1986 (6) TMI 17 - HC - Income Tax

Case In S. 80Vv, Business Expenditure, Deduction U/S 80J, Gratuity Paid To Retired Director, New Industrial Undertaking, Special Deduction, Travel Expenditure

Issues Involved:
1. Deduction under section 80J for the high purity gas manufacturing unit.
2. Computation of capital under section 80J.
3. Treatment of gratuity as salary under sections 40(c) and 40A(5).
4. Deduction of legal and professional charges under section 80VV.
5. Deduction of foreign travel expenses.
6. Deduction of surtax liability.
7. Value of depreciable assets for deduction under section 80J.

Detailed Analysis:

1. Deduction under section 80J for the high purity gas manufacturing unit:
The Tribunal held that the Income-tax Officer was not justified in reducing the quantum of deduction under section 80J on the ground that the relevant industrial undertaking did not work throughout the previous year. The assessee should be allowed deduction at the prescribed rate on the capital employed in the relevant industrial undertaking irrespective of the fact that the undertaking started manufacturing only from April 1, 1975. This was affirmed by the High Court, referencing the Supreme Court decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, stating that capital employed in an undertaking is relevant irrespective of whether the undertaking worked throughout the year.

2. Computation of capital under section 80J:
The Tribunal directed the Income-tax Officer to reconsider the computation of capital in light of the new sub-section introduced by the Finance (No. 2) Act, 1980, with retrospective effect. The High Court agreed, stating that for the purpose of computing deduction under section 80J, the average of increase and decrease of the assets and liabilities after the first day of the relevant previous year is not relevant. Capital employed in the previous year has to be computed as on the first day of that year.

3. Treatment of gratuity as salary under sections 40(c) and 40A(5):
The Tribunal upheld the decision of the Income-tax Officer and the Commissioner (Appeals) that gratuity paid to a retired director should be treated as salary for the purpose of sections 40(c) and 40A(5). The High Court confirmed this, stating that under section 40(c), any amount paid by the assessee to its retired director in excess of Rs. 72,000 could not be allowed as a deduction.

4. Deduction of legal and professional charges under section 80VV:
The Tribunal upheld the decision of the Income-tax Officer and the Commissioner (Appeals) that the ceiling limit of Rs. 5,000 under section 80VV applies to the aggregate expenses incurred by the assessee for a particular assessment year. The High Court agreed, interpreting the expression "in any case" to mean that the maximum deduction permitted under section 80VV is Rs. 5,000 in the aggregate.

5. Deduction of foreign travel expenses:
The Tribunal held that the expenses incurred by the assessee on the foreign travel of its directors and executives in connection with new projects should be treated as capital expenditure. The High Court affirmed this, stating that expenses incurred for launching a new project or initiating a new line of business separate from the existing business cannot be held to be revenue expenditure.

6. Deduction of surtax liability:
The Tribunal disallowed the claim of the assessee for deduction of surtax liability, and the High Court confirmed this decision, referencing the decision in Molins of India Ltd. v. CIT [1983] 144 ITR 317.

7. Value of depreciable assets for deduction under section 80J:
The Tribunal directed the Income-tax Officer to reconsider the assessee's claim for taking the value of the depreciable assets at cost for the purpose of deduction under section 80J in light of the new provision inserted by the Finance (No. 2) Act, 1980. The High Court affirmed this, stating that under rule 19A(2)(i) of the Income-tax Rules, the written down value would be taken into account, meaning the actual cost of acquisition less the aggregate of all deductions of depreciation actually allowed.

Conclusion:
The High Court provided a comprehensive analysis and upheld the decisions of the Tribunal on various points, emphasizing the correct interpretation of the relevant sections of the Income-tax Act. The reference was disposed of with no order as to costs, and a certificate for leave to appeal to the Supreme Court was granted on the question of whether the surtax liability can be allowed as a permissible deduction.

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