Dorr-Oliver (India) Ltd. vs Commissioner of Income Tax

R.S. Mohite, J.—The questions referred by the Tribunal u/s 256(1) are as under:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the sum of Rs. 8,80,518, Rs. 3,31,144 being part of the compensation and fees payable to M/s Dorr-Oliver Inc. of USA under the agreement of 1-1-1959 was not admissible as deduction in the computation of the assessees total income ?

(2) Whether, on the facts and in the circumstances of the case the Tribunal ought to have held that the entire amount of Rs. 19,21,847 and Rs. 7,22,526 being the compensation and fees payable to Dorr-Oliver Inc. of USA was deductible in arriving at the assessees total income ?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is not entitled to the surtax liability being allowed as a deduction in the computation of its income ?

(4) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disallowances out of expenditure incurred on payment of salaries and provision of perquisites to employee directors should be made under the provisions of Section 40(c) of the Income Tax Act and not u/s 40A(5) ?

(5) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the computation of disallowances u/s 40A(5) of the Income Tax Act, in respect of employees who have retired during the year, the limit of Rs. 5,000 per month is applicable for the salary paid during the period upto the date of retirement and separate overall limit of Rs. 60,000 is applicable in respect of retirement benefits ?

(6) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disallowances out of expenditure incurred on payment of salaries and provision of perquisites to employee directors should be made under the provisions of Section 40(c) of the Income Tax Act and not under those of Section 40A(5) ?

(7) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to terminal allowance of Rs. 7,22,065 u/s 32(1)(iii) on the takeover of its business as a going concern by M/s Hindustan Dorr-Oliver Ltd. ?

Of these questions, question Nos. 1, 2 and 3 are referred at the instance of the assessee whereas question Nos. 4, 5, 6 and 7 are referred at the instance of the department.

Our answers to these questions are as under:

As regards question Nos. 1 and 2 are concerned, counsel appearing for the parties are agreeable that the questions have been answered by this Court in the case of Dorr-Oliver (India) Ltd. Vs. Commissioner of Income Tax, in respect of assessment year 1975-76. In the circumstances, the aforesaid questions are answered in the negative and in favour of the revenue.

As far as question No. 3 is concerned, counsel for the parties are agreeable that the aforesaid question has been answered by this Court in the case of Lubrizol India Ltd. Vs. Commissioner of Income Tax, and also by the judgment of the Supreme Court in the case of Smith Kline and French (India) Ltd. and Others Vs. Commissioner of Income Tax, . In view of the aforesaid decision of the Bombay High Court and the Supreme Court, the question is therefore answered in the affirmative and in favour of the revenue.

Insofar as question No. 4 is concerned, counsel for the parties are agreeable that the question has been answered by this Court in the case of Commissioner of Income Tax Vs. Hico Products (P.) Ltd., and approved by the Supreme Court in the case of Commissioner of Income Tax, Delhi (Central-I) Vs. M/s. Continental Construction Ltd., . The question is therefore, answered in the affirmative and in favour of the assessee, to extent allowable u/s 40(c).

Insofar as question No. 5 is concerned, counsel for parties agree that the question is answered by the judgment of this Court in the case of Commissioner of Income Tax Vs. Mercantile Bank Ltd., which judgment has been followed by this Court in the case of The Commissioner of Income Tax Vs. Citibank N.A., . The question is therefore, answered in the negative and in favour of the revenue.

As far as question No. 6 is concerned, counsel for the parties submit that the question is answered by this Court in the case of CIT v. Hico Products (P) Ltd. (supra). The question is therefore, answered in the affirmative and in favour of the assessee to the extent that disallowance is permissible u/s 40(c).

