COMMISSIONER OF INCOME-TAX VS SOUTH INDIA VISCOSE LTD. (N0.2)

1999 P T D 3322

[229 I T R 203]

Madras High Court (India)

Before K. A Thanikkachalam and N.V. Balasubramanian, JJ

COMMISSIONER OF INCOME-TAX

Versus

SOUTH INDIA VISCOSE LTD. (N0.2)

Tax Cases, Nos. 1828 to 1833 of 1984 (References Nos. 1323 to 1328 of 1984), decided our 13th November, 1996.

(a) Income-tax---

----Business expenditure---Entertainment expenditure---Insertion of Expln. 2 to S.37(2-A) w.e.f, 1-4-1976, by Finance Act, 1983---Effect---Not applicable to assessment year 1974-75---Mess expenses---Expenditure not lavish---Deductible for assessment year 1974-75---Indian Income Tax Act, 1961, S.37.

(b) Income-tax---

----Business expenditure---Entertainment expenditure---Insertion of Expln. 2 to S.37(2-A) by Finance Act, 1983, w.e.f. 1-4-1976---Effect---Applies in relation to assessment year 1976-77 onwards---Mess expenses for customers of assessee--Is entertainment expenditure---Not deductible---Indian Income Tax Act, 1961, S.37(2-A), Expln. 2.

(c) Income-tax---

----Capital or revenue expenditure---Purchase of machinery by assessee-- Interest paid to Bank and I.D.B.I. on moneys borrowed---Is revenue expenditure---Indian Income Tax Act, 1961, S.37.

(d) Income-tax---

----Capital or revenue expenditure---Purchase of machinery by assessee on deferred payment basis---Guarantee executed by Bank for assuring due payment of instalments by assessee---Guarantee commission paid to Bank assessee---Is integral part of business---Does not create any asset---Is revenue expenditure---Indian Income Tax Act, 1961, S.37.

(e) Income-tax---

Development rebate---Machinery installed in pulp unit---Entitled to higher development rebate---Indian Income Tax Act, 1961, S.33.

(f) Income-tax ---

---Depreciation---Actual cost---Loans taken from foreign Banns for purchase of machinery---Amounts paid as difference in exchange value in respect of the loans ---Higher instalment paid due to exchange fluctuation---Is capital expenditure ---Assessee entitled to depreciation thereon---Indian Income Tax Act, 1961. S.32.

Explanation 2 inserted in section 37(2-A) of the Income Tax Act, 1961, inserted by the Finance Act, 1983, with retrospective effect from April 1, 1976, is not applicable to the assessment year 1974-75. Therefore, the messing expenses amounting to Rs.23,705 incurred by the assessee, which was not lavish, did not amount to entertainment expenditure for the assessment year 1974-75 and was an allowable deduction.

CIT v. Karuppuswamy Nadar & Sons (1979) 120 ITR 140 (Mad.) fol.

Explanation 2 inserted in section 37(2-A) by the Finance Act, 1983, with retrospective effect from April 1, 1976, is applicable to the assessment year 1976-77 and onwards. Therefore, unless the expenditure is incurred in respect of the assessee's own employees, it is not an allowable deduction. Therefore, the entertainment expenditure amounting to Rs.26,000 and Rs.28,595 for the assessment years 1976-77 and 1977-78, respectively, in regard to the customers of the assessee was not an allowable expenditure in view of Explanation 2 to section 37(2-A) of the Act.

The interest paid to the Bank and the I.D.B.I. on moneys borrowed for purchase of machinery is allowable as business expenditure for the assessment years 1974-75, 1976-77 and 1977-78.

Sivakami Mills Ltd. v. CIT (1979) 120 ITR 211 (Mad.) fol.

The guarantee commission paid to the bank by the assessee on purchase of machinery on deferred payment basis in respect of the assessment years 1974-75, 1976-77 and 1977-78 is an integral part of business and did not create any asset and hence is allowable as revenue expenditure.

Sivakami Mills Ltd. v. CIT (1979) 120 ITR 211 (Mad.) fol.

The assessee was entitled to higher development rebate under section 33 of the Income Tax Act, 1961, in respect of the machinery installed in its pulp unit for the assessment years 1974-75 and 1976-77.

CIT v. South India Viscose Ltd. (No. 1) (1997) 228 ITR 198 (Mad.) fol.

