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Equivalent Citations
citation codes
Case Number
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Acts
  • section 256(2) of the Income-tax Act, 1961 (for short the Act),
  • sub-clauses of clause (b) of sub-section (1) of section 35B
  • section 15C of the Indian Income-tax Act, 1922,
  • sub-clauses of clause (b) of section 35B(1).
  • INCOME TAX ACT 1961
  • Finance (No. 2) Act, 1980,
  • section 36(1)(ii)
  • section 40(c)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
Acts
  • section 256(2) of the Income-tax Act, 1961 (for short the Act),
  • sub-clauses of clause (b) of sub-section (1) of section 35B
  • section 15C of the Indian Income-tax Act, 1922,
  • sub-clauses of clause (b) of section 35B(1).
  • INCOME TAX ACT 1961
  • Finance (No. 2) Act, 1980,
  • section 36(1)(ii)
  • section 40(c)
Smart Summary

Factual and Procedural Background

This is an application by the Commissioner of Income-tax under section 256(2) of the Income-tax Act, 1961 seeking directions to the Income-tax Appellate Tribunal, Delhi Bench "D", to refer five specific questions of law arising from the assessment for the year 1981-82 to this Court for opinion.

Briefly, the assessment gave rise to several additions/disallowances and corresponding deductions claimed by the assessee which were variously allowed or disallowed by the Assessing Officer, altered by the Commissioner of Income-tax (Appeals), and further contested before the Tribunal. The Commissioner (applicant) contested several of the Tribunal's decisions and asked this Court to direct the Tribunal to refer five questions of law to this Court under section 256(2).

Legal Issues Presented

  1. Whether the Tribunal erred in deleting Rs. 19,021 representing commission paid to foreign agents under section 35B(1)(b)(i) without specifying which sub-clause of section 35B(1)(b)(ii) it relied upon.
  2. Whether the Tribunal erred in deleting an addition of Rs. 90,254 on account of an ex gratia payment under section 36(1)(ii) without discussing the provisions of that section.
  3. Whether the Tribunal was justified in deleting an addition of Rs. 25,000 (payment towards a building fund of the Punjab and Haryana Chamber of Commerce) on the ground that it was an allowable business expenditure.
  4. Whether the Tribunal was justified in deleting an addition of Rs. 23,872 under section 40(c) by relying on Glaxo Laboratories (India) Ltd. v. Second ITO and in not accepting the Department's contention in view of the Delhi High Court judgment in Instalment Supply Pvt. Ltd.
  5. Whether the Tribunal was justified in deleting an addition of Rs. 1,17,703 under section 80J by ignoring the Kerala High Court decision in Chembra Peak Estates Ltd. v. CIT, which the Department submitted was on all fours with the present facts.

Arguments of the Parties

Applicant / Department (Commissioner of Income-tax)

  • Question 1: The Tribunal allowed deduction of Rs. 19,021 for commission paid to foreign agents under section 35B but did not specify which sub-clause of clause (b) of section 35B(1) was attracted; therefore a question of law arises as the Tribunal's order lacks the necessary interpretative basis.
  • Questions 2 and 3: The Department challenged the deletions, but the Court characterises these issues as findings on evidence (appreciation of facts).
  • Question 4: The Department contested the Tribunal's reliance on Glaxo and its failure to accept the Department's reliance on the Delhi High Court decision (Instalment Supply).
  • Question 5: Shri R.P. Sawhney, senior counsel for the Department, argued that the Tribunal's findings did not permit allowance under section 80J because the Assessing Officer had recorded that (a) no separate books of account were maintained for the kilns, (b) balance-sheets were prepared on an estimate basis without explanation as to how the estimates were made, and (c) there was no increase in capital employed. The Department relied on three Supreme Court decisions (Textile Machinery Corporation Ltd. v. CIT; CIT v. Indian Aluminium Co. Ltd.; Lohia Machines Ltd. v. Union of India) to support that a question of law arises.

