Vildirect: IncomeTax-caselaws-1991-VIL-619-GUJ-DT

1991-VIL-619-GUJ-DT

Equivalent Citation: [1994] 210 ITR 1002, 106 CTR 24, 62 TAXMANN 394

GUJARAT HIGH COURT

Date: 19.12.1991

MCGAW RAVINDRA LABORATORIES (INDIA) LIMITED

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s) : R. C. MANKAD., A. A. DAVE., J. N. BHATT

JUDGMENT

The judgment of the court was delivered by

R. C. MANKAD, ACTG. C. J.-The Tribunal has referred to us, for our opinion, the following questions under section 256(1) of the Income-tax Act, 1961 ("the Act"):

At the instance of the assessee:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the salary paid to the employee of the appellant for the period during which he was in a foreign country should be considered for the purposes of determining the disallowance under sub-section (5) of section 40A of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the Commissioner (Appeals) holding that the foreign travelling expenses of Rs. 1,579 and Rs. 11,612 were capital expenditure and, therefore, not allowable ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the Commissioner (Appeals) holding that freight charges amounting to Rs. 2,05,575 and export expenses amounting to Rs. 18,340 were not entitled to weighted deduction under section 35B of the Income-tax Act, 1961?"

At the instance of the Revenue :

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that, notwithstanding the provisions of section 80VV of the Income-tax Act, 1961, legal fees in excess of Rs. 5,000 were allowable?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to write off the terminal loss of Rs. 62,085 under section 32(1)(iii) of the Income-tax Act, 1961?"

The assessee is a limited company engaged in the business of manufacture of glucose saline solution and bottling thereof. The assessment year under reference is 1977-78, the previous year being the financial year 1976-77. It will be convenient to deal with this reference, question-wise. We will first take up the questions which are referred to us at the instance of the assessee. The first question is with regard to the salary paid to the assessee's employee, P. V. R. N. Iyer, during the period he was on foreign tour. Iyer received a total remuneration of Rs. 1,42,500, which included the value of perquisites in the previous year relevant to the assessment year under reference. It is not disputed that under section 40A(5) of the Act, the assessee could not have claimed deduction of an amount exceeding Rs. 72,000 paid to lyer by way of salary and perquisites. It was, however, urged that Iyer was sent to a foreign country for the business of the assessee and he was outside India for 29 days. It was, therefore, urged that salary received by Iyer during the period of 29 days could not have been taken into consideration for the purpose of disallowance under section 40A(5). Iyer's salary for 29 days came to Rs. 6,912 and according to the assessee, this amount should have been excluded from consideration while making disallowance under section 40A(5). It is not disputed that had Iyer not gone outside India, his salary and perquisites to the extent of Rs. 70,500 were not allowable under section 40A(5). However, if the salary of Rs. 6,912 paid to Iyer for 29 days during which he was in a foreign country is excluded, the disallowance under section 40A(5) would work out to Rs. 63,588. The Income-tax Officer held that section 40A(5)(b)(i), under which the assessee was making the claim, laid down that clause (a) of the said sub-section was not to apply to any expenditure or allowance in relation among other things to an employment in respect of any period of the employee's employment outside India. The Income-tax Officer held that Iyer was employed in India and he had gone to a foreign country for the business of the assessee. Merely because Iyer had gone to a foreign country, he could not be said to have been employed outside India. He, therefore, rejected the assessee's abovementioned claim. In the appeal preferred, by the assessee, the Commissioner (Appeals) held that under section 40A(5)(b)(i) an expenditure or allowance in relation to any employee in respect of any period of his employment outside India, was not to be taken into account while computing the expenditure under section 40A(5)(a). According to the Commissioner, the assessee's claim was misconceived inasmuch as Iyer was not employed by the assessee outside India. According to the Commissioner, Iyer was employed in India although for some period he was deployed to do the company's work outside the country. The payment of salary to Iyer was not in foreign currency. The Commissioner held that it could not be said that, for any period, Iyer was employed outside India and, therefore, the provisions of section 40A(5)(b)(i) had no application. In other words, he confirmed the view taken by the Income-tax Officer. This view taken by the Commissioner was confirmed by the Tribunal in further appeal filed by the assessee.

