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ISSUES OF THE CASE
In this case, nine questions came before the Hon’ble court, six at the instance of the assessee and three questions at the instance of the Revenue. The questions which came before the court, we will deal with that first and then will come on the facts related to that:-
- Whether as per the facts and the circumstances of the case, the Tribunal was justified in holding that the benefit of Rs. 15,64,284 which was received by the assessee- company under the export incentives schemes is taxable under the Income Tax Act, 1961?
- Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the cash subsidy on controlled cloth which amounted Rs. 49,81,892 was liable to tax under Income Tax Act, 1961?
- Whether as per the facts and the circumstances of the case, the Tribunal was justified as per the law in holding that the amount of Rs. 60,213 which is representing additional expenditure incurred in payment of installments of foreign loan liability because of the exchange fluctuation is capital expenditure?
- Whether as per the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified as per the law in holding that the tiling fees amounting Rs. 37,500 paid to the Registrar of Companies for increasing authorized share capital of the company is a capital expenditure?
- Whether as per the facts and circumstances of the case, the Tribunal was justified as per the law in holding that the fees which was paid to the Controller of Capital Issues for seeking the permission for issuing of the bonus shares amounting to Rs. 1,500 is capital expenditure?
- Whether the Tribunal was justified in holding that the donation made to Vishwa Mangal Trust by the assessee- company will not be qualified for deduction under Section 80G of the Income Tax Act, 1961?
At the instance of the Revenue, the subsequent questions have been referred before the Hon’ble Court:-
- Whether as per the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in allowing the claim of the assessee for deduction of Rs. 89,129 by holding that the sum which was spent on the transit bungalows was he expenditure incurred in connection with the business of the assessee which made this not come in the purview of Section 37(3) of the Income Tax Act, 1961 as the guest house expenses?
- Whether the Income Tax Appellate Tribunal was justified in allowing the miscellaneous expenses and law charges incurred for its proposed cement factory project amounting to Rs. 53,867 and Rs.28,895 as business expenditure even when the project had not yet come into the operations?
- Whether as per the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified as per the law in holding that the additional Rs.68,849 being the unclaimed wages written back by the assessee in its Profit & Loss Account could not be brought to the arena of tax by the Income Tax Officer as per the provisions of Section 41(1) of the Income Tax Act, 1961 ?
STAND OF THE COURT AND FACTS OF THE CASE
- The first and second questions at the instance of assessee are already concluded by this Hon’ble Court in the case of Kesoram Industries and Cotton Mills Ltd. v. CIT (1978) 115 ITR 143. Therefore, taking into consideration that answer, the Hon’ble Calcutta High Court relied on its decision and answered these questions (1st and 2nd questions at the instance of the assessee) in the affirmative and decision came in the favour of the Revenue.
- The third and fourth questions which came before the Court at the instance of the assessee are concluded by the Hon’ble Calcutta High Court only in the case of Union Carbide India Ltd. v. CIT (1987) 165 ITR 678. Considering that decision and following it the Court answered those questions in affirmative and again in the favour of the Revenue.
- Coming to the fifth question, that question is concluded by the decision of this Court only in Income tax Reference No. 248 of 1986, in Woodcraft Products Ltd. v. CIT. Considering as well as following that decision, the Hon’ble Court answered this question in the negative and in favour of the assessee.
- The sixth and final question at the instance of the assessee was also concluded by the decision of this Hon’le Court only which was given in the case of CIT v. Upper Ganges Sugar Mills Ltd. (1985) 154 ITR 308. Considering the said decision and following the same, the Court gave its answer in the affirmative and this answer also came in favour of the Revenue.
- Coming to the first question at the instance of Revenue, where the facts related to that question to be looked upon to come to a decision.
Here, the assessee incurred a total expenditure of Rs.1,60,193, inclusive of Rs.89,129 which was the expenditure incurred on the maintenance of the transit bungalows situated at different places where the rayon, spun pipes and cement units of the assessee were located. This total expenditure was also including the another sum of Rs.71,064 which representing the guest house expenses incurred in the cement unit of assessee. The assesseee here claimed the deduction of both the sums under Section 37 of the Income Tax Act,1961 which was eventually disallowed by the Income tax Officer. The Commissioner of the Income-ax (Appeals) upheld the dis-allowances by following his orders of the assessment years of 1973-74 and 1974-75.
On further appeal by assessee, this was found by the Tribunal that the additions made on this account for the assessment years of 1973-74 as well as of 1974-75 had been deleted by the Tribunal while observing that the transit bungalows had been meant mainly for the employees as well as the customers of the assessee who used to visit the different units of the assessee’s business for business purposes. The Tribunal in its order for assessment years 1973-74 observed that the people who who used to visit the factories of the assessee which are located at different places were compelled to stay at the bungalows situated there and consequently whatever expenses incurred through that was in connection with the business of the assessee only. And since the facts for the assessment year 1974-75 were same to those found by the Tribunal in the assessment year 1973-74, therefore, the Tribunal deleted the addition of Rs.89,129 by the Income Tax Officer because of its being the transit bungalow expenses incurred by the assessee at different place where the units of the assessee were located.
This question even came before the Division Bench of this Court in the same case, where the judgement got already delivered. The Court considering all these facts stated that the transit bungalows are in the nature of the guest houses. All the material facts which are pertaining to the nature of the bungalows and the expenditure incurred on these have not been brought on record. Therefore, the Court because of this very reason declined to answer the first question at the instance of the Revenue. The Court stated that the Tribunal shall dispose off this issue afresh in the light of this decision after allowing the parties to go for additional evidences if required for the decision.