Assessee

  • On appeal before the Tribunal, the assessee conceded (through its counsel) withdrawal of relief granted by the Commissioner in respect of expenditures amounting to Rs. 50,535. The Tribunal nonetheless allowed deduction of Rs. 19,021 as commission to foreign agents under section 35B.
  • No further detailed arguments of the assessee are contained in the provided opinion text.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income Tax, Delhi v. Stepwell Industries Ltd., [1997] 228 ITR 171 (Supreme Court) The heavy onus on the assessee to prove that an expenditure falls within any of the purposes set out in the sub-clauses of clause (b) of section 35B(1); need for specific discussion of which sub-clause applies; no blanket allowance merely because activities took place outside India. The Court relied on this authority to require that the Tribunal verify which sub-clause of section 35B(1)(b) (if any) applied to the foreign commission; remitted Question No. 1 to the Tribunal for fact verification consistent with Stepwell.
CIT v. Mafatlal Gangabhai and Co. (P.) Ltd., [1996] 219 ITR 644 (Supreme Court) Cash payments as reimbursement are to be treated as part of salary and subject to any limit, but such payments are not within the phrase "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite." The Court used this precedent to conclude that Question No. 4 (reimbursement of medical expenses in cash) raised no referable question of law because the principle is settled.
Sukhjit Starch and Chemicals Ltd. v. CIT, [1996] 221 ITR 308 (This Court) Following Mafatlal, reimbursement of medical expenses of a director is not a benefit or amenity within section 40(c) and section 40A(5). The Court noted this court's earlier decision following Mafatlal to reinforce that Question No. 4 is not res integra and thus declined it as a referable question of law.
Glaxo Laboratories (India) Ltd. v. Second ITO, [1986] 18 ITD 226 (Bombay) Used by the Tribunal in the assessment under section 40(c) (as referenced in the opinion). The Tribunal relied on this case in deleting the addition under section 40(c); the present application challenges that approach in Question No. 4 (the Court did not itself resolve the conflict between authorities in this opinion).
Instalment Supply Pvt. Ltd. v. Commissioner of Income-Tax, [1984] 149 ITR 457 (Delhi High Court) Authority relied upon by the Department in opposition to the Tribunal's reliance on Glaxo (specific legal principle as to section 40(c) context is referenced by parties). The opinion records that the Department contended in view of this Delhi High Court decision the Tribunal ought not to have followed Glaxo; the Court treated Question No. 4 as settled by higher authority (Mafatlal) and declined referral.
Chembra Peak Estates Ltd. v. CIT, [1972] 85 ITR 401 (Kerala High Court) Authority asserted by the Department to be on par with the facts of the present case regarding section 80J. The Department argued the Tribunal ignored this decision in allowing section 80J deductions; the Court considered the broader question of law on section 80J and directed a formal reference to be drawn up (Question No. 5).
Textile Machinery Corporation Ltd. v. CIT, [1977] 107 ITR 195 (Supreme Court) Decision under section 15C of the 1922 Act concerning whether a new industrial unit constituted reconstruction of old business; held that where no asset transfer occurred it was not reconstruction. The Department relied on this Supreme Court authority in arguing that question of law arises under section 80J; the Court accepted that a question of law does arise in the present facts and framed a referable question.
CIT v. Indian Aluminium Co. Ltd., [1977] 108 ITR 367 (Supreme Court) Considered under section 15C (1922 Act) issues around establishment of additional centres and extensions to existing centres and the availability of benefit. Relied upon by the Department in support of the contention that legal principles on "separate industrial undertaking" require adjudication; Court found that a question of law arises for reference.
Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308 (Supreme Court) Authority dealing with the interpretation of the expression "capital employed." The Department relied on this case to argue that the absence of increase in capital employed bore on the availability of section 80J relief; the Court found the matter raised a question of law suitable for reference.

Court's Reasoning and Analysis

The Court considered each of the five questions separately and applied legal principles and precedents strictly as set out in the provided opinion text.

Question No. 1 (Section 35B — commission to foreign agents)

The Tribunal had allowed deduction of Rs. 19,021 as commission to foreign agents under section 35B. On review of the Tribunal's order, the Court observed that it was unclear which specific sub-clause of clause (b) of section 35B(1) was relied upon. The Court invoked the Supreme Court's decision in Commissioner of Income Tax, Delhi v. Stepwell Industries Ltd., which emphasises that the onus is on the assessee to prove that the expenditure falls within one of the sub-clauses and that each case must be specifically discussed with reference to the relevant sub-clause. In light of Stepwell, the Court held it necessary that the Tribunal examine and verify the facts and ascertain for which activities the expenditure was incurred and whether those activities fall within any sub-clause of section 35B(1)(b). The Court also directed that the Tribunal keep in view that certain sub-clauses had been omitted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981, when carrying out this verification. Consequently the Court remitted the matter to the Tribunal for factual verification and determination of the applicable sub-clause(s).

