WHIR TEXTILES LTD. VS COMMISSIONER OF INCOME-TAX
1999 P T D 579
[225 I T R 327]
[Gujarat High Court (India)]
Before Rajesh Balia and M.S. Shah, JJ
WHIR TEXTILES LTD.
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No. 130 of 1983, decided on 05/10/1995.
(a) Income-tax
----Capital gains---Computation of capital gains---Cost of acquisition of capital asset---Option to substitute fair market value as on 1-1-1954---Scope of S.50(2)---Option restricted to assets acquired in mode specified in S.49-- Indian Income Tax Act, 1961, Ss.45, 48, 49, 50 & 55.
(b) Interpretation of statutes---
---- General and special provisions
(c) Income-tax.
----Business expenditure---Disallowance---Company---Gratuity---Payment through fund to which contributions have been made by employer---Not includible in salary or perquisite while computing expenditure for purposes of disallowance under S.40-A(5)---Indian Income Tax Act, 1961, S.40-A.
(d) Income-tax---
----Business expenditure---Disallowance---Company---Expenditure resulting in benefit or amenity to employee or director---House rent allowance, conveyance, allowance, medical insurance etc.---Ceiling for purposes of disallowance is in respect of remuneration paid to each employee separately---Expenditure on telephone, gas, electricity and insurance premia of directors---Computation of disallowance is a question of fact---Indian Income Tax Act, 1961, Ss.40-A & 256.
(e) Income-tax.
----Capital or revenue expenditure---Company---Fees paid to Registrar for permission to increase authorised capital---Bank guarantee commission-- Capital expenditure---Indian Income Tax Act, 1961, S.37.
(f) Income-tax.
----Capital or revenue expenditure---Company---Foreign exchange---Assets acquired in foreign country on deferred payment---Excess payable on account of fluctuation in rate of foreign exchange---Capital expenditure---Indian Income Tax Act, 1961, S.37.---[Goculdas Dossa & Co. v. Shah (J.P.) (1995) 211 I T R 706 (Bom.) dissented from]. '
Subsection (2) of section 50 of the Income Tax Act, 1961, on its plain reading has been restricted in its operation to assets acquired in the modes specified under section 49 of the Act. Subsection (2) of section 55 has not been made applicable to depreciable assets generally. Section 50 lays down that the cost of acquisition in the case of depreciable assets would be the written down value in the case of assets acquired at a cost by the assessee, after such cost has been adjusted by the actual depreciation obtained by him. In the case of assets held by the assessee as successor-in-interest of the previous owner of the asset and acquired in any of the modes specified under section 49, (instead of the actual cost in the hands of the predecessor-in-interest, the assessee had the option to take the cost of acquisition in terms of section 55(2) as the fair market value as on January 1, 1954, if such asset had become the property of the assessee prior to that date and then to adjust it by the actual depreciation claimed by him thereon. Where a special mode of determining the cost of acquisition has been provided with reference to sections 48 and 49, the provisions of section 55 cannot again be invoked. While subsection (1) of section 55 opens with the words "for the purpose of sections 48, 49 and 50", subsection (2) of section 55 confines its application for the purpose of sections 48 and 49. This is also indicative of the fact that while the term "adjusted" and "cost of any improvement" defined under subsection (1) of section 55 applies to the asset whose cost is to be determined under section 50, subsection (2) does not apply to the capital asset whose cost of acquisition is to be determined under section 50 by its own force. Section 50 as well as section 55 both operate in the same field, namely, determining the cost of acquisition for the purpose of computing capital gains under section 48. As the field of operation of both the provisions is the same, the principle that a special provision would exclude a general provision would govern while interpreting the two provisions.
Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT (1975) 99 I T R 264 (Guj.) and CIT v. Mihir Textiles Ltd. (1994) 206 I T R 112 (Guj.) fol.
Goculdas Dossa & Co. v. Shah (J.P.) (1995) 211 I T R 706 (Bom.) dissented from.
A perusal of section 40-A(5) makes it obvious that it deals with two types of expenditure, namely, expenditure which is described as salary and expenditure which may be described as perquisites. "Salary" and "perquisites" are two independent and distinct, expressions used in the Income-tax Act. This is also apparent from the explanation, which gives a meaning to salary and perquisites separately. Salary for the purpose of the above provision has been assigned the same meaning as in clause (1) read with clause (3) of section 17. Under section 17(1)(iii) gratuity has been included in the definition of salary. This is to say that gratuity is a part of salary itself and it is not a perquisite, which is in the nature of a benefit other than or any addition to salary, which are being provided to an employee by the employer. Any sum paid by an employer as contribution to an approved gratuity fund is not to be included in computing the expenditure referred to under subsection (5)(a) of section 40-A for the purpose of arriving at the ceiling. The fact that payment has been made out of the approved gratuity fund clearly goes to show that payment has not been made directly by the employer to his employee, de hors the provisions of section 36(1)(v). A perusal of sub-clause (v) of clause (b) of Explanation 2 to section 40-A(5) makes it clear that it does not refer to all payments made out of all or any fund. It only refers to payments made by the assessee to effect an assurance on the life of the employee or effect a contract for an annuity, and not to any other payments. Even such payments are not included in "perquisite" if the same are made out of a recognised provident fund or approved superannuation fund, for the purpose of section 40-A(5) of the Act. Moreover, even if it amounts to perquisite or salary. Explanation 2 does not lay down the principle for including or excluding any amount in the computation of expenditure for the purposes of arriving at a ceiling under subsection (5)(a) of section 40-A. That is to be governed by the substantive provision referred to above, which clearly excludes contributions made to a recognised provident fund or an approved superannuation fund or contributions towards an approved gratuity fund under clause (v) of section 36(1). Therefore, notwithstanding the fact that gratuity is a part of salary, expenditure made by the assessee for making a contribution towards an approved gratuity fund is not to be included in computing the amounts of remuneration for the purpose of ceiling of deductible expenditure under section 40-A(5).
