SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. VS COMMISSIONER OF INCOME-TAX
1997 P T D 491
[213 I T R 523]
[Gujarat High Court (India)]
Before Susanta Chatterji and Rajesh Balia, JJ
SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD.
versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No. 91 of 1992, decided on 12/10/1994.
(a) Income-tax---
----Income-tax proceedings---Special deduction---Ceiling laid down in S.80 VV---Ceiling relates to only one case of determination of liability under the Income Tax Act and not the total expenditure incurred in the previous year-- Indian Income Tax Act, 1961, S.80-VV ---[Indian Oxygen Ltd. v. CIT (1987) 164 ITR 466 (Cal.) dissented from].
The only reasonable interpretation of section 80-VV of the Income Tax Act, 1961, is to construe the limit of Rs.5,000 as relating to any one proceeding for the determination of any liability relating to a particular assessment year and not to the expenses incurred in one previous year.
Indian Oxygen Ltd. v. CIT (1987) 164 ITR 466 (Cal.) dissented from.
A specific provision was required to be inserted in the form of section 80-V for the purpose of allowing deduction of interest on capital borrowed for payment of tax. But for the special provision made, interest on the capital borrowed for the payment of tax is not an allowable expenditure. If that be so, on the same principle, the interest paid for the late payment of tax cannot be held to be allowable expenditure as the same cannot be held to be expenditure incurred wholly and exclusively for the purpose of the business.
Tribunal was not justified in law in confirming the disallowance of Rs.17,475 out of the consultancy fees under section 80-VV.
With regard to the sum of Rs.39,823 certain expenses related to the fees paid to the experts, out-of-pocket expenses incurred by consultation firm and discharge of liability on account of demurrage claimed by the port authorities. Such items without investigation into the facts about the crystallization of such dues could not be disallowed merely on the ground that they related to transactions pertaining to an earlier accounting year.
CIT v. Nathmal Tolaram (1973) 88 ITR 234 (Gauhati) fol.
Bharat Commerce and Industries Ltd. v. Union of India (1991) 188 ITR 277 (Delhi); McGaw Ravindra Laboratories (India) Ltd. v. CIT (1994) 210 ITR 1002 (Guj.); Padmavati Jaikrishna (Smt.) v. Addl. CIT (1987) 166 ITR 176 (SC); Padmavati Jaykrishna (Sint.) v. CIT (1975) 101 ITR 153 (Guj.); Prakash Cotton Mills (P.) Ltd. v. CIT (1993) 201 ITR 684 and (1993) 82 FJR 546 (SC) ref.
(b) Income-tax---
----Business expenditure---Interest on delayed payment of tax---Not deductibe---Indian Income Tax Act, 1961, S.37.
Tribunal was justified in law in disallowing the claim for interest paid under section 220.
(c) Income-tax---
----Business expenditure---Disallowance of expenditure---Entertainment expenditure---Finding that entertainment was on a lavish scale-- Disallowance of expenditure justified---Indian Income Tax Act, 1961, S.37(2-B).
Tribunal had recorded a finding that the entertainment by the directors was of a lavish nature. Hence it was justified in disallowing the expenditure of Rs.8,048 under section 37(2-B).
(d) Income-tax---
----Business expenditure---Accounting---Mercantile system of accounting-- Expenditure relating to earlier years---Liability arising in relevant previous year---Expenditure is deductible---Indian Income Tax Act, 1961, S.37.
Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis.
(e) Income-tax---
----Business expenditure---Surtax liability---Not deductible---Indian Income Tax Act, 1961, S.37.
Tribunal was justified in law in holding that the assessee was not entitled to deduction of surtax liability of Rs.2,79,057 as expenditure for the purpose of business.
S. L. M. Maneklal Industries Ltd. v. C I T (1988) 172 I T R 176 (Guj.) fol.
D.M. Mehra and R.K. Patel for K.C. Patel for the Assessee.
Mihir Thakore for M.R. Bhatt & Co. for the Commissioner.
JUDGMENT
RAJESH BALIA, J.---The Income Tax Appellate Tribunal, Ahmedabad Bench "A" (hereinafter referred to as "the Tribunal"), at the instance of the assessee has referred the following questions for the opinion of the High Court:
"(1) Whether the Tribunal was justified in law in confirming the disallowance of Rs.17,475 out of consultancy fees under section 80 VV of the Act?