Questions Nos. 2 and 3 (Ex gratia payment; Building fund contribution)

The Court held that both these matters were decided by the Tribunal on appreciation of evidence. They amounted to findings of fact and did not raise questions of law suitable for reference under section 256(2). Accordingly, both questions were declined (not referred).

Question No. 4 (Reimbursement of medical expenses; section 40(c))

The Court noted that the Supreme Court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. had held that cash reimbursements are to be treated as part of salary but are not within the expression "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite." This Court also noted its earlier decision in Sukhjit Starch and Chemicals Ltd., which followed Mafatlal, holding that reimbursement of a director's medical expenses is not a benefit or amenity within the meaning of section 40(c) and section 40A(5) and therefore cannot be disallowed. Given those authorities, the Court concluded that Question No. 4 was no longer an open or referable question of law and accordingly declined to refer it.

Question No. 5 (Section 80J — availability of deduction for newly established units)

The facts underpinning Question No. 5 were recited: the assessee claimed deduction under section 80J for three Glost Kilns treated as separate industrial undertakings; the Assessing Officer disallowed on grounds that the new kiln was merely an addition to an existing unit, separate books were not maintained, balance-sheets were prepared on an estimated basis without explanation, and there was no increase in capital employed. The Commissioner (Appeals) granted relief and directed verification; the Tribunal dismissed the Department's appeal.

The Department (through Shri R.P. Sawhney) relied on prior Supreme Court authorities (Textile Machinery Corporation Ltd., CIT v. Indian Aluminium Co. Ltd., and Lohia Machines Ltd. v. Union of India) to contend that legal questions arise as to whether the newly established kilns constituted separate undertakings and whether the "capital employed" test was satisfied. The Court accepted that the controversy in the present case raises a question of law distinct from the cited authorities and framed a precise question of law (reproduced in the opinion). On that basis the Court directed the Tribunal to draw up a statement of case and refer the framed question of law to this Court for opinion.

Holding and Implications

Holding (disposition of each question):

  • Question No. 1: REMITTED to the Tribunal — the Court directed the Tribunal to verify facts and ascertain which sub-clause(s) of clause (b) of section 35B(1) (if any) applied to the commission paid to foreign agents, keeping in view the Stepwell ruling and the deletions effected by the Finance (No. 2) Act, 1980.
  • Questions Nos. 2 and 3: DECLINED — the Court held these to be questions of fact based on appreciation of evidence and not referable questions of law.
  • Question No. 4: DECLINED — the Court held the issue settled by higher authority (Mafatlal) and by the court's own precedent (Sukhjit Starch), and therefore not referable.
  • Question No. 5: REFERRED — the Court found that a question of law arises concerning allowance under section 80J where separate books were not maintained, accounts were estimated, and there was no increase in capital employed; it directed the Tribunal to draw a statement of case and refer the formulated question to this Court for opinion.

Implications

The direct consequences of the decision are:

  • For Question No. 1: The Tribunal must re-examine the factual matrix and explicitly determine which sub-clause of section 35B(1)(b) (if any) applies to the commission payment before permitting deduction. This may lead to confirmation or reversal of the deduction depending on the Tribunal's factual findings and application of the sub-clauses (including consideration of the Finance (No. 2) Act, 1980 omissions).
  • For Questions Nos. 2 and 3: The Tribunal's factual findings on ex gratia payment and the building fund contribution stand; no legal reference is made and no new direction is given by this Court on those points.
  • For Question No. 4: The law as articulated in Mafatlal (and followed in Sukhjit Starch) governs the issue of cash reimbursement of medical expenses; the Tribunal's deletion is not treated as a referable legal question by this Court.
  • For Question No. 5: A specific question of law on the application of section 80J (separate industrial undertaking, maintenance of separate books, and capital employed) will be formally referred to this Court; the Tribunal must prepare a statement of case which may result in this Court providing an authoritative legal opinion on those issues in due course.