The ceiling fixed under section 40-A(5) for the purpose of disallowance of expenditure incurred by the assessee in paying remuneration to the employees is in respect of remuneration paid to each employee separately, and there cannot be any cumulative disallowance by clubbing the allowance paid to a number of employees.
Held further, (i) that the expenditure incurred by way of filing fees for increasing the authorised capital of the company was capital expenditure.
Alembic Glass Industries Ltd. v. C IT (1993) 202 I T R 214 (Guj.) fol.
(ii) that if an expenditure is an integral part of the cost of acquisition of the capital asset and not an integral part of the profit earning process, such expenditure should be treated as a capital expenditure and not as a revenue s expenditure; and therefore, payment of bank guarantee commission for purchasing machinery was capital expenditure.
CIT v. Bharat Suryodaya Mills Co. Ltd. (1993) 202 I T R 942 (Guj.) and CIT v. Vallabh Glass Works Ltd. (1982) 137 I T R 389 (Guj.) fol.
(iii) that the excess amount required to be paid on repayment of loan on account of exchange rate difference was capital expenditure.
CIT v. Hindustan Aluminium Corporation Ltd. (1994) 207 I T R 670 (Bom.) and New India Industries Ltd. v. CIT (1993) 203 I T R 933 (Guj.) fol.
(iv) that the question regarding valuation of perquisites to employees was a pure question of fact. The Tribunal was right in affirming the finding of the Commissioner of Income-tax (Appeals) in computing the disallowance in respect of remuneration paid to P at Rs.790.
Ahmedabad Manufacturing & Calico (Pvt.) Ltd. v. CIT (1986) 162 I T R 800 (Guj.); CIT v. Commonwealth Trust Ltd. (1982) 135 I T R 19 (Ker.); CIT v. Tungabhadra Industries Ltd. (1994) 207 I T R 553 (Cal.); CIT v. Upper Doab Sugar Mills (1979) 116 I T R 240 (All.) and India Jute Co. Ltd. v. CIT (1982) 136 I T R 597 (Cal.) ref.
J.P. Shah for the Assessee.
B.J. Shelat for M.R. Bhatt & Co. for the Commissioner.
JUDGMENT
RAJESH BALIA, J.--- The aforesaid reference has been made by the Income-tax Appellate Tribunal, Ahmedabad Bench "C", Ahmedabad. From the statement of case submitted by the Tribunal, it appears that while three questions have been referred at the instance of the Commissioner of Income-tax, as many as seven questions have been referred to this Court for its decision at the instance of the assessee. The issues raised in this reference relate to the assessment of the assessee for the assessment year 1975-76.
The questions referred to the opinion of this Court at the instance of the Revenue which are reproduced hereinbelow:--
"(1)Whether, on the facts and in the circumstances of the case" the Tribunal was right in law in coming to the conclusion that the expenditure on items like gas and electricity expenses, motor car, personal accident insurance premium, telephone expenses were not in the nature of perquisites for the purpose of disallowance under section 40-A(5) of the Income-tax Act, 1961?
(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 expenditure on items like rent allowance, conveyance allowance, medical insurance premium and personal accident premium were not in the nature of perquisites for the purpose of allowance under section 40-A(5) of the Income-tax Act, 1961?
(3)Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the gratuity paid to an employee could not be regarded as remuneration under section 40-A(5) of the Income-tax Act, 1961."
From the questions, it appears that questions Nos. l and 2 are overlapping and question No.3 appears to be a substitute for another question intended to be referred to this Court. This we gather from the statement of the case. While dealing with the questions which are proposed to be referred at the instance of the Commissioner, the statement of case referring to disallowance made under section 40(c) in respect of remuneration paid to managing director, and the disallowance, made in respect of excess amount of salary/perquisite/benefits made available to one of the employees. R.C. Parikh and inclusion by the Income-tax Officer in arriving at the figure of remuneration paid to the employees by the employer in excess of the amount permissible under section 40-A(5) of the Income-tax Act. No reference in the statement of case has been made to the question relating to payment of gratuity to R.C. Parikh at the instance of the Revenue. We also notice from the previous order that, in fact, the Tribunal has not found that the gratuity paid to the employee is not remuneration. On the other hand, the Tribunal has positively found that it amounts to remuneration to be included in arriving at the maximum limit of allowable remuneration to the assessee as reduction under section 40-A(5).
