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Commissioner Of Income Tax v. Elecon Engg. Co. Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
The Commissioner of Income Tax filed a reference under Section 256(1) to the Income Tax Appellate Tribunal, Ahmedabad Bench 'C', which framed two questions for the Court's decision for Assessment Year 1982-83 (accounting period: calendar year ended 31-12-1981). The two questions concerned (1) whether the difference between the written down value (w.d.v.) and the market value of cars given to employees should be treated as a perquisite for purposes of disallowance under Sections 40A(5) / 40(c) of the Income Tax Act, 1961, and (2) whether the Tribunal was correct in upholding deletion of Rs. 52,72,845 paid as technical design fee to M/s. Weserhutte A.G., West Germany. The Court heard senior counsel for the revenue and counsel for the assessee.
The opinion notes that the second question was concluded by an earlier unreported decision of this Court dated 18-01-2001 in I.T.R. No. 49 of 1988 (Assessment Year 1981-82) in the assessee's own case, which held that payments as technical design fees paid to the German company were allowable where the know-how was acquired on behalf of another company and was never utilised by the assessee. Following that prior finding, the Court answered Question No. 2 in the assessee's favour.
The first question arose because the Assessing Officer observed that certain employees had been given Fiat cars with a w.d.v. of Rs. 12,103 each, estimated the market value at Rs. 30,203, and treated the Rs. 18,000 difference per employee as a perquisite and consequently disallowed that amount under Sections 40A(5) / 40(c). The C.I.T. (Appeals) deleted the addition relying on a Special Bench decision in KODAK LIMITED Vs. I.A.C. and the Tribunal affirmed that deletion, leading to the present reference.
Legal Issues Presented
- Whether, in law and on facts, the difference between the written down value (w.d.v.) and the market value of cars given to employees was to be treated as a perquisite for working out the disallowance under Sections 40A(5) and 40(c) of the Income Tax Act, 1961.
- Whether, in law and on facts, the Tribunal was right in upholding the deletion of the sum of Rs. 52,72,845 paid as technical design fee to M/s. Weserhutte A.G., West Germany.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| KODAK LIMITED Vs. I.A.C., [1986] 18 ITD 213 (Bom) (SB) | Authority relied upon by the C.I.T. (Appeals) for deleting the addition relating to cars given to employees. | The Court records that the C.I.T. (Appeals) deleted the addition on the basis of this Special Bench decision; the Tribunal's deletion was accepted and the Court did not disturb that result. |
| an unreported decision of this Court dated 18-01-2001 rendered in I.T.R. No. 49 of 1988 pertaining to Assessment Year 1981-82 in the assessee's own case | Earlier finding that technical design fee payments (know-how) were allowable where the know-how was acquired on behalf of another company and was never utilised by the assessee; supported allowance of payments as technical design fees. | The Court followed this prior decision and, on that basis, answered Question No. 2 in the affirmative (in favour of the assessee) and against the revenue. |
| COMMISSIONER OF INCOME-TAX V. BRITANNIA INDUSTRIES LTD. [1992] 198 I.T.R. 225 | Authority cited in support of the view that disallowance under the relevant provisions requires that the company must have incurred expenditure. | The Court stated that it was supported in its view by this decision and relied on it in concluding that in the absence of expenditure having been incurred by the company, Sections 40A(5) / 40(c) could not be invoked to make the impugned disallowance. |
Court's Reasoning and Analysis
The Court analyzed Sections 40(c) and 40A(5) of the Income Tax Act and emphasized that these provisions operate to disallow certain amounts only when the company has incurred expenditure and then claims a deduction in computing income under the head "Profits and gains of business or profession." The Court described the statutory scheme as requiring, as a pre-requisite, that an expenditure be incurred by the company before the Assessing Officer can exercise the discretion to disallow a portion of that expenditure.
Applying this statutory reading to the facts, the Court observed that in the present case the assessee had not incurred any expenditure: cars owned by the company were given away at their written down value to employees. The Assessing Officer estimated a higher market value and treated the difference as a perquisite, disallowing that amount under Sections 40A(5) / 40(c). The Court held that because no expenditure was incurred by the company, the statutory provisions that permit disallowance could not be invoked. The Court further noted that there was no provision empowering the Assessing Officer to substitute his estimate of market value for the actual sale price at which the company transferred the cars to its employees.
On the second question, the Court relied on the earlier unreported decision in the assessee's own case (I.T.R. No. 49 of 1988) which had held that the technical design/know-how payments were allowable where the know-how was acquired on behalf of another company and not utilised by the assessee; the Court followed that finding.
Holding and Implications
Holding:
- Question No. 1 is answered in the negative — in favour of the assessee and against the revenue (i.e., the difference between w.d.v. and the market value of cars given to employees cannot be treated as a perquisite for disallowance under Sections 40A(5) / 40(c) where no expenditure was incurred by the company).
- Question No. 2 is answered in the affirmative — in favour of the assessee and against the revenue (the Tribunal's deletion of the technical design fee disallowance is upheld, following the prior unreported decision).
- The reference stands disposed of accordingly.
Implications:
The direct effect is that the Assessing Officer's addition treating the difference as a perquisite and disallowing it under Sections 40A(5)/40(c) is not sustained, and the Tribunal's deletion stands. The earlier finding in the assessee's own case regarding the technical design fee is followed, resulting in allowance of that payment for the year in question. The Court made no order as to costs. The opinion does not assert that it establishes a new legal principle beyond its application to the facts before the Court.