The opinion does not assert the creation of any new binding precedent by this Court in the present order; it primarily clarifies which matters are referable as questions of law, remits factual issues for verification (Question No. 1), declines to refer questions of fact (Questions Nos. 2 and 3), declines to refer a question already settled by higher authority (Question No. 4), and orders a formal reference on the legal issue identified in Question No. 5.

    Commissioner Of Income-Tax v. Somany Pilkington Ltd.

    N.K Agrawal, J.:— This is an application by the Commissioner of Income-tax, under section 256(2) of the Income-tax Act, 1961 (for short “the Act”), seeking a direction to the Income-tax Appellate Tribunal, Delhi Bench-“D”, Delhi (the Tribunal), to refer, for opinion of this court, the following questions of law for the assessment year 1981-82’:

    “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the sum of Rs. 19,021 representing commission paid to foreign agents under section 35B(1)(b)(i) without giving any specific interpretation of various clauses contained in section 35B(1)(b)(ii) of Income-tax Act?

    2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 90,254 made on account of ex gratia payment under section 36(1)(ii) without discussing the provisions of that section?

    3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 25,000 made on account of disallowance towards building fund of the Punjab and Haryana Chamber of Commerce was an allowable business expenditure?

    4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 23,872 made under section 40(c) by relying the case of Glaxo Laboratories (India) Ltd. v. Second ITO, [1986] 18 ITD 226 (Bom) and in not accepting the contention of the Department in view of the judgment of the Delhi High Court in the case of Instalment Supply Pvt. Ltd., New Delhi.…Applicant v. Commissioner Of Income-Tax…, [1984] 149 ITR 457?

    5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 1179,703 made under section 80J by ignoring the decision of the Kerala High Court in the case of Chembra Peak Estates Ltd. v. CIT, [1972] 85 ITR 401, which is at par with the facts of the present case?”

    Question No. 1:

    2. The assessee claimed deduction under section 35B of the Act on expenditures amounting to Rs. 1,54,152. The Assessing Officer allowed deduction in respect of export promotion expenses amounting to Rs. 84,026 only and disallowed deduction in respect of the other items of expenditure. The assessee went in appeal against the disallowance of deduction claimed under other heads of expenditure. The Commissioner of Income-tax (Appeals) allowed deduction under section 35B of the Act in respect of commission amounting to Rs. 69,556. The Department challenged the order of the Commissioner before the Tribunal. On a concession made by counsel for the assessee, the Tribunal withdrew the relief of deduction granted by the Commissioner on expenditures amounting to Rs. 50,535. Deduction claimed by the assessee, in respect of the commission amounting to Rs. 19,021 paid to foreign agency for arranging export, was allowed by the Tribunal. It is this order of the Tribunal allowing deduction of Rs. 19,021 under section 35B which is under reference. On a perusal of the order of the Tribunal, it is not clear as to which of the sub-clauses of clause (b) of sub-section (1) of section 35B were attracted so as to allow deduction of the commission paid to the foreign agents. It was necessary to examine as to which sub-clause was attracted.

    3. The Supreme Court in Commissioner Of Income Tax, Delhi v. Stepwell Industries Ltd., [1997] 228 ITR 171, has observed as under (page 174):

    “In order to get this kind of deduction, the onus lies heavily on the assessee to prove that the expenditure falls within any of the purposes set out in the various sub-clauses of clause (b) of section 35B(1). Merely because some activities took place outside India that will not qualify the expenditure for the deductions mentioned in section 35B…

    In order to get this deduction, the assessee will have to prove that the expenditure was incurred during the previous year wholly and exclusively for the purposes set out in clause (b) of section 35B(1). There cannot be any blanket allowance of the expenditure nor can there be any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the subclauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Some of the sub-clauses provide that if the expenditure is incurred in India, it cannot be allowed but in some of the sub-clauses this requirement is not there. In such cases, the expenditure may or may not be incurred in India. Every case will have to be examined in the light of the provisions of the sub-clauses and the facts proved by the assessee.”

    4. In the light of the observation made by the Supreme Court, it would be necessary to examine and verify whether the expenditure incurred on the payment of commission to foreign agents would fall under any of the sub-clauses of clause (b) of section 35B(1) of the Act. The question is, therefore, remitted to the Tribunal for verifying the facts and to ascertain the activities in respect of which the expenditure was incurred by the assessee. It shall be kept in view that certain sub-clauses were omitted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. If the expenditure has not been incurred on any of the activities specified in the sub-clauses of clause (b) of section 35B(1) of the Act, it would not qualify for deduction.

