| SooperKanoon Citation | sooperkanoon.com/62054 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Jun-23-1986 |
| Judge | T Sugla, R Garg |
| Reported in | (1986)19ITD793(Mum.) |
| Appellant | American Bureau of Shipping |
| Respondent | income-tax Officer |
2. The first common point being ground No. 1 in each of the appeals by the assessee is against the assessment of income from subletting of property as 'Income from other sources'. The assessee claimed it as assessable under the head 'Profits and gains of business or profession'. The assessee is a shipping consultant and supervises the repairs of ships. It is not a shipping company as such nor is it a manufacturing company. It had taken a business premises on rent 10 1968. It was under a monthly tenancy. A part of this premises, i.e., 10 per cent was sublet for the first time in 1975 to a connected concern, namely, ABS Worldwide Tech. Services (I) (P.) Ltd. on a monthly rent of Rs. 500 per month. In the assessment years 1978-79 and 1979-80, the rent was increased to Rs. 1,000 per month because of the additional space given to them and the additional charge of expenses. The assessee claimed the net rent paid by it, i.e., by reducing the receipt of rent.
In the assessment year 1977-78, the ITO treated the receipt of Rs. 6,000 as income from other sources as in his opinion, the income was from subletting and the income of subletting has always been assessed as other sources. After allowing 10 per cent of the expenses on electricity calculated at Rs. 1,804, he brought the balance of Rs. 4,160 to tax under the head 'Income from other sources'. The Commissioner (Appeals) has confirmed the assessment of this income under the head 'Income from other sources'. He, however, allowed Rs. 4,357 being 10 per cent of the rent paid by the assessee, besides the electricity expenses of Rs. 1,804 allowed by the ITO. Similarly in the assessment years 1978-79 and 1979-80, the proportionate expenses on rent and electricity were allowed and the balance only was brought to tax under the head 'Income from other sources'. There is no dispute about the allowance of expenditure insofar as the assessment years 1977-78 and 1978-79 are concerned. The department has, however, challenged the allowance of proportionate expenses of Rs. 9,255 in the assessment year 1979-80 being ground No. 1 in IT Appeal No. 6165 (Bom.) of 1983.
3. Mr. S.E. Dastur, the learned counsel of the assessee submitted that the impugned premises was obtained on rent as commercial asset and subletting of a part thereof to a connected company was a commercial exploitation, the income therefrom has to be nothing but business income. He placed reliance on two decisions of the Delhi High Court in Addl. CIT v. Rajindra Flour & Allied Industries (P.) Ltd. [1981] 128 ITR 402 and Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70. The learned departmental representative Shri Tej Prakash, on the other hand, submitted that the issue should be decided in favour of the department, in view of the Bombay High Court decision in Parekh Traders v. CIT [1984] 150 ITR 310.
4. We have considered the rival submissions. In our opinion, the matter can be decided in a simple way without going into the case laws relied upon by the parties. The premises was taken on rent for the business purposes. By letting out the business premises, the business expenditure of the company on rent was reduced to the extent of rent received by the assessee-company. The receipt, therefore, should not be separately assessed under the head 'Income from other sources'. In fact, the assessee had claimed only the net expenses of rent as reduced by the receipt. We, therefore, direct the ITO to recompute the total income of the assessee by reversing the items of receipts and expenditure relating to this premises and consider the claim of the assessee as per the figures given in its profit and loss account. This will dispose of the departmental ground in the appeal for the assessment year 1979-80 also.
5. The next item assessed under the head 'Income from other sources' is interest income from deposits in all the three years. The ITO held that since fixed deposits were not commercial asset, the interest received thereon could not be said to be the yield of commercial asset. The assessee has received certain funds in 1975 from its New York office to enable it to purchase premises for accommodation of their surveyors.
Till date they could not get a suitable place the money was deposited in the fixed deposits. The assessee could not get any suitable accommodation as contemplated. Therefore, the money was returned to New York office in 1978. In these circumstances, the Commissioner (Appeals) held that the interest income was the yield of exploitation of the funds brought for commercial purposes. We agree with the Commissioner (Appeals) that the funds brought from the New York office were for commercial purposes and its retention in fixed deposits till their purpose was achieved or their return would be the income from business.
Therefore, ground No. 1 in each of the assessment years 1977-78 and 1978-79 and ground No. 2 in the assessment year 1979-80 in the appeals by the revenue are dismissed.