Sub-section (5) of section 40A in so far as it is relevant and as it stood at the relevant time, reads as follows:

"Expenses or payments not deductible in certain circumstances.--- ....(5)(a) Where the assessee--

(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or

(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction:

Provided that where the assessee is a company, so much of the aggregate of--

(a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause ; and

(b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40, in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of seventy two thousand rupees, shall in no case be allowed as a deduction : . . ..

(b) Nothing in clause (a) shall apply to any expenditure or allowance in relation to--

(i) any employee in respect of any period of his employment outside India ; ....

(i) in respect of the expenditure referred to in sub-clause (i) of clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees:....

(ii) in respect of the aggregate of the expenditure and the allowance referred to in sub-clause (ii) of clause (a), one-fifth of the amount of the salary payable to the employee or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of employment in India of the employee during the previous year, whichever is less."

The assessee does not dispute that had Iyer not been sent to foreign country, an amount of Rs. 70,500 out of the total salary of Rs. 1,42,500 paid to Iyer, was not allowable under section 40A(5). However, relying on sub-clause (i) of clause (b) of sub-section (5), it was urged that nothing in the clause was applicable to any expenditure or allowance in relation to any employee in respect of any period of his employment outside India and, therefore, salary paid to Iyer for a period of 29 days, during which he was outside India, could not have been disallowed. In other words, according to the assessee, disallowance should have been restricted to Rs. 63,588 (Rs. 70,500--Rs. 6,912 salary paid during 29 days to Iyer). Sub-clause (i) of clause (b) of section 40A(5) will be attracted only in a case where an employee is employed outside India. If the employment of the employee is not outside India, then the provision will not apply. Now could Iyer be said to have been employed outside India ? The answer has to be in the negative. Iyer was employed by the assessee in India and it was only in connection with the assessee's business that Iyer had gone to a foreign country. He was not employed outside India. A person employed in India can be sent to a foreign country but for that reason, it could not be said that during the period he is in the foreign country he is employed outside India. There has to be an employment outside India. Iyer was never in the employment of the assessee outside India. He was all the time employed in India and was paid his salary, including salary for 29 days during which period he was outside India, in Indian currency. Therefore, there is no question of ignoring Rs. 6,912, which is calculated as salary paid for 29 days to Iyer, while making the disallowance under section 40A(5). As rightly held by the Tribunal and the authorities below out of the salary paid to Iyer Rs. 70,500 were not allowable deduction. In the result, we answer question No. 1 referred to us at the instance of the assessee in the affirmative and against the assessee.

Question No. 2, referred to us at the instance of the assessee, is with regard to travelling expenditure of Rs. 1,579 incurred by lyer and Rs. 11,612 incurred by Rohit C. Mehta, when both went to Malaysia to explore the possibilities to set up a joint venture unit in Malaysia. The Income-tax Officer held that the expenditure which the assessee had incurred for Iyer and Rohit C. Mehta was capital in nature and, therefore, its deduction could not be allowed as business expenditure. In the appeal preferred by the assessee, the Commissioner held that it was not denied that Iyer and Rohit C. Mehta had gone to Malaysia in connection with the setting up of a joint venture unit in Malaysia. According to the Commissioner, the expenditure incurred in exploring the possibility of starting a joint venture of setting up of a manufacturing unit was capital in nature and, therefore, deduction thereof was not admissible. The Commissioner, therefore, rejected the assessee's claim. In further appeal to the Tribunal by the assessee, the Tribunal agreed with the view taken by the authorities below that the aforesaid expenditure should be regarded as of capital nature. The Tribunal also, therefore, disallowed the assessee's claim for deduction of the said expenditure incurred for foreign travel of Iyer and Rohit C. Mehta.

It was urged on behalf of the assessee that the joint venture manufacturing unit, which was to be set up in Malaysia, was to be set up for the same product, which the assessee is manufacturing in India. Therefore, the expenditure, which was incurred for the foreign travel of Iyer and Rohit C. Mehta, was directly connected with the business of the assessee. This expenditure must, therefore, be held to be revenue in nature, deduction whereof was allowable under section 37(1) of the Act. In support of this contention, strong reliance was placed on the decision of this court in CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715.

