1989 (7) TMI 19 - HC - Income Tax

Court expands Income-tax Act perquisites, allows cane cess interest & legal expenses as business expenditure

The court ruled in this case that the perquisites under section 40(c)(iii) of the Income-tax Act, 1961 should not be limited to the terms of rule 3 of the ... Accounting, Business Expenditure, Company, Disallowance, Expenditure On Benefit Or Perquisite To Director, Interest, Litigation Expenditure Issues Involved:1. Justification of the Tribunal's decision regarding perquisites under section 40(c)(iii) of the Income-tax Act, 1961.2. Allowability of interest on cane cess as a business expenditure.3. Allowability of legal expenses incurred in connection with a writ petition against the Sugar Control Order as business expenditure.Issue-wise Detailed Analysis:1. Justification of the Tribunal's Decision Regarding Perquisites:The first issue revolves around whether the Tribunal was justified in holding that the perquisites in terms of rule 3 of the Income-tax Rules, 1962, alone would be the ceiling in the hands of the assessee-company under section 40(c)(iii) of the Income-tax Act, 1961. The Income-tax Officer had disallowed Rs. 22,664 on account of certain perquisites, including concessional residential accommodation. The Commissioner of Income-tax (Appeals) confirmed this disallowance. However, the Tribunal accepted the assessee's plea, referencing the Calcutta High Court's decision in Britannia Industries Co. Ltd. [1982] 135 ITR 35, which supported the view that perquisites in terms of rule 3 of the Income-tax Rules, 1962, alone would be the ceiling. This court, following the decision in CIT v. Ashoka Marketing Ltd. [1990] 181 ITR 493, answered the first question in the negative and in favor of the Revenue.2. Allowability of Interest on Cane Cess as Business Expenditure:The second issue pertains to whether the interest paid or payable for the arrear cess for delayed payment should be allowed as a legitimate business expenditure. The assessee claimed a deduction for interest on cane cess amounting to Rs. 4,59,953, which was not initially considered by the Income-tax Officer or the Inspecting Assistant Commissioner. The Commissioner of Income-tax (Appeals) denied the deduction, relying on a Patna High Court decision that quashed the levy of interest. However, the Tribunal accepted the assessee's claim, noting that the Bihar Sugarcane Ordinance, 1968, had validated the levy of interest retrospectively. The court held that the liability for interest was outstanding and constituted a liability, even though no separate provision was made. The Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 was cited, establishing that a liability accrues even if not entered in the books of account. The court concluded that the interest on cane cess was allowable as a deduction, answering the second question in the affirmative and in favor of the assessee.3. Allowability of Legal Expenses Incurred in Connection with a Writ Petition:The third issue involves whether legal expenses incurred in connection with a writ petition filed against the Sugar Control Order should be allowed as business expenditure. The assessee incurred Rs. 11,695 in legal expenses related to a writ petition challenging the Sugar Control Order and seeking permission to collect excess sugar prices. The Income-tax Officer disallowed the expenses, but the Commissioner of Income-tax (Appeals) allowed them, stating that the writ petition was filed in the interest of the business. The Tribunal upheld this view, referencing the Supreme Court's test in Malayalam Plantations Ltd. [1964] 53 ITR 140. The court rejected the Revenue's contention that section 80VV was applicable, as the writ petition was not related to determining liability under the Income-tax Act. The court applied the principles from CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166, which allow for expenses incurred to protect the business from coercive processes and ensure future profits. The court concluded that the legal expenses were allowable as business expenditure, answering the third question in the affirmative and in favor of the assessee.Conclusion:In summary, the court answered the first question in favor of the Revenue, while the second and third questions were answered in favor of the assessee. The court held that the perquisites under section 40(c)(iii) should not be limited to the terms of rule 3 of the Income-tax Rules, 1962. However, the interest on cane cess and the legal expenses incurred in connection with the writ petition were deemed allowable as business expenditures.