M/s Dalmia Cement (Bharat) Ltd. vs C.I.T.

Badar Durrez Ahmed, J.—This reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the said Act") has arisen at the instance of the assessee and is in respect of the Assessment Year 1985-86 and arises out of Reference Application No. 361/Del/94 moved by the assessee before the Income Tax Appellate Tribunal. The following two questions have been referred to us for determination:-

Whether on the facts and in circumstances of the case, the Tribunal is right in law in holding that the expenditure of? 8,98,587/- incurred by the appellant company in reimbursing its employees for expenses on public taxis in connection with the business of the company, is of the nature of payment of conveyance allowance, thereby attracting the disallowance provided for in section 37(3A) of the I.T. Act, 1961?

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee company is not entitled to depreciation allowance in respect of the 11th and 12th Floors of Hansalaya Building, 15, Barakhamba Road, New Delhi?

Question No. 1

It is apparent that an amount of Rs. 8,98,587/- had been incurred by the assessee company on account of reimbursement of employees? expenses on public taxis in connection with the business of the company. The Assessing Officer as well as the Commissioner of Income Tax (Appeals) and also the Income Tax Appellate Tribunal have all held in favour of the Revenue by considering the said amount of Rs. 8,98,587/- as an expenditure which would be covered u/s 37(3B)(ii) of the said Act. In view of this fact, the said expenditure was subjected to disallowance to the extent of 20 per cent in respect of the amount of such expenditure which was in excess of Rs. 1 lakh. This disallowance was done u/s 37(3A) of the said Act.

Mr Mehta, the learned counsel appearing for the assessee drew our attention to the relevant provisions. Section 37(3A) of the Act as on April 1, 1984, runs as under:

(3A) Notwithstanding anything contained in sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds Rs. 1,00,000, 20 per cent of such excess shall not be allowed as deduction in computing the income chargeable under the head Profits and gains of business or profession.

From a plain reading of section 37(3A) of the Act it is clear that the items specified in sub-section (3B) of the Act, would not, to the extent indicated, be allowed to be deducted in computing the income chargeable under the head "Profits and gains of business or profession?. Now let us turn to section 37(3B) which reads as follows:

(3B) The expenditure referred to in sub-section (3A) is that incurred on-

(i) advertisement, publicity and sales promotion

or

(ii) running and maintenance of aircraft and motor cars or

(iii) payments made to hotels.

In the present reference we are concerned with clause (ii) of section 37(3B) of the Act inasmuch as it refers to expenditure incurred on "running and maintenance of," inter alia, "motor cars". The Explanation after section 37(3B), so much as is relevant, reads as under:-

Explanation.- For the purposes of sub-sections (3A) and (3B),-

(a) xxxx

(b) xxxx

(c) expenditure on running and maintenance of aircraft and motor cars shall include, -

(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire;

(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also.

In our view, the expenditure incurred on public taxis/metered taxis would not at all come within the purview of section 37(3A) read with sub-section (3B) and the said Explanation. Section 37 deals generally with deductions which are allowed in computing the income chargeable under the head - "Profits and gains of business or profession." By virtue of the said section, any expenditure which is not an expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee is to be allowed in computing the income chargeable under the head "Profits and gains of business or profession." Therefore, from a plain reading of section 37(1) of the Act business expenditure is allowable u/s 37 of the Act. But, notwithstanding this general provision u/s 37(1), a restriction on the deduction has been placed by the Legislature in section 37(3A) of the Act insofar as expenditure incurred on, inter alia, running and maintenance of motor cars is concerned. The Explanation after section 37(3B) makes it clear that the expression "expenditure on running and maintenance of motor cars" shall include expenditure on hire charges for engaging cars plying for hire and conveyance allowance paid to the employees and to the directors, where the assessee is a company.

Keeping these provisions in mind, let us examine as to whether the expenditure incurred on public taxis/metered taxis can be included in the expression "expenditure on running and maintenance of motor cars." Clause (ii) of Section 37(3B) refers to expenditure incurred on "running and maintenance of aircraft and motor cars?. Taxi fare paid for travel in a public taxi cannot, by any stretch of imagination, mean expenditure on "running and maintenance of ...motor cars?. The expenditure on taxi fare would not also fall within the inclusive meaning given in clause (c) of the said Explanation of "expenditure on hire charges for engaging cars plied for hire?. If sub-section (3B) is read carefully it would be apparent that it connotes some form of ownership of the aircraft or motor cars, as the case may be. This concept of ownership is extended by the said Explanation to even a possessory right over the motor cars by virtue of taking them on hire. But, in the present case the public taxis were neither owned or possessed by the assessee nor were they taken on hire by the assessee. Consequently, the expenses on taxi fare in respect of public taxis/metered taxis cannot be considered as an expenditure falling u/s 37(3B)(ii) read with the said Explanation.

