COMMISSIONER OF INCOME TAX Vs. AMBICA MILLS LIMITED

JUDGEMENT

(1.) THE Tribunal, Ahmedabad has referred the following four questions for the opinion of this Court under S. 256(1) of the IT Act, 1961 :

(2.) THE matter relates to the asst. year 1972 -73. In its return of income filed on 30th June, 1972, the assessee -company which carried on business of manufacturing textiles, steel tubes, machineries, gas cylinders and chemicals, claimed deduction of the expenditure that it incurred by providing the medical expenses, telephone expenses and personal accident insurance premiums of three managing directors of the company. The ITO disallowed these expenses and added them to the income of the assessee under S. 40A(5) of the said Act. In appeal, the CIT(A) 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 S. 40A(5) of the Act and confirmed the order of the CIT(A) on that count. This question had arisen in the assessee's own case in IT Ref. No. 277/87, decided on 11th March, 1998 [reported as Ambica Mills Ltd. vs. CIT (1998) 146 CTR (Guj) 195]. in respect of the asst. yrs. 1980 -81 and 1981 -82, so far as medical reimbursement is concerned. Following the decision of this Court in Gujarat Steel Tubes Ltd. vs. CIT (1994) 116 CTR (Guj) 82 : (1994) 210 ITR 358 (Guj) : TC 16R.718, and for the reasons recorded in our judgment dt. 11th March, 1998 (supra), we hold that reimbursement of medical expenses and telephone expenses to the managing directors would be benefits within the meaning of the provisions of S. 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 S. 40(c) r/w S. 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. The question No. 1 is, therefore, answered in the negative against the assessee as regards these two items of medical expenses and telephone expenses. 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 assessee's own case in IT Ref. No. 88 of 1983 [reported as Ambica Mills Ltd. vs. CIT (1998) 147 CTR (Guj) 347]. Similar question had also arisen in IT Ref. No. 147 of 1989 [reported as CIT vs. Cama Motors (P) Ltd. (1998) 147 CTR (Guj) 361], which came to be considered in respect of another assessee. As held by us, the question whether premium paid for policy taken out for the managing director would constitute benefit to the director within the meaning of S. 40 (c), would depend upon the nature of policy, who had taken it out and whose obligation was it to pay the premium. If the intention of the company by taking out such policy of insuring directors against personal accident was in fact to insure itself in respect of the liability that may arise towards the director as a result of the accident, then that situation would be different from a director himself taking out a personal accident insurance policy under which he would be obliged to pay the premium and not the company. If such premiums are reimbursed to the director, which is an obligation of the director himself to pay and not that of the company, qua the insurance company, then that would amount to a benefit to the director within the meaning of the provisions of S. 40(c) of the said Act. In the present case, it is not shown that the director himself wanted to take out the policy or that it was his own obligation to pay the premiums and in fact no such contention was canvassed by the assessee before the lower authority. The amount of premium was Rs. 1,182 for each of the two managing directors and Rs. 1,191 for the third managing director. It appears that the premiums were paid directly by the company which had taken out the policies in respect of these three directors. We, therefore, do not find any error of law committed by the Tribunal in holding that the personal accident insurance premium was not meant to be a benefit or perquisite to the directors and therefore, should not be disallowed. Question No. 1 to the extent it relates to the expenditure of insurance premium is, therefore, answered in the affirmative against the Revenue.

(3.) AS regards question No. 2, the assessee had claimed a sum of Rs. 1,40,000 as business expenditure on the ground that it was incurred in getting a feasibility report for putting up a mini steel plant. Admittedly, the project did not materialise. The ITO held that these expenses were not made wholly and exclusively for the purpose of business and disallowed them. The CIT(A) took note of the fact that one of the units of the assessee, manufactured steel tubes, and on that basis, held that the expenditure incurred in respect of the project of a mini steel plant, was an expenditure incurred for the purpose of business and granted relief to the assessee in that regard. The Tribunal, in appeal preferred by the Department, held that it had occasion to consider an identical issue in the assessee's own case for the asst. year 1962 -63 and for the reasons recorded in paragraph 40 of its earlier order dt. 31st March, 1979, it held that the said expenditure was incurred for the purpose of business and was, therefore, rightly allowed by the CIT(A). In paragraph 40 of the order of the Tribunal which it had referred to and which was read before us, there was reference to a project for manufacture of seamless pipes in that matter and the assessee's contention was that the expenditure that it had incurred was in the course of its own business of manufacture of pipes. It is in that context, that the Tribunal in para 40 of its order dt. 31st March, 1979 (ITA 688/Ahd/77 -78), to which it has referred, held that the assessee was admittedly carrying on business of manufacture of tubes and was having substantial income therefrom. It is in this context the Tribunal had earlier held that the expenditure incurred in respect of the project of manufacture of seamless pipes could be claimed for deduction as business expenditure by the assessee. In the present case, however, the expenditure was incurred by the assessee over getting feasibility report, for setting up a new mini steel plant, from M/s Dastur & Co. which project of course did not materialise. The mini steel plant which the assessee wanted to put up was quite different from its existing business of manufacturing steel tubes. The Tribunal proceeded on an erroneous footing that the question involved in the assessee's case pertaining to the asst. yrs. 1962 -63 to 1969 -70 which the Tribunal had decided on 31st March, 1979, was identical. As noted above, in that case the expenditure was incurred on project for manufacture of seamless pipes and not in respect of establishing any new mini steel plant. Similar question had arisen in CIT vs. S.L.M. Maneklal Ltd. (1977) 107 ITR 133 (Guj) : TC 16R.1221, wherein the assessee had claimed deduction in respect of the expenditure incurred on getting an expert opinion for erecting a foundry, which was to be started for manufacturing raw materials. This Court held that since the expenditure in question was incurred for the purpose of bringing into existence a capital asset, it must be held to be an expenditure of a capital nature within the meaning of S. 37 of the Act and hence, the deduction could not be allowed under that provision by treating it as business expenditure. In CIT vs. Shri Digvijay Cement Co. Ltd. (1986) 53 CTR (Guj) 274 : (1986) 159 ITR 253 (Guj) : TC 17R.1520, this Court had held that in order to determine whether an expenditure is of the nature of revenue or capital, the aim and object of the expenditure should be considered. An expenditure would be capital in nature if it is made with a view to bringing into existence an asset or an advantage of an enduring nature. But of course, it is not at all necessary that it should have had that result. In that case the Court was concerned with the expenditure in obtaining a feasibility report for setting up a shipyard, which report was not favourable for the project and no shipyard was in fact established. It was held that the expenses were incurred with a view to decide whether an asset or advantage of almost a permanent nature should be brought into existence or not and therefore, it was capital in nature and not deductible. In the present case also, the project of putting up a mini steel plant was a new project, which the assessee wanted to put up and it had, therefore, engaged M/s Dastur & Co. for giving a feasibility report in respect of such new project. The project of putting up a mini steel plant was entirely different from the existing business of the assessee of manufacturing steel tubes. The expenditure incurred for obtaining the feasibility report was, therefore, a capital expenditure and could not have been treated as revenue expenditure incurred in respect of the existing business of the assessee. The Tribunal, therefore, committed an error in allowing the said expenditure as business expenditure. Question No. 2 is accordingly answered in the negative against the assessee and in favour of the Revenue.