(2) Whether the Tribunal was justified in law in disallowing the claim for interest paid under section 220 of the Income-tax Act holding that the same was not allowable deduction for the purpose of business of the assessee?
(3) Whether the Tribunal was justified in holding that a sum of Rs.8,048 incurred by Shri K.N. Mehra and Shri D.N. Mehra, directors of the assessee-company was disallowable as entertainment expenditure within the meaning of section 37(2B) of the Act?
(4) Whether, in the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to deduction of surtax liability of Rs.2,79,057 as expenditure for the purpose of business?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs.39,823 was not allowable in the year in question on the ground that the liability has arisen in the years 1968-69 to 1973-74?"
Question No. 1 relates to the allowance of expenditure in respect of getting legal opinion in various matters as well as counsel fee in respect of various matters relating to determination of the assessee's liability under the Income-tax Act, 1961 (hereinafter referred to as "the Act"), before the authorities under the Act or before the High Court, detailed in the order of the Tribunal.
The Tribunal has upheld the order of the Income-tax Officer restricting the claim of the assessee for the deduction to 4a sum of Rs.5,000 out of the claim of Rs.22,475 for consultancy fees and/or counsel fees.
Section 80-VV of the Act reads as under:
"80-VV. In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any Court relating to the determination 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."
A close scrutiny of section 80-VV leads us to the conclusion that the upper limit of allowance as deduction under section 80-VV of the Act relates to any one case of determination of liability under the Act by way of tax, penalty or interest independently during the relevant previous year and not a total expenditure incurred during one previous year. The expenses which are allowable under section 80-VV of the Act have nexus with any proceedings relating to the determination of any liability under the Act by way of tax, penalty or interest which are before the Income-tax authorities or the Appellate Tribunal or any Court. Any expenditure incurred before the hierarchy of the authorities of the Income Tax Department and the Courts relating to the determination of liability under the Act for a particular assessment year constitutes the subject of the proviso. It must be remembered that the unit of determination of liability under the Act is the assessment year relevant to a previous year, while the deduction of such expenditure is allowable in the previous year in which the same has been incurred by the assessee but it is not essential that such expenses must be related to the determination of liability for the previous year in question. Expenses incurred by the assessee in any previous year may relate to any other one or more previous year or years and in each case determination of liability may be separate under the Act. Therefore, in our opinion, the only reasonable interpretation of section 80-VV of the Act is to construe the limit of Rs.5,000 to any one proceeding for the determination of any liability relating to a particular assessment year and not to the expenses incurred in one previous year.
Learned counsel appearing for the respondent, in this connection, drew the attention of the Court to the decision of the Calcutta High Court in the case of Indian Oxygen Ltd. v. CIT (1987) 164 ITR 466. With utmost respect of the reasons aforesaid, we are unable to agree with the view expressed therein about the interpretation of the expression "in any case" in the proviso to section 80-VV.
It may further be noticed that, apart from the interpretation which we have expressed above, a Division Bench of this Court in the case of McGaw Ravindra Laboratories (India) Ltd. v. CIT (1994) 210 ITR 1002 had occasion to consider the scope of operation of section 80-VV of the Act. The Court, on a plain reading of the section, was of the opinion that the aforesaid provision is operative only in relation to the expenditure incurred by an assessee in respect of the proceedings before any Income-tax authority, the Tribunal or any Court but is not applicable in respect of the expenses which are not related to any proceedings before any Income-tax Authority or Tribunal or any Court. Such expenses will have to be examined and dealt with in accordance with the provisions of section 37(1) of the Act. The relevant observations read as under (at page 1013):
"...any expenditure incurred in connection with any matter other than a proceeding before he Income-tax Authority or the Tribunal or any Court would not be covered by the aforesaid provision, even if such matter is in connection with the Act. The authorities below were, therefore, right in holding that the fees paid to C.C. Chokshi & Co., for matters other than proceedings for determination of any liability under this Act, were not hit by provisions of section 80-VV. Thus, the expenditure of Rs.5,000 incurred for surtax assessment and fees of Rs.2,500 paid to C.C. Chokshi & Co., for attending to matters other than proceedings before the Income-tax Authority or the Tribunal or the Court were not hit by the provisions of section 80-VV."