We also find that while questions Nos. l and 2 referred to disallowance negatived by the Tribunal under section 40-A(5), no question has been framed with respect to disallowance under section 40(c) for compensation payable to the managing director. No question has been asked by the Revenue in the reference application about the computation of remuneration paid to the managing director.
In the light of the statement of the case, we consider question No. l as referable to the computation of remuneration payable to Shri R.C. Parikh apart from gratuity and question No.2 as applicable to house rent allowance, conveyance allowance, medical insurance premium, personal accident claims premium in respect of other employees. The Income-tax Officer while computing the remuneration payable to R.C. Parikh has found that the salary payable to R.C. Parikh and the value of perquisites or benefits provided directly or indirectly to R.C. Parikh exceed by a sum of Rs.19,650, the permissible limit of allowable deduction under section 40-A(5) of the Income-tax Act. The value of perquisites under consideration were cooking gas, electricity charges, motor car, personal accident insurance premium, telephone expenses and medical insurance premium. In respect of telephone expenses, the Income-tax Officer included one-third of telephone expenses on account of estimated personal use of the telephone. On appeal, motor car, perquisites, gas and electricity charges and expenses on servants were held to be perquisites made available to the assessee but the amount includible on that account which resulted in direct or indirect benefit to the employee otherwise than for purpose of business was slashed down to a lower figure and finally disallowed by the Income-tax Officer. There is no finding that the telephone was provided by the assessee to its employee for personal use. The fact that only one-third of the expenses have been added by the Income-tax Officer on estimate basis goes to show that the telephone was provided for use for the business by the assessee to its employee, R.C. Parikh. Under these circumstances, the finding in this respect that only Rs.790 is disallowable expenditure out of amount of remuneration to R.C. Parikh has been affirmed by the Tribunal. In the aforesaid circumstances, it can well be said that so far as gas and electricity expenses, motor car expenses are concerned, the Tribunal has not held them to be not in the nature of perquisites. While holding them to be in the nature of perquisites it has determined at a lesser amount than that taken by the Income-tax Officer as properly required to be considered for the purposes of determining the value of direct or indirect benefit that arose to the employee by providing these facilities by the assessee. Obviously, under section 40-A(5), the benefit which is to be considered resulting in the provision of direct or indirect benefit of the employee is the benefit, expenses, relating to which, but for such provision or facility, amenity or perquisite, would have been the employee's obligation to discharge. Any expenses incurred by the company for its employees for the purpose of its own business cannot be said to be a perquisite or amenity resulting in direct or indirect benefit to the employee so as to fall within the purview of perquisites for the purpose of limit prescribed under section 40-A(5) for computing the allowable deduction on account of such expenses.
Likewise from the Tribunal's order it is not apparent whether the policies were taken by the assessee for its business purposes or for the reimbursement of personal benefit of the employee. In the absence of any finding that the personal accident insurance or motor accident insurance taken by the company was for the personal benefit of the employee and not to safeguard the company's own interest against possible disablement of its employee, it is not possible to come to conclusive finding whether the personal accident insurance premium or medical insurance premium amounts to perquisite. It depends upon the terms and conditions on which the insurance policy has been taken by the employer. Moreover, it appears from the statement of the case and the order of the Tribunal, that the disallowance under section 40-A(5) in respect of remuneration payable to R.C. Parikh has been restricted on account of computation of expenses or valuation of perquisites attributable to personal benefit to the employee and, in these circumstances, in our opinion, the question referred to us is not a question of law, but a pure question of fact in the realm of arithmetic computation of valuation of perquisites payable to the employee.
We, therefore, answer question No. l in the affirmative that is to say the Tribunal was right in affirming the finding of the Commissioner of Income-tax (Appeals) in computing the disallowance in respect of remuneration paid to R.C.. Parikh at Rs.790.
Coming to the second question, we find that while the Income-tax Officer has computed the disallowance under section 40-A(5) at Rs.18,872 on account of house rent allowance, conveyance allowance, medical insurance and personal accident insurance premium, the Income-tax Officer has calculated all these sums in respect of R.M. Patel, S.K. Shah, C.D. Desai, S.K. .Deay and V.T. Desai cumulatively and not with reference to each employee separately. The ceiling fixed under section 40-A(5) for the purpose of disallowance of expenditure incurred by the assessee in paying remuneration to the employees is in respect of remuneration paid to each employee separately and there cannot be any cumulative disallowance by clubbing the allowance paid to a number of employees. In different cases, a different amount may be treated as payment made to the employee beyond the ceiling fixed under section 40-A(5). The result may be that even including some items within the definition of perquisite resulting in direct or indirect benefit to the employee in one case it may not exceed the permissible ceiling and in another case it may exceed it. Therefore, the very foundation of calculation made by the Income-tax Officer was contrary to the provision. The Commissioner of Income-tax (Appeals) had found in respect of these items as a fact that there is no excess in view of what has been stated in the statement submitted by the assessee that is to say on the computation it was found' as a fact by the Commissioner of Income-tax (Appeals) that the amount paid to the employees is not in excess of the permissible ceiling. This finding has not been reversed by the Tribunal. In that view of the matter, the question whether any of the items mentioned in question No.2 are perquisites or not do not call for any decision inasmuch as the matter is only of academic nature. We, therefore, decline to answer that question.
