Bombay High Court
Otis Elevator Co. (India) Ltd vs Commissioner Of Income-Tax on 26 April, 1991
Equivalent citations: [1992]195ITR682(BOM)
JUDGMENT
B.N. Srikrishna J.
1. This reference pertaining to the assessment year 1972-73, made at the instance of the assessee, refers the following questions of law for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that, for computing the capital employed for the purpose of section 80J of the Income-tax Act, 1961, liabilities of the assessee were to be deducted from the value of total assets in computing the capital employed in the undertaking ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that house rent allowance and club fees paid to employees are perquisites for the purpose of section 40(a)(v) of the Income-tax Act, 1961 ?
3. Whether the Tribunal was right in holding that loss arising of theft of motor car and motor cycle cannot be allowed in computing income ?"
2. Out of the above questions, we may straightway answer question No. 1 as it is common ground between both counsel that the question of law raised thereunder is concluded by reason of the retrospective amendment made in section 80J(1)(III) of the Income-tax Act, 1961, as also by the judgment of the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. Counsel are agreed that the question, therefor, will have to be answered in the negative and in favour of the Revenue. The question is so answered.
3. The facts relevant for answering the second and third questions referred to us are as under :
The Income-tax Officer had disallowed house rent allowance of Rs. 105 paid to one of the employees, Rs. 4,148 being club fees paid on behalf of Shri P. L. Vashi, and Rs. 1,054, being club fees paid on behalf of another Shri J. M. Bhavanagarwala. These amounts were disallowed under section 40(a)(v) on the ground that they were in the nature of perquisites. The assessee in appeal specifically contended before the Appellate Assistant Commissioner that the said expenditure does not constitute a benefit or amenity as it is the company's policy and practice to require that executives become members of clubs and participate in the club/sports activities with the intention to establish and maintain business contacts, which is in the long-term interests of the company's business. The Appellate Assistant Commissioner took the view that the assessee had incurred these expenses in the interests of its business as the assessee felt that the membership of the clubs would provide its officers and executives better contact and association with persons in good position and would result in publicity. The Appellate Assistant Commissioner also held that these amounts were not paid with the intention to benefit the employees and, therefore, the payment of such club fees should be considered to have been made for promoting the business of the assessee as it could not be disassociated from the assessee's business. In this view of the matter, the Appellate Assistant Commissioner reversed the finding of the Income-tax Officer and deleted the disallowance made by the Income-tax Officer under section 40(a)(v). The Tribunal neither went into this issue in detail nor did it record any finding with regard to the aspect of the matter dealt with in detail by the Appellate Assistant Commissioner. It cursorily observed that these amounts, in its view, were in the of perquisites as it was the obligation of the employees concerned to pay for the same and, in this view of the matter, it set aside the findings of the Appellate Assistant Commissioner and restored the additions ordered by the Income-tax Officer.
4. Mr. Mistry learned counsel for the assessee, contended that the question of law raised by the second question was concluded by the decision of this court in CIT v. Indokem Private Ltd. [1981] 132 ITR 125. Dr. Balasubramanian, learned counsel for the Revenue, however, contested this submission and maintained that the memberships of clubs were not intended for the benefit of the assessee company's business but actually were the respective obligations of the employees which had been met by the assessee employer and, consequently, they were perquisites within the meaning of section 40(a)(v) and that they ought to be disallowed as provided thereunder and that the Income-tax Officer was right in disallowing these items of expenditure. As we look at this issue, it appears to us that the factual findings of the Appellate Assistant Commissioner which were clear on the pint have not been disturbed by the Tribunal. The Appellate Assistant Commissioner categorically found that the payments of club fees were made with a view to enable the assessee to improve its business relations and prospects. The Tribunal, without recording a contrary finding on this crucial aspect of the matter, restored the order of the Income-tax Officer. In our judgment, considering the clear finding given by the Appellate Assistant Commissioner, without a contrary finding thereto by the Tribunal, we must accept the facts as found by the Appellate Assistant Commissioner. Consequently, the payments must be allowed as business expenditure not falling within the mischief of section 40(a)(v). The house rent payment being a cash amount paid would be covered by the ratio of the decision in Indokem [1981] 132 ITR 125 (Bom). We therefore, answer question No. 2 in the negative and in favour of the assessee.
5. Coming next to the third question, it appears that one scooter and one motor car belonging to the assessee were stolen during the relevant previous year. These vehicles were not recovered despite complaints lodged with and efforts of the police. The assessee has not received any insurance payment with regard to the theft of these vehicles. The aggregate written down value of these vehicles was Rs. 17,598. The assessee claimed that this amount should be deducted under section 32(1)(iii) of the Act. The Departmental authorities disallowed the claim of the assessee and the Tribunal confirmed the disallowance. That is how the matter is before us in this reference.
6. Learned counsel for the assessee contends before us that at least the written down value of the two vehicles should be deducted under section 32(1)(iii) of the Act, while learned counsel for the Revenue contends that there is nothing in this section which warrants the deduction of the written down value of any asset which is lost on account of theft.
7. The relevant portion of section 32(1)(iii) reads as under :
"32(1) in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed-. . .
(iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof.
8. On facts, it is clear that the vehicles concerned could not be said to have been "sold", "discarded" or "demolished" in the previous year. But the last contingency contemplated under this clause is "destroyed". In our view, the expression "destroyed" used in this section has a wider connotation than mere physical destruction. It also applies to a case where the use of the asset is denied to the assessee in its business for an indefinitely long duration, even though there may be no evidence of its physical destruction, In our view, where the asset of the nature described in the section becomes unavailable to the assessee for an indefinitely long period albeit on account of an act of a stranger, the asset must be said to have been destroyed as far as the assessee is concerned. It is no consolation to the assessee to have the mental satisfaction that probably the asset may be physically intact in the possession of the thief. For all practical purposes, the asset is irretrievably lost to the assessee and it business, as where the asset is destroyed by fire, earthquake, flood or the like. We hardly see any distinction between the two situations. In our view, the assessee's claim was permissible under section 32(1)(iii).
9. Dr. Balasubramanian, learned counsel for the Revenue, contended on the authority of the Gujarat High Court in CIT v. Nagari Mills Ltd. [1981] 127 ITR 230, that the various contingencies contemplated in section 32(1)(iii) have a common factor, namely, voluntary act on the part of the assessee. While this may be true in connection with sale, discarding or demolition, we are not sure that this can be said to be true in the case of destruction. Destruction can be either voluntary or involuntary, there being more likelihood of its being involuntary. The third question therefore, shall have to be answered in the negative and in favour of the assessee.
10. In the result, we answer the question referred for our opinion as under :
Question No. 1 : In the negative and in favour of the Revenue.
Question No. 2 : In the negative and in favour of the assessee.
Question No. 3 : In the negative and in favour of the assessee.
11. No order as to costs.