to the employees.
11. We hereby restore this ground to be decided pro tanto, hence may be treated as allowed for statistical purposes.
12. The ground No. 4 for asst. yr. 1997-98 is in respect of disallowance of Rs. 10,000 made on ad hoc basis out of the miscellaneous expenses. This ground has not been pressed, hence dismissed.
13. The ground No. 5 for asst. yr. 1997-98 and ground No. 4 for asst.
yr. 1998-99, is in respect of assessee's claim for deduction under Section 80HHC of the Act. The authorities below have held that the sales-tax and excise is part and parcel of' the turnover, hence to be included for the purposes of calculation of deduction. This issue stands covered in favour of the assessee by the decision of Bombay High Court in the case of Sudarshan Chemicals Industries Ltd. .
14. In the result, both the appeals of the assessee are partly allowed as indicated above.