Insofar as question No. 7 is concerned, it would be necessary to mention a few facts which are germane for the answering of the said question. In this case the assessee Dorr-Oliver India Ltd., wanted to assign its business to Hindustan Dorr-Oliver Ltd., as a going concern at the market value. Government of India however, by its letter dated 30-11-1974 addressed to the assessee, informed the assessee to get the valuation of the asset done and the transaction effected as per the book value. Ultimately the assignment was effected by an agreement dated 1-10-1976 with effect from 20-2-1977. It was the case of the assessee that on the date of the assignment, the WDV of the asset of the assessee company was Rs. 21,52,932. Since the amount which could actually be realised as per the direction of Government of India was only the book value, the amount actually realised was only the book value i.e. Rs. 14,30,866. This resulted in a short realisation and loss of Rs. 7,22,065. In the circumstances, the assessee claimed a deduction of the loss suffered u/s 32(1)(iii). The assessing officer held that since the business was taken over by Hindustan Dorr-Oliver Ltd., as a going concern, the loss of the assessee could not be turned as terminal loss but was a capital loss. He relied upon the judgment in the case of Sarabhai M. Chemicals Private Ltd. Vs. P.N. Mittal Competent Authority, Inspecting Assistant Commissioner of Income Tax, Acquisition Range-II, Ahmedabad and another, . He also held that since this was not a transfer in view of Section 47(iv), even such capital loss would not be deductible as there was no transfer of a capital asset. The assessee preferred an appeal and argued that since a definite price was fixed in respect of the assets transferred, the loss suffered by the assessee was a terminal loss admissible u/s 32(1)(iii). The Commissioner (Appeals) found that the price in respect of the business transferred was not a slump price. He found that the assessing officer was wrong in holding that a capital asset of the business had been transferred as a going concern and consequently he directed the assessing officer to allow the claim of the assessee after due verification.

The department preferred an appeal before the Tribunal and the Tribunal held that the loss has to be allowed as a terminal loss u/s 32(1)(iii) because the consideration was relatable to the value of the asset transferred. Tribunal thus confirmed the decision of the Commissioner (Appeals). The department filed an application for reference and this question was thus referred.

We find from the record that this is a case where there was a specific stipulation of the Government of India to effect the transfer at book value. The transfer thus took place at the book value which was lesser than the market price of the said asset. The question is whether the loss suffered is one admissible to a deduction u/s 32(1)(iii). The relevant part of Section 32(1)(iii) of the Income Tax Act reads as under:

32(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed--

(iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the WDV thereof.

In the case of Pandit Lakshmikanta Jha Vs. Commissioner of Income Tax, , the Supreme Court was contemplating a situation where the assessee had sold his business of publication of 2 newspapers as a going business along with the assets and liabilities of the company to another company in consideration of the allotment of fully paid up shares. The sale deed executed recited the value of the movables including plant and machinery of the business and the said value was in excess of the WDV. The Income Tax authorities sought to treat the excess over the WDV as profits under the second proviso of Section 10(2)(vii) of the Income Tax Act, 1922. We find from the order of the Tribunal that the Tribunal has relied upon this judgment in the case of Pandit Lakshmikanta Jha v. CIT (supra). The finding of the Tribunal is that the present case is covered by the ratio laid down by the Supreme Court in the aforesaid judgment. We find that the facts of the present case are not similar to the facts in Pandit Lakshmikanta Jhas case (supra) and it will be incorrect to say that the Supreme Court judgment covers the issue as raised in the present case. The question before the Apex Court considered the assessment of profit u/s 10(2)(vi) (section 41(2) of the Income Tax Act, 1961). The question of terminal allowance u/s 32(1)(iii) was not considered by the apex court as the case before it was one of sale effected at a price higher than the WDV.

Some arguments were made by the counsel for revenue on the basis of Sections 45 and 47 of the Income Tax Act. In our view, these sections are not attracted to the facts of the present case as there is no capital gain in the present case as the assessee has suffered a loss.

In our view, the plain reading of Section 32(1)(iii), inter alia permits a deduction of the difference between the lesser amount of sale price and the WDV of the building, plant and machinery which are sold. In the present case the receipt of a lesser amount was dictated by a condition of sale laid down by the Government of India. The deduction was therefore, permissible u/s 32(1)(iii). The question is therefore, decided in the affirmative, against the revenue and in favour of the assessee.

In view of the answers as given, the reference stands disposed of with no order as to costs.