TMI Blog1991 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... he foreign travelling expenses of Rs. 1,579 and Rs. 11,612 were capital expenditure and, therefore, not allowable ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the Commissioner (Appeals) holding that freight charges amounting to Rs. 2,05,575 and export expenses amounting to Rs. 18,340 were not entitled to weighted deduction under section 35B of the Income-tax Act, 1961?" At the instance of the Revenue : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that, notwithstanding the provisions of section 80VV of the Income-tax Act, 1961, legal fees in excess of Rs. 5,000 were allowable? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to write off the terminal loss of Rs. 62,085 under section 32(1)(iii) of the Income-tax Act, 1961?" The assessee is a limited company engaged in the business of manufacture of glucose saline solution and bottling thereof. The assessment year under reference is 1977-78, the previous year being the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture under section 40A(5)(a). According to the Commissioner, the assessee's claim was misconceived inasmuch as Iyer was not employed by the assessee outside India. According to the Commissioner, Iyer was employed in India although for some period he was deployed to do the company's work outside the country. The payment of salary to Iyer was not in foreign currency. The Commissioner held that it could not be said that, for any period, Iyer was employed outside India and, therefore, the provisions of section 40A(5)(b)(i) had no application. In other words, he confirmed the view taken by the Income-tax Officer. This view taken by the Commissioner was confirmed by the Tribunal in further appeal filed by the assessee. Sub-section (5) of section 40A in so far as it is relevant and as it stood at the relevant time, reads as follows: "Expenses or payments not deductible in certain circumstances.--- ....(5)(a) Where the assessee-- (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable to any expenditure or allowance in relation to any employee in respect of any period of his employment outside India and, therefore, salary paid to Iyer for a period of 29 days, during which he was outside India, could not have been disallowed. In other words, according to the assessee, disallowance should have been restricted to Rs. 63,588 (Rs. 70,500--Rs. 6,912 salary paid during 29 days to Iyer). Sub-clause (i) of clause (b) of section 40A(5) will be attracted only in a case where an employee is employed outside India. If the employment of the employee is not outside India, then the provision will not apply. Now could Iyer be said to have been employed outside India ? The answer has to be in the negative. Iyer was employed by the assessee in India and it was only in connection with the assessee's business that Iyer had gone to a foreign country. He was not employed outside India. A person employed in India can be sent to a foreign country but for that reason, it could not be said that during the period he is in the foreign country he is employed outside India. There has to be an employment outside India. Iyer was never in the employment of the assessee outside India. He w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of this contention, strong reliance was placed on the decision of this court in CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715. In Alembic Glass Industries Ltd.'s case [1976] 103 ITR 715 (Guj), on which reliance is placed by the assessee, the facts were as follows: The assessee was a company manufacturing glass at Baroda from 1947. During the accounting period relating to the assessment years 1965-66 and 1966-67, the company incurred expenditure of Rs. 7,53,084 and Rs. 77 lakhs, respectively, for establishing a new glass manufacturing unit at Bangalore. The said unit did not go into production during the two assessment years in question, and, therefore, during the course of assessment, the Income-tax Officer disallowed the payment of interest of Rs. 50,000 and Rs. 2 lakhs, respectively, in the two years on such borrowings. He further held that the Bangalore unit was not a branch of the assessee's factory and was, therefore, a new business ; and since this new business had not started production, the payment of interest could not be taken as revenue expenditure. For the same reason, he disallowed in respect of both years, some miscellaneous expenditure and travelling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete interconnection, interlacing and interdependence of both the units. It is, therefore, difficult to say that the manufacturing unit, which was to be started in Malaysia, was part of the existing business of the assessee. In our opinion, therefore, the decision of this court in Alembic Glass Industries Ltd.'s case [1976] 103 ITR 715 will not be of any assistance to the assessee. The next decision on which reliance was placed on behalf of the assessee is in the case of CIT v. Hindustan Machine Tools (No. 2) [1989] 175 ITR 216 (Kar). In that case, in connection with the commissioning of six new divisions, the assessee had entered into a collaboration agreement with certain parties and had paid technical assistance fees during the previous year ending on March 31, 1971, relevant to the assessment year 1971-72. The assessee claimed deduction of the amount paid as business expenditure. The Income-tax Officer disallowed the claim on the ground that the deduction could be given only from the year in which the production commenced. The Appellate Assistant Commissioner held that the engineering and technical assistance fees relating to the previous year for the assessment year 1971 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The unit in Malaysia was going to be a new and independent unit. Therefore, in our opinion, the expenditure incurred for the foreign travel of Iyer and Rohit C. Mehta for exploring the possibility of establishing a joint venture unit in Malaysia could not be said to be revenue in nature. This expenditure was capital in nature as rightly held by the Tribunal and the authorities below. We, therefore, answer question No. 2 referred to us at the instance of the assessee, in the affirmative and against the assessee. So far as question No. 3, which has been referred to us at the instance of the assessee, is concerned, learned counsel for the assessee stated that the assessee was not pressing this question. We, therefore, need not answer this question. This brings us to the two questions which are referred to us at the instance of the Revenue. The first question referred to us at the instance of the Revenue relates to legal fees. The assessee had paid fees of Rs. 5,000 for surtax assessment and Rs. 7,500 for its income-tax work. Thus, the total fees paid by the assessee came to Rs. 12,500. The assessee claimed deduction of the entire expenditure of Rs. 12,500 incurred by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of any liability under this Act, by way of tax, penalty or interest : Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees." It is clear from the above provision that expenditure incurred by the assessee in respect of any proceedings before the income-tax authority or the Tribunal or any court relating to any liability under the Act, by way of tax, penalty or interest was hit by the said provision. If the expenditure was incurred in respect of proceedings which are not under the Act, the above provision has no application. What is hit by the above provision is expenditure incurred in respect of proceedings relating to the determination of any liability under the Act before any income-tax authority or the Tribunal or any court. The authorities below were, therefore, right in holding that the expenditure incurred in connection with surtax assessment would not be covered by section 80W. Similarly, any expenditure incurred in connection with any matter other than a proceeding before the income-tax authority or the Tribunal or any court would not be covered by the aforesaid provision, even it such matter is in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the Income-tax Officer to allow the deduction of loss of Rs. 62,085. In the appeal by the Revenue, the Tribunal held that the assessee had discarded the machinery and put a realisable value thereon. It held that from the mere fact that the assessee had put a value on the discarded machinery, it could not be said that it had not discarded the machinery. All that the section 32(1)(iii) requires is that the difference should be written off, which the assessee has done. The Tribunal, therefore, confirmed the view of the Commissioner. It is in the background of the above facts that question No. 2 has been referred to us for our opinion at the instance of the Revenue. There is nothing in section 32(1)(iii) which requires the assessee to sell the machinery to claim loss or terminal loss under the said provision. It is not disputed that the machinery or the pieces of machinery in question are discarded by the assessee and while doing so it has estimated its value or scrap value. It is not the case of the Revenue that the estimate made by the assessee is incorrect. Therefore, under section 32(1)(iii), the assessee is entitled to claim deduction of loss of Rs. 62,085 as claimed by it. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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