1999 (2) TMI 41 - HC - Income Tax

Business Expenditure, Company, Ceiling On Expenditure, Salary And Perquisites, Condition Precedent, Special Deduction

Summary

Issues Involved:
1. Applicability of Section 40(c)(ii) vs. Section 40A(5) for deductions in respect of salary and perquisites to the managing director.
2. Entitlement to deduction under Section 80J for substantial expansion of spindles during assessment years 1980-81 and 1981-82.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(c)(ii) vs. Section 40A(5):
The first issue concerns whether the provisions of Section 40(c)(ii) or Section 40A(5) should be applied for allowing deductions in respect of salary, perquisites, etc., made to the managing director who is also an employee. The Supreme Court in CIT v. Indian Engineering and Commercial Corporation Pvt. Ltd. [1993] 201 ITR 723 held that both sections apply to employees who are also directors, and the higher of the two ceilings should be applied. In this case, the managing director is an employee who receives a salary and perquisites approved under the Companies Act. Therefore, the Tribunal erred in holding that Section 40A(5) does not apply to the managing director. The court directed the Assessing Officer to recompute the deduction extent using the Supreme Court's ratio in the aforementioned case.

2. Entitlement to Deduction under Section 80J:
The second issue pertains to the assessee's entitlement to deductions under Section 80J for the assessment years 1980-81 and 1981-82 due to substantial expansion of spindles. The assessee claimed deductions based on substantial expansion from 32,400 to 50,200 spindles by July 1981, which included erecting new sheds, installing a carding room, and constructing godowns. The Income-tax Officer rejected the claim, arguing that substantial expansion does not equate to establishing a new industrial undertaking, a requirement for Section 80J benefits. The Tribunal, however, found that the expansion constituted an independent unit capable of functioning as such.

The court examined the statutory provisions and the Tribunal's findings. Section 80J, before its omission, provided deductions for profits from newly established industrial undertakings without explicitly requiring the undertaking to be new. The court noted that the conditions under Section 80J(4) focus on the non-formation by splitting or reconstruction of existing businesses and the fresh installation of plant and machinery. The court emphasized that substantial expansion creating a new production facility capable of independent functioning meets the requirements of Section 80J.

The court referenced several Supreme Court decisions, including Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195, CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 567, and CIT v. Orient Paper Mills Ltd. [1989] 176 ITR 110, which supported the view that substantial expansion resulting in a new, identifiable unit qualifies for deductions under similar provisions.

The court concluded that the assessee's substantial expansion, completed by July 1981, constituted an independent industrial undertaking eligible for Section 80J deductions. Therefore, the second question was answered in favor of the assessee, granting entitlement to the claimed deductions.

Conclusion:
The court directed the Assessing Officer to apply the higher ceiling for deductions under Sections 40(c) and 40A(5) for the managing director and affirmed the assessee's entitlement to Section 80J deductions for substantial expansion, answering the questions in favor of the Revenue and the assessee respectively. The assessee was awarded costs of Rs. 2000.