Commissioner Of Income-Tax v. Modern Bakeries India Limited

Arijit Pasayat, C.J:— This order will govern Income-Tax References Nos. 283 of 1981 and 284 of 1981; At the instance of the Revenue, the following questions have been referred for the opinion of this court by the Income-Tax Appellate Tribunal, Delhi Bench-A (in short “the Tribunal”), under section 256(1) of the Income-Tax Act, 1961 (in short “the Act”):

“1. Whether, on the facts and in the circumstances of the case, the Tribunal Was correct in law in holding that the expenditure of Rs. 43,403 did not constitute entertainment expenditure within the meaning of section 37(2B) and was therefore not liable to be disallowed?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the cost of machinery amounting to Rs. 1,24,27,650 gifted by the Government of Australia to the Government of India and given by the Government to the assessee against shares of the assessee to be issued to the Government and shown in the balance-sheet of the assessee-company as a liability owed to the Government of India, should be included as capital employed by the assessee for the purpose of computation of deduction admissible under section 80} of the Income-Tax Act?”

2. The dispute relates to the assessment year 1973-74.

3. The factual position in a nutshell is as follows:

The assessee-company is a Government undertaking with several units spread over in the country. A sum of Rs. 59,933 was claimed by the assessee as expenditure incurred on its guests at various branches. The Income-Tax Officer treated the entire expenditure as entertainment expenditure under section 37(2B) and disallowed the amount. On appeal, the Appellate Assistant Commissioner (“the AAC” in short) found that Rs. 16,530 represented expenditure in connection with the conference of the assessee's managers and on internal meetings. He held that expenditure to that extent cannot be described as entertainment expenditure. Accordingly, he restricted the disallowance to Rs. 43,403. In appeal before the Tribunal it was contended that the Appellate Assistant Commissioner was wrong in maintaining the disallowance to the aforesaid extent. The Tribunal examined the details of expenditure and found that it has been incurred on offering tea, coffee, etc., to the officials/guests of the assessee at its various branches; considering the fact that the turnover ran into several crores, the expenditure could not be considered to be lavish or extravagant. On the contrary, it was incurred only for extending customary courtesy to persons who are connected with the assessee's business. It was also found that expenditure of Rs. 6,099 was incurred in connection with conference of the Social Welfare Departments of various Governments, incurred at six places, in connection with the assessee's business. A sum of Rs. 2,771 was incurred on lunch and dinner to foreign dignitaries who had come to help the assessee to run its business more efficiently. Accordingly, it was held that the entire amount was to be allowed as expenditure.

4. Similarly, the assessee had claimed deduction under section 80J of the Act in respect of the imported machinery worth Rs. 1,24,27,650. The said machinery was received as a gift from the Government of Australia under the Colombo Plan. It was given to the assessee on the understanding that no money was to be paid for it but shares equivalent to the cost were to be issued. In reality no shares had been issued. In the balance-sheet, the assessee indicated the amount as a liability owed by the company to the Government. On these facts, the Income-Tax Officer was of the view that the amount in question was to be excluded while computing the capital employed for the purpose of deduction admissible under section 80J. On appeal, the Appellate Assistant Commissioner held that the value should be considered as capital and not a debt owed by the assessee to the Government. The matter was carried in further appeal by the Revenue before the Tribunal. Though ‘there was no elaborate discussion, in essence the Tribunal concurred with the views recorded by the Appellate Assistant Commissioner on the question of allowability of deduction under section 80J of the Act. The Tribunal referred to the decisions of the Calcutta High Court in Century Enka Ltd. v. 1TO, [1977] 107 ITR 123 and Century Enka Ltd. v. ITO, [1977] 107 ITR 909. It was held that the capital for the purpose of section 80J has to be computed as the aggregate value of the assets without deduction on account of liability or borrowed capital.

5. On being moved for reference, the questions as set out above have been referred for the opinion of this court.

6. We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessee in spite of service.

7. So far as the first question is concerned, the issue is settled by the decision of the apex court in CIT v. Patel Bros, and Co. Ltd., [1995] 215 ITR 165. In view of this position, the answer to the question referred is in the affirmative, in favour of the assessee and against the Revenue.

8. So far the second question is concerned, we find that the Assessing Officer proceeded on the basis that there was no finality attained on the question of issuance of shares, if any. In fact the assessee itself was treating the amount as liability owed by the company to the Government. The Appellate Assistant Commissioner, however, held otherwise. According to him, the amount was never payable to the Government as such. The intention from the beginning was that no payment was to be made in cash, but there was to be allotment of shares. It was further held that in the circumstances the Government could not be treated as a creditor and the assessee a debtor. It would have been more appropriate if the amount had been shown under the head “Share capital” as monies received were towards allotment of shares. Having said so, the Appellate Assistant Commissioner further observed that the amount cannot also be compared with the share application money received by the company. The said monies become part of the capital only when shares are allotted and if shares are not allotted the applicant becomes entitled to have the application money refunded. In the instant case, the decision had already been taken to allot shares of the required value to the Government., The amount cannot, therefore, be treated as debt due to the Government but only as capital. Therefore, while applying rule 19A(3) of the Income-Tax Rules, 1962 (in short the “Rules”), the amount in question could not have been excluded from the capital computation.

9. According to learned counsel for the Revenue the approach of the Appellate Assistant Commissioner was erroneous. He did not give any positive finding as to the nature of the amount or the transaction. On the one hand, he held that the amount cannot be treated as a debt owed by the assessee to the Government and went on to further hold that the amount was to be shown under the head “Share capital” as the monies were received for allotment of shares. After having said so, the Appellate Assistant Commissioner again held that the amount cannot be compared with the share application money received by the company. The assessee itself had been showing the amount as liability. It is also submitted that the decisions referred to by the Tribunal, i.e, Century Enka Limited v. ITO, will have really no application in view of the decision of the apex court in Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308. We have considered the submissions made by learned counsel for the Revenue and we find substance in the contention. In fact the factual, position does not seem to have been properly appreciated by the Tribunal. It merely followed the reasoning’ given by the Appellate Assistant Commissioner without analysing as to whether they are tenable on the facts of the case. The Appellate Assistant Commissioner himself was not very sure as to the nature of the transaction or how the amount in question has to be reflected. Additionally, we find that the position regarding the allowability of deduction under section 80J of the Act along with rule 19A(3) of the Rules has been considered by the apex court in Lohia Machines Ltd. 's case, [1985] 152 ITR 308. We, therefore, feel it appropriate to direct the Tribunal to rehear the appeal only in respect of the issue relating to section 80J of the Act read with rule 19A(3) of the Rules and take a fresh decision.

10. The references are accordingly disposed of.