Bombay High Court
Bralco Metal Industries Pvt. Ltd. vs Commissioner Of Income-Tax on 2 September, 1993
Equivalent citations: [1994]206ITR477(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee the following questions have been referred by the Tribunal to this court for opinion :
"(1) Whether, on the facts and in the circumstances of the case, the expenditure incurred in connection with the foreign tours of the assessee's managing director was deductible in arriving at the assessee's total income for the years under consideration ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that surtax liability was not admissible deduction for the years under consideration ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the development rebate was not admissible on rolling mill rolls for the years under consideration ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified holding that the benefit under section 35B was not available in respect of expenditure incurred on carriage of goods made for export for the assessment year 1975-76 ?
(5) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in directing the Income-tax Officer to recompute the disallowable expenditure in relation to the perquisite given to the relatives of the assessee under the provisions of section 40(c) instead of section 40A(5) of the Act for the assessment year 1975-76 ?"
2. So far as questions Nos. 2, 4 and 5 are concerned, learned counsel for the parties are agreed that these are covered by the decisions of this court one way or the other and they may be answered in the light thereof.
3. We, therefore, first answer these three questions. Question No. 2 is covered by the decision of this court in Lubrizol India Ltd. v. CIT [1991] 187 ITR 25. Following the same we answer it in the affirmative, i.e., in favour of the Revenue and against the assessee. Question No. 4 is covered by a decision of this court in M. H. Daryani v. CIT [1993] 202 ITR 731. Following the same we answer this question also in the affirmative, i.e., in favour of the Revenue and against the assessee. Question No. 5 is covered by the decision of this court in CIT v. Hico Products Pvt. Ltd. (No. 1) [1993] 201 ITR 567. Following the same, it is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
4. We are now left with questions Nos. 1 and 3. We shall set out briefly the facts relevant for the determination of the issues involved in these two questions.
5. This reference relates to the assessment years 1973-74, 1974-75 and 1975-76. The assessee is a private limited company. The business of the assessee-company is to manufacture and sell copper, brass, aluminium circles, steel, strips, etc. In the previous year relevant to the assessment year 1973-74, the assessee incurred an expenditure of Rs. 27,859 in connection with the foreign tours of its managing director and claimed deduction with the foreign tours of its managing director and claimed deduction in respect of the same as a revenue expenditure. Similar claim was made for a sum of Rs. 36,552 in the previous year relevant to the assessment year 1974-75. The claim of the assessee for deduction of the amount spent by it on the foreign tours of its managing director was not allowed by the Income-tax Officer on the ground that the foreign visit of the managing director was only to inspect and to take a trial run of the capital equipment purchased by the company and, as such, it was an expenditure of capital nature and not a revenue expenditure. This order of the Income-tax Officer was affirmed by the Appellant Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal. The assessee also claimed development rebate under section 33 in respect of rolling mill rolls purchased by it for use in its factory. This claim was rejected by the Income-tax Officer on the ground that as 100 per cent. depreciation was allowable on the rolls under section 32 of the Act, the assessee was not entitled to claim development rebate thereon. In other words, according to the Income-tax Officer, by allowance of depreciation at the rate of 100 per cent., the entire value of the rolls has been allowed as a deduction by way of expenditure in the year of purchase itself and that being so, the same cannot be treated as the cost of plant or machinery or any spare part thereof. The order of the Income-tax Officer was affirmed by the Appellant Assistant Commissioner as well as by the Tribunal. Aggrieved bye order of the Tribunal on both these counts, the assessee applied to the Tribunal under section 256(1) of the Act for reference of various questions of law arising out of the order of the Tribunal including questions in regard to the above controversies. Hence this reference.
6. We have carefully considered the controversy raised in question No. 1 in regard to the allowability of the expenditure incurred in connection with the foreign tours of the assessee's managing director as a dedication under section 37(1) of the Income-Act in computation of its income. Under section 37(1) of the Act, any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession is allowable as deduction in computing the income chargeable under the head "Profits and gains of business or profession", the only exception being that it is not in the nature of capital expenditure or personal expenses of the assessee. It is nobody's case in the instant case that it is personal expenses of the assessee. According to the Revenue, it is an expenditure of capital nature. We have carefully considered the controversy. Section 37 of the Act is couched in the widest possible terms. As observed by the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the expression "for the purpose of the business" is wiser in scope than the expression "for the purpose of earning profits". Its range is wide : it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. The only limitation that was put by the Supreme Court was that "the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business." The said section came up for further consideration of the Supreme Court in Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261, where it was held (at page 275);
"........ the expression 'wholly and exclusively'........ does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the courts of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction...... even though there was no compelling necessity to incur such expenditure."
