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Judgment
Dr. Satish Chandra, J.—Present appeal u/s 260-A of the income tax Act, 1961, has been preferred against the judgment and order dated 28.12.2007 passed by the Income Tax Appellate Tribunal, Lucknow in ITA No. 211/Luc/2006 and Cross Appeal No. ITA 245/Luc/2006 for the Assessment Year 2002-03. On 30.06.2008, a Coordinate Bench of this Court has admitted the appeal on the following substantial questions of law:
i. Whether the interest on unsecured loan granted by the Government was covered by Section 43B or not as per the ratio laid down by the Hon''ble Apex Court in New India Mining Corporation (P) Ltd Vs. Commissioner of Income Tax dated 15.2.2000, (2000) 243 ITR 640 SC .
ii. Whether on the facts and in the circumstances of the case, the spares can be capitalized and depreciation claimed on it even when they are not used and thus merit allowance u/s. 32 and whether a company can take cover under AS-2 even when disallowance is warranted u/s. 32.
iii Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is justified in law in deleting the addition towards short provision of interest on Government loan for Financial Year 2001-02 and towards short provision of DA arrears of employees when disallowance was made as these amounts were not actually paid by the assessee before the prescribed date and the assessee failed to verify with the documentary evidence that these expenses had not been claimed in any other year.
The brief facts of the case are that the assessee, a wholly owned undertaking of U.P. Government, is engaged in the business of generation of electricity in the State of U.P. For the assessment year under consideration, the assessee has filed the loss return, which was scrutinized by the A.O. u/s 143(3) of the Act and made the additions, which were deleted by the First Appellate Authority as well as by the Tribunal. Still not being satisfied, the department has filed the present appeal.
With this background, heard Sri D.D. Chopra, learned counsel for the department and Sri S.K. Garg, learned counsel for the assessee and perused the pleading of the appeal.
With regard to substantial question of law No. 1, it appears that during the assessment year under consideration, the assessee has received a grant from the State Government, which was deposited in the State Bank of India. The money was lying with the Bank for a period of three months. So, the A.O. has computed the interest @ 9% and made the addition of Rs. 55,32,750/-. The same was deleted by the appellate authorities.
On perusal of the record, it appears that the money was kept in current account of the State Bank of India and in the current account, nobody can earn interest. Thus, there was no question to earn the interest and Tax thereupon. Therefore, we find no reason to interfere with the impugned order passed by the Tribunal pertaining to Substantial Question of law No. 1.
With regard to substantial question of law No. 2, the grievance of the department is pertaining to the depreciation on spare parts. It is a submission of learned counsel that the assessee has purchased various parts for the equipments used in generating electricity. During the assessment year under consideration, the same were capitalized in the books of account. The A.O. opined that the machinery part becomes unserviceable. So, no depreciation can be allowed on the spare parts. Finally, the A.O. made the addition, which was deleted by the appellate authorities.
By considering the totality of the facts and circumstances of the case, it may be mentioned that the accounts were maintained as per the accounting standard II issued by the Institute of Chartered Accountants of India, and the said standard is mandatory for all the companies. Hence, the assessee has capitalized the value of spare parts along with the equipments. The spare parts were supplied along with the equipments to keep the same in workable conditions. It may be mentioned that the spare parts cannot be utilized independently and the same will have to be used along with the equipments. When the depreciation is allowed on the equipments, then it is also allowable on its spare parts. When it is so, then we find no reason to interfere with the impugned order passed by the Tribunal with respect to Substantial Question of law No. 2.
The last grievance of the department is pertaining to the interest on the government loan received from the State Government.
It is submitted that during the assessment year under consideration, the assessee has received a loan from the State Government for the purpose of distribution of the dearness allowance to the assessee company. The said dearness allowance was not paid to the employees before the prescribed date. So, the short provision of DA arrears of employees in accounts was claimed by the assessee but the same was disallowed by the A.O.
By considering the totality of the facts and circumstances of the case it may be mentioned that section 43-B of the income tax Act deals with certain deductions to be only on actual payment. Section 43-B, on reproduction reads as under:
43-B.: Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) a any sum referred to in clause (ii) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing,
(e) any sum payable by the assessee as interest on any loan or advances from the scheduled bank in accordance with the terms and conditions of the agreement governing such loan (or advances), or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.
From the above, it appears that the aforesaid section is not applicable to the interest on government loans and for DA arrears of employees. If the liability had finalized in the year under consideration, then the same would be allowed. The short fall in the provision was pointed out by the AG Auditors, so the A.O. made an addition. But fact remains that assessee has filed the revised return. Moreover, interest if any earned on the loan, the same will go to the State and it is the duty of the assessee to return it to the State as per G.O. issued in 1976 as well as terms and conditions of the loan.
Thus, the appellate authorities have rightly allowed the claim of the assessee. Therefore, the order the Tribunal is hereby sustained along with the reasons mentioned therein.
The answer to the substantial questions of law is in favour of the assessee and against the department. In the result, the appeal filed by the department is dismissed.