Judgment:
B.C. Patel, J.
1. The assessee in both these references, Shri Ambica Mills Ltd., is a public limited company, which was running five different divisions.
IT Ref. No. 315 of 1984
2. This reference pertains to the asst. yr. 1976-77.
3. The assessee-company had three managing directors. Beside the salary, they were given benefits such as commission, house rent, reimbursement of certain expenses, free use of car for personal purpose and reimbursement of telephone expenses installed at their residence. In the course of assessment proceedings, the assessee claimed that the payment of insurance for accident policy, reimbursement of telephone expenses at residence and medical reimbursement expenses were not perquisite for the purpose of s. 40A(5) of the IT Act (hereinafter referred to as 'the Act').
4. The assessee incurred expenses of Rs. 1,08,877 on issue of bonus shares and claimed allowance thereof as revenue deduction. The ITO disallowed the same as a capital expenditure on the ground that the issue of bonus shares can be treated towards the basic structure of the company and the expenditure involved brought benefit of permanent nature.
5. The assessee also claimed deduction of royalty payment of Rs. 1,73,229 to M/s. Mettur Beardsell Ltd., Madras, which was paid during the accounting period for the use of trade-mark 'tebilized' and for the other services rendered. The ITO was of the view that since Mettur Beardsell was not the owner of the trade-mark 'tebilized', the payment of the aforesaid amount to them was for the purpose of the services rendered to the company. The owner of the trade-mark 'tebilized' was M/s. English Sewing Company with whom the assessee had entered into an agreement for the use of the trade-mark. The ITO, therefore, considered the payment to be an expenditure incurred for the purpose of business of the company.
6. In the aforesaid circumstances, the following three questions are referred to this Court :
'1. Whether, the Tribunal has erred in law and on facts of the case in holding that medical expenses and personal accident insurance premium paid by the company for its managing directors were not disallowable under s. 40A(5) r/w s. 40(c) of the IT Act, 1961
2. Whether, in the facts and in the circumstances of the case, the Tribunal has not erred in law in holding that the expenditure of Rs. 1,08,877 incurred by the company on the issue of bonus shares was not a capital expenditure but of a revenue nature and allowable as such
3. Whether, the amount of Rs. 1,73,229 paid by the assessee to M/s. Mettur Beardsell Ltd., Madras, was an allowable deduction on the facts and in the circumstances of the case'.
IT Ref. No. 377/84
7. This reference pertains to asst. yrs. 1977-78 and 1978-79.
8. On the same grounds stated hereinabove in para. 2.3 above (but with the change of amounts and years), the following question was referred to this Court :
'Whether on the facts and in the circumstances of the case, the assessee was entitled to deduction of Rs. 1,79,752 and Rs. 2,01,185 being the amounts paid to M/s. Mettur Beardsheel Co. Ltd., for the user of its trade-mark, namely, 'tebilized' in the asst. yrs. 1977-78 and 1978 (1978-79 sic) respectively.'
9. Similarly, for the same grounds stated in para. 2.1 hereinabove, the following question was referred to this Court.
'Whether, on the facts and in the circumstances of the case, reimbursement of medical expenses, personal accident insurance premium and telephone expenses paid to the directors should be considered while applying the provisions of s. 40A(5) of the IT Act, 1961.'
10. Thus, question No. 1 in IT Ref. No. 312/1984 and question No. 2 in IT Ref. No. 377/1984 are identical. Similarly, question No. 3 in IT Ref. No. 312/1984 and question No. 1 in IT Ref. No. 377/84 are identical.
11. Question No. 1 in IT Ref. No. 312/1984 and question No. 2 in IT Ref. No. 377/1984.
12. So far as question No. 1 is concerned, it requires no detailed discussion as in the case of this very assessee itself, for the asst. yr. 1980-81 reported in Ambica Mills Ltd. vs. CIT (1998) 231 ITR 583 : TC S18.2021 this Court, after considering the provisions held as under :
'That it was clear from the approval that was sought under s. 310 of the Companies Act from the Government that the expenditure in question related to the managing director in his capacity as a director and not an employee of the company. Thus, the expenditure was required to be computed under s. 40(c)(i) of the Act. The said clause takes within its sweep any expenditure on remuneration or benefit or amenity to a director and the word 'remuneration' would, therefore, obviously include direct cash payments to the director. Therefore, expenditure incurred on cash reimbursement of medical expenses to the managing director would fall within sub-clause (i) of clause (c) of s. 40 and not under s. 40A(5)(a) under which only expenditure incurred on a person in his capacity of an employee could be computed where such employee is also a director.'
13. Similar questions are raised in the aforesaid references. In view of the aforesaid view expressed by the Court earlier, the answer must be in positive and in favour of the Revenue so far question No. 1 in IT Ref. No. 312/1984 and question No. 2 in IT Ref. No. 377/1984 are concerned.
Question No. 2 in IT Ref. No. 312/1984.
14. So far as question No. 2 in IT Ref. No. 312/1984 is concerned, on an identical question in the case of CIT vs . Ajit Mills Ltd. : [1994]210ITR658(Guj) this Court held that such expenditure is not deductible as revenue expenditure and that the expenses incurred in connection with the issuance of bonus shares are incurred by the company for its permanent structure and are directly connected with the acquisition of capital and with the advantage of enduring nature. While deciding this question in the case of Ajit Mills (supra) this Court has also relied on the decisions in the case of Shree Digvijay Cement Co. Ltd. vs . CIT : [1982]138ITR45(Guj) and Ahmedabad Mfg. & Calico (P) Ltd. vs . CIT : [1986]162ITR800(Guj) .
15. In view of the aforesaid decisions, this question must be answered in negative and in favour of the Revenue.
Question No. 3 in ITR No. 312/1984 and question No. 1 in ITR No. 377/1984
16. With regard to these questions, Mr. Bhatt, learned advocate fairly stated that the same is answered by a decision of this Court in the case of CIT vs. Ashoka Mills Ltd. (1996) 218 ITR 526 : TC S16.1736. In that case also, an agreement was entered into for the use of trade-mark 'tebilized', and on reference, this Court held that the assessee was carrying on business of manufacturing cloth; the process employed under the trade name 'tebilized' conferred anti-crease property on the cloth; the assessee entered into the above agreement for the purpose of enabling the assessee to carry on its business more efficiently and more profitably, while leaving the fixed capital untouched; the agreement is permitting the assessee to make use of the particular process and the user of the trade-mark 'tebilized' did not create any asset nor did they confer any right of a permanent nature in favour of the assessee. The Court further held that apart from the fact that the agreements in the present case do not confer any right for exclusive user, the duration of the agreement is for only eight years, that too terminable by six months' prior notice; the agreements merely enable the assessee to confer on the product the advantages of better quality and marketability. The payment of royalty in that case was, therefore, held to be clearly in the course of profit-earning process and not for acquisition of an asset or right of a permanent character.
17. In the light of the aforesaid, question No. 3 in IT Ref. No. 312/1984 and question No. 1 in IT Ref. No. 377/1984 must be answered in positive in favour of the assessee, and against the Revenue.
18. Both these references stand disposed of accordingly, with no orders as to costs.