1. This is a reference, at the instance of the Commissioner of Income Tax, and the Income Tax Appellate Tribunal, Ahmedabad Bench 'C' has referred the following questions under Section 256(1) of the Income Tax Act, 1961 (for short 'the Act') :
"(1) Whether, in law and on facts the difference between the w.d.v. and the market value of the cars given to the employees was to be treated as a perquisite for working out the disallowance u/s. 40A(5)/40(c)?
(2) Whether, in law and on facts the Tribunal was right in upholding the deletion of the sum of Rs. 52,72,845/- paid as technical design fee to M/s. Weserhutte A.G. West Germany ?" 2. The Assessment Year is 1982-83 and the relevant accounting period is calender year ended 31-12-1981.
3. Heard Mr. M.R. Bhatt, learned sr. standing counsel on behalf of the applicant - revenue and Mr. B.D. Karia, learned advocate appearing on behalf of the respondent assessee.
4. It is common ground between the parties that the second question referred to us stands concluded by an unreported decision of this Court dated 18-01-2001 rendered in I.T.R. No. 49 of 1988 pertaining to Assessment Year 1981-82 in the assesse's own case. In the circumstances, it is not necessary to set out facts and contentions in detail. Suffice it to state that the payment as technical design fee for the year under consideration is third installment while the first two installments had come up for consideration in the earlier year. In the earlier year it has been held by this Court that
"..... we find that know-how was acquired by the assessee on behalf of another Company by the name of Negveli Lignite Corporation. This Company had paid the assessee Company for this know-how and the assessee had further paid the amount to the German Company. The know-how was never utilized by the assessee. Therefore, in our view, the assessee is entitled to the allowance of Rs. 1,12,30,810/- being payments as technical design fees to foreign collaborators. Question No. 2 is answered in the affirmative i.e. in favour of the assessee and against the revenue."
5. Following the aforesaid finding we answer question No. 2 in the affirmative i.e. in favour of the assessee and against the revenue.
6. So far as question No. 1 is concerned, it is noted by the assessing officer that certain employees of the assessee - Company had been given Fiat cars having w.d.v. of Rs. 12,103/= each. The assessing officer estimated the market price of the cars in the year 1981 at Rs. 30,203/= and treated the difference of Rs. 18,000/= per employee as perquisite while working out the disallowance under Section 40A(5)/40(c) of the Act. The assessee carried the matter in appeal and the C.I.T. (Appeals) deleted the addition on the basis of the decision of special Bench of the Tribunal in the case of KODAK LIMITED Vs. I.A.C., [1986] 18 ITD 213 (Bom) (SB). The appeal of the revenue before the Tribunal failed and hence, the present question.
7. Section 40(c), as is relevant for the present, reads as under :
Amounts not deductible.
40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-
(a) x x x x x
(b)x x x x x
(c) in the case of any company-
(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,
(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, [so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case exceed - "
8. Similarly, Section 40A(5) as is relevant for the present reads as under :
"[Expenses or payments not deductible in certain circumstances. 40A(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (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 seventy-two thousand rupees, shall in no case be allowed as a deduction. "
9. Therefore, on a plain reading of the aforesaid provisions it is apparent that under the said sections while computing income chargeable under the head "Profits and gains of business or profession" certain amounts shall not be deducted. However, what is material is that such disallowance has to be of an expenditure incurred by the Company. Only after an expenditure is incurred by the Company and the Company claims a deduction of such expenditure while computing its income from profits and gains from business that the assessing officer will be in a position to exercise his discretionary power to disallow certain portion of the expenditure. For the present controversy, it is not necessary to enter into the discussion as to whether such expenditure would result directly or indirectly in providing remuneration or benefit or amenity to a director, or employee or other persons mentioned in the provision. The pre-requisite condition is incurring of an expenditure.
10. In the present case, admittedly, the assessee Company has not incurred any expenditure. All that has happened is that certain cars belonging to the assessee company have been given away at w.d.v. to the employees. The assessee company has not incurred any expenditure. The assessing officer estimated the market value of the cars and has worked out the difference as perquisite in hands of the employees and disallowed the same by invoking Section 40A(5)/40(c) of the Act. The C.I.T. (Appeals) and the Tribunal have rightly deleted the addition. The section specifically requires incurring of expenditure and thereafter determining as to whether it amounts to a perquisite / benefit, etc. and then disallowance of the stipulated percentage within the aggregate limit specified in the section. There being no expenditure in the present case the said provision cannot be invoked and no disallowance in the form of addition can be made. Furthermore, it is pertinent to note that there is no provision by which the assessing officer can substitute the sale price at which the cars were given away by the company to the employees. In these circumstances, we do not find any reason to interfere with the order of the Tribunal. We are supported in the view that we have taken by a decision of the Calcutta High Court in the case of COMMISSIONER OF INCOME-TAX V. BRITANNIA INDUSTRIES LTD. [1992] 198 I.T.R. 225. 11. Question No. 1, therefore, requires to be answered in the negative i.e. in favour of the assessee and against the revenue.
12. The reference stands disposed of accordingly with no order as to costs.
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