Calcutta High Court
Commissioner Of Income-Tax vs Machinery Manufacturing Corporation ... on 5 June, 1991
Equivalent citations: [1992]198ITR559(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment years 1978-79 and 1979-80, the following questions of law have been referred to this Court :
Questions in R. A. No. 1112(Cal) of 1986 :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the order of the Commissioner of Income-tax (Appeals) allowing the assessee's claim for compensation of Rs. 1,18,578 paid to the employees for early retirement treating the same as a revenue expenditure ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in sustaining the order of the Commissioner of Income-tax (Appeals) allowing the assessee's claim for deduction of Rs. 75,000 in respect of incentive wages paid to the employees for better performance on account of early retirement benefits ?
3. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the provisions of Section 32A of the Income-tax Act, 1961, the Tribunal was justified, in law in sustaining the order of the Commissioner of Income-tax (Appeals) allowing the assessee's claim for investment allowance in respect of assets like electrification, fire extinguishers and time-office equipments ? "
2. Question in R. A. No. 1113(Cat) of 1986 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the order of the Commissioner of Income-tax (Appeals) allowing the assessee's claim for compensation of Rs. 3,49,842 paid to the employees for early retirement treating the same as a revenue expenditure ? "
3. The facts relating to this reference are that, for the assessment years 1978-79 and 1979-80, the Income-tax Officer disallowed the assessee's claim of Rs. 1,18,578 and Rs. 3,49,842, respectively, being the amount paid to the employees for early retirement on the ground that the payment was not a liability of the assessee and that the same was in the nature of ex gratia payment.
4. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the expenditure was incurred for the purpose of the business and is an allowable deduction. The Income-tax Officer was, accordingly, directed to allow the claim of the assessee.
5. Being aggrieved, the Department filed appeals before the Appellate Tribunal. Having regard to the facts of the case, the Tribunal, following the decision of the Calcutta High Court in the case of Assam Oil Co. Ltd. [1985] 154 ITR 647 confirmed the order of the Commissioner of Income-tax (Appeals).
6. For the assessment year 1978-79, the Income-tax Officer disallowed the assessee's claim of Rs. 75,000 out of Rs. 1,21,082 shown as ex gratia payment. It was stated before the Income-tax Officer that the amount represented early retirement benefits to the employees and other benefits. The Income-tax Officer was of the view that the payments made for early retirement benefit are not a liability of the assessee. The Income-tax Officer estimated such payments at Rs. 75,000 and disallowed the same.
7. Before the Commissioner of Income-tax (Appeals), it was contended on behalf of the assessee that the ex gratia payment was in the nature of an incentive to the employees for better performance. The Commissioner of Income-tax (Appeals) held that the payment was in the nature of an incentive to the employees and being in addition to salary, .there was no cause for disallowance. Consequently, the Commissioner of Income-tax (Appeals) deleted the disallowance of Rs. 75,000. In the appeal filed by the Department, the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) on the point and allowed the claim of the assessee.
8. For the assessment year 1978-79, the Income-tax Officer disallowed the assessee's claim for investment allowance under Section 32A of the Income-tax Act, 1961, on electrification, time-office equipment and fire-fighting equipment as he was of the view that these items were neither plant and machinery nor were in the nature of office equipment.
9. Against the said order of the Income-tax Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who directed the Income-tax Officer to allow the claim of the assessee for investment allowance on the aforesaid three items.
10. In the appeal filed by the Department against the order of the Commissioner of Income-tax (Appeals), the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) on the point.