Question No.3 which has been referred to us at the instance of the Revenue relates to the question whether gratuity paid to an employee could be regarded as remuneration under section 40-A(5) of the Act or not.
From the order of the Tribunal, we find that in fact the Tribunal has found that the payment of gratuity would be clearly hit by section 40-A(5) of the Act. The foundation on which question No.3 has been referred to us having been decided in favour of the Revenue, it could not have been a cause of grievance by the Revenue. However, as the question of gratuity being considered as perquisite under section 40-A(5) is even otherwise covered under question No.5 referred to us at the instance of the assessee, we intend to deal with the aforesaid question alongwith questions Nos.5, 6 and 7 referred at the instance of the assessee relating to includibility of amount paid to the employee as gratuity in computing the ceiling up to which remuneration paid to its employee is allowable expenditure under section 40-A(5).
For the present purpose, questions Nos.5, 6 and 7 referred at the instance of the assessee are as under:--
(5)Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of section 40-A(5) are applicable to the payment of gratuity and that provisions of section 40-A(7) are not overriding in this respect?
(6)Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that payment of gratuity would not be covered in clause (iii) of the second proviso to section 40-A(5)(a)?
(7) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the gratuity paid in excess of the ceiling limit prescribed in section 10(10) of the Act would be includible in determining the disallowance under section 40-A(5) and in not excluding entire gratuity from the ' provisions under section 40-A(5)?
Shri R.C. Parikh, one of the employees, was paid Rs.1,25,000 as gratuity on his retirement. The assessee had claimed that the amount of gratuity paid to an employee from an approved fund was not includible as remuneration in computing the disallowance under section 40-A(5) of the Act.
He claimed that the payment of such gratuity was covered by the provisions of section 36(1)(v) and section 40-A(7) of the Act, therefore, the said amount was not includible. The contention of the Revenue was that the expression "perquisite" has been defined in Explanation 2(b) to section 40-A(5) which includes payment of any sum by the assessee through any fund except through a recognised provident fund or approved superannuation fund.
Therefore, the payment of gratuity is covered by the above definition and has rightly been included in computing the disallowance by the Income-tax Officer.
It would be pertinent to refer to the relevant provisions of the Act as it was existing during the assessment-year in question. Section 40-A(5) to the extent it is relevant reads as under:--
"40A.(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 into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit,
Then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of 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 a 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 one hundred and two thousand rupees, shall in no case be allowed as a deduction:
Provided further that in computing the expenditure referred to in sub-clause (i) or the expenditure or allowance referred to the sub clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely--
(i) the value of any travel concession or assistance referred to in clause (5) of section 10;
(ii) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of section 10;
(iii) any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36;
(iv) any expenditure referred to in clause (ix) of subsection (1) of section 36. "
From the perusal of the aforesaid provision it is obvious that it deals with two types of expenditure, namely, expenditure which is described as salary and expenditure which may be described as perquisites. Salary and perquisites are two independent and distinct expressions used in the Income- tax Act. This is also apparent from the Explanation which gives a meaning to salary and perquisites separately. Salary for the purpose of the above provision has been assigned the same meaning as in clause (1) read with clause (3) of section 17 subject to certain modifications with which we are not concerned and perquisite has been further defined to mean in clause (b) of Explanation 2.
Section 17 which comes under Chapter IV deals with computation of total income under the head "salaries". Section 17 defines "salary", "perquisite" and "profits in lieu of salary" for' the purpose of the Act. Section 17(1) reads as under:--
"17. (1) salary includes:--
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance of salary;
(v-a) any payment received by an employee in respect of any period of leave not availed of by him;
(vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and
(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-Rule (2) of the Rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it' is chargeable to tax under sub-Rule (4) thereof;"
Under section 17(1)(iii) gratuity has been included in the definition of salary. This is to say that gratuity is a part of salary itself and it is not a perquisite, which is in the nature of benefits other than or any addition to salary, which are being provided to an employee by the employer. Therefore, for the purpose of finding the meaning of gratuity one does not have to travel beyond section 17(1) and to find out a different meaning, whether it amounts to a perquisite or not. It is to be noticed that under the main provision of subsection (5)(a) of section 40-A in the further proviso any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36 have been excluded from inclusion in the computation of expenditure referred to in sub -clause (i) or in sub-clause (ii) of section 40-A(5)(a). Clause (v) of sub section (1) of section 36 reads as under:--
"36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. "
The above clause shall be read in respect of matters spelt out therein in computing the income referred to in section 28. Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust.