In Alembic Glass Industries Ltd.'s case [1976] 103 ITR 715 (Guj), on which reliance is placed by the assessee, the facts were as follows:

The assessee was a company manufacturing glass at Baroda from 1947. During the accounting period relating to the assessment years 1965-66 and 1966-67, the company incurred expenditure of Rs. 7,53,084 and Rs. 77 lakhs, respectively, for establishing a new glass manufacturing unit at Bangalore. The said unit did not go into production during the two assessment years in question, and, therefore, during the course of assessment, the Income-tax Officer disallowed the payment of interest of Rs. 50,000 and Rs. 2 lakhs, respectively, in the two years on such borrowings. He further held that the Bangalore unit was not a branch of the assessee's factory and was, therefore, a new business ; and since this new business had not started production, the payment of interest could not be taken as revenue expenditure. For the same reason, he disallowed in respect of both years, some miscellaneous expenditure and travelling expenditure referable to the establishment of the Bangalore unit. On appeal, the Appellate Assistant Commissioner held that though the unit established at Bangalore was a new one, it did not become a new business undertaking and, therefore, the deductions claimed by the assessee ought to have been allowed. On second appeal, the Tribunal agreed with the view of the Appellate Assistant Commissioner. On a reference at the instance of the Commissioner, this court held that it could not be disputed that the business organisation, administration and funds of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. There was one company which controlled the administration of both the units, which supplied the staff to both the units and which managed the whole of the business organisation of both the units. The production of both the units was considered the production of the assessee company itself. In the application for the proposed establishment of the new unit at Bangalore made by the assessee to the Government of India on December 8, 1959, and in the application for licence submitted by the assessee to the Government, it was stated that the new unit at Bangalore was nothing but an expansion of the existing business. This court observed that there was complete interconnection, interlacing and interdependence of both the units, which is the test laid down for determining whether two lines of business constitute the "same business" within the meaning of section 24(2) of the Indian Income-tax Act, 1922, by the Supreme Court in CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632.

In the instant case, the facts are entirely different. The manufacturing unit which was to be established in Malaysia was to be a joint venture of the assessee and the Government of Malaysia or other persons. It was not going to be an expansion of the assessee's business, which is carried on in India. There is nothing to indicate that the business organisation, administration and funds of both the units were to be common. In fact, from the facts stated before us, it is clear that the business organisation, administration and funds of the assessee's unit in India and the proposed unit in Malaysia were not going to be common. The production of both the units was not to be considered to be the production of the assessee. There was not going to be complete interconnection, interlacing and interdependence of both the units. It is, therefore, difficult to say that the manufacturing unit, which was to be started in Malaysia, was part of the existing business of the assessee. In our opinion, therefore, the decision of this court in Alembic Glass Industries Ltd.'s case [1976] 103 ITR 715 will not be of any assistance to the assessee.

The next decision on which reliance was placed on behalf of the assessee is in the case of CIT v. Hindustan Machine Tools (No. 2) [1989] 175 ITR 216 (Kar). In that case, in connection with the commissioning of six new divisions, the assessee had entered into a collaboration agreement with certain parties and had paid technical assistance fees during the previous year ending on March 31, 1971, relevant to the assessment year 1971-72. The assessee claimed deduction of the amount paid as business expenditure. The Income-tax Officer disallowed the claim on the ground that the deduction could be given only from the year in which the production commenced. The Appellate Assistant Commissioner held that the engineering and technical assistance fees relating to the previous year for the assessment year 1971-72 were allowable as revenue expenditure. However, deduction could not be allowed for the engineering fee paid relating to the assessment year 1970-71, as it had not become a liability in the course of the assessment year 1971-72. The Tribunal held that the entire business activity of the assessee was one and the same and there was no question of starting a new business and, therefore, the Appellate Assistant Commissioner was right in allowing the assessee's claim with regard to technical assistance fees. On a reference, the Karnataka High Court held that the only ground on which the Income-tax Officer disallowed the deduction was that production had not commenced during the previous year. However, since the new units were only a continuation of the existing business, the technical assistance fees paid by the assessee in connection with the setting up of the six new divisions were allowable as business expenditure. We fail to see how this decision can help the assessee in the instant case. The question before the Karnataka High Court was whether the Income-tax Officer was right in holding that since the production had not commenced in the new units during the previous year deduction of expenditure could not be allowed as business expenditure. It was in that context that it was held that the new units were only a continuation of the existing business of the assessee and, therefore, the technical fees paid by the assessee in connection with the setting up of the new units were allowable as business expenditure. In the instant case, the manufacturing unit which was to be established in Malaysia was not going to be the unit of the assessee itself. This unit was going to be a joint venture unit with either the Malaysian Government or other persons. It, therefore, could not be said that this unit was going to be in continuation of the business which was carried on by the assessee.

