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TMI Blog1998 (12) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... le under the Industrial Tribunal's award dated September 30, 1971, which was disputed by the assessee, should be allowed as a deduction while computing the income of the assessee ?" This is related to the claim of the assessee for deduction of a sum of Rs. 4,59,648 which became payable under the award of the Industrial Tribunal dated September 30, 1971. The Income-tax Officer has rejected the said claim on the ground that since the assessee is disputing its liability by challenging the award in higher forums and, therefore, no deduction can be allowed. The Tribunal allowed the appeal after the Appellate Assistant Commissioner has confirmed the order of the Income-tax Officer following its earlier decision in ITA No. 2352 and 2559/Ahd. of 1978-79, dated October 29, 1979, holding that the liability to pay enhanced salaries and wages to its employees under the award can be allowed in the year in question as a deduction while computing the income. The question answered is clearly governed by a decision of the Division Bench of this court to which one of us (A. R. Dave J.) was a party in ITR No. 154 of 1983, decided on April 1, 1998, and followed in the assessee's own case in the earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167 (Guj) and CIT v. Ahmedabad Kaiser-I-Hind Mills Co. Ltd. [1983] 141 ITR 472 (Guj). Following the aforesaid decisions, we answer question No. 2 in the affirmative that is to say, in favour of the Revenue and against the assessee. Question No. 3 reads as under : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to Rs. 53,423 ?" This question relates to the assessee's claim for deduction for the expenses incurred on account of issuance of certificate of shares, bonds, etc., as a consequence of amalgamation that took place between the company and the Bank of India Ltd. The Bank of India Ltd. amalgamated with the company with effect from April 1, 1971. It was the case of the assessee that as expenditure has been incurred after the amalgamation became effective on April 1, 1971, because of some administrative difficulties after the amalgamation in issuing share certificates, bonds, etc., same should be treated as expenditure allowable for the assessment year in question as business expenditure. Section 37 of the Act has twin requirements before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, replacing, or enlarging the profit yielding subject or income earning apparatus is ordinarily of capital nature. On the other hand, expenses incurred in the process of operating such profit-yielding subject or income-earning apparatus in the form of earning of profits is of revenue nature. Amalgamation of companies results in substance in acquisition of the transferor-company by the transferee-company resulting in alteration of its capital structure as well as frame work of business that is to say amalgamation is an event which concerns the corpus and in carrying on of the business, though it is a decision for the better and profitable running of the business. In 19 TC Lord MacMillan has opined on a construction of the contracts in question, that there was an agreement which calls for consideration. wherein the contractors were not dismissed of their contracts or failed to conduct their business but they merely amalgamated the company to share the profits and earning as between the contracting parties. Viewed from the aforesaid proposition one cannot fail to perceive that the scheme of amalgamation is a transaction which affects the basic framework of the profit-making a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the issue is whether the expenses are in fact part of the amalgamation process, The expenses necessary for bringing into existence amalgamation being one relating to the structure of business are capital in nature. The fact that the liability has been discharged actually after the amalgamation would not make any difference. This court in an unreported decision in New Commercial Co. Ltd. v. Addl. CIT (ITR No. 40 of 1972) has considered the question whether a sum of Rs. 10,000 paid by the assessee-company to the chartered accountant in relation to the scheme of amalgamation which was ultimately approved by this court was an admissible expense under section 37 of the Income-tax Act or not. The court took notice of the fact that the main object of this arrangement is to effect internal economics with a view to bring down the cost of production and to utilise the capital equipment to the maximum advantage of both the units so as to obtain the optimum production and to stop competition between the two units. The court held that obviously, the services of the chartered accountants were utilised in order to get the advice regarding this scheme of amalgamation by which certain per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 35B(1)(b)(viii) of the Act. The expenditure became eligible allowance at weighted deduction of the expenses which are incurred wholly and exclusively for services outside India in connection with or incidental to the execution of any contract for the supply of goods outside India or such goods and services or facilities. The claim has been denied by the Income-tax Officer solely on the ground that the assessee-company simply reimbursed in India the exchange and bank charges incurred-by Ilac Limited on its behalf. However, nothing has been stated about the purpose for which such expenses were incurred by the said Ilac Ltd. and whether the recipient company rendered any service as is referred in sub-clause (viii) on behalf of the assessee or not. In the absence of such enquiry, it is not possible to come to any conclusion about the allowability of weighted deduction. It is not envisaged in the provision that services mentioned in sub-clause (viii) must be rendered by the assessee personally and not through any agent. Nor is it envisaged that payment must be made only outside India for such services rendered outside India. It cannot also be said that if for rendering such service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to weighted deduction also cannot be decided solely on that basis. It must entail an inquiry whether the amount which was spent by the assessee by way of reimbursing to Ilac Ltd. was incurred wholly and exclusively for the purpose of such service outside India in connection with or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities which the assessee was to perform or execute outside India. Questions Nos. 5 and 6 which are interconnected, read as under : "(5) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to claim the entire amount of gratuity of Rs. 1,54,00,000 debited in the books of account under section 28 read with section 37 of the Act ? (6) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the balance amount of Rs. 69,85,759 was not allowable as gratuity liability even if the same was not provided for in the books of account of the assessee by holding that the appellant had followed the cash system of accounting in respect of the payment of gratuity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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