On a plain reading of these provisions it is apparent that any sum paid by an employer as contribution to an approved gratuity fund is not to be included in computing the expenditure referred to under subsection (5)(a) of section 40-A for the purpose of arriving at the ceiling. The fact that payment has been made out of an approved gratuity fund clearly goes to show that payment has not been made directly by the employer to his employee de hors the provisions of section 36(1)(v). It may be noticed that a gratuity may be paid directly by the employer to an employee without an approved gratuity fund but in that event the deduction on such. expenditure may not be considered under section 36(1)(v). But we are not concerned with that situation. Contributions made to an approved gratuity fund are not to be included irrespective of the fact whether such contribution comes under sub- clause (i) or sub-clause (ii) of subsection (5)(a). The expenditure having been incurred at the time when the contribution was made and not included in the computation of expenditure for the purpose of subsection (5)(a), it cannot be so included when payment out of that fund has been made later on. The expenditure when made by the assessee has been dealt with in accordance with section 36(1)(v) read with section 40-A(7), if the approved gratuity fund or the condition of allowability of contributions of an approved gratuity fund as laid down under section 40-A(7) are not fulfilled, the expenditure made by the assessee would not be entitled for deduction. If the conditions to entitlement of deduction are fulfilled and the assessee becomes entitled to claim deduction, in that event, the deduction is allowable under section 36(1)(v) read with subsection (7) of section 40-A. As undisputedly the claim of the assessee was about the payments made out of an approved gratuity fund to an employee, it is not to be included for computation of ceiling of expenditure. That contention of the assessee is required to be accepted on the plain reading of the provision itself.
The Tribunal has apparently erred firstly in considering the payment of gratuity to an employee as perquisite under section 17(2) of the Act read with Explanation 2(b) of section 40-A(5) in consideration, by overlooking section 17(1)(iii) itself which unequivocally states that gratuity is deemed to be a salary distinct from perquisite under section 17(2).
It has further fallen into error by applying sub-clause (v) of clause (b) of Explanation' 2 to section 40-A(5) to the payments made out of approved gratuity fund.
"Explanation 2.-- In this subsection--
(a) 'salary'...
(b) 'perquisite' means
(v) payment by the assessee of any sum, whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity."
A bare perusal of the provision makes it clear that it does not refer to all payments made out of all or any fund. It only refers to payment made by the assessee to effect an assurance on the life of the employee or to effect a contract for an annuity, and not to any other payments. Even such payments are not included in "perquisite" if the same are made out of recognised provident fund or approved superannuation fund, for the purpose of section 40-A(5). This is so because such payments out of recognised provident fund or approved superannuation fund are not to be considered perquisite under section 17(2)(v) either. Payment of gratuity cannot be said to be payment to effect assurance on the life of the employee or for effecting contract for an annuity.
Moreover, even if it amounts to perquisite or salary, Explanation 2 does not lay down the principle for including or excluding any amount in the computation of expenditure for the purposes of arriving at a ceiling under subsection (5)(a). That is to be governed by the substantive provision referred to above, which clearly excludes contributions made to a recognised provident fund or an approved superannuation fund or contributions towards an approved gratuity fund under clause (v) of section 36(1).
Therefore, notwithstanding the fact that gratuity is a part of salary, expenditure made by the assessee for making a contribution towards an approved gratuity fund is not to be included in computing the amount of remuneration for the purpose of ceiling of deductible expenditure under section 40-A(5). The assessee does not make an expenditure twice over, that is to say once by making the contribution towards approved gratuity fund, and then when the approved gratuity fund makes payment to the employee. If the argument of the Revenue was to be accepted, it would amount to holding that the assessee makes the very same expenditure twice over first expenditure would be incurred when contribution is to be made to gratuity fund, that obviously cannot be included in the computation for the purpose of section 40-A(5)(a). Then again, according to the Revenue, when the gratuity fund makes payment to the employee and it reaches the. hands of employee, it becomes part of salary paid by the assessee. That result obviously would, in our opinion, does not flow from the reading of the provision and contrary to all canons of construction.
Accordingly, we answer question No.6 referred to above, that payment of gratuity to an employee made through an approved gratuity fund to which contribution may have been made by the assessee-employer and such contribution being expenditure of the employer covered under sub -clause (iii) of the proviso to section 40-A(5)(a) cannot be included in the computation of expenditure for its purpose.
In view of our answer to question No.6, questions Nos.3, 5 and 7 are of academic interest and we decline to answer the same.
Question No.4 referred at the instance of the assessee reads as under:--
"4.Whether, on the facts and 'circumstances of the case, the Appellate Tribunal was right in law in holding that the fees paid to the Registrar of Companies for getting permission to increase the authorised capital is expenditure of capital nature?"