The view expressed by us is supported by a decision of the Bombay High Court in the case of Commissioner of Income Tax Vs. Indian Hume Pipe Co. Ltd., wherein the said court held:-

A short point which arises for consideration in this appeal is whether the expenditure incurred on hiring of yellow taxis stood disallowed u/s 37(3A) of the income tax Act, 1961, as it stood at the relevant time. The relevant year of assessment is 1985-86. The Act as it stood at the relevant time, inter alia, stated u/s 37(3B), Explanation (c), that expenditure incurred on hire charges for engaging cars plied for hire stood disallowed. In the present case, the assessee has incurred expenses on hiring taxis (yellow taxis). Therefore, section 37(3B) has no application to the facts of the present case.

The learned counsel for the revenue invited our attention to a decision of the High Court of Karnataka in Karnataka State Financial Corporation Vs. Commissioner of Income Tax, . However, that case is distinguishable from the present case. In that decision the question was whether the "conveyance allowance" which was paid to the employees who owned two wheelers, would be expenditure of the type referred to in section 37(3B)? The nature of expenditure was conveyance allowance paid to the employees. That falls within sub-clause (ii) of clause (c) of the said Explanation. In the present case, we are not concerned with Explanation (c)(ii) of section 37(3B) of the Act. The issue before us is whether the expenditure on public taxis/metered taxis would fall under Explanation (c)(i). The present case is not a case of payment of "conveyance allowance". Even in the said decision, this distinction has been noticed as would be apparent from the following observation:-"Explanation (c) to section 37(3B) includes the expenditure incurred on hire charges for cars plied on hire. But that is not the case here." Consequently, the decision in Karnataka State Financial Corporation (supra) would have no applicability in the present case.

According to Mr Mehta, the reimbursement made to the employees by the assessee company on account of their expenses on public taxis in connection with the business of the assessee company would not fall within the expenditure described as "running and maintenance of motor cars". In support of his contention, he had placed reliance on a decision of the Calcutta High Court in the case of Commissioner of Income Tax Vs. General Electric Co. of India Ltd., . The question before the Calcutta High Court was whether on a proper interpretation of section 37(3A) read with sub-section (3B) and the Explanation (c) below sub-section (3B), the Tribunal was right in law in holding that the expenditure on metered taxis was not hit by the aforesaid section? The Calcutta High Court was of the view that expenditure incurred on metered taxis would not at all come within the purview of section 37(3A) read with sub-section (3B). The said court held:-

In our view, Explanation (c) given in clause (ii) of section 37(3B) of the Act cannot be brought into action in a case of metered taxis because it is neither an expenditure incurred on hire charges for engaging cars plying for hire nor it was a conveyance allowance paid to employees. It is an expenditure incurred for traveling in a metered taxi which is a totally different concept altogether.

It is clear that the Calcutta High Court was of the view that an expenditure on metered taxis or public taxis was not an expenditure of the nature referred to in section 37(3B) and, therefore, no disallowance could be made u/s 37(3A) of the said Act.

We are in agreement with the view taken by the Calcutta High Court and the Bombay High Court in the aforesaid decisions. It is clear that the expenditure referred to in Section 37(3B)(ii) pertains to running and maintenance of aircraft and motor cars. This has further been explained in clause (c) of the said Explanation to include expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire. In our view, taxis used by employees of the assessee company for the business of the assessee company cannot be construed as hiring of cars as contemplated under the said provisions. We agree with Mr Mehta that there also appears to be a distinction between direct and indirect hiring. Had it been a case where the assessee company itself had hired the cars, then possibly the expenditure could fall within Section 37(3B) of the said Act. However, in the present case, we find that in the assessment order itself, the assessee, wherever it has found that the expenditure fell within Section 37(3A) has shown the said disallowance as indicated in Page 94 of the paper book. We, therefore, hold that the expenditure of Rs. 8,98,587/- incurred by the assessee company in reimbursing its employees for expenses on public taxis in connection with the business of the company is not of the nature of payment of conveyance allowance or one which falls within the expenditure as specified in sub-section (3B) of Section 37 of the said Act. Consequently, question No. 1 is answered in the negative and in favour of the assessee.

Question No. 2

Insofar as question No. 2 is concerned, the same stands covered in favour of the assessee on account of the decision of the Supreme Court in the assessee''s own case pertaining to the Assessment Year 1982-83 entitled Dalmia Cement (Bharat) Ltd. Vs. Commissioner of Income Tax, where the Supreme Court ordered as under:-

The question that this court is called upon to answer in this reference at the behest of the assessee reads thus:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee-company is not entitled to depreciation allowance in respect of eleventh and twelfth floors of Hansalaya Building at Barakhamba Road, New Delhi?

The answer to the question is covered by the decision of this court in M/s Mysore Minerals Limited, M.G. Road, Bangalore Vs. The Commissioners of Income Tax, Karnataka, Bangalore, . Following that judgment, the question is answered in the negative and in favour of the assessee. No order as to costs.

We may point out that the question that has arisen for our determination in this reference arose in the backdrop of the issue as to whether depreciation allowance could be allowed in the case of a property which was not registered in the name of the assessee. This question was answered, as pointed out by the Supreme Court in the case of Mysore Minerals Limited (supra) to the effect that depreciation allowance could be allowed even in the case of a property which was not registered in the name of the assessee company though it was the owner thereof for all practical purposes.

Consequently, following the aforesaid decisions of the Supreme Court, this question is answered in favour of the assessee and against the Revenue.

The reference stands answered accordingly.