TMI Blog1986 (6) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... or decrease of assets and liabilities during the year without considering the bank overdraft allocable to the said unit. The Income-tax Officer proceeded on the basis of the assets and liabilities as on the first day of the computation period but did not take into account the average increase or decrease of such assets and liabilities. In the said assessment year, the assessee paid gratuity to one of its directors. In the computation of the total taxable income, the Income-tax Officer found that such gratuity had been paid in excess of the limit permitted under sections 40(c) and 40A(5) of the Act and disallowed the said excess amount. The amount paid by way of gratuity to a retired director was treated as salary for the said purpose. The assessee claimed deduction of expenditure incurred for payment of legal and professional charges. The Income-tax Officer construing section 80VV of the Act of 1961 disallowed an amount of Rs. 39,680 on the ground that the said section 80VV laid down a ceiling of Rs. 5,000 in respect of such expenditure. In the said assessment year, directors and executives of the assessee had made trips to the United Kingdom and the United States of America. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, (b) progress achieved in obtaining approval of the Government of India for the proposed foreign collaboration agreement for manufacture of cyrogenic equipment, (c) major diversification of the business of the assessee, (d) a basic heavy organic chemical project and for submission of a report to the Government of India, and (e) finalising a draft agreement with details for submission to the Government of India in respect of the said project. He found that the major purpose of the visit was to finalise the proposal of the assessee for a new project, viz., castor oil and castor oil derivative projects. The Commissioner (Appeals) held that the expenditure incurred in connection with the aforesaid was for the purpose of securing to the assessee an advantage of an enduring nature in the shape of a future project. It was held that the expenditure incurred for such future scheme and project should not be treated as business expenditure of the year under appeal. The disallowance of the claim of the assessee in respect of this item by the Income-tax Officer was upheld. The Commissioner (Appeals) also upheld the decision of the Income-tax Officer disallowing the claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) on this point and directed the Income-tax Officer to reconsider the matter in the light of the provisions contained in the new sub-section and recompute the capital employed. It was contended on behalf of the assessee before the Tribunal that the Commissioner (Appeals) had erred in upholding the decision of the Income-tax Officer to treat the entire gratuity paid to the retired director as salary for the purpose of disallowance under sections 40(c) and 40A(5) of the Act as a part of the same was exempt under section 10(10) and could not be regarded as part of the salary for the purpose of section 40A(5). The Tribunal rejected the contention of the assessee and held that in view of the definition of salary as contained in clause (a) of Explanation 2 to the said section 40A(5), salary included any gratuity and, therefore, the Income-tax Officer and the Commissioner (Appeals) were justified in directing that the entire gratuity paid by the assessee to the retired director should be taken into account for the purpose of section 40A(5). It was contended on behalf of the assessee before the Tribunal that in section 80VV of the Act, the ceiling limit of Rs. 5,000 was fixed in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ceiling laid down by the proviso under section 80VV of the Act applies in relation to the aggregate expenses of the nature mentioned in that section taking all proceedings in respect thereof collectively and not in relation to each such proceeding separately ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses incurred by the assessee on the foreign travel of some of its employees in connection with new projects for manufacture of a new article or thing was an expenditure of capital nature and as such not admissible as a deduction? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the disallowance of Rs. 7,98,210 paid by the assessee towards its surtax liability? 6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the Income-tax Officer to reconsider the assessee's claim for taking the value of the depreciable assets at cost for the purpose of deduction under section 80J of the Act in the light of the new provision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alary', '.Perquisite' and 'Profits in lieu of salary' defined.-For the purposes of sections 15 and 16 and of this section, 1) 'Salary' includes (i) wages ; ...... (iii) any gratuity; ......... (3) 'profits in lieu of salary ' includes (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto ; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12) or clause (13A) of section 10), due to or received by any assessee from an employer or former employer or from a provident or other fund (not being an approved superannuation fund), to the extent to which it does not consist of contributions by the assessee or interest on such contributions. 40. Amounts not deductible.-Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession",- ... . ...... (c) in the case of any company (i) any expenditure which resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 . ...... Explanation 2.-In this sub-section (a) 'salary' has the meaning assigned to it in clause (1) read with clause (3) of section 17." It was contended on behalf of the assessee that under section 10(10), gratuity received by an employee on his retirement is not includible to the extent as provided in his total income. The said provision also applied in the case of receipt of profits in lieu of salary under section 17(3) of the Act. The learned advocate for the assessee submitted further that under section 40A, if expenditure was incurred direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er clause (3) of section 17, in our view, should govern the case and not the general provisions under section 17(1)(iii) under which all gratuities are included in the expression " salary ". If a gratuity paid to an employee on his retirement cannot be categorised as profits in lieu of salary, it is difficult to understand why the same payment should be treated as salary. The definition of " salary " in section 17 governs the provision of section 40A(5) and if we import the definition into section 17, it has to be held that gratuity which is paid on the retirement of an employee under section 10(10) of the Act may not be included in the salary for the purpose of income-tax. However, in any view, this would be of academic interest on the facts. Under section 40(c), a limit has been fixed regarding the expenditure which results directly or indirectly in the provision of remuneration or benefit or amenity to a director, namely, Rs. 72,000, which is the same as in section 40A(5). Even if the payment which has been made on account of gratuity to a retired director does not come within the definition of salary or profit in lieu of salary within the meaning of section 17, it is neverthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed limit of Rs. 5,000. In support of his contentions, the learned advocate for the assessee drew our attention to the new section introduced in the Act, namely, section 40A(12), in which the matter has been clarified and a ceiling of Rs. 10,000 has been fixed for deduction in respect of such expenditure. The learned advocate for the Revenue contended to the contrary and submitted that the expression "in any case " should mean " in the case of any particular assessee " referred to in section 8 OA which reads as follows: " 80A. Deductions to be made in computing total income.