INCOME TAX OFFICER v. D.P.F. TEXTILES LTD
[Citation -1984-LL-0720-2]

Citation 1984-LL-0720-2
Appellant Name INCOME TAX OFFICER
Respondent Name D.P.F. TEXTILES LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 20/07/1984
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags change of previous year • extra shift allowance • plant and machinery • additional payment • prescribed rate • bonus act
Bot Summary: 1980-81 the first point raised in grounds 2, 3 and 4 is regarding the direction of the CIT to the ITO to allow a sum of Rs. 4,33,433 as a deduction in the computation of the income. Madras Benches have been invariably holding that payments in excess of statutory bonus made by an employer to his employees to discharge a legally enforceable obligation arising out of a settlement under the Industrial Disputes Act would qualify for deduction under s. 37 of the IT Act, even if the dispute which is the subject of the settlement, relation to bonus, and such payments will not therefore, attract the mischief of the first proviso to s. 36(I)(ii) as invoked by the ITO for the purpose of the disallowance. 20th Nov., 1979 requested the approval of the ITO for the change in the previous year. The ITO completed the assessment on the basis, that is to say allowing depreciation only for a period of one year comprising of twelve months, inspire of the proviso to r. 5(1) of the IT Rules. The assessee did not accept the assessment on this point even though it has agreed to this condition before the ITO. On appeal, the CIT held that the condition imposed by the ITO was clearly at variance with the proviso to r. 5(1) and that the ITO had no power to impose it. The Allahabad High Court has held that the ITO cannot impose conditions which are not reasonable and consonant with the Act. As regards the point made by the ITO regarding the anomaly that would be involved if the depreciation is allowed with the condition imposed by the ITO we have only to point out the disposal of this question by the CIT. As stated by him, such an anomaly is inherent in the main part of r. 5(1) itself according to which even in a case when the previous year is only for a period of twelve months the full amount of the depreciation calculated at the statutorily prescribed rate shall have to be allowed in respect of assets which have actually been used at any time during that period.


In this appeal by Revenue for asst. yr. 1980-81 first point raised in grounds 2, 3 and 4 is regarding direction of CIT (A) to ITO to allow sum of Rs. 4,33,433 as deduction in computation of income. This sum, when it was accepted as liability by assessee. represented additional payment agreed to be paid to workers of assessee textile nil on basis of terms of settlement entered into between Southern India Mills owner' Association, Coimbatore and Textile trade unions in Coimbatore District dt. 12th Oct. 1979. This additional payment was calculated at rate of 12 per cent of total earnings. This was in addition to 8 per cent that was given as bonus by assessee to its workers. ITO considered that this payment was also bonus because earlier under settlement dt. 9th Jan., 1979, issue of bonus for year ended Dec., 1978 was considered, discussed and settled at 20 per cent of to total earnings. He was of view that this payment should also be brought within purview of first proviso to s. 36(I)(ii) and since sum of Rs. 4,33,433 represented excess over 8 per cent which he considered to be permissible under Payment of Bonus Act, he disallowed this sum. CIT (A) on appeal has pointed out that Tribunal. Madras Benches have been invariably holding that payments in excess of statutory bonus made by employer to his employees to discharge legally enforceable obligation arising out of settlement under Industrial Disputes Act would qualify for deduction under s. 37 of IT Act, even if dispute which is subject of settlement, relation to bonus, and such payments will not therefore, attract mischief of first proviso to s. 36(I)(ii) as invoked by ITO for purpose of disallowance. for purpose of disallowance. Revenue is in appeal against this order of CIT (A). This question has been considered in detail by Madras Bench 'D' of Tribunal in IAC vs. Jawahar Mills Ltd. (1984) 8 ITD 20 (Mad). It has been held that additional payment of nature disallowed in this case is not profit sharing bonus and, therefore, cannot be disallowed by invoking first proviso to s. 36(I)(ii). It further hold that such payment was allowable as deduction either under second proviso to s. 36(I)(ii) or even under s. 37(I). We would follow this order of Tribunal and reject these three grounds raised by Revenue. second point raised in ground 5, 6 and 7 is regarding claim of assessee for extra shift allowance on additions to plant and machinery during previous year for this assessment year. ITO had not allowed this on ground that these additions to plant and machinery and not worked throughout previous year for this assessment year. He has relied upon decision of Madras High Court in case of South India Viscose Ltd. vs. CIT (1982) 29 