The amount paid as difference in exchange value resulting in highest instalments paid due to exchange fluctuation in respect of the loans taken from foreign banks for purchase of machinery, is capital expenditure and the assessee is entitled to depreciation thereon.

Sivananda Steels Ltd. v. CIT (1997) 228 ITR 197 (Mad.) fol.

South India Shipping Corporation Ltd. v. CIT (Addl.) (1979) 116 TR 819 (Mad.) ref.

S.V. Subramanaim and C.V. Rajan for the Commissioner

K. Vaitheeswaran for P. P. S. Janarthana Raja for the assessee

JUDGMENT

K..A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal has referred the following six questions for the pinion of this Cot, f under section 256(1) of the Income Tax Act, 1961, for to assessment years 1974-75, 1976-77 and '.977-78:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in deleting the Income-tax Officer's disallowance of mess expenses on the ground that it is not entertainment expenditure for the assessment year 1974-75?

(2) Whether, on the facts and in the circumstances of the case and having regard to the retrospective amendment made to section 37(2 A) by the Finance Act, 1983, with effect from April 1, 1976, the Tribunal is justified in disallowing the mess expenses of Rs.26,000 and Rs.28,595, respectively, for the assessment years 1976-77 and 1977-78 on the ground that it is nor entertainment expenditure?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest paid to Media Banka, Ital Viscose and I.D.B.I. on moneys borrowed on the purchase of machinery should be allowed as business expenditure for the assessment years 1974-75, 1976-77 and 1977-78?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the guarantee commission paid to the bank should be treated as revenue expenditure for the assessment years 1974-75, 1976-77 and 1977-78?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the machinery installed in the pulp unit should be allowed higher development rebate for the assessment years 1974-75, 1976-77 and 1977-78?

(6) Whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the depreciation should be allowed on the amount paid as difference in the exchange value in respect of the loans taken from foreign banks for the purchase of machinery for the three assessment years?"

In so far as question No. 1 is concerned, it relates to entertainment expenditure incurred for the assessment year 1974-75. The assessee-company manufactures and sells staple fibre rayon, etc. For the assessment year 1974-75, the Income-tax Officer disallowed a sum of Rs.23,705 since it was in the nature of entertainment expenditure. The Commissioner of Income-tax (Appeals), however, held that it could not be so, in view of the decision rendered in Karuppuswamy Nadar & Sons' case, (1979) 120 ITR 140 (Mad.). On further appeal, the Tribunal sustained the order passed by the Commissioner, since there is an Explanation 2 introduced to section 37(2-A) of the Act, with effect from April 1, 1976, which will not be applicable to the assessment year 1974-75. Accordingly, we consider that the order passed by the Tribunal, in allowing the expenditure claimed by the assessee is correct, since it is not lavish expenditure. Therefore, we answer question No. l in the affirmative and against the Department.

In so far as question No.2 is concerned, it relates to the assessment years 1976-77 and 1977-78. The assessee incurred entertainment expenditure to the extent of Rs.26,000 and Rs.28,595, respectively. According to the Income-tax Officer, they are in the nature of entertainment expenditure and, therefore, not allowed as a deduction. The Commissioner of Income-tax held on appeal that they should not be treated as an entertainment expenditure, -in view of the decision of this Court in Karuppuswamy Nadar & Sons` case, (1979) 120 ITR 140. On further appeal, the Tribunal confirmed the order passed by the Commissioner. However, Explanation 2 to section 37ojj(2-A) was introduced from April 1, 1976, and it would apply in relation to the assessment year 1976-77 onwards.

If the Explanation is applicable for the assessment years 1976-77 and 1977-78, unless the expenditure is incurred towards the assessee's own employees, it is not allowable as a deduction. In the present case, entertainment expenditure was incurred on customers and, therefore, it cannot be allowed as a deduction, in view of Explanation 2 to section 37(2-A) of the Act. Accordingly, we hold that the Tribunal was not correct in holding that the entertainment expenditure amounting to Rs.26,000 and Rs.28,595 for the assessment years 1976-77'and 1977-78, respectively, is allowable as an expenditure. Accordingly, we answer question No.2 in the negative and in favour of the Department.

