Commissioner of Income Tax vs Somany Pilkington Ltd.

N.K. Agrawal, J.—This is an application by the CIT, u/s 256(2) of the IT Act, 1961 (for short, "the Act"), seeking a direction to the Tribunal, Delhi Bench ''D'', Delhi, to refer, the opinion of this Court, the following questions of law for the asst. yr. 1981-82 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the sum of Rs. 19,021 representing commission paid to foreign agents u/s 35B(1)(b)(i) without giving any specific interpretation of various clauses contained in Section 35B(ii) of IT Act ?"

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 90,254 made on account of ex-gratia payment u/s 36(1)(ii) without discussing the provisions of that section ?"

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 25,000 made on account of disallowance towards building fund of Punjab & Haryana Chamber of Commerce was an allowable business expenditure ?"

"Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in deleting the addition of Rs. 23,872 made under s. 40(c) by relying on the case of Glaxo Laboratory India Ltd. vs. ITO (1986) 26 TTJ (Bom) 214 : (1986) 18 ITD 226 (Bom) and in not accepting the contention of the Department in law of the judgment of Delhi High Court in the case of Installment Supply P. Ltd. Vs. Commissioner of Income Tax, New Delhi, "

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition on Rs. 1,79,703 made under 80J by ignoring the decision of Kerala High Court in the case of Chembra Peak Estates Ltd. Vs. Commissioner of Income Tax, which is at par with the facts of the present case ?"

Question No. 1

The assessee claimed deduction u/s 35B of the Act on expenditures amounting to Rs. 1,54,152. The AO allowed deduction in respect of export promotion expenses amounting to Rs. 84,026 only and disallowed deduction in respect of the other items of expenditure. Assessee went in appeal against the disallowance of deduction claimed under other heads of expenditure. The CIT(A) allowed deduction u/s 35B of the Act in respect of commission amounting to Rs. 59,556. The Department challenged the order of CIT(A) before the Tribunal. On a concession made by the counsel for the assessee, the Tribunal withdrew the relief of deduction granted by the CIT(A) on expenditures amounting to Rs. 50,535. Deduction claimed by the assessee, in respect of the commission amounting to Rs. 19,021 paid to foreign agency for arranging export was allowed by the Tribunal. It is this order of the Tribunal allowing deduction of Rs. 19,021 u/s 35B which is under reference.

On a perusal of the order of the Tribunal, it is not clear as to which of the sub-clauses of cl. (b) of sub-Section (1) of Section 35B were attracted so as to allow deduction of the commission paid to the foreign agents. It was necessary to examine as to which sub-clause was attracted.

Supreme Court in Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., has observed as under :

"In order to get this kind of deduction, the onus lies heavily on the assessee to prove that the expenditure falls within any of the purposes set out in the various sub-clauses of cl. (b) of Section 35B(1). Merely because some activities took place outside India that will not qualify the expenditure for the deductions mentioned in Section 35B.

xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx In order to get this deduction, the assessee will have to prove that the expenditure was incurred during the previous year wholly and exclusively for the purposes set out in cl. (b) of s. 35B(1)(b). There cannot be any blanket allowance of the expenditure nor can there be any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the sub-clauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Some of the sub-clauses provide that if the expenditure is incurred in India, it cannot be allowed but in some of the sub-clauses this requirement is not there. In such cases, the expenditure may or may not be incurred in India. Every case will have to be examined in the light of the provisions of the sub-clauses and the facts provided by the assessee."

In the light of the observation made by the Supreme Court, it would be necessary to examine and verify, whether the expenditure incurred on the payment of commission to foreign agents would fall under any of the sub-clauses of cl. (b) of s. 35B(1) of the Act. The question is, therefore, remitted to the Tribunal for verifying the facts and to ascertain the activities in respect of which the expenditure was incurred by the assessee. It shall be kept in view that certain sub-clauses were omitted by the Finance (No. 2) Act, 1980, w.e.f. 1st April, 1981. If the expenditure has not been incurred on any of the activities specified in the sub-clauses of cl. (b) of s. 35B(1) of the Act, it would not qualify for deduction.