6. The next substantial dispute in the assessee's appeal as well as in departmental appeal is concerning with the applicability of Section 44C of the Income-tax Act, 1961 ('the Act'). In the assessee's appeal for the assessment year 1977-78 it has been challenged that the provisions of Section 44C do not apply. To elaborate the argument Shri Dastur submitted that this year being a loss year, there was no total income and, therefore, Clause (a) of Section 44C providing that an amount equal to 5 per cent of the adjusted total income does not apply. There are three alternative conditions in Section 44C and excess of the least amount computed under each of the three conditions is not to be allowed. Relying on the decision of the Special Bench of the Tribunal in the case of IAC v. Goodricke Group Ltd. [1985] 12 ITD 1 (Cal.), Mr.
Dastur contended that since Clause (a) does not apply in this case, the whole Section 44C would not be applicable and, consequently, no disallowance could be made. Decision of the Supreme Court in CIT v.Official Liquidator, Palai Central Bank Ltd. [1984] 150 ITR 539 is also relied upon in this behalf. He further stated that the object of Section 44C is to allow something and not to deny and, therefore, the interpretation placed by the department is contrary to this object. The learned departmental representative, on the other hand, relied upon the orders of the ITO and the Commissioner (Appeals) and supported their decisions with the help of the Supreme Court decision in Karimtharuvi Tea Estate Ltd. v. State of Kerala 7. We have carefully considered the rival submissions. Section 44C relevant for the purposes of this controversy reads as under : Notwithstanding anything to the contrary contained in Sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made in computing the income chargeable under the head 'Profits and gains of business or profession', in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely :- (a) an amount equal to five per cent of the adjusted total income ; or (c) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, Provided that in a case where the adjusted total income of the assessee is a loss, the amount under Clause (a) shall be computed at the rate of five per cent of the average adjusted total income of the assessee.
(i) 'adjusted total income' means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in Sub-section (2) of Section 32 or the deduction referred to in Section 32A or Section 33 or Section 33A or the first proviso to Clause (ix) of Sub-section (1) of Section 36 or any loss carried forward under Sub-section (1) of Section 72 or Sub-section (2) of Section 73 or Sub-section (1) of Section 74 or Sub-section (3) of Section 74A or the deductions under Chapter VI-A ; (a) in a case where the total income of the assessee is assessable for each of the three assessment years immediately preceding the relevant assessment year, one-third of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid three assessment years ; (b) in a case where the total income of the assessee is assessable only for two of the aforesaid three assessment years, one-half of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid two assessment years ; (c) in a case where the total income of the assessee is assessable only for one of the aforesaid three assessment years, the amount of the adjusted total income in respect of the previous year relevant to that assessment year ; The limit in Clause (a) is equal to five per cent of the adjusted total income. The adjusted total income is defined in Explanation (i) as extracted above. Proviso to Section 44C provides an alternate computation of five per cent of average adjusted total income as against of 'adjusted total income' in a case the latter is a loss (sic). The average adjusted total income as defined in Explanation (ii) means one-third of three years aggregate adjusted total income of preceding three years or half of two years or equivalent of the preceding year as the case may be, if total income assessed in the preceding year was of less than three years. Reading the proviso to Section 44C this much is clear that the adjusted total income may be a loss also. It is not necessarily a positive income as argued by Mr.
Dastur. The proviso, in our opinion, only gives further concession to those assessees whose adjusted total income in a particular year happens to be a loss. This clause does not say that there has to be a positive income in the preceding years. It only says that 'where total income of the assessee is assessable'. These words in our view only connote the existence of the company as an assessee in any or all the three years. If the company was an assessee in these years the total income may be loss or profit. If the average adjusted total income is also a loss which it is in present case, the five per cent would, in our opinion, be nil and, therefore, no head office expenses shall be allowed to it.
