Gujarat H.C : Whether, the expenditure on account of accident insurance and medical expenses in respect of the two managing directors of the company was includible for purposes of computing the disallowance under s. 40A(5) ?

High Court Of Gujarat

CIT vs. Gujarat Steel Tubes Ltd.

Sections 28(iiib), 37(1), 40A(5)

M.S. Shah & K.A. Puj, JJ.

IT Ref. No. 133 of 1989

24th June, 2002

Counsel Appeared

Tanvish U. Bhatt, for the Petitioner : None, for the Respondent

JUDGMENT

K.A. PUJ, J. :

In this reference at the instance of the Revenue, following three questions were referred to this Court for our opinion :

“(i) Whether, the expenditure on account of accident insurance and medical expenses in respect of the two managing directors of the company was includible for purposes of computing the disallowance under s. 40A(5) ?

(ii) Whether, the receipt of Rs. 47,64,070 on account of cash compensatoy support (CCS) was a revenue receipt and, therefore, exigible to tax ?

(iii) Whether, the expenditure of Rs. 22,000 incurred by way of fees to an advocate was allowable as revenue expenditure ?”

2. So far as the first question is concerned, it covers two items, namely, expenditure incurred on accident insurance and medical expenses in respect of the two managing directors of the company whether the same was includible’ for the purpose of computing the disallowance under s. 40A(5) of the IT Act. This issue arose before this Court in the case of Ambica Mills Ltd. vs. CIT (1998) 147 CTR (Guj) 347 : (1999) 235 ITR 264 (Guj) : TC S16.1663 wherein this Court has taken the view that if the company had, by taking out a policy of insuring the directors against personal accidents sought in fact to insure itself in respect of the liability that may arise towards the directors as a result of accident, then that situation would be different from a director himself taking out a personal accident insurance under which he would be obliged to pay the premiums himself and not the company. On the basis of the facts found in that case, this Court has held that the entire expenses of the insurance premium paid on the insurance policy in respect of managing directors taken by the company was allowable as expenditure of the company. The decision to take policy was taken by the company and there was nothing on record to show that the director himself wanted to take the insurance. In the case before us, the Tribunal has also found as a matter of fact that the insurance policy of the director was taken by the company and premium was also paid by the company. Hence, this issue squarely falls within the ratio laid down by this Court in Ambica Mills Ltd.’s case (supra). So far as the medical expenses are concerned, the same issue arose in the case of Ambica Mills Ltd. vs. CIT (supra) wherein it is held that reimbursement of medical expenses incurred by the director is a benefit of the director within the meaning of s. 40(c)(i) of the Act, and is not an allowable expenditure. Following this decision, we answer question No. 1 partly in favour of the assessee so far as the insurance premium is concerned and partly against the assessee and in favour of the Revenue so far as the reimbursement of the medical expenses is concerned.

3. As far as the second question is concerned, the Tribunal has merely relied on the Full Bench decision of the Delhi Bench of the Tribunal and the said decision was reversed by the Delhi High Court in the case of Gedore Tools (P) Ltd. vs. CIT (2000) 161 CTR (Del) 472 : (1999) 238 ITR 268 (Del) wherein the view was taken that cash compensatory support receipts received from the Government would be taxable receipts in the hands of the assessee and constitute profits and gains. The Rajasthan High Court has also taken the same view in the case of CIT vs. Emery Stone Mfg. Co. (1996) 131 CTR (Raj) 12 : (1997) 225 ITR 480 (Raj) : TC S13.1398 wherein it is held that, “in respect of incentives received by exporters, new cls. (iiia), (iiib) and (iiic) have been inserted in s.

28, to provide that profits on sale of import entitlement licences, cash compensatory support and drawback of duty, respectively, shall be chargeable to income-tax under the head ‘Profits and gains of business or profession’. These have further been included in the definition of the term ‘income’ in cl. (24) of s. 2. These amendments will take effect retrospectively from the dates from which these incentives were introduced. Hence, the cash compensatory support received by an exporter would be assessable.” No contrary judgment has been pointed out taking the different view than the view taken by these two High Courts and accordingly we hold that the receipt of Rs. 47,64,070 as cash compensatory support was a revenue receipt and, therefore, exigible to tax. This question is, therefore, answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

4. So far as the third question is concerned, it is observed by the Tribunal in its order that the assessee had advanced certain sums of money to acquire premises in the property known as Neptune Tower. However, the said transaction was not materialized and the assessee had to incur an expenditure of Rs. 22,000 by way of fees paid to advocate for recovering the sums so invested. The AO has taken the view that the expenditure was a capital loss suffered in connection with the capital asset and the said finding was confirmed by the CIT(A). The matter was taken to the Tribunal and it was contended before the Tribunal that the expenditure so incurred has no direct connection with the acquisition of the capital asset but it was in fact connected with the recovery of the amount which was blocked by way of advance for the purpose of capital asset and, therefore, an allowable expenditure. The Tribunal has accepted this contention urged on behalf of the assessee and held that the amount was incurred only for the purpose of recovery of the amount advanced for the acquisition of the capital asset. The Tribunal has further observed that the impugned asset is not acquired and, therefore, the transaction or the agreement failed. The Tribunal has further taken the view that once there was a breach of an agreement it could not be said that the expenditure incurred for recovery of the advance had direct connection with the acquisition of the capital asset. According to the Tribunal, the expenditure incurred had only connection with the recovery of the amount and, therefore, the same ought to have been considered as laid out during the course of carrying on business and, therefore, a revenue expenditure which should have been required to be allowed. We find no error in the view taken by the Tribunal and, hence, we confirm the finding arrived at by the Tribunal. We, therefore, answer this question in the affirmative, i.e., in favour of the assessee and against the Revenue.

5. The reference is, accordingly, disposed of with no order as to costs.

[Citation : 258 ITR 235]

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