In the light of the facts which are found by the Tribunal and the authorities below, it is clear that the manufacturing unit which was to be established in Malaysia and for which Iyer and Rohit C. Mehta had gone to Malaysia was going to be an independent unit. It was not going to be a unit of the assessee itself. It was going to be a joint venture unit. Therefore, the business which was going to be established in Malaysia could not be said to be a continuation of the business of the assessee. The unit in Malaysia was going to be a new and independent unit. Therefore, in our opinion, the expenditure incurred for the foreign travel of Iyer and Rohit C. Mehta for exploring the possibility of establishing a joint venture unit in Malaysia could not be said to be revenue in nature. This expenditure was capital in nature as rightly held by the Tribunal and the authorities below. We, therefore, answer question No. 2 referred to us at the instance of the assessee, in the affirmative and against the assessee.

So far as question No. 3, which has been referred to us at the instance of the assessee, is concerned, learned counsel for the assessee stated that the assessee was not pressing this question. We, therefore, need not answer this question.

This brings us to the two questions which are referred to us at the instance of the Revenue. The first question referred to us at the instance of the Revenue relates to legal fees. The assessee had paid fees of Rs. 5,000 for surtax assessment and Rs. 7,500 for its income-tax work. Thus, the total fees paid by the assessee came to Rs. 12,500. The assessee claimed deduction of the entire expenditure of Rs. 12,500 incurred by way of fees. The Income-tax Officer, however, held that under section 80VV of the Act the assessee was not entitled to claim deduction of an amount exceeding Rs. 5,000. He, therefore, allowed deduction of Rs. 5,000 and disallowed deduction of Rs. 7,500. In the appeal preferred by the assessee, the Commissioner observed that Rs. 5,000 were paid in connection with surtax assessment and Rs. 7,500 were paid to C. C. Chokshi and Co. which was not only for representation in any proceedings before the income-tax authorities, but also included fees for general advice in the matters. The Commissioner held that Rs. 5,000 paid for surtax assessment could not be disallowed under section 80VV. Section 80VV, according to him, hits only such expenditure which is incurred by the assessee in respect of any proceedings before any income-tax authority or the Tribunal or any court "relating to the determination of any liability under this Act by way of tax penalty or interest". The Commissioner held that reference to "this Act" was obviously to the Income-tax Act. The determination of surtax is under the Companies (Profits) Surtax Act, 1964. Therefore, professional fees paid to lawyers for conduct of surtax assessment was admissible for deduction, so far as the amount of Rs.7,500 paid to C. C. Chokshi and Co. was concerned. The Commissioner, following his decision in the assessee's appeal for the assessment year 1976-77, held that out of the sum of Rs. 7,500, a sum of Rs. 2,500 related to matters other than proceedings before any income-tax authority or the Tribunal or the court. Thus, according to the Commissioner, out of the said fee paid to C. C. Chokshi and Co. only Rs. 5,000 related to proceedings under the Act. Since the payment of this fees is within the limit prescribed by section 80VV, there was no question of disallowing any part of the expenditure of Rs. 12,500. The Tribunal having confirmed the view taken by the Commissioner, question No. 1 is referred to us for our opinion.