In so far as question No.3 is concerned, it relates to deduction claimed with regard to interest paid to Media Banka, Italy, Ital Viscose and I.D.B.I: The Income-tax Officer disallowed the interest paid in sums of Rs.35,05,550, Rs.22,11,351 and Rs.15,45,451, respectively, being the assessee's interest payments to Media Banka, etc., as capital payment relating to the purchase of machinery. The Commissioner of Income-tax (Appeals), however, held that it should be held as a revenue expenditure following the decision in Sivakami Mills Ltd. v. CIT (1979) 120 ITR 211 (Mad.). On further appeal, the Tribunal upheld the Commissioner's order, following the aforementioned decision, as also the Tribunal's own order in I.T.A. No.858/Mds. of 1980: Inasmuch as the Tribunal followed the decision of this Court in Sivakami Mills' case, (1979) 120 ITR 211, which still holds good, there is no infirmity in the order of the Tribunal. Accordingly, we answer question No.3 in the affirmative and against the Department.

In so far as question No.4 is concerned, it relates to the guarantee commission paid to the bank. According to the assessee, this should be treated as revenue expenditure. For the assessment years 1974-75, 1976-77 and 1977-78, the assessee had paid guarantee commission in sums of Rs.10,79,258, Rs.6,57,855 and Rs.4,83,728, respectively, which the Income-tax Officer disallowed, but the Commissioner on appeal allowed it. The Tribunal upheld the findings of the Tribunal following this Court's decision in Sivakami Mills' case (1979) 120 ITR 211. Inasmuch as the Tribunal has followed the aforesaid decision of this Court, on this point, we consider that there is no infirmity in the order of the Tribunal on this aspect. Accordingly, we answer question No.4, referred to us, in the affirmative and against the Department.

In so far as question No.5 is concerned, it relates to the development rebate allowable with reference to the machinery installed in the pulp unit. The assessee claimed a higher development rebate for the assessment years 1974-75 and 1976-77 (in the question referred to this Court, assessment year 1977-78 has been wrongly included) with regard to the machinery installed for the pulp unit. The Income-tax Officer denied the development rebate on the new additions to plant and machinery installed in the pulp unit. The Commissioner (Appeals), however, allowed the assessee's claim, which the Tribunal confirmed, following the Tribunal's earlier order in I.T.A. No. 1025 of 1978 for the assessment year 1973-74. A similar question came up for consideration before this Court in the case of the very same assessee for the assessment year 1973-74 in T.C. No.232 of 1982, CIT v. South India Viscose Ltd. (No.l) (1997) 228 ITR 198, wherein by judgment, dated September 19, 1996, this Court held that the assessee is entitled to a higher development rebate with regard to machinery installed in the pulp unit. In view of the decision of this Court in CIT v. South India Viscose Ltd. (No.l) (1997) 228 ITR 198, we are of the opinion that the order passed by the Tribunal is in order. Accordingly, we answer question No. 5 referred to us in the affirmative and against the Department.

In so far as question No.6 is concerned, it relates to depreciation allowable on the amount paid as difference in exchange fluctuations. For the years under consideration, the Income-tax officer has disallowed as capital expenditure, the difference paid in foreign exchange value in respect of the loans from the foreign banks for the purchase of machinery in the sums of Rs.18,60,345, Rs.9,88,680 and Rs.7,31,279, respectively. The Commissioner, however, upheld the expenditure following the decision of this court in the assessee's own case in CIT v. South India Viscose Ltd. (1979) 120 ITR 451. The Tribunal also upheld that view, following the decision in South India Shipping Corporation Ltd. v. Addl. CIT (1979) 116 ITR 819. The Tribunal held that the assessee's claim is well-founded in view of the provisions in section 43-A and directed the Income-tax Officer to verify the claim and allow depreciation in accordance with law. A similar question came up for consideration before this Court in the case of Sivananda Steels Ltd. v. CIT (1997) 228 ITR 197 (T.C. Nos. 1137 and 1138 of 1983) and by judgment, dated November 7, 1996, this Court held that the higher instalment paid due to exchange fluctuation, is capital in nature. If the expenditure involved is in the nature of capital expenditure, the as assessee is naturally entitled to depreciation thereon. Accordingly, we see no infirmity in the order passed by the Tribunal on this question. Therefore, we answer question No.6 in the affirmative and against the Department. No costs.

M.B.A./3079/FC Reference answered