1998 (10) TMI 7 - HC - Income Tax

Court Decision: Income-tax Act - Assessee wins on disallowance, deductions allowed for feasibility studies & business expenses

The court ruled in favor of the assessee regarding the disallowance under section 40(c) of the Income-tax Act, distinguishing between 'commission' and ... Business Expenditure, Company, Capital Or Revenue Expenditure Issues Involved:1. Disallowance u/s 40(c) of the Income-tax Act, 1961.2. Limitation of expenditure u/r 6D of the Income-tax Rules.3. Deductibility of fees paid to Tata Sons Limited as business expenditure.4. Deductibility of reimbursement of expenses to Apex Geological Services Pvt. Ltd. and Holtec Engineers Pvt. Ltd. as business expenditure.Summary:Issue 1: Disallowance u/s 40(c) of the Income-tax Act, 1961The Tribunal held that the commission paid to the managing director cannot be taken into account for disallowance u/s 40(c). The court examined the distinction between 'commission' and 'remuneration' and concluded that the Legislature intended different meanings for these terms. The court noted that section 40(c) does not explicitly include 'commission,' unlike section 40(b). Therefore, the commission paid as a percentage of net profit to the managing director is not considered 'remuneration' under section 40(c). The court affirmed this view, favoring the assessee.Issue 2: Limitation of expenditure u/r 6D of the Income-tax RulesThe Tribunal's decision that the allowance of expenditure should be limited with reference to the whole of the previous year and not by splitting up each trip was contested. The court referred to its earlier judgment in CIT v. Coromandel Fertilisers Ltd., which held that the unit of expenditure for rule 6D is the trip, not the individual employee. The court answered this question in the negative, favoring the Revenue.Issue 3: Deductibility of fees paid to Tata Sons Limited as business expenditureThe assessee paid Rs. 2,29,306 to Tata Sons Ltd. for feasibility studies on new projects. The Income-tax Officer disallowed this, considering it as pre-commencement expenses. However, the Tribunal and the Commissioner of Income-tax (Appeals) held it as revenue expenditure. The court agreed, stating that the expenditure was for the profitable and effective utilization of surplus funds and did not result in acquiring a new asset of enduring nature. The court affirmed that the expenditure is revenue in nature and deductible.Issue 4: Deductibility of reimbursement of expenses to Apex Geological Services Pvt. Ltd. and Holtec Engineers Pvt. Ltd. as business expenditureThe assessee incurred Rs. 13,241 and Rs. 7,860 towards preliminary studies on limestone deposits. The Income-tax Officer disallowed these amounts, but the Tribunal and the Commissioner of Income-tax (Appeals) considered them as revenue expenditure. The court upheld this view, stating that the expenses were for exploring investment avenues for surplus funds and did not result in setting up a new business. The court concluded that the expenditure was wholly and exclusively for the purpose of the existing business and thus deductible.Conclusion:The court answered the first and third questions in the affirmative, favoring the assessee, and the second question in the negative, favoring the Revenue. The fourth question was also answered in favor of the assessee, affirming the deductibility of the expenses.