-(1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80VV. (2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee. " The learned advocate for the Revenue submitted that the expression "in any case " should be considered and construed in the context of section 80A. On a consideration of the section and the submissions made on behalf of the parties, it appears to us th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd its mills' superintendent to make an on the spot study of the latest developments in such manufacture in the United Kingdom and other countries and to make a report on their return with their recommendation whether such development should be adopted and whether new machines should be purchased. Subsequently, new, improved and modern machinery were imported by the assessee for its mills. On these facts, it was held by the High Court of Gujarat that the tour, though for the purpose of a preliminary survey of new methods and for purchase of new machinery at a later stage, would be one for the purpose of bringing into existence capital assets and the expenditure would be capital in nature. (b) Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52 (SC). This decision was cited for the proposition laid down by the Supreme Court that if an expenditure is made in respect of a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, the same may be regarded as revenue expenditure laid out wholly and exclusively for the purpose of the business. The Supreme Court further held that the question whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capacity. Two directors and the production manager of the assessee were sent to Germany to acquire technical know-how for manufacturing electric hoists of a different design and greater capacity and also for studying and obtaining training in the manufacture of conveyor leaders. On these facts, it was held by the Gujarat High Court that the expenditure having been incurred for limited purpose, viz., to obtain new design of a hoist and to study new and modern manufacturing process, and no capital assets having been brought into existence or intended to be brought into existence, the expenditure incurred was held to be deductible as a business expenditure. (g) Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555 (AP). In this case, a director of the assessee had gone to Japan with the object of negotiating a technical collaboration agreement with a Japanese company for the manufacture of scooters which the assessee did not manufacture till then. On the facts, it was held by the Andhra Pradesh High Court that as the expenditure was incurred to start a new line of business and which had no connection with the expansion of the old business, the expenditure should be treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's business and was a revenue expenditure. (k) CIT v. Mc Gaw Ravindra Laboratories (India) Ltd. [1981] 132 ITR 401 (Guj). In this case, the assessee manufactured blood transfusion equipment with the collaboration of a foreign company. It deputed one of its representatives to negotiate with the foreign company for changes in the agreement to cover ancillary products and for export of its products to other countries. It also deputed one of its technicians for training for setting up a blood bank project. On these facts, it was held by the Gujarat High Court on a concession by the assessee that half of the expenses of the tour of the representatives was in connection with the establishment of a new unit and was not deductible as revenue expenditure but the balance would be revenue expenditure. The expenditure incurred on travelling by the technician was held to be entirely capital in nature as it was incurred to start manufacture of a new product. (1) CIT v. Elecon Engineering Co. Ltd. [1981] 132 ITR 752 (Guj). In this case, the assessee deputed one of its directors to go abroad for selection of foreign engineers with a view to start manufacture of aerial ropeways which the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant and machinery. In order to reduce the expenditure on foreign exchange, the assessee deputed its representatives to visit Italy and the U.S.A. On these facts, it was held by the Bombay High Court that the principal purpose of the visit being to reduce the foreign exchange component in the expenditure to be incurred in setting up the plant, the expenditure incurred was revenue in nature. (p) Hindusthan Aluminium Corporation Ltd. v. CIT [1986] 159 ITR 673 (Cal). In this case, the assessee erected a factory for the manufacture of aluminium and started production during the accounting period. During the same period, the assessee incurred expenditure in sending a number of its employees to the United States of America for practical training and experience. The employees concerned agreed to work for the assessee at least for a period of five years at a settled remuneration after they returned from abroad. On these facts, it was held by a Division Bench of this court that the expenditure incurred for the sending and training of its employees abroad was to enable the assessee to run its factory efficiently and competently. The expenditure was directly linked to the profit-earning p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, 1986. Following the said judgment, we answer the said question by stating that under rule 19A(2)(i) of the Income-tax Rules, in determining the value of the assets for the computation of capital employed, if the assessee is entitled to depreciation, the written down value would be taken into account. It is settled that in the case of assets acquired in the accounting year, the written down value means the actual cost of the assets. In the case of assets acquired before the accounting year, the written down value would mean the actual cost of acquisition less the aggregate of all deductions of depreciation actually allowed and not merely allowable to the assessee in the past years. To that extent as above, the depreciation already allowed would have to be considered. The learned advocate for the assessee orally prayed for a certificate for leave to appeal to the Supreme Court on the question whether the surtax liability of the assessee was a permissible deduction in computing the income of the assessee for the purpose of income-tax. The learned advocate stated that such certificate has been given in Molins of India Ltd. by this court. As in answering question No. 5, we have fol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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