1998 (12) TMI 37 - HC - Income Tax

Business Expenditure, Capital Or Revenue Expenditure, Export Market Development Allowance, Weighted Deduction

Issues Involved:
1. Deduction of salaries and wages payable under the Industrial Tribunal's award.
2. Deduction of betterment levy paid to Ahmedabad Municipal Corporation.
3. Deduction of expenses incurred on issuance of share certificates and bonds due to amalgamation.
4. Weighted deduction claims under section 35B for exchange and bank charges, and insurance and freight.
5. Deduction of accrued liability of gratuity under sections 28 and 37.

Detailed Analysis:

1. Deduction of Salaries and Wages Payable under the Industrial Tribunal's Award:
The primary issue was whether the Tribunal was right in allowing the deduction of Rs. 4,59,648 payable under the Industrial Tribunal's award dated September 30, 1971, which the assessee disputed. The Tribunal allowed the deduction, stating that the liability had arisen and the award was enforceable for the relevant assessment year. The court upheld this view, stating that the liability to make payment pursuant to the award had arisen, and merely challenging the award did not negate the enforceability of the liability. This principle was consistent with the court's earlier decision in ITR No. 363 of 1983. Thus, the court answered in favor of the assessee and against the Revenue.

2. Deduction of Betterment Levy Paid to Ahmedabad Municipal Corporation:
The issue was whether the Tribunal was justified in disallowing the deduction of Rs. 48,409 paid as betterment levy under section 37 of the Act. The Tribunal, following its earlier decision, held that betterment charges are capital in nature and not deductible under section 37. The court agreed, referencing multiple decisions including CIT v. Ahmedabad Manufacturing and Calico Printing Co. Ltd. and CIT v. Mihir Textiles Ltd., which established that betterment charges are capital expenditures. Therefore, the court answered in favor of the Revenue and against the assessee.

3. Deduction of Expenses Incurred on Issuance of Share Certificates and Bonds Due to Amalgamation:
The question was whether the expenses of Rs. 53,423 incurred due to the amalgamation of the company with Bank of India Ltd. were deductible. The court examined whether the expenses were capital or revenue in nature. It referenced several cases, including Assam Bengal Cement Co. Ltd. v. CIT and Raza Buland Sugar Co. Ltd. v. CIT, concluding that expenses related to amalgamation, which alter the capital structure of the company, are capital in nature. Thus, the Tribunal was justified in disallowing the deduction, and the court answered in favor of the Revenue and against the assessee.

4. Weighted Deduction Claims under Section 35B for Exchange and Bank Charges, and Insurance and Freight:
The assessee claimed weighted deductions for exchange and bank charges (Rs. 3,40,208) and insurance and freight (Rs. 24,16,085). The court upheld the Tribunal's disallowance of insurance and freight charges, referencing section 35B(1)(b)(iii) which excludes such expenses incurred in India. However, for exchange and bank charges, the court noted that the Tribunal disallowed the claim without proper inquiry into whether the expenses were incurred wholly and exclusively for services outside India. The court remanded this issue for further inquiry, stating that the weighted deduction could not be denied solely because the payment was made in India. Thus, the court provided a nuanced answer: affirming the disallowance of insurance and freight charges but requiring further inquiry for exchange and bank charges.

5. Deduction of Accrued Liability of Gratuity under Sections 28 and 37:
The final issue was whether the assessee could claim the entire amount of gratuity (Rs. 1,54,00,000) and an additional amount (Rs. 69,85,759) under sections 28 and 37. The court referenced the Supreme Court decision in Shree Sajjan Mills Ltd. v. CIT, which established that any provision for gratuity must meet the conditions of section 40A(7) to be deductible. Since the assessee did not create an approved gratuity fund, the court upheld the Tribunal's disallowance of the gratuity claims. Thus, the court answered in favor of the Revenue and against the assessee.

Conclusion:
The court provided a comprehensive analysis of each issue, affirming the Tribunal's decisions in favor of the Revenue for most claims, except for the exchange and bank charges, which required further inquiry. This judgment highlights the importance of adhering to specific provisions of tax law and the necessity of thorough inquiry into the nature and purpose of claimed deductions.

← Previous Next →