C I T vs. SHAHABAD COOP SUGAR MILLS LTD.

ITA/515/2008HC Punjab & HaryanaPHHC01080515200817 December 2010Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE ADARSH KUMAR GOEL10 pages
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What were the facts?

The Revenue appealed against an order of the Income Tax Appellate Tribunal (ITAT) concerning assessment year 1994-95. The assessee, Shahbad Co-op. Sugar Mills Ltd., had claimed deductions for an education fund (Rs. 25,000) and a subscription to the Haryana State Cooperative Development Federation (Rs. 6,19,637). The Assessing Officer (AO) disallowed these claims, stating they pertained to assessment year 1992-93. The AO also disallowed depreciation of Rs. 18,24,187 on machinery costing Rs. 97.20 lacs, citing an audit report that indicated the machinery was neither used nor in usable condition. The CIT(A) upheld the AO's disallowances. The ITAT, however, allowed the assessee's claims for the education fund and subscription, and also allowed depreciation on the machinery.

What did the High Court hold?

The High Court decided to answer questions 1 and 2 in favour of the revenue and question 3 in favour of the assessee. Regarding questions 1 and 2, the Court found that the ITAT's reliance on the Registrar's letter was flawed as it was neither produced nor its contents disclosed to the revenue, and the assessee's own submissions to the AO indicated the payments related to assessment year 1992-93. Given the mercantile system of accounting, these payments were not allowable in assessment year 1994-95. For question 3, the Court upheld the ITAT's decision to allow depreciation. It noted that while auditors raised an objection about the machinery being idle, the assessee's reply, supported by an engineer's certificate, justified the installation for increasing plant capacity and stated the machinery was working. The Court referred to judicial interpretations of 'used' in Section 32, which includes machinery kept ready for use, even if not actively operated. The Court found no reason to interfere with the ITAT's finding that the assessee was entitled to depreciation.

What were the issues?

1. Whether, following the mercantile system of accounting, the assessee was entitled to claim Rs. 25,000 for an education fund in assessment year 1994-95, when the liability related to an earlier assessment year (Section 37 of the Income Tax Act, 1961). 2. Whether, following the mercantile system of accounting, the assessee was entitled to claim Rs. 6,19,637 for a subscription to the Haryana State Cooperative Development Federation in assessment year 1994-95, when the liability related to assessment year 1992-93 (Section 37 of the Income Tax Act, 1961). 3. Whether depreciation of Rs. 18,24,187 was allowable on machinery costing Rs. 97.20 lacs, which auditors reported as neither used nor in usable condition, based on an engineer's certificate provided during appellate proceedings (Section 32 of the Income Tax Act, 1961). Assessee's arguments: For issues 1 and 2, the assessee contended that the payments were made on the directions of the Registrar of Cooperative Societies, with a letter dated 23/03/1994 received on 31/03/1994, making them allowable in the relevant year. For issue 3, the assessee argued that the machinery was installed to increase plant capacity and was working properly, supported by an engineer's certificate. The assessee also relied on prior ITAT orders for assessment year 1995-96. Revenue's arguments: For issues 1 and 2, the revenue argued that the ITAT erred by relying on a letter from the Registrar which was not on record, not reproduced, and not provided to the revenue for rebuttal. The revenue also pointed to the assessee's own details submitted to the AO indicating the payments related to assessment year 1992-93. For issue 3, the revenue argued that depreciation was not admissible as the machinery was kept idle and never used.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 37,Section 32

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH.

Date of decision: 17.12.2010 The Commissioner of Income Tax -----Appellant. Vs. The Shahbad Co-op. Sugar Mills Ltd. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Yogesh Putney, Sr.Standing Counsel for the appellant. Mr. S.K. Mukhi, Advocate and Ms. Jyoti, Advocate for the respondent. --- ADARSH KUMAR GOEL, J.

1.

The revenue has preferred this appeal under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order of the Income Tax Appellate Tribunal, New Delhi in I.T.A. No.3530/DEL/1997 for the assessment year 1994-95 claiming following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in allowing the assessee’s claim of Rs.25,000/- on account of education fund ignoring the fact that the assessee had been following the mercantile system of accounting and that the liability of the annual subscription for the earlier asstt. Year of which the assessee was well aware was not allowable in the year relevant to the Asst

The order continues below.

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