8. The cases relied upon by Mr. Dastur are not applicable to the facts of the case. The case of the Special Bench was no doubt a case under Section 44C wherein it was held that since Clause (c) was not applicable the non obstante provision of Section 44C would have no application for disallowance of head office expenses. But a close look of the case would show that the emphasis was not on the fact that a particular clause does not apply in a particular year but it was on the fact that that particular clause could not conceivably be applied in a particular case. The following extract of that decision clarifies the position : ... In view of the above observations of the Supreme Court, we are inclined to hold that if any one or more of the computations under Clause (a), (b) or (c) of Section 44C is not conceivable in a particular case, it will have to be held than non obstante provisions contemplating disallowance of 'head office expenditure' under Section 44C does not apply.(p. 8) 9. It is not a case in this appeal before us ; may be because of losses it did not apply in this year but that does not mean that Clause (a) of Section 44C is not conceivably applicable in the case of the assessee.
It could not be said that the assessee would never have any adjusted total income. The fact that there is no dispute in the assessment years 1978-79 and 1979-80 goes to prove that there was presumably adjusted income in those years and Clause (a) would, therefore, be workable. In our opinion, therefore, this case could have helped the assessee only when there is conceivably no possibility of any computation under Clause (a) of Section 44C and not in a case where it could not be worked out in a year or two, 10. The case of the Supreme Court relied upon by the learned counsel of the assessee is again on the theory of 'conceivability'. This was a-case under the Super Profits Tax Act, 1963, which was held not applicable to a case where the liquidator has been appointed in the case of a company. It was because when the liquidator is appointed, it is not conceivable that the company could have any capital and, therefore, it was held by their Lordships of the Supreme Court that the company was not chargeable to super profit tax. This ground in the assessee's appeal is, therefore, dismissed.
11. We now come to the merits of disallowable items under Section 44C.In the assessee's appeal for the assessment year 1977-78, there is no dispute regarding the quantum of expenses. However, in departmental appeal for the assessment year 1977-78 ground No. 4 is against the allowance of travelling expenses of Rs. 64,082 and 50 per cent of the miscellaneous expenses being Rs. 8,321. Ground No. 5 in departmental appeal is against the allowance of plan approval expenses of Rs. 3,10,112. The travelling expenses are of Mr. S.G. Schaeffer which were specifically incurred on account of Indian branch. We agree that they could not be in the nature of head office expenses. The miscellaneous expenses are of general administration expenses. They included publications and rule books, etc., which were distributed to various clients in India or the shipbuilders. There appears to be no justification for treating 50 per cent of these miscellaneous expenses as attributable to head office expenses under Section 44C. As regards plan approval, engineering expenses of Rs. 3,10,112 we have gone through the details filed. These expenses were incurred for specific technical services of the nature of approval of the plan for ships being constructed in India, reviewing survey reports, covering ships being constructed at Indian shipyards, approval of designs, tonnage admeasurements and issuance of tonnage certificates, reviewing test reports, etc. These expenses were incurred not only at head office in New York but also in other offices like London, Geneva, Hamburg. We, therefore, confirm the order of the Commissioner (Appeals) holding that these expenses were not head office expenses for the purpose of Section 44C. In view of this finding, we reject the assessee's ground No. 4 in the assessment year 1977-78 which was taken alternatively as a matter of abundant caution it was relevant only when we would have held that the expenses disputed in departmental appeal were head office. This ground contemplates the full allowance of head office expenses up to 1-6-1976, the date when Section 44C was introduced. Since we have rejected the departmental appeal, this ground becomes infructuous.
12. In the assessment year 1978-79 the nature of expenses is more or less the same as in the assessment year 1977-78. The amount of travelling expense is $15,310, miscellaneous expenses Rs. 1,858 and on plan approval Rs. 6,33,588. For the reasons discussed in earlier paragraph for the assessment year 1977-78, we hold that these expenses were not head office expenses and confirm the order of the Commissioner (Appeals). There is one another item of expenditure of Rs. 9,120 incurred on printing and stationery in this year. This expense was disallowed because of the absence of proper proof of recovery of the same from the clients. Like miscellaneous expenses, these expenses were also for specific jobs and, therefore, could not be treated in the nature of head office expenses under Section 44C.13. The assessee has challenged the treatment of $ 926 on travelling treated as head office expenses. The disallowance is on the ground that these expenses were not for any specific job in India. $ 872 were expenses on air transportation of Mr. N. Gandhi, the accountant of head office. The visit was regarding accounts administration. The balance $ 54 was on miscellaneous travelling by New York office. The assessee has not been able to prove that these expenses were not head office expenses. We, therefore, confirm the action of the authorities below treating them as head office expenses.