The assessee had paid a sum of Rs.15,000 to the Registrar of Companies for getting permission to increase its authorised capital. The assessing authority as well as the Commissioner of Income-tax (Appeals) and the Tribunal has rejected the claim of deduction 'of the said expenditure as revenue expenditure for computing the income from profits and gains of the business by treating the said expenditure as of capital nature.
It has been pointed out that this Court in the case of Alembic Glass Industries Ltd. v. CIT (1993) 202 I T R 214 has laid down that the expenditure incurred by way of filing fees for increasing the authorised capital of the company was capital expenditure. For coming to that conclusion, the Court relied on its earlier decision in the case of Ahmedabad Manufacturing and Calico (Pvt.) Ltd. v. CIT (1986) 162 I T R 800 (Guj.). The same view was taken by the Calcutta High Court in CIT v. Tungabhadra Industries Ltd. (1994) 207 I T R 553. Though there appear to be some contrary decisions on this issue, there being a binding decision on this issue, following the same we answer question No.4 in the affirmative, that is to say in favour of the Revenue and against the assessee.
Question No.8 at the instance of assessee was referred in the following terms:--
"8.Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that bank guarantee commission was not expenditure of revenue nature?"
The assessee had purchased plant and machinery for its establishment on credit and for securing such credit purchase the assessee had to furnish a bank guarantee. The assessing authority as well as the Tribunal has held that the commission for furnishing bank guarantee was not of revenue nature.
This Court in the case of CIT v. Bharat Suryodaya Mills Co. Ltd. (1993) 202I T R 942 held that if an expenditure is an integral part of the cost of acquisition of the capital asset and not an integral part of the profit earning process, such expenditure should be treated as a capital expenditure and not as a revenue expenditure; and, therefore, payment of bank guarantee commission for purchasing machinery was held to be capital expenditure. In arriving at this conclusion, the Court has followed its earlier decision in the case of CIT v. Vallabh Glass Works Ltd. (1982) 137 I T R 389.
In view of the aforesaid two decisions of this Court, we answer question No.8 also in the affirmative, that is, in favour of the Revenue and against the assessee.
Question No.9 reads as follows:--
"Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that excess amount required to be paid on repayment of loan on account of exchange rate difference is not revenue expenditure?"
The Income-tax Officer has disallowed the sum of Rs.22,925 claimed by the assessee as revenue loss on account of excess payment on account of exchange rate difference. The assessee had acquired certain asset from .a country outside India for the purpose of business on deferred payments. The price was payable in foreign currency. As a consequence of a change in the rate of exchange after the acquisition of such asset, there was increase in the liability of the assessee as expressed in Indian currency for making payment towards cost of such asset and that increased liability of repayment of money borrowed in foreign currency was sought to be claimed as deduction under section 37 as a revenue loss or revenue expenditure.
Section 43-A made special provision relating to such contingency, providing that the amount by which the liability created on account of acquiring an asset from a foreign country payment of which is expressed in foreign currency, to the extent it is increased or reduced during the previous year on account of fluctuation of exchange rate, such increase or reduction be adjusted for computing the acquisition cost of the asset which is also to be taken as actual cost for the purpose of depreciation or cost of acquisition for the purpose of section 48. Obviously, once increased liability becomes part of the cost of acquisition of asset, it becomes capital expense and cannot be allowed as a revenue expenditure. We are supported in our aforesaid conclusion by the decision of this Court in the case of New India Industries Ltd. v. CIT (1993) 203 I T R 933 and in the case of CIT v. Hindustan Aluminium Corporation Ltd. (1994) 207 I T R 670 (Bom.). Accordingly we answer question No.9 in the affirmative, that is to say, in favour of the Revenue and against the assessee.
The last question referred for our decision at the instance of the assessee reads as under:--
"10 Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law, in holding that the assessee had no option to substitute the fair market value of plant and machinery as on January 1, 1954, in the computation of capital gain arising on sale thereof ?"
The assessee had sold certain depreciable assets during the previous year-which were acquired by him prior to January 1, 1954. By taking the written down value as the cost of acquisition, the Income-tax Officer has calculated the capital gain arising out of the transfer of such asset at Rs.5,720. The assessee has claimed a capital loss on account of the said transfer of asset at 8.22,925 by claiming that he had an option to value this .capital asset which were acquired before January 1, 1954, at the market price prevalent as on January 1, 1954, under section 55 as it was existing during the relevant assessment year. This claim of the assessee was rejected on the ground that there being special provisions dealing with assets in respect of which depreciation claim was allowed and under section 50, where the assessee has acquired an asset before January 1, 1954, and the asset is being used by him, only the written down value defined under section 43 can be taken as the cost of acquisition of the asset. It is only where the assets have been acquired in any of the modes prescribed under section 49, namely, either on distribution of assets on the total or partial partition of a H.U.F. or under a gift or will or by succession or on any distribution of assets on the dissolutions of a firm, etc., or on distribution of assets of a company or on a transfer to an irrevocable trust or on account of transfer of capital of a company to its subsidiary company or by a subsidiary company to the holding company or under a scheme of amalgamation prior to January 1, 1954, the cost of acquisition could be taken at the option of the assessee as the fair market value on January 1, 1954. These are all contingencies where the assessee himself has not incurred any cost for acquiring the asset and the cost of acquisition has to be determined with reference to his predecessor-in-title for the purpose of arriving at capital gains.