    Questions Nos. 2 and 3:

    5. Question No. 2 relates to the ex gratia payment and question No. 3 is regarding a payment towards the building fund of the Chamber of Commerce. These are matters decided by the Tribunal on appreciation of evidence. Therefore, these do not give rise to any question of law. These are based on finding of facts and appreciation of evidence. Both the questions are, therefore, declined.

    Question No. 4:

    6. This question relates to reimbursement of medical expenses in cash to the employees and the director.

    7. The Supreme Court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd., [1996] 219 ITR 644, has considered a similar question and has held that cash payments shall be treated as part of salary and will be subject to the limits or ceiling, if any, in that behalf but these cannot be brought within the purview of the words “any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite.”

    8. This court in Sukhjit Starch and Chemicals Ltd. v. CIT, [1996] 221 ITR 308, also held, following the decision of the Supreme Court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd., [1996] 219 ITR 644,-that reimbursement of medical expenses of the director of a company is not a benefit or amenity within the meaning of section 40(c) and section 40A(5) of the Act and cannot be disallowed.

    9. Question No. 4, thus is no more res integra and is not a referable question of law and is, therefore, declined.

    Question No. 5:

    10. The assessee claimed deduction under section, 80J of the Act at Rs. 1,79,703 on the ground that three Glost Kilns were separate industrial undertakings set up by the assessee during the year. It was claimed that those units satisfied the conditions laid down in section 80J. Copies of the profit and loss account and balance-sheets of all the three separate units were filed. The Assessing Officer, however, took the view that the addition of a new Glost Kiln did not constitute a separate industrial undertaking but was merely an addition to the existing unit. The Assessing Officer also held that no separate books of account had been maintained for any of the kilns and separate books of account of the units were prepared by the assessee after estimating the sales and expenses in the case of each unit. The basis of such estimates was not explained by the assessee. The Assessing Officer further noticed that there was no increase in the capital employed by the assessee during the year in question. The Assessing Officer, therefore, declined to allow deduction under section 80J of the Act.

    11. The Commissioner of Income-tax, on the assessee's appeal, allowed relief under section 80J and directed the Assessing Officer to verify the amount of capital employed by the assessee in each kiln and to allow deduction accordingly. The Tribunal dismissed the Department's appeal against the order of the Commissioner.

    12. Shri R.P Sawhney, learned senior counsel for the Department, has argued that a question of law does arise from the order of the Tribunal inasmuch as the findings recorded by the Assessing Officer in his assessment order did not permit any deduction in respect of the profits of the newly established unit of the assessee because the conditions laid down in section 80J had not been fulfilled. Shri Sawhney has placed reliance on three decisions of the Supreme Court. In Textile Machinery Corporation Ltd. v. CIT, [1977] 107 ITR 195, the question had arisen before the Supreme Court under section 15C of the Indian Income-tax Act, 1922, and the specific issue related to reconstruction of old business. It was held that the new industrial unit of the assessee could not be said to be reconstruction of his old business as there was no transfer of any asset of the old business to the new undertaking. In CIT v. Indian Aluminium Co. Ltd., [1977] 108 ITR 367 (SC), also, a similar matter was examined by the Supreme Court under section 15C of the Indian Income-tax Act, 1922. In that case, the assessee had established one more centre at Muri and also had made extension to the existing centres at Belur and Alupuram. It was held that the benefit of section 15C was rightly allowed to the assessee. In Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308 (SC), the question before the Supreme Court related to the interpretation of the expression “capital employed”.

    13. The controversy raised in the question, in the case in hand, does give rise to a question of law. In the cases referred to above and, decided by the Supreme Court, the controversies were different. On a consideration of the controversy in the case of the assessee here, the following question of law is found to arise from the order of the Tribunal:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing deduction under section 80J of the Income-tax Act, 1961, though the assessee did not maintain separate books of account in relation to the new units and had drawn the balance-sheet on estimate basis and, there was no increase in the capital employed and, thus, the assessee did not satisfy the conditions specified in section 80] of the Act?”

    14. The Tribunal is directed to draw up a statement of case and refer the aforesaid question of law to this court for opinion.

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    Commissioner Of Income-Tax v. Somany Pilkington Ltd.
    (Dec 17, 1998)