Section 80VV reads as follows:

"Deduction in respect of expenses incurred in connection with certain proceedings under the Act.--In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under this Act, by way of tax, penalty or interest :

Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees."

It is clear from the above provision that expenditure incurred by the assessee in respect of any proceedings before the income-tax authority or the Tribunal or any court relating to any liability under the Act, by way of tax, penalty or interest was hit by the said provision. If the expenditure was incurred in respect of proceedings which are not under the Act, the above provision has no application. What is hit by the above provision is expenditure incurred in respect of proceedings relating to the determination of any liability under the Act before any income-tax authority or the Tribunal or any court. The authorities below were, therefore, right in holding that the expenditure incurred in connection with surtax assessment would not be covered by section 80W. Similarly, any expenditure incurred in connection with any matter other than a proceeding before the income-tax authority or the Tribunal or any court would not be covered by the aforesaid provision, even it such matter is in connection with the Act. The authorities below were, therefore, right in holding that the fees paid to C.C.Chokshi and Co., for matters other than proceedings for determination of any liability under the Act, were not hit by provisions of section 80W. Thus, the expenditure of Rs. 5,000 incurred for surtax assessment and fees of Rs. 2,500 paid to C. C. Chokshi and Co. for attending to matters other than proceedings before the income-tax authority or the Tribunal or the court were not hit by the provisions of section 80W. The remaining expenditure of Rs. 5,000 is within the limit prescribed by section 80W and, therefore, there is no question of disallowing any part thereof. We, therefore, confirm the view taken by the Tribunal and answer question No. 1 referred to us at the instance of the Revenue in the affirmative and against the Revenue.

So far as the second question referred to us at the instance of the Revenue is concerned, the facts are as follows:

Certain pieces of machinery owned by the assessee were no longer in use and, therefore, the assessee discarded them estimating their value at Rs. 9,555. The written down value of those pieces of machinery was Rs. 72,040. The assessee, therefore, worked out the terminal loss at Rs. 62,085 and made a claim in that regard under section 32(1)(iii) of the Act. The Income-tax Officer disallowed the claim holding that the assessee had not actually sold the pieces of machinery in the previous year relevant to the assessment year under reference and, therefore, the claim for terminal loss was premature. In the appeal preferred by the assessee, the Commissioner held that section 32(1)(iii) permits deduction in case of any machinery or plant "which is sold, discarded, demolished or destroyed in the previous year". In view of the language of the said provision, it was not necessary that the machinery should be sold during the previous year to entitle the assessee to claim deduction under the said provision. According to the Commissioner, the approach of the Income-tax Officer was, therefore, erroneous. The machinery had become obsolete. The assessee had written off the amount in its account books during the previous year by estimating the scrap value at Rs. 9,555. The Commissioner held that the estimate of the value of the scrap made by the assessee could not be said to be wrong. In this view of the matter, the Commissioner directed the Income-tax Officer to allow the deduction of loss of Rs. 62,085. In the appeal by the Revenue, the Tribunal held that the assessee had discarded the machinery and put a realisable value thereon. It held that from the mere fact that the assessee had put a value on the discarded machinery, it could not be said that it had not discarded the machinery. All that the section 32(1)(iii) requires is that the difference should be written off, which the assessee has done. The Tribunal, therefore, confirmed the view of the Commissioner. It is in the background of the above facts that question No. 2 has been referred to us for our opinion at the instance of the Revenue.

There is nothing in section 32(1)(iii) which requires the assessee to sell the machinery to claim loss or terminal loss under the said provision. It is not disputed that the machinery or the pieces of machinery in question are discarded by the assessee and while doing so it has estimated its value or scrap value. It is not the case of the Revenue that the estimate made by the assessee is incorrect. Therefore, under section 32(1)(iii), the assessee is entitled to claim deduction of loss of Rs. 62,085 as claimed by it. The view taken by the Tribunal, therefore, does not call for our interference. We, therefore, answer question No. 2 referred to us at the instance of the Revenue, in the affirmative and against the Revenue.

Reference answered accordingly with no order as to costs.

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