CTR (Mad) 56: (1982) 135 ITR 206 (Mad). CIT (A) on other hand, allowed this claim and directed allowance of extra shift allowance on ground that concern as whole has worked extra shift for relevant period. He has pointed out instructions of CBDT given in its Circular No. F 10/83/8/ITA.II and relying on decisions of Supreme Court in Navnital C. Javeri vs. K. K. Sen, ITO (1967) 56 ITR 198 (SC) and Ellerman Lines Ltd. vs. CIT 1972 CTR (SC) 71: (1971) 82 ITR 913 (SC), held that ITO is bound to follow instructions contained in Circular. It is contended before us that in view of decision of Madras High Court in South India Viscose Ltd. (supra), which has been pronounced long after Circular of CBDT quoted by CIT (A), assessee is not entitled to extra shift allowance claimed and allowed by CIT (A). This question has been considered in assessee's own case for asst. yrs. 1977-78 and 1979-80 by Tribunal by its order dt. 16th July, 1983 in ITA Nos. 372 and 373/Mds/83. It has been held that in view of binding nature o f Circular issued by CBDT ITO was bound to allow extra shift depreciation claimed by assessee. In view of this order of Tribunal, we reject these three grounds raised by Revenue. last point raised in grounds 8 and 0 is regarding claim of assessee for depreciation for fifteen months. assessee was previously closing its accounts on 31st Dec., each year. But it changed account year to one ending on 31st March. This resulted in previous year for this assessment year extending from 1st Jan., 1979 to 31st March, 1981. It has duration of fifteen months. assessee had by its letter dt. 20th Nov., 1979 requested approval of ITO for change in previous year. ITO by his letter dt. 29th Nov., 1979 stated that change over is allowed on four conditions. One such condition was that even though entire income of often months is considered for assessment, as far as depreciation is concerned only claim for period of one year/12 months will be allowed. assessee accepted this condition by its letter dt. 30th Nov., 1979 and has stated in this regard as follows: "...........We were also advised that depreciation for one year only is admissible against income of fifteen months and we have already stated that we would agree for this condition in our letter dt. 20th Nov., 1979." ITO completed assessment on basis, that is to say allowing depreciation only for period of one year comprising of twelve months, inspire of proviso to r. 5(1) of IT Rules. assessee did not accept assessment on this point even though it has agreed to this condition before ITO. On appeal, CIT (A) held that condition imposed by ITO was clearly at variance with proviso to r. 5(1) and that ITO had no power to impose it. He cited decision of Allahabad High Court in J. K. Synthetics vs. O. S. Bajpai, ITO 1975 CTR (All) 256: (1976) 105 ITR 864 (All), where it was held that while granting permission under s. 3(4) for change of previous year, ITO can valid impose only such conditions as are reasonable and consonant with Act. He, therefore, directed allowance of depreciation for fifteen months period as laid down in proviso to r. 5(1). In appeal before us is has been urged by Departmental Representative that ITO has imposed condition and this conditions has been accepted by assessee and, therefore, assessee is not entitled to any depreciation over and above what was stipulated at time when assessee was allowed change in previous year. Departmental Representative also brought to our notice anomaly in this regard that might notice anomaly in this regard that might result if depreciation is allowed according to directions of CIT (A), as elaborated by ITO in hi assessment order in para 3. assessee relies upon order of CIT (A). On careful consideration, we are of opinion that order of CIt (A) in this regard has been correctly made. Depreciation that has been directed to be allowed by CIT (A) is in accordance with r. (5)(1) and its proviso. Allahabad High Court has held that ITO cannot impose conditions which are not reasonable and consonant with Act. In view of this decision condition imposed by ITO with regard to depreciation cannot be considered to be reasonable and, therefore, cannot be considered to be proper and valid condition for allowing change in previous year. We are of view that ITO could not have denied change even if assessee had not accepted this condition. As regards point made by ITO regarding anomaly that would be involved if depreciation is allowed with condition imposed by ITO we have only to point out disposal of this question by CIT (A). As stated by him, such anomaly is inherent in main part of r. 5(1) itself according to which even in case when previous year is only for period of twelve months full amount of depreciation calculated at statutorily prescribed rate shall have to be allowed in respect of assets which have actually been used at any time during that period. We would, therefore, reject these grounds raised by Revenue. In result, appeal is dismissed. *** INCOME TAX OFFICER v. D.P.F. TEXTILES LTD.
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