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1998 Supreme(Guj) 750
IN THE HIGH COURT OF GUJARAT
R. K. ABICHANDANI, KUNDAN SINGH, JJ.
Commissioner of Income-Tax - Petitioner
Versus
Ambica Mills Ltd. - Respondent
Income-tax Reference No 199 of 1983
Decided On : 13-04-1998
For the Petitioner:P.G. Desai with Manish R. Bhatt, Advocates.
For the Respondent:Hansa B. Punani, Advocate.
1. Medical expenses and telephone expenses provided to managing directors are benefits within the meaning of section 40(c)(i) and, therefore, disallowed under section 40A(5). 2. Personal accident insurance premiums paid by the company for its managing directors are not considered benefits or perquisites and, therefore, not disallowed. 3. Expenditure incurred for obtaining a feasibility report for a mini steel plant is capital in nature and not deductible as business expenditure. 4. Depreciation is allowed on RCC roads constructed by the assessee, but development rebate is not allowed as roads are not mentioned in section 33, which provides for development rebate.
Headnote:
INCOME TAX - DISALLOWANCE OF EXPENDITURE - MEDICAL EXPENSES, TELEPHONE EXPENSES, ACCIDENT INSURANCE PREMIUM, FEASIBILITY REPORT, RCC ROADS, MACHINERY DIVISION - SECTION 40A(5), 32, 33, 80-I - INTERPRETATION AND APPLICATION.
Fact of the Case:
The assessee, a company engaged in manufacturing textiles, steel tubes, machinery, gas cylinders, and chemicals, claimed deductions for medical expenses, telephone expenses, accident insurance premiums, feasibility report expenses, depreciation, and development rebate on RCC roads, and relief under section 80-I for profits from the machinery division.
Finding of the Court:
1. Medical expenses and telephone expenses incurred by the company for its managing directors were held to be benefits within the meaning of section 40(c)(i) and, therefore, disallowed under section 40A(5). 2. Personal accident insurance premiums paid by the company for its managing directors were not considered benefits or perquisites and, therefore, not disallowed. 3. Expenditure incurred for obtaining a feasibility report for a mini steel plant was held to be capital in nature and not deductible as business expenditure. 4. Depreciation was allowed on RCC roads constructed by the assessee, but development rebate was not allowed as roads are not mentioned in section 33, which provides for development rebate. 5. The claim for deduction under section 80-I for profits from the machinery division was held to be not covered by the Tribunal's earlier order and was remanded for reconsideration.
Issues: 1. Whether medical expenses, telephone expenses, and accident insurance premiums should be disallowed under section 40A(5) of the Income Tax Act, 1961? 2. Whether the expenditure incurred for obtaining a feasibility report for a mini steel plant should be allowed as business expenditure? 3. Whether depreciation and development rebate should be allowed in respect of RCC roads constructed by the assessee? 4. Whether the assessee was entitled to relief under section 80-I of the Income Tax Act, 1961, for profits from the machinery division?
Ratio Decidendi: 1. Medical expenses and telephone expenses provided to managing directors were held to be benefits within the meaning of section 40(c)(i) and, therefore, disallowed under section 40A(5). 2. Personal accident insurance premiums paid by the company for its managing directors were not considered benefits or perquisites and, therefore, not disallowed. 3. Expenditure incurred for obtaining a feasibility report for a mini steel plant was held to be capital in nature and not deductible as business expenditure. 4. Depreciation was allowed on RCC roads constructed by the assessee, but development rebate was not allowed as roads are not mentioned in section 33, which provides for development rebate. 5. The claim for deduction under section 80-I for profits from the machinery division was held to be not covered by the Tribunal's earlier order and was remanded for reconsideration.
Final Decision: 1. Question No. 1 was answered in the negative against the assessee as regards medical expenses and telephone expenses, and in the affirmative against the Revenue as regards accident insurance premium. 2. Question No. 2 was answered in the negative against the assessee and in favor of the Revenue. 3. Question No. 3 was answered partly in favor of the assessee and partly in favor of the Revenue. 4. Question No. 4 was answered in the negative and remanded for reconsideration.
JUDGMENT :
R. K. ABICHANDANI, J.
1. The Income-tax Appellate Tribunal, Ahmedabad, has referred the following four questions for the opinion of this court under section 256(1) of the Income Tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the medical expenses, telephone expenses and accident insurance premium should not be disallowed under section 40A(5) of the Income Tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that a sum of Rs.1,40,000 paid by the assessee to Dastur and Co. for obtaining feasibility report for a project should be allowed as business expenditure ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that depreciation and development rebate should be allowed to the assessee in respect of RCC roads constructed by the assessee ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that in respect of the machinery installed in its machinery division the assessee was entitled to relief under section 80-I of the Income Tax Act, 1961 ?"
2. The matter relates to the assessment year 1972-73. In its return of income filed on June 30, 1972, the assessee-company which carried on the business of manufacturing textiles, steel tubes, machinery, gas cylinders and chemicals, claimed deduction of the expenditure that it incurred by providing medical expenses, telephone expenses and personal accident insurance premiums of three managing directors of the company. The Income-tax Officer disallowed these expenses and added them to the income of the assessee under section 40A(5) of the said Act. In appeal, the Commissioner of Income-tax (Appeals) deleted all these three items in respect of which the assessee incurred expenditure, from the computation of the disallowance. The Tribunal held in appeal that the reimbursement of medical expenses, telephone expenses, etc., did not amount to "perquisite" within the meaning of section 40A(5) of the Act and confirmed the order of the Commissioner of Income-tax (Appeals) on that count.
3. This question had arisen in the assessee's own case in Income-tax Reference No. 277 of 1987, decided on March 11, 1998 (Ambica Mills Ltd. v. CIT [1998] 231 ITR 583 (Guj)), in respect of the assessment years 1980-81 and 1981-82, so far as medical reimbursement, is concerned. Following the decision of this court in Gujarat Steel Tubes Ltd. v. CIT [1994] 210 ITR 358 and for the reasons recorded in our judgment dated March 11, 1998, in I. T. R. No. 277 of 1987 (Ambica Mills Ltd. v. CIT [1998] 231 ITR 583), we hold that reimbursement of medical expenses and telephone expenses to the managing directors would be benefits within the meaning of the provisions of section 40(c)(i) of the Act and, therefore, the expenditure incurred by the assessee-company in respect of these items is required to be computed in the disallowance under section 40(c) read with section 40A(5) of the Act. The Tribunal, therefore, in our view, committed an error in holding that the medical expenses and telephone expenses should not be disallowed. Question No. 1 is, therefore, answered in the negative against the assessee as regards these two items of medical expenses and telephone expenses.
4. As regards the expenditure incurred on payment of insurance premiums in respect of the policies that the assessee-company had taken out for the managing directors, the question is concluded by our decision in the assessee's own case in I.T.R. No. 88 of 1983 (Ambica Mills Ltd. v. CIT [1999] 235 ITR 264). A similar question had also arisen in I.T.R. No. 147 of 1989 (CIT v. Cama Motors Pvt. Ltd. [1998] 234 ITR 699), which came to be considered in respect of another assessee. As held by us, the question whether premium paid for policy taken out for
