Commissioner of Income-tax Vs. Bharat Suryodaya Mills Co. Ltd. - Court Judgment

Excerpt:
- - in this case, the assessee did make a provisions for payment of gratuity but, admittedly, the conditions prescribed by clause (b) are not satisfied. thus this clearly appears to be a case of demolition of a wall and rebuilding the same in order to protect the property of the assessee.g.t. nanavati, j. 1. the income-tax appellate tribunal had referred to this court four questions under section 256(1) of the income-tax act, 1961. question no. 1 is referred at the instance of the revenue and questions nos. 2, 3 and 4 are referred at the instance of the assessee. the questions are as follows : '(1) at the revenue's instance : whether, on the facts and circumstances of the case, the income-tax appellate tribunal was right in law in holding that the expenditure of rs. 23,782 incurred by the assessee on construction of a new wall was allowable as revenue expenditure (2) at the assessee's instance : whether, in view of the fats and circumstances of the case, the tribunal was right in not allowing the provision of rs. 12,38,797 made for payment of gratuity to the employee in view of the provisions of the income-tax act, 1961 (3) whether, in view of the facts and circumstances of the case, the tribunal was right in not allowing the claim of rs. 2,41,715 as bonus or as trade loss under income-tax act, 1961 (4) whether, in view of the facts and circumstances of the case, the tribunal was right in not allowing rs. 65,766 being bank guarantee commission as expenditure under income-tax act, 1961 ?' 2. the points which arise for our consideration because of questions nos. 2 and 4 are now covered by the decision either of this court or of the supreme court. question no. 2 is with respect to the payment of gratuity and it is covered by the decision of the supreme court in shree sajjan mills ltd. v. cit : 1986ecr276(sc) , where in it is held that, for gratuity to be deductible, the conditions laid down in section 40a(7) must be fulfilled and the deduction cannot be allowed on general principles under any other section of the act. in this case, the assessee did make a provisions for payment of gratuity but, admittedly, the conditions prescribed by clause (b) are not satisfied. therefore, question no. 2 will have to be answered in the affirmative, i.e., against the assessee and in favour of the revenue. 3. question no. 4 is with respect to bank guarantee commission and what is required to be considered is whether such expenditure can be regarded as revenue expenditure. the bank guarantee commission was paid for providing bank guarantee for purchase of machinery, etc. in cit v. vallabh glass works ltd. [1982] 137 itr 389, this court, has held that if the expenditure is an integral part of the cost of acquisition of a capital asset and not an integral part of the profit-earning process, such expenditure should be treated as a capital expenditure and not a revenue expenditure. payment of bank guarantee commission for purchasing machinery was regarded as capital expenditure in that case. therefore, question no. 4 will have to be answered in the affirmative, i.e., against the assessee and in favour of the revenue. 4. question no. 1 requires us to consider whether expenditure of rs. 23,782 incurred by the assessee on construction of a new wall was allowable as revenue expenditure. the assessee was required to demolish one side wall around his premises by the municipality. for that purpose, the municipality had given a notice or giving a set-back to the old compound wall for the purpose of widening the road running by the side of that roads. thus this clearly appears to be a case of demolition of a wall and rebuilding the same in order to protect the property of the assessee. it was, however, contended by learned counsel for the revenue that the wall was an asset of the assessee and, being of a permanent or an enduring nature, was a capital asset. as the assessee had constructed a new wall, it should be treated as having acquired a new asset of an enduring nature and, therefore, the expenditure incurred on construction of that wall should be regarded as capital expenditure. in support of this contention, learned counsel relied upon the two decisions of the supreme court in assam bengal cement co. ltd. v. cit : [1955]27itr34(sc) and indian molasses co. (pvt.) ltd. v. cit : [1959]37itr66(sc) . in our opinion, those decisions can be of no application to the facts of this case. as we have pointed out, an old wall was require dot be rebuilt because of demolition. thus, the expenditure which was incurred was more in the nature of repaired rather than creation of a new capital asset. a wall was required to be built by the assessee as a necessity for running his business. in our opinion, the tribunal was right in holding that the expenditure was allowable as revenue expenditure. therefore, question no. 1 will have to be answered in the affirmative, i.e., against the revenue and in favour of the assessee. 5. as regards the claim of the assessee that rs. 2,41,715 which was paid to its employees was either a bonus or a trade loss and as such an allowable deduction, learned counsel for the revenue very fairly pointed out that the tribunal has committed an error in applying a wrong provision. the claim pertains to the calendar year 1970. the proviso which has been relied upon by the tribunal was added by the payment of bonus (amendment) act, 1976, in section 36 of the income-tax act, 1961, with effect from september 25, 1975. so, at the relevant time, the said proviso was not in existence. at that time, the proviso read as under : 'provided further that the amount of the bonus (not being bonus referred to in the first proviso) or commission is reasonable with reference to - (a) the pay of the employee and the conditions of his service; (b) the profits of the business or profession for the previous year in question; and (c) the general practice in similar business or profession.' 6. the tribunal was, therefore, not right in not allowing the claim on the basis of the proviso which was not applicable. question no. 3 therefore, will have to be answered in the negative, i.e., in favour of the assessee and against the revenue. as the correct proviso applicable requires that the amount of bonus to be available as permissible deduction should be reasonable with reference to (a) the pay of the employee and the conditions of his service, (b) the profits of the business or professions for the previous year in question, and (c) the general practice in similar business or profession, and as no inquiry was held by the tribunal with respect to the same, the tribunal will have now to consider the same and decide that question afresh in accordance with law. 7. in the result : question no. 1 is answered in the affirmative, that is, against the revenue and in favour of the assessee; question no. 2 is answered in the affirmative, that is, against the assessee and in favour of the revenue; - question no. 3 is answered in the negative, that is, in favour of the assessee and against the revenue; and question no. 4 is answered in the affirmative, that is, against the assessee and in favour of the revenue. 8. no order as to costs.