COLOUR CHEM LIMITED VS COMMISSIONER OF INCOME TAX, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 3599 (1999)

(a) Income-tax--

----Business expenditure---Disallowance of expenditure above prescribed limit---Payment of salary to employee---Proportionate salary paid during stay outside India in ordinary course of employment---Not includible while computing disallowance---Indian Income Tax Act, 1961, S.40A.

(b) Income-tax---

----Business expenditure---Disallowance of expenditure above prescribed limit---Expenditure resulting in benefit or amenity to employee---Medical reimbursement--Not includible while computing disallowance---Indian. Income Tax Act,, 1961, S.40A.

(c) Income-tax---

----Business expenditure-Surtax- --Not deductible---Indian Income Tax Act, 1961, S.37.

(d) Income-tax---

----Investment allowance---Machinery for manufacture of heavy chemicals-Meaning heavy chemicals"---Parameter of tonnage applies to decide if chemical is "heavy"---Machinery for manufacture of tanning agents-- Entitled to investment allowance---Indian Income Tax. Act, 1961, S.32A.

The proportionate salary of employees of the assessee for the period of their stay outside India in the ordinary course of their employment should be excluded from the total salary while computing disallowance under section 40A(5) of the Income Tax Act, 1961.

CIT v. Continental Construction Ltd. (1998) 230 ITR 485 (SC) fol.

The amount representing medical remibursement given to employees. Which was not treated as perquisite in computing disallowance under section 40A(5) should not be treated as, part of salary for computation of disallowance under the said provision.

CIT v. Indokem (Pvt.) Ltd. (1981) 132 ITR-125 (Bom.) fol.

Surtax is not deductible in computing profits and gains of business.

Smith Kline and French (India) Ltd. v. CIT (1996) 219, ITR 581 (SC) fol.

During the relevant accounting year, the assessee acquired and installed machinery at the cost of Rs.1,06,02,027 for manufacture of the following tanning ,agents, viz., (1) diketene, (2) Acetoacetarylides and acetoeretamides, (3) acetic anhydride, (4) synthetic tanning agents. The Assessing Officer held that the items manufactured by the assessee were not heavy chemicals within the meaning of entry 26 and entry 27 of the Ninth Schedule. The Assessing Officer came to the conclusion that the word "heavy chenucal" must be understood as in common parlance; that the word "heavy" was used as an adjective qualifying the quality of the chemical, such as large specific gravity, large molecular weight or chemical make up of heavier elements or consisting of heavier isotope of a particular element like heavy water which consists of a heavy isotope of hydrogen. This reasoning of the Assessing Officer was accepted by the Commissioner of Income-tax, (Appeals). However, the Tribunal relied upon the dictionary meaning given to word "heavy-chemical". It held that the assessee was entitled to investment allowance. On a reference:

Held, that according to the meanings given by the chemical dictionaries, it is clear that heavy chemical is described as heavy chemical on the basis of the tonnage whereas fine chemical is defined on the basis of smaller quantity. In other words, the parameter of tonnage applies in order to ascertain whether the chemical is a heavy chemical or a fine chemical. The Assessing Officer had applied a different test, which normally applies to cases of molecular weight. That test was not correct. The assessee was entitled to investment allowance.

J.D. Mistry with Ms. H. Desai instructed by T. Pooran & Co. for the Assessee.

R.V. Desai with B.M. Chatterjee for the Commissioner.

JUDGMENT

S.H. KAPADIA, J.---By this reference under section 256(1) of the Income Tax Act, 1961, at the instance of the assessee, the Income-tax Appellate Tribunal has referred the following questions of law to this Court for opinion:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that proportionate salary of employees of the assessee for the period of their stay outside India in the ordinary course of their employment should not be excluded from the total salary while computing disallowance under section 40A(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 holding that the amount representing medical reimbursement given to employees which was not treated as perquisite in computing disallowance under section 40A(5) of the Income Tax Act, 1961, should be treated as part of salary for computation of disallowance under the said provision?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that amount payable towards surtax was not liable to be deducted in computing the .profits and gains of the business of the assessee?"

Counsel for the parties are agreed that question No.1 is covered by the decision of the Supreme Court in CIT v. Continental Construction Ltd. (1998) 230 ITR 485, and following the same, it should be answered in the negative and in favour of the assessee. The question is answered accordingly.

