Cellulose Products of India Ltd. vs Commissioner of Income Tax

Rajesh Balia, J.—By a consolidated order, the Tribunal, Ahmedabad Bench B has referred the following six questions for our decision at the instance of the assessee :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the commission paid to the managing directors is includible in remuneration while computing the disallowance under s. 40(c) of the Act ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amount of Rs. 25,125 paid as foreign exchange difference arising out of deferred payment of purchase price of machinery, was capital expenditure ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that no depreciation is admissible in respect of machinery installed in earlier years for scientific research and development ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that payment of surtax is not admissible expenditure while computing the total income ?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the factory ''road'' cannot be treated as a ''plant'' and, therefore, no investment allowance in respect of the cost of road amounting to Rs. 2,47,143 is admissible ?

(6) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that weighted deduction under s. 35 is not available in respect of export outward freight charges amounting to Rs. 1,57,903 ?"

Learned advocate for the assessee D. A. Mehta does not press for decision in respect of any of the questions referred to above. In that view of the matter we decline to answer the questions referred at the instance of the assessee.

The following questions of law have been referred for our decision by the Tribunal at the instance of Revenue :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal has been right in law in holding that simply because the managing directors were making personal use of the telephones installed at their residences, nothing can be taxed as perquisites so far as the company is concerned ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal has been right in law in allowing whole of telephone expenses incurred on the telephone installed at the residence of the managing directors ?"

The assessee has claimed an amount on account of telephone expenses at the residence of two managing directors and two other employees totalling to Rs. 12,834. Out of this amount the ITO has included half of the amount of telephone bills paid by the company in computing the remuneration, salaries, perquisites, benefits and amenities provided to these persons for the purposes of s. 40(c) in the case of directors and s. 40A(5) in case of employees for calculating maximum limit upto which remuneration paid to these persons could be considered as allowable expenditure. The order was confirmed by the CIT(A). However the Tribunal following its earlier decision in respect of asst. yr. 1974-75 relating to the same assessee had accepted the contention of the assessee and has held that it could not be treated as perquisite provided to directors and employees and following that decision for the asst. yr. 1974-75 in R. A. No. 2156/Ahd/1979 decided on 21st Oct., 1980, the claim of the assessee was allowed in toto and the amount of telephone bills paid by the company in respect of telephone bills of the telephones installed at the residence of aforesaid four persons were not included in computing the remuneration and the value of benefits, perquisites and amenities etc. for the purpose of s. 40A(5)/40(c) of the IT Act. Though the order of earlier year has not been attached with the annexures which has been made part of the statement of case from the order of CIT(A), we find that the Tribunal has in the earlier case reached a finding "that there was no evidence on record to show that the telephone was installed at the residence of managing directors to give benefits or amenities to the persons". That finding in respect of the asst. yr. 1974-75 does not appear to have been challenged as per the learned counsel for the Revenue.

The assessee in the present case is a company. The question referred relates to expenses incurred by it for the telephone installed at the residence of the managing director.

The relevant part of s. 40(c) as was in force at the relevant time reads as under :

"(c) in the case of any company -

(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,

(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit,

if in the opinion of the Assessing Officer (AO) any such expenditure or allowance as is mentioned in sub-cls. (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause 9(i) shall, in no case, exceed".

Perusal of above provision indicates that expenses which results in making provision for any remuneration or benefit or amenity directly or indirectly for the director is subjected to restriction on allowable limit of deductions on that account for the purpose of computing profits or gains of business of the assessee. So far as any direct payment is made or a benefit or amenity is made available directly for such director, or person, it poses no difficulty. However, where no such direct benefit or amenity is made available to such director or person, it depends on facts and circumstances of each case whether expenses incurred by the company has resulted in indirect benefit or amenity to him. When any facility is provided by the company to its director or any other person for the purpose of its business, it cannot be said that company has incurred any expenditure which resulted in any benefit or amenity directly. In that event, it has to be found as a fact that any indirect benefit or amenity has accrued to such director or person.

The provision under s. 40A(5) which provides for permissible limit of deduction on account of expenses incurred by assessee in providing for salaries, perquisites and benefits to its employees are, for the present purpose, in substance subject to same conditions.

In the present case there is a finding of fact recorded by the Tribunal that there was no evidence that telephone was installed at the residence of the managing directors to give benefits or amenities to the persons. In the face of this finding there cannot be any application of provisions of s. 40A(5) or s. 40(c) resulting in direct provision of remuneration, benefit, amenity or perquisite in favour of the said category of persons. So far as the question whether providing of telephone facility at the residence of directors and employees any indirect benefit has been made available to these persons, the Tribunal has not recorded any finding. Without any such finding in favour of the Revenue or against the assessee, the provision of s. 40A or 40(c), in our opinion, cannot be attracted.

Accordingly, we answer the aforesaid questions referred to us at the instance of Revenue in affirmative that is to say in favour of the assessee and against the Revenue. There shall be no order as to costs.