2002 (6) TMI 17 - HC - Income Tax

(i) Whether, the expenditure on account of accident insurance and medical expenses in respect of the two managing directors of the company was includible for purposes of computing the disallowance under section 40A(5)? - (ii) Whether, the receipt of Rs. 47,64,070 on account of cash compensatory support (CCS) was a revenue receipt and therefore exigible to tax? - (iii) Whether, the expenditure of Rs. 22,000 incurred by way of fees to an advocate was allowable as revenue expenditure?

Summary

Issues:
1. Whether expenditure on accident insurance and medical expenses for managing directors is includible for computing disallowance under section 40A(5)?
2. Whether receipt of cash compensatory support is a revenue receipt and taxable?
3. Whether expenditure incurred on fees to an advocate is allowable as revenue expenditure?

Analysis:

Issue 1:
The first issue involves determining if the expenditure on accident insurance and medical expenses for managing directors is includible for computing disallowance under section 40A(5) of the Income-tax Act. The court referred to a previous case where it was held that if the company takes out an insurance policy for directors against personal accidents to protect itself from potential liabilities, the expenses are allowable. In this case, the Tribunal found that the insurance policy for the directors was taken and paid for by the company. The court held that the insurance premium is allowable as expenditure for the company. However, regarding medical expenses, it was held that reimbursement of medical expenses for directors is a benefit and not an allowable expenditure. The court partly favored the assessee for insurance premium and partly favored the Revenue for medical expenses.

Issue 2:
The second issue pertains to whether the receipt of cash compensatory support (CCS) is a revenue receipt and thus taxable. The Tribunal relied on a Full Bench decision which was later reversed by the Delhi High Court, stating that CCS receipts from the Government are taxable and constitute profits. The court also cited a similar view by the Rajasthan High Court regarding incentives received by exporters. As no contrary judgment was presented, the court held that the CCS received is a revenue receipt and exigible to tax, ruling in favor of the Revenue.

Issue 3:
The third issue involves determining if the expenditure on fees to an advocate is allowable as revenue expenditure. The Tribunal noted that the expenditure was incurred to recover sums invested in a failed transaction for acquiring premises. The Assessing Officer treated it as a capital loss, but the Tribunal accepted the argument that the expenditure was for recovering the blocked amount, not directly related to acquiring the asset. The Tribunal viewed the expenditure as a revenue expense necessary for recovering the advance, not for acquiring the asset. The court agreed with the Tribunal's reasoning, confirming the expenditure as a revenue expense and ruling in favor of the assessee.

In conclusion, the court provided detailed analyses for each issue, referencing previous cases and legal provisions to arrive at informed decisions. The judgment favored the assessee for the expenditure on accident insurance premiums and advocate fees, while ruling in favor of the Revenue for the reimbursement of medical expenses and the receipt of cash compensatory support.