1991 (9) TMI 11 - HC - Income Tax

Keyword(s) Business Expenditure Capital Gains Depreciation Disallowance Export Market Development Allowance Foreign Exchange Insurance Scientific Research Weighted Deduction

Issues Involved:
1. Applicability of section 40(c) to remuneration or benefits provided to whole-time directors.
2. Classification of exchange rate fluctuation loss on a dollar loan as capital or revenue expenditure.
3. Allowability of depreciation on assets representing capital expenditure on scientific research.
4. Nature of expenditure incurred for the issue of additional share capital.
5. Taxability of insurance compensation received for destroyed assets under 'Capital gains'.
6. Entitlement to weighted deduction under section 35B for freight, insurance charges, and interest on packing credit related to exports.

Detailed Analysis:

Issue 1: Applicability of section 40(c) to remuneration or benefits provided to whole-time directors
The Tribunal upheld the disallowance of Rs. 3,06,935 paid as remuneration exceeding the limits prescribed under section 40(c). The assessee contended that disallowance should be based on a finding of excessiveness or unreasonableness. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that section 40(c) imposes an overall ceiling limit independent of the excessiveness or unreasonableness criteria. The court affirmed this view, stating that any amount exceeding Rs. 72,000 annually is outright disallowable, thus answering the first question in the negative and against the assessee.

Issue 2: Classification of exchange rate fluctuation loss on a dollar loan as capital or revenue expenditure
The Tribunal classified the Rs. 8,721 loss due to exchange rate fluctuations on a dollar loan for purchasing machinery as capital expenditure. The court referenced previous decisions, including CIT v. Bharat General and Textile Industries Ltd. and Bestobell (India) Ltd. v. CIT, which held that such losses are capital in nature as they augment the cost of the capital asset. The court, therefore, answered the second question in the negative and against the assessee.

Issue 3: Allowability of depreciation on assets representing capital expenditure on scientific research
The Tribunal denied depreciation on assets for which full deduction was allowed under section 35 in previous years. The court noted that section 35 was amended retrospectively, precluding depreciation claims on such assets. Consequently, the court upheld the Tribunal's decision, answering the third question in the negative and against the assessee.

Issue 4: Nature of expenditure incurred for the issue of additional share capital
The Tribunal classified the expenditure for issuing additional share capital as capital expenditure. The assessee argued that the issue was mandated by the Foreign Exchange Regulation Act to reduce foreign equity holding, thus making it a revenue expenditure. However, the court disagreed, stating that the necessity of compliance does not change the capital nature of the expenditure. The court distinguished this case from CIT v. Glaxo Laboratories (India) Ltd., holding that the ultimate effect of restructuring the capital base is determinative. The fourth question was answered in the negative and in favor of the Revenue.

Issue 5: Taxability of insurance compensation received for destroyed assets under 'Capital gains'
The Tribunal taxed the compensation received for destroyed assets as capital gains. The court referenced Marybong and Kyel Tea Estates Ltd. v. CIT, where insurance compensation was considered a transfer of assets. Although the court acknowledged a divergence of opinion, it followed the precedent set in Marybong, answering the fifth question in the negative and in favor of the Revenue. However, due to the divergence, the court certified the question for appeal to the Supreme Court.

Issue 6: Entitlement to weighted deduction under section 35B for freight, insurance charges, and interest on packing credit related to exports
The Tribunal denied weighted deduction for freight, insurance charges, and interest on packing credit under section 35B. The court referenced Bharat General and Textile Industries Ltd. v. CIT, which held that such expenses do not qualify under section 35B(1)(b). Thus, the court answered the sixth question in the negative and against the assessee.

Certification for Supreme Court Appeal:
The court certified the following question for appeal to the Supreme Court: "Whether the amount received from the insurance company in respect of plant and machinery, furniture and fittings destroyed during the riots by the workers would be taxable under the head 'Capital gains'?"

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