In view of the specific provision of section 50 as then existing during the relevant assessment year, the Income-tax Officer computed the cost of acquisition of the capital asset as the written down value of the assets in the books of the assessee after making necessary adjustments. This computation of capital gains has been affirmed by the Commissioner of the Income-tax (Appeals) as well as by the Tribunal.
In coming to the conclusion, the Tribunal has relied on a decision of this Court in the case of Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT (1975) 99 I T R 264.
Learned counsel for the assessee candidly stated that though the Tribunal's order is in consonance with the decision of this Court, recently a Full Bench of the Bombay High Court had taken a different view dissenting from the view taken by this Court and the matter may be reconsidered in the light of the said decision. The decision of the Bombay High Court is Goculdas Dossa and Co. v. J.P. Shah (1995) 211 I T R 706.
I Section 50 at the relevant time read as under:
"50. Special provision for computing cost of acquisition in the case of depreciable assets.-- Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or-under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications:--
(1)The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
(2)Where under any provision of section 49, read with subsection (2) of section 55, the fair market value of the asset on the 1st day of April, 1954, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted."
Section 48 provides the manner of computing the capital gains by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets by deducting the other amounts enumerated in that section which provides expenditure incurred wholly and exclusively in connection with such transfer and acquisition of such asset and the cost of any improvement thereto.
Section 49 deals with cases where the capital asset has become the property of the assessee in which cost of acquisition has not been incurred by the assessee but which has been acquired by him is various modes referred to in section 49as a successor to the holder of the asset.
Section 50 deals with as to what shall be the cost of acquisition in the hands of the assessee in respect of assets for which depreciation has been allowed under the Indian Income-tax Act, 1922, or any Act repealed by that Act or under the present Act. It consists of two situations. Firstly, it provides in a general way under subsection (1) that the written down value, as defined in clause (6) of section 43, of the asset, as adjusted, is to be taken as the cost of acquisition of an asset in respect of which the assessee had got depreciation. However, it further provides that where the cost of acquisition of an asset is to be taken to be the cost of acquisition to previous owner, which is of a date prior to January 1, 1954, the cost of acquisition in such an event is to be taken to be at the option of assessee the market value as on January 1, 1954, as reduced by the depreciation claimed by and allowed to the assessee after January 1, 1954.
Subsection (2) of section 50 on its plain reading has been restricted in its operation to assets acquired in the modes specified under section 49. Subsection (2) of section 55 has not been made applicable to depreciable assets generally. We find that this Court in Rajnagar Vaktapur Ginning's case (1975) 99 I T R 264 repelling the challenge not the ground of Article 14, about the classification under clause (a) and clause (b), held as under (at page 282):--
"The classification, as stated by us, is based on a rational basis, namely, whether the assessee who is owning, and has acquired depreciable assets from his own fund and has earned and enjoyed the depreciation allowance on, the said assets; while in the case of successor, in any of the modes mentioned in section 49, the assessees have not enjoyed the depreciation on such assets, as that depreciation allowance might have been enjoyed by the previous owner.... We have set out the relevant sections 48, 49 and 50. On the plain reading of section 50, we think that it is only those assessees who acquired depreciable assets in any one of the modes prescribed under section 49 that have the benefit of option to select either the fair market value of the assets on January 1, 1954, or the cost acquisition by the previous owner. It is an admitted position that the applicant-company is not an assessee acquiring depreciable assets in any of .the modes mentioned in section 49 and clearly, therefore, this case falls within section 50(1) and, therefore, in the case of the applicant-company for purposes of computation of capital gains tax, the adjusted written down value as defined in clause (6) of section 43 of the Act would be the cost of acquisition of the assets. "
The said view has been followed by the Allahabad High Court in the case of CIT v. Upper Doab Sugar Mills (1979) 116 I T R 240, the Kerala High Court in CIT v. Commonwealth Trust Ltd. (1.982) 135 I T R 19 (FB) and the Calcutta High Court in India Jute Co. Ltd. v. CIT (1982) 136 I T R 597.
Section 48 states that for the purpose of arriving at the capital gains, the cost of acquisition has to be reduced from the consideration received or accrued to the assessee. What shall be the cost of acquisition has not been defined in section 48. Section 49 envisages where the assessee himself has not incurred any cost, the cost of acquisition of the asset in his hand shall be deemed to be the cost for which the previous owner of the property acquired it. Further, section 50 clearly indicates what shall be the cost of acquisition for the purpose of section 48 or 49 for deducting from the sum of consideration.
