Case Note & Summary
This is an income tax reference at the instance of the Revenue (Commissioner of Income Tax) against the assessee, M/s. Tata Iron & Steel Company Limited, arising out of the order of the Income Tax Officer for the Assessment Year 1979-80 under section 256(1) of the Income Tax Act, 1961. The Revenue referred six questions of law to the High Court concerning the allowability of various expenditures claimed by the assessee. The first question related to the payment of 'record production bonus' of Rs.12,83,946 to employees. The Income Tax Officer had disallowed this payment, but the court found that the bonus was paid at a flat rate of Rs.27 per employee as per long-standing practice to encourage extra labour, irrespective of profits. The court held that such payment was not a bonus out of profits and thus not hit by section 36(1)(ii), and was allowable as revenue expenditure. The second question concerned the payment of Rs.32 lacs to M.N. Dastur & Co. for preparing a feasibility report and travelling expenses of Rs.27,424. The court held these were allowable as revenue expenditure as they were incurred for business purposes. The third question was whether expenditure of Rs.18.81 lacs on fabrication of a cooler was capital expenditure; the court answered in the affirmative. The fourth question was whether the entire initial contribution to the superannuation fund was allowable in the assessment year; the court held it was. The fifth question was whether section 40(c) or section 40-A(5) applied to an employee-director; the court held it did. The sixth question concerned expenditure on diaries & calendars (Rs.43,341), brochure (Rs.1,668), film shows (Rs.10,000), and chairman's statement (Rs.2,06,750) and whether they were hit by section 37(3-A); the court held they were not, as they were not advertisement expenditure. The court answered all questions in favor of the assessee and against the Revenue.
Headnote
A) Income Tax - Record Production Bonus - Section 36(1)(ii) - Payment of Rs.12,83,946 as record production bonus to employees was not hit by section 36(1)(ii) as it was not a bonus paid out of profits but a payment made irrespective of profit, pursuant to long-standing practice to encourage extra labour. Held that such payment is allowable as revenue expenditure (Paras 3-4). B) Income Tax - Revenue Expenditure - Feasibility Report - Payment of Rs.32 lacs to M.N. Dastur & Co. for preparing feasibility report and travelling expenses of Rs.27,424 were allowable as revenue expenditure as they were incurred for the purpose of business and not for acquiring a capital asset (Para 2). C) Income Tax - Capital Expenditure - Fabrication of Cooler - Expenditure of Rs.18.81 lacs on fabrication of cooler was capital expenditure as it resulted in acquisition of an asset of enduring benefit (Para 2). D) Income Tax - Superannuation Fund - Initial Contribution - Entire initial contribution to superannuation fund was allowable in Assessment Year 1979-80 as it was an allowable deduction under the Income Tax Act (Para 2). E) Income Tax - Employee-Director - Section 40(c) or 40-A(5) - Provisions of section 40(c) or section 40-A(5) applied in the case of employee-director of assessee company (Para 2). F) Income Tax - Advertisement Expenditure - Section 37(3-A) - Expenditure on diaries & calendars (Rs.43,341), brochure highlighting achievements (Rs.1,668), film shows (Rs.10,000), and publishing of chairman's statement (Rs.2,06,750) was not hit by section 37(3-A) as they were not in the nature of advertisement expenditure (Para 2).
Issue of Consideration
Whether the following expenditures are allowable as deductions under the Income Tax Act, 1961: (1) record production bonus, (2) payment for feasibility report and travelling expenses, (3) fabrication of cooler, (4) initial contribution to superannuation fund, (5) applicability of section 40(c) or 40-A(5) to employee-director, (6) expenditure on diaries, brochures, film shows, and chairman's statement under section 37(3-A).
Final Decision
The court answered all six questions in favor of the assessee and against the Revenue. The reference was disposed of accordingly.
Law Points
- Record production bonus not hit by section 36(1)(ii) as it is not a bonus paid out of profits
- Feasibility report preparation fees allowable as revenue expenditure
- Fabrication of cooler is capital expenditure
- Initial contribution to superannuation fund allowable in full
- Section 40(c) or 40-A(5) applies to employee-director
- Expenditure on diaries
- brochures
- film shows
- and chairman's statement not hit by section 37(3-A)
