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1989 Supreme(Cal) 104
High Court Of Calcutta
Suhas Chandra Sen, Bhagabati Prasad Banerjee
COMMISSIONER OF INCOME-TAX - Appellant
Versus
INDIAN OXYGEN LTD. - Respondent
Income-Tax Reference 441 Of 1979
Decided On : 03/09/1989
Bagchi, D.PAL, M.SEAL
Provisions for payment of gratuity to employees, reimbursement of medical expenses to employees, and payments made in pursuance of agreements entered into in the course of business are allowable deductions. Bad debts are also allowable deductions.
Headnote:
INCOME TAX - Deduction - Provision for payment of gratuity to employees - Reimbursement of medical expenses to employees - Payment to British Oxygen Ltd., London - Bad debt claim - Allowability.
Fact of the Case:
The assessee claimed a deduction for provision for payment of gratuity to employees, reimbursement of medical expenses to employees, payment to British Oxygen Ltd., London, and a bad debt claim. The Income Tax Officer disallowed the claims, but the Appellate Assistant Commissioner allowed them. The Tribunal upheld the Appellate Assistant Commissioner's order.
Finding of the Court:
The High Court held that the provision for payment of gratuity to employees, reimbursement of medical expenses to employees, and payment to British Oxygen Ltd., London, were allowable deductions. The High Court also held that the bad debt claim was allowable.
Issues: 1. Whether the provision for payment of gratuity to employees was an allowable deduction. 2. Whether the amounts paid to the employees as reimbursement of medical expenses incurred by them resulted in the provision of any perquisites to the employees. 3. Whether the sum paid to British Oxygen Ltd., London, was a permissible deduction. 4. Whether the bad debt claim was allowable.
Ratio Decidendi: 1. The provision for payment of gratuity to employees was an allowable deduction because it was a liability incurred in the course of the business. 2. The amounts paid to the employees as reimbursement of medical expenses incurred by them did not result in the provision of any perquisites to the employees because the expenses were incurred for the benefit of the employees and not for the benefit of the employer. 3. The sum paid to British Oxygen Ltd., London, was a permissible deduction because it was a payment made in pursuance of an agreement that was entered into in the course of the business. 4. The bad debt claim was allowable because the debt had become bad and the assessee had lost all hopes of recovery.
Final Decision: The High Court answered all the questions in favor of the assessee.
( 1 ) THE Tribunal has referred the following questions of law to this court under Section 256 (1) of the Income-tax Act, 1961 ("the Act") :"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 40,10,165 representing a provision made for payment of gratuity to the employees was an allowable deduction in computing the profits and gains of the assessee's business ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amounts paid to the employees as reimbursement of medical expenses incurred by them did not result directly or indirectly in the provision of any perquisites to the employees within the meaning of Section 40a (5) of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 36,936 paid by the asses-see to British Oxygen Ltd. , London, in pursuance of the agreement dated October 1, 1958, was a permissible deduction under Section 37 (1) of the Income-tax Act, 1961 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting aside the order of the Appellate Assistant Commissioner and restoring the order of the Income-tax Officer in respect of the bad debt claim amounting to Rs. 1,05,406 ?"
( 2 ) IN this case, the assessment year involved is 1972-73 for which the relevant accounting year is the year ending on September 30, 1971.
( 3 ) IN view of the judgment of this court, in the case of CIT v. Eastern Spinning Mills Ltd. [1980] 126 ITR 686, question No. 1 is answered in the affirmative and in favour of the assessee.
( 4 ) IN view of the decision of this court in the case of Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827 question No. 2 is also answered in the affirmative and in favour of the assessee.
( 5 ) QUESTION No. 3 is covered by the assessee's own case, viz. , CIT v. Indian Oxygen Ltd. and also in view of the principles laid down in the assessee's own case in CIT v. Indian Oxygen Ltd. this question is also answered in the affirmative and in favour of the assessee.
( 6 ) SO far as question No. 4 is concerned, the finding of the Tribunal is as follows :"the assessee had a branch in Pakistan. In 1940, another company, Pakistan Oxygen Ltd. , was formed. The branch of the assessee-company was closed, but an amount of Rs. 1,40,511 remained lying with the branch at Karachi as it was not allowed to be remitted to India. In 1965, due to the conflict between India and Pakistan that amount became vested in the Custodian of Enemy Properties. The Government of India provided a relief of 25 per cent. of the claim of the assessee subject to a certain condition that the assessee did not receive anything out of its claim for Rs. 1,40,511 from the Government of Pakistan. After adjusting the amount received from the Government of India, the assessee wrote off the balance of Rs. 1,05,406 as a bad debt. The Income-tax Officer disallowed the claim of the assessee for bad debt of Rs. 1,05,406 as premature. The Appellate Assistant Commissioner took the view that the debt had become bad as nothing had been recovered for the last 20 years and consequently he allowed the assessee's claim. Before us it is submitted by the learned representative of the Department that the assessee's branch in Pakistan was closed in 1949 and the amount of Rs. 1,40,511 was lying with the Chartered Bank, Karachi, since then. He has next submitted that the amount became a capital asset of the assessee and that the loss was a capital loss and could not be allowed as deduction as a bad debt. Reliance is placed on the decision in the case of CIT v. Canara Bank Ltd. in support of his contention. Learned counsel for the assessee, on the other hand, has urged that the amount of Rs. 1,40,511 was part of the assessee's circulating capital and that it was kept in the current accoun