11. At the hearing before us Mr. Mitra, appearing for the Revenue, has contended that there is a distinction between the payment for retirement and payment made as an incentive for early retirement. It is his contention that the amount, which has been paid, is by way of ex gratia and it is not for commercial expediency and as such not liable to be treated as a revenue expenditure. We are, however, unable, to accept the contention of Mr. Mitra. The Tribunal has relied on a decision of a Division Bench of this court in CIT v. Assam Oil Co. Ltd. reported in [1985] 154 ITR 647. In that case, the assessee was a non-resident company which had been prospecting and extracting petroleum and also ran a refinery. It was granted prospecting licence by the Government of India on the condition that it would ultimately transfer the new area to a resident company. The resident company known as Oil India Ltd. was incorporated in 1959 and the assessee transferred its new areas to it. The assessee's business stood restricted to its operations at Digboi and its refinery located there. The assessee found that the Digboi fields were getting exhausted gradually and that there was no prospect of further allotment of fresh areas to the assessee for prospecting and extracting. The refinery of the assessee came to depend more and more on the crude petroleum extracted by Oil India, Ltd. By reason of the aforesaid, man-power requirement of the assessee was substantially reduced and it was felt that the number of personnel of the assessee had to be rationalised in keeping with its reduced requirements. It, therefore, started a voluntary scheme whereby its surplus personnel had the option to resign from service in consideration of which the assessee undertook to pay retrenchment compensation. The assessee claimed deduction of this amount as business expenditure. Its claim was negatived by the Income tax Officer. The Tribunal found that there was no closure of the business as such by the assessee. The scheme had no direct relationship with the transfer of part of the assessee's business to Oil India Ltd. and its object was to bring about rationalisation and economy. It allowed the deduction.
12. In that case, it was held that it was conclusively established that the assessee's business in which the disputed payments were made did not come to a closure and that the assessee made such payments in order to effect economy and rationalisation of its personnel. No asset of enduring nature came into existence by reason of the payments though benefits accrued to the assessee thereunder which would continue not only for one year but in future years. But this benefit could not be related to any asset as such. The amount paid as retrenchment compensation was, therefore, allowable as revenue expenditure.
13. It may be mentioned that the Division Bench relied on a decision of the Supreme Court in Indian Cable Co. Ltd. v. Their Workmen . In that case, certain amounts were paid by the employer under a voluntary retirement scheme. The question before the Supreme Court was regarding quantification of the bonus payable to the workmen of the company. There the Supreme Court observed as follows (at page 2199 of AIR 1972 SC) :
" We will now deal with the items which, according to the unions should not have been allowed to be deducted from the gross profits. The first item relates to a sum of Rs. 18,24,047 paid by the company to retired workmen at Jamshedpur Workshop under a voluntary retirement scheme. This scheme is exhibit G and it was framed on August 9, 1965. The scheme states that the company has been suffering from an acute shortage of imported raw materials in view of the difficulty in getting foreign exchange and as such production could not be maintained for some considerable time. In view of these difficulties it is stated that the company has found it necessary substantially to reduce the number of workers in the workshop. The scheme offered substantial benefits to workmen who chose to retire voluntarily, namely, ex gratia payment equal to retrenchment compensation under Section 25F of the Industrial Disputes Act, and gratuity admissible to the workmen. There is evidence on the side of the company that about 450 workmen availed themselves of the voluntary retirement scheme and a sum of Rs. 18,24,047 was paid. This item has been included in the profit and loss account under the heading ' Salary, wages, bonus and retirement gratuities '. The company gave a break-up of these items in answer to the interrogatories furnished to it by the workmen.
The contention on behalf of the unions is that under the retirement gratuity scheme, which is in force, a workman retires at the age of 60 and normally during the year 1965-66, the payment of gratuity to persons so retired would have come to Rs. 1.21 lakhs. Therefore, it was argued that the payment of Rs. 18.24 lakhs odd paid as lump sum under the voluntary retirement scheme during the year 1965-66 was not proper as that amount would have in the ordinary course been spread over eight or ten years.
