1984 (1) TMI 171 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation of Section 37(3) of the Income Tax Act, 1961, read with Rule 6D of the Income Tax Rules, 1962.
2. Deductibility of surtax liability.
3. Disallowance of travelling allowance under Rule 6D.

Detailed Analysis:

1. Interpretation of Section 37(3) of the Income Tax Act, 1961, read with Rule 6D of the Income Tax Rules, 1962:
The primary issue in this case revolves around the interpretation of Section 37(3) of the Income Tax Act, 1961, in conjunction with Rule 6D of the Income Tax Rules, 1962. The Delhi Bench 'E' of the Tribunal had previously ruled in Bharat Commerce and Industries vs. ITO that the period an employee spends on duty outside the headquarters is not considered as time spent in travelling. Consequently, the daily allowance paid for such periods was deemed outside the disallowance prescribed by Section 37(3) and Rule 6D. The Delhi Bench directed that such expenditure should be considered for deduction under Section 37(1), free of the restrictions in Section 37(3).

However, the Madras Bench 'C' found it difficult to agree with this reasoning and suggested that the appeal be heard by a Special Bench. The Special Bench had to determine whether the daily allowance paid for periods spent outside the headquarters should be disallowed under Section 37(3) and Rule 6D.

2. Deductibility of Surtax Liability:
The assessee, a public limited company, claimed a deduction for surtax liability of Rs. 39,197. The authorities below rejected this claim, and the Special Bench followed the precedent set in Amar Dye Chem Ltd. vs. ITO, holding that such a deduction was not allowable. Consequently, the assessee's objection regarding the surtax liability was rejected.

3. Disallowance of Travelling Allowance under Rule 6D:
The assessee objected to the disallowance of Rs. 9,160 as part of the travelling allowance under Rule 6D, notwithstanding the favorable decision by the Delhi Bench in Bharat Commerce & Industries vs. ITO. The assessee had initially added back Rs. 9,160 as part of travelling expenses not allowable under Rule 6D but later claimed it as an allowable expenditure based on the Delhi Bench's decision.

The Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, interpreting Section 37(3) and Rule 6D to cover the entire period an employee spends outside the headquarters, including the daily allowance. The CIT(A) emphasized that Section 37(3) aimed to restrict unduly large amounts spent on daily allowances and other travel-related expenses.

The assessee's counsel argued that the expenditure disallowed was legitimate business expenditure and would have been allowed under Section 37(1) but for the alleged restriction in Section 37(3). The counsel contended that the restriction was applied incorrectly, as the true import of Section 37(3) was misunderstood by the authorities. The counsel further argued that "expenditure incurred in connection with travelling" should only include expenses incurred during the actual travel from Point A to Point B and not the expenses incurred after reaching the destination.

The Tribunal examined the legislative intent behind Section 37(3) and Rule 6D, considering the Finance Minister's Budget Speech of 1964-65, which highlighted the need to curb unduly large expenditures on daily allowances and other travel-related expenses. The Tribunal concluded that the phrase "in connection with travelling" includes hotel expenses incurred at the place of destination and not just during the transit.

The Tribunal also referred to judicial interpretations and dictionary meanings of the word "travel," concluding that hotel expenses incurred at the destination are part of the "travelling expenses" within the meaning of Section 37(3) and Rule 6D. The Tribunal confirmed the CIT(A)'s interpretation that the entire period spent by an employee outside the headquarters, including the stay at the destination, should be considered for disallowance under Section 37(3) and Rule 6D.

The Tribunal dismissed the appeal, upholding the CIT(A)'s order and confirming the disallowance of Rs. 9,160 as part of the travelling allowance under Rule 6D.

Separate Judgments:
The Vice President and Judicial Member concurred with the main judgment, emphasizing that the restriction under Rule 6D applies only to daily allowances for hotel stays and not to other business-related expenses incurred during the stay. They agreed that the expenditure incurred by the assessee, though reasonable, falls within the category of expenses subject to the limitations of Rule 6D and Section 37(3).

Conclusion:
The Tribunal dismissed the appeal, confirming the disallowance of the travelling allowance under Rule 6D and rejecting the claim for deduction of surtax liability. The interpretation of Section 37(3) and Rule 6D was upheld, including hotel expenses incurred at the destination within the scope of "travelling expenses."