1988 (12) TMI 138 - AT - Income Tax

Amalgamating Company, Assessment Year, Business Expenditure, Carry Forward And Set Off, Expenditure On Repair, Revenue Expenditure, Salary And Perquisites, Set Off Of Loss

Issues Involved:

1. Allowance of provisions for guarantee liability (AY 1980-81 and 1981-82)
2. Allowance of provisions for repairs (AY 1980-81)
3. Application of sec. 40(c) instead of sec. 40A(5) for director employees (AY 1981-82)
4. Allowance of professional fees as revenue expenditure (AY 1981-82)
5. Set off of loss of the merged company (AY 1981-82)

Issue-wise Detailed Analysis:

1. Allowance of Provisions for Guarantee Liability (AY 1980-81 and 1981-82):

The revenue challenged the CIT(A)'s direction to allow provisions for guarantee liability of Rs. 3,64,311 for AY 1980-81 and Rs. 2,11,157 for AY 1981-82. The Tribunal noted that the provision was a contingent liability and relied on the Supreme Court decision in Indian Molasses Co. (P.) Ltd. v. CIT, which held that contingent liabilities are not allowable as deductions. The Tribunal emphasized that the liability must be an "actual liability in praesenti" and not a future contingent liability. Since the assessee had not been making such provisions in earlier years and the liability was contingent, the Tribunal decided in favor of the revenue, setting aside the CIT(A)'s order.

2. Allowance of Provisions for Repairs (AY 1980-81):

The revenue contested the CIT(A)'s allowance of provisions for repairs of Rs. 1,64,370, which was reduced to Rs. 1,15,808. The Tribunal found that the liability for repairs had not arisen in the assessment year under appeal but was only a contingent liability. Since the liability had neither arisen nor the amount was spent in AY 1980-81, the Tribunal held that the provision for repairs could not be allowed in this assessment year. The CIT(A)'s order was set aside, and the issue was decided in favor of the revenue.

3. Application of Sec. 40(c) Instead of Sec. 40A(5) for Director Employees (AY 1981-82):

The revenue challenged the CIT(A)'s application of sec. 40(c) instead of sec. 40A(5). The Tribunal referred to the Special Bench decision in Geoffrey Manners & Co. Ltd. v. ITO, which held that sec. 40(c) is applicable for computing the ceiling on salary and perquisites paid to director employees. The Tribunal found no reason to disagree with the Special Bench's finding and upheld the CIT(A)'s application of sec. 40(c), deciding this issue in favor of the assessee.

4. Allowance of Professional Fees as Revenue Expenditure (AY 1981-82):

The revenue argued that professional fees of Rs. 28,999 for amalgamation proceedings should be treated as capital expenditure. The assessee contended that the amalgamation was in the business interest, not for increasing capital. The Tribunal, relying on the Bombay High Court decision in Bombay Burmah Trading Corpn. Ltd. v. CIT and other relevant cases, held that the expenditure was for running the business more efficiently and should be treated as revenue expenditure. The CIT(A)'s allowance of the professional fees was upheld, and the issue was decided against the revenue.

5. Set Off of Loss of the Merged Company (AY 1981-82):

The revenue contested the CIT(A)'s allowance of set off of loss of Rs. 8,66,511 of the merged company. The Tribunal noted that the amalgamation was not approved by the Central Government under sec. 72A, which is a prerequisite for such set off. The Tribunal referred to various judicial precedents and the commentary by Kanga and Palkhivala, concluding that the unabsorbed losses and depreciation of the merged company could not be carried forward. The CIT(A)'s order was set aside, and the issue was decided in favor of the revenue.

Conclusion:

(i) ITA 2771/BOM/85 (AY 1980-81) is dismissed.
(ii) ITA 2772/BOM/85 (AY 1981-82) stands partly allowed.

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