Commissioner of Income Tax vs Raipur Manufacturing Co.

M.S. Shah, J.—At the instance of Revenue, the following questions of law have been referred to this Court by the Tribunal, Ahmedabad Bench, ''B'', arising from its order in ITA No. 1494/Ahd/81, in respect of the asst. yr. 1978-79.

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that claim of the assessee for the payment of royalty of Rs. 19,449 for the use of trade mark was allowable as revenue expenditure ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs. 9,918 paid to the managing director for reimbursement of medical expenditure was liable to be excluded while computing disallowance under s. 40(c) of the IT Act, 1961 ?"

As far as Question No. 1 is concerned, the same arises from the assessee''s claim for deduction of sum of Rs. 19,449 as royalty payment for the use of trade mark "Tebilized". The ITO disallowed the claim. In appeal the CIT upheld the contention of the assessee and allowed the deduction holding it to be revenue expenditure. The Tribunal upheld the decision of the CIT(A).

At the hearing of the present reference, both the learned advocates agreed that the facts giving rise to the question No. 1 are similar to the facts which had given rise to an identical question in IT Ref. No. 200 of 1983 in which we have answered the question as per our decision dt. 9th Oct., 1995 [Since reported as CIT vs. Ashoka Mills Ltd.]. There is no dispute about the fact that the agreements between Mettur Beardsell Ltd. and the assessee-company in the present case were the same as the agreement between Mettur Beardsell Ltd. and Ashok Mills Ltd., assessee-company in IT Ref. No. 200 of 1983 (supra). After a detailed discussion, we have already held in the said decision dt. 9th Oct., 1995 that the amount of royalty paid for user of trade mark "Tebilized" was a revenue expenditure. Following the said decision, we hold that the expenditure incurred by the assessee-company for payment of royalty for the trade mark was a revenue expenditure. Accordingly, our answer to question No. 1 is in the affirmative, i.e., in favour of the assessee and against the Revenue.

As far as question No. 2 is concerned, the facts are that the ITO while determining the value of remuneration for the purpose of disallowance under s. 40(c) of the IT Act ("Act" for short) included the reimbursement of medical expenses for the managing director. In appeal, the CIT(A) directed the ITO to exclude a sum of Rs. 9,918 being reimbursement of medical expenses in computing the remuneration paid to the managing director under s. 40(c) of the IT Act. In appeal preferred by the Revenue, the Tribunal upheld the decision of the CIT(A). At the instance of the Revenue, therefore, the above question No. 2 has been referred to this Court under s. 256(1) of the Act. 5. At the hearing of the present reference, the learned advocate appearing for both the sides agreed that answer to the above question is covered by the opinion of this Court in the case of Commissioner of Income Tax Vs. Deepak Family Trust No. 1 and Others, wherein this Court has held that reimbursement of medical expenses incurred by the director is benefit to the director within the meaning of s. 40(c)(i) of the Act. Section 40(c)(i) provides that in the case of any company any expenditure which results directly or indirectly in the provision of any remuneration or benefit of amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person shall not be allowable deduction if that deduction in respect of the aggregate of such expenditure and allowance in respect of any one person exceeds Rs. 72,000 per year. This section, therefore, prescribes the ceiling of Rs. 72,000 for the permissible deduction of the expenditure incurred by the company which results directly or indirectly in the provision of "any remuneration, benefit or amenity" to a director. In the case of Gujarat Steel Tubes Ltd. (supra), this Court held that the phrase "any remuneration, benefit or amenity" is of wide amplitude and it covers benefit or amenity in cash or in kind. In view of the clear language of aforesaid sub-clause (i) the medical reimbursement would be covered by s. 40(c). In our view, therefore, the Tribunal was not right in excluding the sum of Rs. 9,918 paid to the managing director for the reimbursement of the medical expenses, while computing disallowance under s. 40(c) of the Act. Accordingly, our answer to question No. 2 is in the negative, i.e., in favour of the Revenue and against the Assessee.

There shall be no order as to costs.