Counsel for the parties are agreed that question No. 2 is covered by the decision of this Court in CIT v. Indokem (Private) Ltd. (1981) 132 ITR 125, and following the same, it should be answered in the negative and in favour of the assessee. Question No.2 is answered accordingly.

Counsel for the parties are agreed that question No.3 is covered by the decision of the Supreme Court in Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581, and following the same, it should be answered in the affirmative and in favour of the Revenue. The question is answered accordingly.

The Income-tax Appellate Tribunal has also referred the following question of law to this Court for opinion at the instance of the Revenue:

"(1) Whether, on the facts and in the circumstances of the' case, the Tribunal was justified in law in allowing investment allowance of Rs.26,50,507 to the assessee by treating the chemicals manufactured by the assessee as heavy chemicals as listed in the Ninth Schedule to the Income Tax Act, 1961?"

During the relevant accounting year, the assessee acquired and installed machinery at the cost of Rs.1,06,02,027 for manufacture of the following tanning agents, viz., (1) diketene, (2) acetoacetarylides and acetoecetamides; (3) acetic anhydirde, (4) synthetic tanning agents. Under section 32A of the Act, investment allowance at the rate of 25 percent. of the cost is allowable on new machinery or plant for the purpose of manufacture or production of one or more of the articles or things specified in the Ninth Schedule. Entry 26 and entry 27 of *the Ninth Schedule read as follows.

"(26) Inorganic heavy chemicals (other than soda ash and caustic soda mentioned in items 12 and 13, respectively).

(27) Organic heavy chemicals."

The assessee claimed that chemicals manufactured or produced by the assessee came within the ambit of entries 26 and 27 as the above tanning agents constitute heavy chemicals. The assessee accordingly made a reserve for making a claim for investment allowance. The Assessing Officer held that the items manufactured by the assessee were not heavy chemicals and he, therefore, disallowed the claim of the assessee. The disallowance was confirmed by the Commissioner of Income-tax (Appeals). The assessee came in appeal before the Tribunal. The Tribunal accepted the plea of the assessee and came to the conclusion that the assessee was entitled to claim investment allowance. The product manufactured by them came within the ambit of entries 26 and 27 of the Ninth Schedule as heavy chemicals.

The short point, which arises for consideration is: whether the chemicals manufactured or produced by the assessee were heavy chemicals? The Assessing Officer came to the conclusion that the word "heavy chemical" must be understood in common parlance. That the word "heavy" being used as an adjective qualifying the quality of the chemical, such as large specific gravity, large molecular weight or chemical trade up of heavier elements or consisting of heavier isotope of a particular element like "heavy water" which consists of a heavy isotope of hydrogen. This reasoning of the Assessing Officer was accepted by the Commissioner of Income-tax (Appeals). However, the Tribunal relied upon the dictionary meaning given to the word "heavy chemical. In Condensed Chemical Dictionary, IXth Edition, published by Van Norestrand. Reinhold Company---page 430, the word "heavy chemicals" has been defined to mean "a chemical produced in tonnage quantities often in a relatively impure state. Examples: sodium chloride, sulphuric acid, etc. whereas the word "fine chemicals" is defined at page 384 of the same dictionary as a chemical produced in comparatively small quantities and relatively pure state. Examples: pharmaceutical and biological products, perfumes, photographic chemicals, etc. Similarly, in the New Encyclopaedia Britannica, 15th Edition, volume 4, page 128, gives the definition of the word "heavy organic chemicals" to mean chemicals like phenol, ethylene, etc. Similarly, Webster's Third New International Dictionary Unabridged----1968 Edition, page 1047, has defined the word "heavy chemical" to mean "a chemical produced and handled in large lots" whereas the word "fine chemical" is defined to mean "a chemical which is produced and handled in relatively small amounts. Like a perfume".

Looking to the above meanings given by the chemical dictionaries, it is clear that "hevy chemical" is described as heavy chemical on the basis of the tonnage whereas "fine chemical" is defined on the basis of the smaller. quantity. In other words, the parameter of tonnage applies in order to ascertain whether the chemical is a heavy chemical or a fine chemical. The Assessing Officer has applied a different test which normally applies to cases of molecular weight. That test is not correct as indicated by the above meanings given by the dictionaries to heavy chemicals.

In the circumstances, the above question is answered. in the affirmative, i.e., in favour of the assessee and against the Revenue.

Reference is disposed of accordingly with no order as to costs.

M.B.A./84/FCOrder, accordingly