Question Nos. 2 & 3

Question No. 2 relates to the ex gratia payment and Question No. 3 is regarding a payment towards the building fund of Chamber of Commerce. These are the matters decided by the Tribunal on appreciation of evidence. Therefore, these do not give rise to any question of law. These are based on finding of facts and appreciation of evidence. Both the questions are, therefore, declined.

Question No. 4

This question relates to reimbursement of medical expenses in cash to the employees and the director.

Supreme Court in Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., has considered a similar question and has held that cash payment shall be treated as part of salary and will be subject to the limits or ceiling, if any, in that behalf but these cannot be brought within the purview of the words "any expenditure which results directly or indirectly in. the provisions of any benefit or amenity or perquisites."

This Court in Sukhjit Starch and Chemicals Ltd. Vs. Commissioner of Income Tax, also held, following the decision of Supreme Court in CIT vs. Mafatlal Gangabhai & Co. (P) Ltd. (supra), that reimbursement of medical expenses of the Director of a company is not a benefit or amenity within the meaning of s. 40(c) and s. 40A(5) of the Act and cannot be disallowed.

Question No. 4, thus, is no more res integra and is not a referable question of law and is, therefore, declined.

Question No. 5

The assessee claimed deduction under s. 80J of the Act at Rs. 1,79,703 on the ground that 3 glost kilns were separate industrial undertakings set up by the assessee during the year. It was claimed that those units satisfied the conditions laid down in s. 80J. Copies of the P&L a/c and balance sheets of all the three separate units were filed. The AO, however, took the view that the addition of a new glost kiln did not constitute a separate industrial undertaking but was merely an addition to the existing unit. The AO also held that no separate books of accounts had been maintained for any of the Kilns and separate books of account of the units were prepared by the assessee after estimating the sales and expenses in the case of each unit. The basis of such estimates was not explained by the assessee. The AO further noticed that there was no increase in the capital employed by the assessee during the year in question. The AO therefore, declined to allow deduction under s. 80J of the Act.

The CIT(A) on assessee''s appeal, allowed relief under s. 80J and directed the AO to verify the amount of capital employed by the assessee in each kiln and to allow deduction accordingly. The Tribunal dismissed Department''s appeal against the order of the CIT(A).

Shri R. P. Sawhney, learned senior counsel for the Department, has argued that a question of law does arise from the order of the Tribunal inasmuch as the findings recorded by the AO in his assessment order did not permit any deduction in respect of the profits of the newly-established unit of the assessee because the conditions laid down in s. 80J had not been fulfilled.

Shri Sawhney has placed reliance on three decisions of the Supreme Court. In Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner of Income Tax, West Bengal, , the question had arisen before the Supreme Court under s. 15C of the Indian IT Act, 1922 and the specific issue related to reconstruction of old business. It was held that the new industrial unit of the assessee could not be said to be reconstruction of his old business to the new undertaking. In Commissioner of Income Tax, West Bengal-I Vs. Indian Aluminium Co. Ltd., also, a similar matter was examined by the Supreme Court under s. 15C of the Indian IT Act, 1922. In that case, the assessee had established one more centre at Muri and also had made extension to the existing centres at Belur and Alupuram. It was held that benefit of s. 15C was rightly allowed to the assessee. In Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, the question before the Supreme Court related to the interpretation of the expression "capital employed".

The controversy raised in the question, in the case in hand, does give rise to a question of law. In the cases referred to above and, decided by the Supreme Court, the controversies were different. On a consideration of the controversy in the case of the assessee here, the following question of law is found to arise from the order of the Tribunal :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing deduction under s. 80J of the IT Act, 1961, though the assessee did not maintain separate books of accounts in relation to the new units and had drawn the balance sheet on estimate basis and, there was no increase in the capital employed and, thus, the assessee did not satisfy the conditions specified in s. 80J of the Act ?"

The Tribunal is directed to draw up a statement of case and refer the aforesaid question of law to this Court for opinion.