14. In the assessment year 1979-80 also both the assessee and the department are in appeal. In the assessee's appeal, the dispute is regarding Rs. 39,015 on travelling expenses and Rs. 15,476 on legal expenses. In department's appeal, the objection is for the following expenses : The Commissioner (Appeals) had proceeded with the treatment of these expenses on the principle that the expenses relating specifically to Indian branch are not in the nature of head office under Section 44C, as they have nothing to do with the general administration or executive functions of the assessee's head office. We do not think that the principle on which the Commissioner (Appeals) had proceeded was in any way wrong. He is perfectly justified in this approach. We have gone through the details and find that the treatment of expenses in the assessee's appeal as head office expenses and the inclusion of the expenses disputed in department's appeal is correct on fact. Both the appeals by the assessee as well as by the department are rejected on these points.
15. The next dispute in the assessee's appeal for the assessment years 1978-79 and 1979-80 is concerning the claim of depreciation. The assessee claimed that the unabsorbed depreciation of earlier years should be given preference over the current year's depreciation and the latter could have been allowed to be carried forward. This dispute has since been settled by the decision of the Supreme Court in CIT v.Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 against the assessee, this ground in both the appeals for the assessment years 1978-79 and 1979-80 is, therefore, rejected.
15.1 There is one more ground in the assessee's appeal for the assessment year 1979-80. This is against the disallowance under Rule 6D of the Income-tax Rules, 1962. The expenses on travelling according to the assessee, were incurred in the context of their business and, therefore, it WHS contended that nothing could be disallowed under Section 37(3) of the Act read with Rule 6D. The department's appeal is against the direction of the Commissioner (Appeals) to calculate the disallowance of expenses on the basis of 'per person' as against 'per trip' under Rule 6D. The disallowance per trip basis worked out by the ITO is Rs. 25,125 whereas it works out to Rs. 24,715 on per person basis. Both the points are covered by the Special Bench decision of the Tribunal. The case of Sundaram Finance Ltd. v. IAC [1984] 7 ITD 845 (Mad.) (SB) upheld the applicability of Rule 6D even in cases where the travelling expenses were otherwise allowable as business expenditure and the case of Blackie Sons (India) Ltd. [IT Appeal Nos. 706-707 (Bom.) (SB) of 1975-76 dated 20-10-1976] upheld the calculation of per person basis. We, therefore, reject this ground in both the appeals by the assessee as well as by the department.
16. In departmental appeal for the three years ground Nos. 2 and 3 each in the assessment years 1977-78 and 1978-79 and ground Nos. 3 and 4 in the assessment year 1979-80 the dispute is against the decision of the Commissioner (Appeals) holding that the medical reimbursement of employees and repairs to flats occupied by the employees were neither perquisite nor salary for the purposes of disallowance under Section 40A(5) of the Act. The department's reliance is on the Kerala High Court decisions in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 (FB), CIT v. Forbes, Ewart & Figgis (P.) Ltd. [1982] 138 ITR 1 (FB) and Travancore Tea Estates Co. Ltd. v. CIT [1985] 154 ITR 745. However, in view of the Special Bench decision in the case of Blackie Sons (India) Ltd. (supra) and the Bombay High Court decision in the case of CIT v.Indo-kem (P.) Ltd. [1981] 132 ITR 125, we hold that the medical reimbursement cannot be treated as part of perquisites. But in view of the Special Bench decision in the case of Glaxo Laboratories India Ltd. v. Second ITO [1986] 18 ITD 226 (Bom.), we do not agree with the Commissioner (Appeals) that the medical reimbursement would not be even a part of the salary. To this extent, we reverse the decision of the Commissioner (Appeals). As regards the repairs to flat, we agree with the Commissioner (Appeals) that the expenses neither resulted in any perquisite nor it could be treated as part of salary. The repairs are carried out by the employer for the upkeep of the flats. It does not add anything to the enjoyment of the employees which could be termed as a benefit, amenity or perquisite or even salary. We, therefore, reject the departmental ground on this point.