In view of the aforesaid position we answer question No. l in the negative, i.e., in favour of the assessee and against the Revenue.
Question No.2 relates to allowability of interest paid by the assessee on account of late payment of the tax under section 220 of the Act as deducted from its profits and gains from the business. The authorities under the Act disallowed the expenditure on the ground that such liability has not been incurred by the assessee or such interest has not been incurred by the assessee wholly and exclusively for the purpose of business. The assessee in this connection relied on the principles enunciated by the Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. v. CIT (1993) 201 ITR 684 alongwith the decision of the Delhi High Court in the case of Bharat Commerce and Industries Ltd. v. Union of India (1991) 188 ITR 277. Mr. Mehta, the learned advocate appearing for the assessee, argued that whenever any statutory impost paid by the assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1), the assessing authority is to examine whether the payment of such impost is by way of penalty or is compensatory in nature. If the authority comes to the conclusion that the concerned impost is purely compensatory in nature he is under an obligation to allow deduction under section 37(1) of the Act. He relies on the following observations of the apex Court in the case of Prakash Cotton Mills (P.) Ltd. (1993) 201 ITR 684, 690:
" ....whenever, any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(l) of the Income Tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income Tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature .... "
He further contended that the interest charged under section 220 of the Act is compensatory in nature and it is not by way of penalty. He drew the attention of the Court to the following observations made by the Delhi High Court in the case of Bharat Commerce and Industries Ltd. (1991) 188 ITR 277 (headnote):
"The reationale behind the provisions of section 220 to levy interest on delayed payment of tax is not to penalise the party but to make a provision for compensation for the department on the failure of the assessee to make payment on the first notice of demand."
The argument apparently appears to be facile but does not stand scrutiny of reason. The mere fact that the interest on the late payment of the tax is compensatory does not make it an expense wholly or exclusively carried out for the purpose of business. The essence of section 37 of the Act is that such expenses are wholly laid out or incurred for the purpose of business. If the preliminary liability to be discharged by the assessee is not allowable as expenses laid out or incurred for the purpose of business, ordinarily the interest paid thereon also cannot be considered as expenses laid out or incurred wholly for the purpose of the business. In the case of Prakash Cotton Mills (1993) 201 ITR 684, the Supreme Court was concerned with the interest payable by the assessee on the demand created under the Bombay Sales Tax Act, 1959. The liability incurred on account of sales tax is deductible and any amount paid as interest in the nature of compensation for the late payment of such liability partakes of the character the original liability and is allowable. So also is the interest paid on the late payment of excise duty or contribution to the provident fund. In each case, the amount paid towards the excise duty or contribution to the provident fund are the expenses allowable to be deducted from the gross profit and, therefore, any amount paid for compensation on delayed payment to the recipient also becomes allowable under section 37(1) of the Act. However, in the present case, the interest is payable on the personal liability of the assessee of the income-tax which is a direct tax and is not a part of the business expenditure. In this connection, it may further be noticed that interest on money borrowed for the payment of the tax was held to be not an allowable expenditure. Reference in this connection be made to the decision of the Supreme Court in the case of Padmavati Jaikrisbna (Smt.) v. Addl. CIT (1987) 166 ITR 176. The Supreme Court, affirming the decision of this Court in Padmavati Jaykrishna (Smt.) v. CIT (1975) 101 ITR 153 disallowing the claim for deduction of interest on the amounts borrowed to pay taxes and annuity deposits, held as under (at page 179):
"We are inclined to agree with the High Court that so far as meeting the liability of income-tax and wealth tax is concerned, it was indeed a personal one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and exclusively for the purpose of earning income. "
It may be noted that specific provision was required to be inserted in the form of section 80-V for the purpose of allowing of such interest as expenditure in the computation of profits and gains from business. But for the special provision made, interest on the capital borrowed for the payment of tax is not allowable expenditure. If that be so on the same principle the interest paid for the late payment of tax cannot be held allowable expenditure as the same cannot be held to be expenditure incurred wholly and exclusively for the purpose of the business. For the aforesaid reasons, we answer question No.2 in the affirmative, i.e., in favour of the Revenue and against the assessee.
