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TMI Blog1981 (8) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... griculture amounting to Rs. 81,847. It was also claimed that the expenses on account of ex gratia payments to widows or dependants of the deceased employees as well as expenses on reimbursement of the medical expenses to the employees should be allowed as a deduction in working out the business income. The ITO, however, while allowing the weighted deduction on agricultural development allowance in respect of the expenses of Rs. 16,74,091, did not allow the weighted deduction in respect of depreciation amounting to Rs. 64,732 and scientific research expenses in the field of agriculture amounting to Rs. 81,847. The ITO did not accept the other claims of the assessee-company. It is not necessary to refer in detail to the order of the ITO. The assessee, being aggrieved by the aforesaid order, went up in appeal before the AAC. The AAC upheld the action of the ITO except on the issue of the weighted deduction for expenses amounting to Rs. 64,732 in respect of which the AAC held the weighted deduction on account of agricultural development allowance, as laid down by s. 35C, should be allowed. Against the aforesaid order of the AAC, both the assessee as well as the Revenue went up in app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the I.T. Act, 1961 : " (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that no weighted deduction on account of agricultural development allowance under section 35C of the Income-tax Act, 1961, was admissible in respect of depreciation on assets used for the purpose of providing goods, services or facilities as laid down in section 35C(1)(b)? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the profit on exchange of Rs. 1,40,529 was liable to tax and was, therefore, includible in the total income of the assessee-company ? " At the instance of the Revenue, the Tribunal has referred the following two questions to this court under s. 256(1) of the I.T. Act, 1961 : " (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the monetary payments made by the assessee-company to its employees for reimbursement of medical expenses incurred by the employees did not represent expenditure resulting, directly or indirectly, in the provision of any benefit or amenity or perquisite to the said employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purpose of business or profession, should be allowed in computing the income chargeable under the head " Profits and gains of business ". We were further of the opinion that the expression " expenses incurred " as well as " allowance and depreciation " in ss. 30 to 36 had been similarly used. We were, therefore, of the opinion that, when the Legislature used the expression " any expenditure " in s. 37, it intended to cover both. We, thereafter, referred to the beneficial construction of accounting and held that two constructions were possible and, in that view of the matter, we were of the opinion that having regard to the purpose of the section and having regard to the language used it was possible to construe the depreciation claimed as expenditure incurred. If that construction was possible, the assessee was entitled to the benefit of a beneficial construction and in that view of the matter we were of the opinion that the Tribunal was right in holding that the depreciation debited in the accounts was expenditure incurred in terms of s. 44A of the I.T. Act, 1961. The same ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ators and farmers. The Appellate Assistant Commissioner, therefore, held that the amount of Rs. 81,847 on account of salaries, wages, etc., of personnel engaged in research, development and training programme in imparting knowledge and skill and demonstrating modern techniques and improved methods of curing of leaf tobacco would be entitled to the weighted deduction as laid down under section 35C. The assessee-company was aggrieved by the order of the Appellate Assistant Commissioner in holding that on depreciation amounting to Rs. 64,732 the weighted deduction under section 35C will not be admissible. The Revenue, on the other hand, was aggrieved by the order of Appellate Assistant Commissioner that on expenses of Rs. 81,847 the weighted deduction under section 35C should be allowed. Both the assessee-company and the Revenue have, therefore, come up on this issue in the present appeals before us. " Thereafter, the Tribunal has set out the relevant contentions of the learned lawyers appearing before the Tribunal. The Tribunal, on the aspect of (the expenses of) Rs. 81,847 in respect of scientific research and the agricultural development, observed, inter alia, as follows : " Elab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances permit for the use or consumption of an asset must be included in the charge for running the business. The provision for depreciation does not depend upon what the business 'can afford' as the debit therefor is an essential one, constituting not an appropriation of, but a charge against, profits for the period in question ....... During the usual yearly period a year's life has been 'consumed', however careful the activities of the engineer in maintaining the efficiency of machines, so that the cost of such consumption should be charged up against the profits of the appropriate period, however great may be the difficulty of measuring it. " Our attention was drawn, however, to the decision in the case of Ramnugger Cane and Sugar Co. Ltd. v. CIT [1981] 128 ITR 716, where this court observed that it was never the intention of the Legislature to give relief by way of any agricultural development allowance under s. 35C of the I.T. Act, 1961, to all concerned but only to a particular category. The allowance could be claimed by a company or a co-operative society engaged in the manufacture or processing of articles or things made out or by using any products of agricultur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1971] 81 ITR 641, a Calcutta High Court decision, which ultimately went to the Supreme Court, reported in [1979] 116 ITR 1 (SC), about the ratio of which we shall presently refer, observed, inter alia, as follows: "We have considered the rival submissions. In the case of Sutlej Cotton Mills Ltd. v. CIT [1971] 81 ITR 641 (Cal), the hon'ble High Court of Calcutta was dealing with the loss where the assessee-company earned profits in the assessment year 1954-55 which were remitted three years later resulting in loss due to devaluation of the Indian rupee and the hon'ble High Court of Calcutta held that this loss had nothing to do with the business and was due to an act of sovereign power which could not be allowed as a deduction. The facts here, however, are that there was no devaluation of currency and what was received by the assessee was on account of export sales, and the profit on exchange was the extra amount which the assessee received on account of export sales due to favourable foreign exchange rate at the relevant time and this was not a case of profits of an earlier year which were being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as trading profit of the assessee. We must emphasise that in this case the Tribunal has categorically made a finding that the amount represented profit on exchange. It is not a profit due, to fluctuation or escalation of price in respect of the export sales. This aspect is important to be borne in mind. Whether a devaluation profit in these circumstances would be taxable or not came up for consideration before us in Income-tax Reference No. 57 of 1977 (Indo-Burma Petroleum Co. Ltd. v. CIT [1982] 136 ITR 251 (Cal), where we referred to the several authorities. There