1998 (4) TMI 105 - HC - Income Tax

Amenity Or Benefit To Director, Medical Expenses, Perquisite, Insurance Premia, RCC Roads, Developement Rebate

Issues Involved:

1. Disallowance of medical expenses, telephone expenses, and accident insurance premium under section 40A(5) of the Income-tax Act, 1961.
2. Allowability of Rs. 1,40,000 paid for obtaining a feasibility report as business expenditure.
3. Entitlement to depreciation and development rebate for RCC roads.
4. Entitlement to relief under section 80-I for machinery installed in the machinery division.

Detailed Analysis:

Issue 1: Disallowance of Medical Expenses, Telephone Expenses, and Accident Insurance Premium

The Tribunal had concluded that medical expenses, telephone expenses, and accident insurance premiums should not be disallowed under section 40A(5). However, following precedents set in the assessee's own case and other relevant cases, the court held that reimbursement of medical expenses and telephone expenses to managing directors constituted "benefits" under section 40(c)(i) and should be disallowed under section 40(c) read with section 40A(5). Thus, the Tribunal erred in its decision regarding these expenses. Conversely, the premiums paid for accident insurance policies taken out by the company for its managing directors did not constitute a benefit to the directors, as the policies were taken by the company to insure itself against liabilities. Therefore, the Tribunal was correct in not disallowing these premiums.

Issue 2: Allowability of Rs. 1,40,000 for Feasibility Report as Business Expenditure

The assessee claimed Rs. 1,40,000 as business expenditure for obtaining a feasibility report for a mini steel plant project, which did not materialize. The Tribunal allowed this expenditure, equating it with a similar past case involving seamless pipes. However, the court found this comparison erroneous, as the mini steel plant was a new project distinct from the existing business. Referring to precedents where expenditures for new projects were deemed capital in nature, the court concluded that the expenditure was capital and not deductible as business expenditure. Thus, the Tribunal's decision was incorrect.

Issue 3: Depreciation and Development Rebate for RCC Roads

The Tribunal allowed both depreciation and development rebate for RCC roads constructed by the assessee, based on its earlier decisions. The court, however, referred to established jurisprudence, which treats such roads as "buildings" eligible for depreciation but not for development rebate. Consequently, the Tribunal was correct in allowing depreciation but wrong in allowing development rebate. The court thus partially upheld and partially overturned the Tribunal's decision.

Issue 4: Relief Under Section 80-I for Machinery

The Tribunal granted relief under section 80-I based on its earlier decision, which actually pertained to development rebate under section 33, not section 80-I. The court highlighted that the Tribunal mistakenly conflated the two issues and failed to properly address the specific requirements of section 80-I and Schedule VI. Consequently, the Tribunal erred in its conclusion, and the matter was remanded for reconsideration in light of the correct legal provisions.

Conclusion:

The reference was disposed of with no order as to costs. The court provided a detailed analysis and corrected the Tribunal's errors on several counts, ensuring the application of the correct legal principles to each issue.

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