1993 (10) TMI 19 - HC - Income Tax

Bonus Shares, Business Expenditure, Capital Expenditure, Capital Or Revenue Expenditure, Income Tax Act, Liability For Surtax, Medical Expenses, Previous Year, Setting Up, Surtax Liability, Tax Liability

Issues Involved:
1. Deductibility of surtax liability.
2. Reimbursement of medical expenses to directors.
3. Payment to Gujarat Steel Tubes Employees' Welfare Fund.
4. Expenditure for the issue of bonus shares.
5. Premium paid for deferred annuity policies on directors' lives.

Issue-wise Detailed Analysis:

Re: Question No. 1 - Deductibility of Surtax Liability:
The court addressed whether the surtax liability of Rs. 21,85,104 is deductible in computing the total income of the assessee. The court referred to the precedent set in S. L. M. Maneklal Industries Ltd. v. CIT [1988] 172 ITR 176, which held that surtax is akin to income-tax and is not an expenditure laid out wholly and exclusively for business purposes. Therefore, it is not an allowable deduction under section 37 of the Income-tax Act. The court answered this question in favor of the Revenue and against the assessee.

Re: Question No. 2 - Reimbursement of Medical Expenses to Directors:
The court considered whether the reimbursement of medical expenses of Rs. 20,695 and Rs. 4,311 to the directors constitutes a benefit or amenity under section 40(c)(i) of the Income-tax Act, 1961. The Tribunal had held that such reimbursements are perquisites and fall within the ambit of section 40(c)(i), which limits the allowable expenditure to Rs. 72,000 per year. The court upheld this view, stating that the reimbursement is a benefit to the director and is covered by the wide amplitude of the phrase "any remuneration, benefit or amenity." Thus, the question was answered in the affirmative, in favor of the Revenue and against the assessee.

Re: Question No. 3 - Payment to Gujarat Steel Tubes Employees' Welfare Fund:
The court examined whether the sum of Rs. 5 lakhs paid to the Gujarat Steel Tubes Employees' Welfare Fund was rightly disallowed. The Tribunal had disallowed the claim, stating that the actual payment was made after the relevant accounting year. However, the court noted that the company maintained accounts on a mercantile basis and had posted credit and debit entries in favor of the trust before the end of the accounting year. The court concluded that the amount was irrevocably set apart and paid to the trust, and therefore, should be considered as paid within the relevant assessment year. The question was answered in the negative, in favor of the assessee and against the Revenue.

Re: Question No. 4 - Expenditure for the Issue of Bonus Shares:
The court addressed whether the expenditure of Rs. 24,125 incurred for the issue of bonus shares is allowable as revenue expenditure. Referring to the decision in Ahmedabad Mfg. and Calico Pvt. Ltd. v. CIT [1986] 162 ITR 800, the court held that such expenses are related to the company's permanent structure and acquisition of capital advantages, thus not allowable as revenue expenditure. The question was answered in favor of the Revenue and against the assessee.

Re: Questions Nos. 5 and 6 - Premium Paid for Deferred Annuity Policies on Directors' Lives:
The court considered whether the premium of Rs. 45,000 paid for deferred annuity policies on the lives of each of the two directors was includible in the total income and allowable under section 37 of the Income-tax Act. The court noted that the policies were the property of the company, and the directors had no vested right or interest in them. The expenditure was considered capital in nature, as it was a lump sum payment with no recurring liability and the ownership of the policy remained with the company. The court concluded that the expenditure was not allowable under section 37, as it was capital expenditure. Consequently, question No. 6 was answered in the negative, in favor of the Revenue and against the assessee, and question No. 5 was left unanswered as it was rendered redundant by the finding on question No. 6.

Conclusion:
The reference was disposed of accordingly, with no order as to costs.

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