we observed that the fundamental point that required consideration in matters of this type was whether the money was utilised for earning the profit as such which resulted in the sum of Rs. 1,68,157. In that case, as in the instant reference before us, the assessee was not a dealer in foreign exchange. The question that normally arises in such a situation is the accretion or the profit or the excess amount realised as a result of any trading activity of the assessee. Secondly, we have to address ourselves to the problem, if it is a profit, then, when did this profit arise ? Is it at the time of appreciation or depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the carrying on of the banking business." That, according to our opinion, is the true test whether the profit in question arose out of any trading activity. It is not sufficient to be taxable if it is in any way connected with the trade of the assessee. It must be as a result of a trading activity of the assessee or it must arise or result from the trading activity of the assessee. Merely because the holder of a currency gets something more than what it would have got otherwise would not transform the accretion into a trading profit unless the holding or the dealing in foreign exchange of the particular currency was the trading activity of the assessee concerned. In this case, there is no such finding. We referred to the observations of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, where the Supreme Court generally dealt with the nature of the taxability in case of both profit and loss on devaluation. Bat we pointed out, in the aforesaid decision of ours, that the point involved in the Supreme Court case was the allowability of a particular loss and we noted that the loss might be a loss occasioned by carrying on of the operation of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew our attention to the observations at p. 746, where the learned judge had referred to the decision of the Court of Appeal in England, in the case of Imperial Tobacco Co. Ltd. v. Kelly (Inspector of Taxes) [1943] 25 TC 292. There the facts as found by the Court of Appeal were significantly different. There the circumstances under which the dollars were sold could be treated to be arising in the course of the trade. Dealing with this, Lord Greene M R. observed at pp. 299-301 of the report as follows: " Unless I am greatly mistaken, this is a perfectly clear case. The facts may be put concisely in this way. A manufacturer in this country purchased the raw material of his manufacturing business in the United States of America. With a view to the buying season he provided himself in advance with dollar currency, with which he proposed to pay for the raw material which he was going to buy. He does not carry on the business of speculation in dollar currency; but the whole of his purchases of dollars are made in contemplation of the purchases of raw material which he is proposing to make, and not otherwise. Having furnished himself in a particular year with a quantity of dollars, the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, namely, dollars. I call dollars a 'commodity' not for the reason that they are not currency in this country, but because they have a characteristic which is common to other commodities, and is not shared by sterling, namely, that their value from day to day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do. The appellant company having provided themselves with this particular commodity, which they proposed to exchange for leaf tobacco, their contemplated transactions became impossible of performance, or were not in fact performed. They then realised the commodity which had become surplus to their requirements. When I say 'surplus to their requirements', I mean surplus to their requirements for the purpose and the only purpose for which the dollars were acquired. In these circumstances, they sell this surplus stock of dollars: and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction which would be completed by the purchase and delivery of the leaf and payment of the dollar purchase price for it. The sale that took place as a result of the Government order formed an integral part of one trading activity of the assessee. In those circumstances, the court of Appeal in England found that it could be treated as trading profit of the assessee. In the background of the facts as we have noted in the instant case there is no such finding. We must also refer to the decision of the Kerala High Court in the case of M. Shamsuddin & Co. v. CIT [1973] 90 ITR 323. There, for cashew kernels exported by the assessee-firm in respect of the forward contracts, prices used to be fixed in dollars and at the time of payment, the assessee would receive the rupee equivalent of the price. On account of such receipt by the assessee after the devaluation of the Indian currency on 6th June, 1966, the assessee had earned a profit of Rs. 2,54,862 which the assessee had claimed was a receipt of casual nature. The ITO held that the amount was taxable and his order was confirmed on appeal. On a reference, the High Court, agreeing with the Tribunal, held that as result of the devaluation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as perquisites of the employees which provide to the employee an amenity or benefit whether convertible into money or not and direct payments to the employees cannot be held to be a perquisite and, therefore, the expenses on medical reimbursement of the employees, which were direct payments to them for medical expenses incurred by them, do not come within the scope of perquisites for making the disallowance under s. 40A(5). On the other hand, the learned departmental representative, Shri Roy, relied on the wordings of s. 40A(5) and the proviso thereto in Support of his contention that even the direct payments to the employees can be treated to be a perquisite for the purpose of making the disallowance under s. 40A(5). We have considered the rival submissions. The various Benches of the Appellate Tribunal have been consistently holding the view that direct payments to the employees do not come within the scope of expenditure resulting directly or indirectly in the provision of any perquisite to an employee (whether convertible into money or not) for the purpose of working out the disallowance under section 40A(5). We, therefore, agree with the assessee's learned counsel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment and for which the reimbursement had been made. In the premises, in our opinion, the ratio of the said decision of this court mentioned hereinbefore will be applicable. Reliance was placed on the case of CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad). This decision, in our opinion, does not help the Revenue. It has been noted that they referred and applied the ratio of the principles of the decision of this court in the case of CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 and also referred to the Supreme Court leave application which was dismissed. In the view we have taken, we are of the opinion that the Tribunal was right on this aspect of the matter and question No. 1, at the instance of the Revenue, must be answered in the affirmative and in favour of the assessee. So far as question No. 2 is concerned, there is a categorical finding that the expenses in question were incurred by the assessee for commercial expediency. The Tribunal has observed, inter alia, as follows : " The last grievance in the assessee's appeal is against the disallowance of ex gratia payments estimated at Rs. 10,000 by the Income-tax Officer and confirmed in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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