1995 (4) TMI 24 - HC - Income Tax

Accounting Year Business Expenditure Capital Or Revenue Expenditure Deduction In Respect Special Deduction Technical Services

Summary

Issues Involved:
1. Whether the fee for technical services constitutes revenue expenditure allowable under section 37 of the Income-tax Act, 1961.
2. Whether the commission paid to the managing director should be taken into consideration for purposes of computing the disallowance under section 40(c) of the Income-tax Act, 1961.
3. Whether the assessee is entitled to deduction under section 80V in respect of the interest disallowed under section 40A(8) of the Income-tax Act.
4. Whether the amount of Rs. 74,124 was deductible.

Issue-wise Detailed Analysis:

1. Fee for Technical Services as Revenue Expenditure:
The court addressed whether the sum of Rs. 47,104 representing the fee for technical services constitutes revenue expenditure allowable under section 37 of the Income-tax Act, 1961. Both parties agreed that this issue had been previously resolved by a Full Bench in Praga Tools Ltd. v. CIT [1980] 123 ITR 773. Consequently, the court answered this question in the affirmative, in favor of the assessee and against the Revenue.

2. Commission Paid to Managing Director:
The court examined whether the commission paid to Dr. W. R. Carrea, the managing director, should be considered for disallowance under section 40(c) of the Income-tax Act, 1961. The Income-tax Officer had disallowed part of the commission, and the Appellate Commissioner upheld this decision. However, the Income-tax Appellate Tribunal allowed the deduction, noting the absence of the term "commission" in section 40(c) in contrast to section 40(b). The court analyzed sections 40(b) and 40(c) and determined that "remuneration" is a broader term that includes commission. Citing various judicial precedents, the court concluded that the commission paid to Dr. Carrea constituted remuneration under section 40(c). Therefore, the Tribunal's decision was incorrect, and the court answered this question in the negative, in favor of the Revenue and against the assessee.

3. Deduction under Section 80V:
The court noted that the issue of whether the assessee is entitled to deduction under section 80V in respect of the interest disallowed under section 40A(8) was covered by the Supreme Court decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580. Consequently, the court answered this question in the affirmative, in favor of the assessee and against the Revenue.

4. Deductibility of Rs. 74,124:
The court addressed whether the amount of Rs. 74,124 out of the provision for gratuity was deductible. The Income-tax Officer had disallowed this amount, arguing it pertained to the previous year. However, the Tribunal allowed the deduction, noting that the gratuity fund was recognized and the amount was actually paid during the year. The court analyzed sections 36(1)(v) and 40A(7) of the Income-tax Act, noting that provisions made for gratuity payable during the year are allowable. The court cited several judicial precedents supporting this view. Consequently, the court upheld the Tribunal's decision, answering this question in the affirmative, in favor of the assessee and against the Revenue.

Conclusion:
The court answered the questions as follows:
- Question 1: In the affirmative, in favor of the assessee and against the Revenue.
- Question 2: In the negative, in favor of the Revenue and against the assessee.
- Question 3: In the affirmative, in favor of the assessee and against the Revenue.
- Question 4: In the affirmative, in favor of the assessee and against the Revenue.

The reference case was accordingly answered, with no order as to costs.