7. In the instant case, we do not find any serious controversy in regard to the fact that the expenditure in question was business expenditure. The only contention of the Revenue is that it is an expenditure of capital nature because the purpose of the visit of the managing director was to inspect and to take a trial run of the capital equipment purchased by the assessee-company. In other words, according to the Revenue, the visit related to the purchase of the machinery which was a capital equipment and, as such, this expenditure should form part of the price of the machinery and should not be treated as a revenue expenditure. We have carefully considered the above submission. In a given case, the above contention of the Revenue may carry weight and require serious consideration but that is not so in all cases. It would depend on the facts and circumstances of each case. In the instant case, there is no dispute about the fact that the visit of the managing director was for the purpose of business. There is also no dispute that there was a running business. It was not a case of business which was in the process of establishment. The business of the assessee was already going on and it was in connection with the running business that some more plant or machinery were intended to be purchased. If the visit was either to take a decision whether it was suitable for its business or not for any other such purpose, we do not think that it will convert the expenditure incurred on the managing director's visit into an expenditure of a capital nature. In a given case where a decision is taken to purchase the machinery and the purchase has in fact been made in pursuance of such decision, it may be possible for the Revenue to contend that the expenditure should be added to the cost of the machinery but in a case where a decision is taken not to purchase the machinery it would not be possible to treat the expenditure on the visit as part of the cost of any machinery because no machinery, as such, is purchased. In such an even, either it may be disallowed altogether or it may be allowed treating it as a revenue expenditure. In our opinion, having regard to the facts and circumstances of the present case it is difficult to hold that the expenditure incurred by the managing director on the foreign tour can be held to be an expenditure of capital nature. It may be apposite to observe that the dividing line between capital expenditure and revenue expenditure, which was held by the courts to be thin all throughout, has become much thinner and thinner by a catena of decisions of the Supreme Court rendered during the last few years. Applying the above ratio to the facts of the present case, we are of the clear opinion that the Tribunal was not justified in holding the expenditure on the tours of its managing director was capital expenditure and in disallowing the claim of the assessee for deduction under section 37(1) of the Act. In that view of the matter, we answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Revenue.
8. As regards question No. 3, we find that there is no dispute regarding the fact that the rolls purchased by the assessee formed part of the machinery or plant used by the assessee for the purpose of its business. That bins so, section 33 of the Act is clearly attracted which provides that in respect of new machinery or plant owned by the assessee and wholly used for business purposes, development rebate at the rate specified therein shall be allowed. Allowance of depreciation thereon at a particular rate or even disallowance of depreciation is not re, event for that purpose. Sections 32 and 33 are two independent provisions and the claim under each of them has to be decided on the language thereof. In the instant case, depreciation is allowable on the rolls under section 32 of the Act though at the rate of 100 per cent. Grant of development rebate is not dependent on the rate of depreciation allowable under section 32 of the Act read with Appendix 1 to the rules. It will not make any difference whether the rate is 20 per cent. or 100 per cent. The fact remains that the rolling mill rolls are machinery used for the purpose of business of the assessee. The two sections (sections 32 and 33) are intended to achieve two different objects and that is why under section 33 allowance of development rebate is hedged in with a number of conditions and development rebate once allowed is even liable to be withdrawn on the happening of certain contingencies. In that view of the matter, we are of the opinion that the assessee cannot be denied development rebate merely on the ground that the rate of depreciation prescribed in the Appendix to the Rules happens to be 100 per cent, if the assessee has otherwise fulfilled the conditioned or requirements of the law for allowability of development rebate. In the light of the forgoing discussion, we hold that the Tribunal was not justified in holding that development rebate was not admissible on the rolling mill rolls because the rate of depreciation thereon happened to be 100 per cent.
9. We may also observe that there is a marked difference between allowance of depreciation at the rate of 100 per cent. and revenue expenditure allowable as a deduction under section 37(1) of the Act. These are two different types of deductions based on different foundations. Depreciation is an allowance on account of wear and treat of the machinery by the user for which provision has been made separately in section 32 of the Act whereas "revenue expenditure" under section 37 covers a wise range of expenditure other than capital expenditure and personal expenditure of the assessee, which is allowable as a deduction in computation of the income if it is incurred for the purpose of the business. In the instant case, deduction has not been allowed to the assessee for depreciation on the rolls as a revenue expenditure. What was grated was an allowance for depreciation on the rolls under section 32 of the Act at the prescribed rates. In that view of the matter also, we find that the approach of the Tribunal was not correct. In our opinion, allowance or disallowance of depreciation has not bearing on the claim for development rebate which has to be decided independently in terms of section 33 of the Act.
10. We, therefore, answer question No. 3 in the negative, i.e., in favour of the assessee and against the Revenue. We, however, like to make it clear that the Tribunal, while giving effect to this opinion, shall verify whether the requirements for allowance of development rebate under section 33 have been complied with by the assessee and only if it had been so done, development rebate on the rolling mill rolls shall be allowed to the assessee.
11. No order as to costs.