Section 50 specifically deals with as to what shall be the cost of acquisition in the case of a capital asset in respect of which deduction on account of depreciation has been obtained by the assessee. The heading of the section also reads "special provision for computing the cost of acquisition in the case of depreciable assets". The provision has been made with reference to sections 48 and 49 in which the term "cost of acquisition" occurs. Moreover, the principle in both the clauses (1) and (2) has been to arrive at the written down value of the asset in the hands of the assessee after adjusting the amount of depreciation which has been obtained by the assessee. Under clause (1) where the asset has been acquired by the assessee at a cost, depreciation has to be adjusted against cost of acquisition to the purchaser on the date of acquisition. In case the asset is acquired by the assessee other than by himself incurring the cost in any of the modes specified in section 49, the cost of acquisition in the hands of the previous owner is deemed to be the cost of acquisition for the assessee. For the purpose of section 50 also such cost of acquisition to the previous owner has to be taken in the hands of the assessee. However, it does not follow that the assessee has himself taken full advantage of depreciation on that asset. Clause (2) of section 50 further provides to read section 55(2) therewith which in turn provides that the cost of acquisition in the case of an asset would be the fair market value of the asset as on the first day of January. 1954, if the asset has been acquired by the assessee prior to January 1, 1954 in any of such modes and that cost as to be reduced by the amount of depreciation obtained by assessee with effect from January 1, 1954, until the date of transfer. Thus, section 50 generally lays down that the cost of acquisition in the case of depreciable assets would be the written down value, where in the case of assets acquired at a cost by the assessee after such cost has been adjusted by actual depreciation obtained by him and in the case of assets held by the assessee as successor-in-interest of the previous owner of the asset and acquired in any of the modes specified under section 49, instead of the actual cost in the hands of the predecessor-in-interest, the assessee had the option to take the cost of acquisition in terms of section 55(2) as the fair market value as January 1, 1954, if such asset has become the property of the assessee prior to that date and then to adjust it by the actual depreciation claimed by him therein. Thus, where a special mode of determining the cost of acquisition has been provided with reference to sections 48 and 49, once again the provisions of section 55 cannot be invoked.
We may further point out that while subsection (1) of section 55 opens with "for the purposes of sections 48, 49 and 50", subsection (2) of section 55, confines its application for the purpose of sections 48 and 49. This is also indicative of the fact that while the term "adjusted" and "cost of any improvement" defined under subsection (1) of section 55 applies to the asset, whose cost is to be determined under section 50, subsection (2) does not apply to the capital asset whose cost of acquisition is to be determined under section 50 by its own force. The cost of acquisition of one asset is not to be determined twice, once under section 50 and then under section 55.
We have noticed that section 50 as well as section 55 both operate in the same field, namely, determining the cost of acquisition for the purpose of computing capital gains under section 48, inasmuch as cost of acquisition is a necessary component of computation of capital gains and section 50 as well as section 55(2) both deal with as to what shall be the cost of acquisition for the purpose of deducting the same amount from the consideration received or accrued to the transferee. As both deal with the determination of cost of acquisition in relation to a capital asset, the field of operation cannot but be one. As the field of operation of both the provisions is the same, the principle that a special provision would exclude the general provision would govern while interpreting the two provisions.
That according to us is the literal interpretation of the two provisions read together. This classification would result in unreasonable discrimination between the two classes of assessees did not find favour with this Court in Rajnagar's case (1975) 99 I T R 264.
The Bombay High Court in Gokuldas Dossa & Co. v. J.P. Shah (1995) 211 I T R 706 (FB) was considering a petition under Article 226 raising the issue whether the assessee who had purchased a depreciable asset prior to January 1, 1954, (date as amended from time to time), is entitled to the option of substituting the fair market value on that date as the cost of acquisition for computing its capital gain, and whether section 50(2) of the Act, is arbitrary and, therefore, ultra vires Article 14 of the Constitution.
The Bombay High Court after taking notice of the history of the enactment and considering the object of the provisions under the 1922 Act as well as the 1961 Act, was of the view that the two provisions, namely, 50 and 55(2), do not operate in the same field and, therefore, the principle that a special provision excludes the general provision does not apply and was further of the opinion that taking the liberal presumption would result into a situation which would render the provisions ultra vires Article 14 of the Constitution.
Since we ourselves have come to the conclusion, as discussed above, that the two provisions operate in the same field and the literal construction reasonably leads to the conclusion at which this Court has earlier arrived and the question of examining the vires of the provision a proceeding under section 256 does not arise, we are of the opinion that there do not exist sufficient grounds for us to make a reference to a larger Bench for reconsidering the decision in Rajnagar's case (1975) 99 I T R 264 (Guj.).
This Court had again applied the same principle in the assessee's own case for the assessment year 1972-73 by a decision in CIT v. Mihir Textiles Ltd. (1994) 206 I T R 112.
In view of the aforesaid discussion we answer question No.10 also in the affirmative.
The reference is disposed as discussed above. There shall be no order as to costs.
M.B.A./1721/FC Order accordingly.