- Now the facts leading to the second question at the instance of the Revenue would be discussed to find the background of that issue. The facts leading to that question are that the assessee had a cement unit in Basant Nagar, Andhra Pradesh. The cement unit of assessee incurred the miscellaneous expenditure of Rs.53,872 and also a further sum of Rs.28,892 on account of legal charges related to the setting up of the proposed new cement factory in Rajasthan during the previous year. The Income Tax Officer dis-allowed both the sums which was aggregating to Rs.82,767 on the ground that the expenses did not relate to the existing business of the assessee and therefore, it represented the part of the capital expenditure.
The Commissioner of Income Tax (Appeals) while following the decision of the Gujarat High Court in the case of CIT v. Almebic Glass Industries Ltd. (1976) 103 ITR 715, held that both the amounts to be allowed as the revenue expenditure. The further appeal by the Revenue was taken up and in that appeal, the Tribunal upheld the order of the Commissioner of Income tax (Appeals) while observing that there was no new factory set up by the assessee in Rajasthan during that relevant previous year. The expenses were incurred for exploring the possibilities of starting a new cement project in addition the existing cement unit of the assessee which was situated in the Andhra Pradesh. The Tribunal relied on the decision of the Commissioner of the Income Tax (Appeals) and stated that the CIT v. Alembic Glass Industries Ltd. was correctly applied by it in this case as it was applicable.
- Now considering the third question referred at the instance of the Revenue, the facts related to that question are that the Income-tax Officer found during the scrutiny of the Profit & Loss Account that the unclaimed wages of Rs.68,849 had been written back by the assessee as the same were not anymore required to be paid to the employees. The Income tax Officer brought that sum to tax by invoking Section 41(1) of the Income Taxt Act,1961.
The Commissioner of the Income Tax(Appeals) deleted the addition by following the orders of the Tribunal in the case of the assessee for the assessment years 1965-66 to 1970-71. The Tribunal maintained the order of the Commissioner of Income Tax (Appeals) by following the decision of the Calcutta High Court only in the case of CIT v. Sugauli Sugar Works Pvt. Ltd. (1983) 140 ITR 286. It was found that the sum of Rs.68,849 not only included the wages but also bonus and leave wages of the employees. It was forfeited by the assessee during the pertinent previous year.
Court while dealing with this question stated that though where an assessee treats a given amount as his own income in his profit and loss account and had even mentioned also that the said amount has become a part of his income due to forfeiting the same, then the asserting authority would be entitled to do the same and to treat the amount as the income of the assessee. Though, in this case, its not the scenario and the asserting authority won’t be entitled to do so. The onus was on the assessee to establish that as per law that it was not entitled to forfeit the same and therefore, its liability did not cease.
The Court after considering the conduct of the assessee in this case in forfeiting the amount coupled with the long passage of time, inferred that those who might be having any claim against the assessee had abandoned those claims. This would be a clear case of remission or ceasation of liability of the assessee. All the sceanrios like forfeiture of the amount, long passage of time, writing back the amount in the P&L Account, smallness of amount, unpaid amount nature etc would demostrate that there has been a remission or we can say the cessation of the liability of the assessee to the extent that the assessee has written it back in its P&L account after forfeiting those.In that context and also considering the Payment of Wages Act, it was found that the amount forfeited by assessee will be assessable under Section 41(1) of the Income Tax Act, 1961[2] and therefore the Court gave the answer of this question in negative and in favour of the Revenue.
CONTENTION OF THE PARTIES IN THE CASE
The contention raised before the Tribunal was reiterated here before the Hon’ble High Court as well.
Contention of the assessee in the second question at the instance of the Revenue:-
The assessee contended that it carried on business related to manufacture of cement, rayon, cellophane paper, cast iron spun pipes, etc., and through these incurred certain expenditure related to setting up a new cement factory unit in Rajasthan. The existing cement unit of the assessee were located at Bsant Nagar (Andhra Pradesh) during the year under appeal. The expenses so incurred were of revenue in nature and it is the case of an existing business having the business project of establishing a new unit in the same line of the cement business.
Contention of the Revenue on the second question at the instance of the Revenue:-
The Revenue contended that an expenditure may be allowed as a business expenditure if it is satisfied by the assessee that the expenditure has been incurred in regard to the business which was being carried out in the relevant previous year. It was also contended by the Revenue that the expenditure has to be treated as the capital expenditure if the expenditure affected the very structure of the profit-earning machinery of the assessee.
ANALYSIS
There was no dispute in the fact that there was no new unit set up by the assessee at Rajasthan during the relevant year. The expenses which was shown was done for exploring the possibilities of starting a new cement project, in addition to the existing cement unit of the assessee. The Court also taken into consideration various cases which were decided by the Gujarat High Court, Bombay High Court, Punjab and Haryana High Court and several other High Courts of the country. After taking into consideration the facts and decision given in these cases by the other Hon’ble High Courts, the Hon’ble Calcutta High Court , the Court in the answer of the second question at the instance of the Revenue gave the answer in affirmative and in favour of the assessee and relied on the reasoning given by the Patna High Court in the case of CIT v. Jamshedpur Engineering and Machine Manufacturing Co. Ltd. (1986) 157 ITR 730. Here, the Court stated that the miscellaneous expenses and law charges were incurred for the proposed cement factory project which are inseparably connected with the business carrying off of the assessee.
DECISION
Decision as already stated in the section of the stand of the court showed a mixture of decisions, some came in the favour of the assessee, while some answers of the issues raised came in the favour of the Revenue. But, Court literally took into different facets of the case and took into consideration each question as whole and tried to find the background of that question to find the most suitable decision at that point of time. The Court gave its answers related to the questions raised before it but did not pass any order as to costs in this case.
[1] Income Tax Act, 1961 (Act 43 of 1961)
[2] Income Tax Act, 1961, s. 41(1).