The Tribunal has rejected this claim of the unions, and, in our opinion, quite rightly. If there had been a retrenchment and compensation had been paid to all these workmen, the unions cannot raise any objection in law to the payment of such amount. If retrenchment had been resorted to, the junior-most men under the principle 'last come, first go' would have been sent out of service. On the other hand, the voluntary retirement scheme enabled the younger workmen to continue in service while it offered a temptation for the older employees to retire from service. The voluntary retirement scheme has not been challenged as mala fide by the unions. We are in agreement with the view of the Tribunal that the payment of the compensation to induce the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate carrying on of the business and it was an expenditure allowable under Section 37(1) of the Income-tax Act. It was not an expenditure of a capital nature. The Tribunal was justified in declining to add back this item of expenditure to the gross profits."
14. In our view, it cannot be disputed on the facts of this case that the amounts were paid by the company to the employees for commercial expediency and that it was incurred wholly and exclusively for the purpose of the business and that is also the finding of the Tribunal which has not been challenged before us.
15. In our view, therefore, the Tribunal was right in allowing the claim for compensation paid to the employees for early retirement as revenue expenditure. For the reasons aforesaid, we answer the first question in R. A. No. 1112 (Cal) of 1986 and the only question in R. A. No. 1113 (Cal) of 1986 in the affirmative and in favour of the assessee.
16. The second question in R. A. No. 1112 (Cal) of 1986 does not bring out the real controversy and the question is refrained as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in sustaining the order of the Commissioner of Income-tax (Appeals) allowing the assessee's claim for deduction of Rs. 75,000 in respect of incentive wages paid to the employees for better performance ?"
17. In our view, this question is now well-settled. If the employer pays any amount to the employee which is by way of an incentive, in that event such amount shall be treated as additional emoluments and such payment is inextricably connected with the business and necessarily for commercial expediency. It cannot be said that the claim which has been made is de hors the business of the assessee. As will appear from the narration of facts, it was found that it was the payment made by the assessee for better performance and, accordingly, it must be held that such payment was for commercial expediency and incurred wholly and exclusively for the purpose of business. In our view, the Tribunal, on the facts, came to a correct conclusion and, accordingly, the second question in R. A. No. 1112 (Cal) of 1986 is answered in the affirmative and in favour of the assessee.
18. The only other question which is required to be considered is question No. 3 in R. A. No. 1112 (Cal) of 1986. This question relates to the grant of investment allowance on three items like electrification, fire extinguishers and time-office equipments. The view of the Tribunal was that these were plant and, accordingly, eligible for investment allowance.
19. In our view, each and every item is not eligible for investment allowance even though it may be used in the business. The machinery or plant must have a close nexus with the business of construction, manufacture or production of any article or things, not being article or things specified in the 11th Schedule. It cannot be said that fire extinguishers or time-office equipments which are used by the assessee in the business are inextricably connected with the production of the article or things for which investment allowance is available.
20. In our view, therefore, irrespective of the nature of the business, one has to retain fire extinguishers and the time-office equipments, and they are not items like plant and machinery which would come within the purview of Section 32A. These are not plant installed for the purpose of business of the construction, manufacture or production of any article or thing.
21. Accordingly, in our view, these items are not eligible for any investment allowance.
22. So far as electrification is concerned; we fail to appreciate how electrification is an asset. The Tribunal has not adverted to the facts and circumstances relating to this electrification. It has been mentioned by the Commissioner of Income-tax (Appeals) as" installation of electrification machinery" but the nature of the machinery or the purpose for which it was installed has not been mentioned at all. We, therefore, do not find any material on the basis whereof we can decide this question as to whether electrification machinery is eligible for investment allowance or not. Wo, therefore, decline to answer the third question so far as it relates to electrification machinery.
23. In the premises, we answer the third question in K. A. No. 1112 (Cal) of 1986 by saying that no investment allowance is admissible on fire extinguishers and time-office equipments. The Tribunal will decide as to whether, having regard to the nature and function of the electrification machinery, such machinery can be termed as plant within the meaning of Section 32A and whether such machinery is otherwise eligible for investment allowance. The Tribunal will be at liberty to allow the parties to adduce fresh evidence, if necessary, for determination of this question.
24. There will be no order as to costs.
Shyamal Kumar Sen, J.
25. I agree.