17. In department's appeal for the assessment year 1979-80, there are two more grounds which are not in other appeals. First of that (ground No. 8) is against allowing depreciation disallowed by the ITO in respect of furniture and fixtures, air-conditioner and electrical installation installed at Beach House, Madh Island where the employees of the assessee stay during holidays. The Commissioner (Appeals) following his order in earlier years, allowed the claim of depreciation. In earlier year, i.e., the assessment year 1977-78, the Commissioner (Appeals) had followed the Madras High Court decision in CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619 and 130 ITR 361 (sic) and noticed the fact that no person other than employees stay at this Beach House. He held that the ITO was not justified in treating the premises in the nature of guest-house. The decision in assessment year 1977-78 was followed in the assessment year 1978-79 and in this appeal for the assessment year 1979-80 also. No appeal was filed by the department for the assessment years 1977-78 and 1978-79 but since there was an amendment in the provisions by insertion of Sub-section (5) in Section 37 with effect from 1-4-1979, it was contested by the department in this assessment year 1979-80. Two defences were put forward by Mr.
Dastur before us, one being that Section 37(5) applies only to a guest-house and not to all premises. In the present case, the Beach House is a sort of holiday home where only the employees of the assessee stay. A premises to be guest-house must be to house the guests and employees could not be termed as guests. The second defence of Mr.
Dastur is that the non obstante provisions contained in Section 37(4) did not prohibit the claim of depreciation under Section 32 of the Act even if the Beach House is treated as a guest-house. To understand the controversy it would be appropriate to look at the provisions of Section 37(4) and 37(5).
By Section 5 any accommodation whether maintained, hired, reserved or otherwise arranged by the assessee for the purpose of providing lodging or boarding and lodging to any person on tour or visit to the place at which such accommodation is situated, is accommodation in the nature of a guest-house within the meaning of Sub-section (4).
It is irrespective of any nomenclature and includes boarding and lodging to the employees and directors of the company. Mr. Dastur contended that boarding and lodging contemplated under this sub-section is to the employees who are on tour or visit which according to him, could mean only for the purposes of business and not when an employee was on personal trip. It is admitted by Mr. Dastur that the proviso to Section 37(4) does not apply in this case because there were less than 100 wholetime employees. We do not agree with Mr. Dastur that Sub-section (5) does not apply in this case. It enropes the lodging or boarding and lodging to all persons including the employees of the company. Such persons must be on a tour or a visit to that place. If contention of Mr. Dastur is accepted, then Sub-section (5) could never apply to outsiders because their tour or visit would not be for the purposes of the assessee's business. Tour may be susceptible of a business nature alone but visit in our opinion, could cover both the personal as well as the business purposes. We, therefore, hold that by virtue of Sub-section (5) the Beach House accommodation is in the nature of a guest-house for the purposes of Section 37(4).
18. Now we come to the second aspect of the matter, namely, even if the Beach House is a guest-house, the depreciation on any asset therein could still be not disallowed. The non obstante provision clause in Sub-section (4) is only with respect to anything contained in Sub-section (1) or Sub-section (3) of Section 37. Neither of the provisions contained in Sub-section (1) or (3) deal with the depreciation allowance. The depreciation claimed is provided in Section 32 and this section is not subject to the provisions of Section 37(4) even though Clause (ii) of Section 37(4) prohibits the allowance of depreciation on asset in a guest-house. The result is that whereas Section 32 allows the depreciation and Section 37(4)(ii) prohibits the same. Neither of the two provisions are subject to each other. In such a situation, in our opinion, the provision beneficial to the assessee must be followed. In other words, depreciation has to be allowed under Section 32 there being no dispute for the maintenance of guest-house was for the purposes of business. We, therefore, uphold the decision of the Commissioner (Appeals) allowing the depreciation though on two different grounds.
19. The last ground in departmental appeal for the assessment year 1979-80 being ground No. 9 is against the deletion of addition of Rs. 9,425 made by the ITO under Section 37(1), read with Section 80VV, of the Act. The facts are that the sum of Rs. 13,000 was paid by the assessee to Ferguson & Co., C.A. Out of this Rs. 13,000 a sum of Rs. 3,575 alone was for the expenses on the representation before the authorities, the balance of Rs. 9,425 was for other matters. The Commissioner (Appeals) disposed of the matter in light of the Tribunal's decision in the case of International General Electric Co.
(I) Ltd. v. ITO [IT Appeal No. 24 (Bom.) of 1974, dated 5-10-1979].
After having gone through the details and the orders of the authorities, below, we are of the opinion that the Commissioner (Appeals) was right in holding that Rs. 9,425 was not subject to the provisions of Section 80VV but were allowable under Section 37 outright.