Question No.3 relates to disallowance of Rs.8,048 incurred by the directors of the assessee-company. The Income Tax Officer has disallowed the said expenses as falling under the head of entertainment expenditure, under section 37(2-B) of the Act. The Tribunal recorded a finding, after going through the record, that the expenses incurred are of lavish nature and the authorities below were justified in not allowing the same as business expenditure, that is to say, the expenses were not held to be wholly and exclusively incurred for the purpose of business. In view of that finding, which is a finding of fact and which is not challenged before us on the grounds on which the finding can be challenged, we answer question No.3 in the affirmative, i.e., in favour of the Revenue and against the assessee.
Question No.4 relates to the claim of the assessee for deduction of Rs.2,79,057 on account of surtax liability as deductible expenses for the purpose of business. It has been brought to our notice that the answer is squarely covered by a decision of this Court in the case of S.L.M. Maneklal Industries Ltd. v. CIT (1988) 172 ITR 176, in favour of the Revenue and against the assessee. Accordingly, question No.4 is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
Question No.5 relates to the expenditure of Rs.39,823 actually incurred during the previous year but was not allowed as deduction from the profit of the previous year on the ground that the liability in respect of various expenses included in the aforesaid sum had arisen in the earlier previous year and not in the relevant previous year and as the assessee r maintained accounts on the mercantile system, the same was not allowable as expenses of the previous year in question.
From the statement of the case and the order of the Tribunal it appears that the contention of the assessee was that the expenditure in dispute was incurred in the year under consideration because they were quantified in the previous year concerned and the Commissioner of Income-tax (Appeals) rest contended by saying that when the expenses related to the earlier accounting years how each of these expenses could be quantified in the year of consideration. The Tribunal affirmed the disallowance by observing that there is no dispute that the assessee-company maintained its books of account on mercantile basis. It was observed that if that is so there was no justification in claiming these expenses for the assessment year under appeal. Having considered the material on record, we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. if for want of necessary-material crystallizing the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be crystallized, which is to be taken into account under the mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallized, can only be adjusted as a contingency item but not as an accrued income or liability of that year. To illustrate, we find from the details of the expenses that certain expenses related to the fees paid to the experts, out-of-pocket expenses incurred by the consultation firm and discharge of liability on account of demurrage claimed by the port authorities. Such items without investigation into the facts about the crystallization of such dues cannot be disallowed merely on the ground that they relate to transactions pertaining to an earlier accounting year. In this connection, it is useful to refer to a decision of the Gauhati High Court in the case of CIT v. Nathmal Tolaram (1973) 88 ITR 234 which was a case arising under the Indian Income-tax Act, 1922, as to the interpretation of section 1Q(2)(xv) which is corresponding to section 37(1) of the 1961 Act. The question related to the claim of deduction on account of the sales tax liability paid during the year 1957-58, whereas the liability related to the accounting year 1949-50. The Division Bench in that case observed as under (at page 238):
"Under section 4 of the Income Tax Act, the income that accrues or arises during any previous year alone is to be taken note of. There is, therefore, a bar to include any income that accrues or arises outside the previous year subject to the deeming provisions in the Act. There is, however, no express bar in law, nor one by necessary implication, restricting the power of the Income Tax Officer to exclude the expenditure laid out or expended under section 10(2)(xv) of the Act. We are, therefore, unable to accede to the submission of learned counsel for the Department.
Section 10(2)(xv), shorn of other details for our purpose, provides for making allowances of any expenditure 'laid out' or 'expended'. The words 'laid out' are with reference to the mercantile system while the word expended' is with regard to the cash system. Once there was the sales tax demand in this case, which was an enforceable liability and as such a real expenditure, for which the assessee laid out the amount by debiting his account in the accounting year which was also the year of demand of the Department, deduction can be legitimately claimed under section 10(2)(xv). Here is a case where there is no doubt about the genuineness of the expenditure. There is also the compulsiveness in the sales tax demand, which can be ignored only at the peril of the assessee. This expenditure had never been taken note of in the earlier years for one reason or the other. In the absence of any legal bar in the way of the assessee claiming this expenditure in the year of demand for which provision has already been made in his accounting year, deduction under section 10(2)(xv) is permissible in law and has been rightly allowed by the Tribunal. "
We are in respectful agreement with the said view expressed by the Gauhati High Court. We, therefore, answer question No.5 in the negative, i.e., in favour of the assessee and against the Revenue.
This reference accordingly stands disposed of with no orders as to costs
M.B.A./1186/FCReference answered