Kochuveli v. The Cit, Kerala[[1]],While

*THE HON’BLE SRI JUSTICE GODA RAGHURAMAND THE HONB’BLE SRI JUSTICE M.S RAMACHANDRARAO + [RC No.58 of 1997 ] Novopan India Ltd v.The Commissioner of Income Tax, A.P. Hyderabad andothers % 31-12-2012 !Counsel for the petitioner : Counsel for the Respondents: <Gist : >Head Note: ? Cases referred: THE HON’BLE SRI JUSTICE GODA RAGHURAMANDTHE HON’BLE SRI JUSTICE M.S. RAMACHANDRA RAO RC No.58 of 1997 Order : ( Per Sri MSR, J ) This Reference has been made by the IncomeTax Appellate Tribunal, Hyderabad-A Bench,Hyderabad under Section 256 (1) of the Income TaxAct, 1961 ( for short “the Act”) for the opinion of thisCourt on the following question of law arising out ofits order dated 13.10.1995 in ITA No.687/Hyd/91 forthe assessment year 1985-86 i.e. “Whether on thefacts and in the circumstances of the case, theHon’ble Income Tax Appellate Tribunal, Hyderabadis correct in holding that the daily allowance paid tothe employees would partake the character of hotelexpenses for the purpose of disallowance under.Section 37(3-A) to (3D)?” The assessee M/s. Novopan India Limited, Hyderabad is engaged in the manufacture and saleof plain and laminated particle boards etc. For theassessment year 1985-86, it filed return declaring“nil” income on 30.9.1985. The assessing officer, while completing the assessment under Section 143(3) of the Act, disallowed an amount of Rs.1,08,915/- representingdaily allowance paid to the employees of theassessee under Section 37(3A) to (3D) on theground that the “daily allowance” paid to theemployees has to be treated similar to “paymentsto hotels”. On appeal, the CIT (Appeals) confirmed the disallowance by order dated 22.1.1991. However,he held that the hotel expenses of Rs.5,10,899/-included daily allowance of Rs.1,09,815/- paid tothe employees. Therefore he directed that the totalhotel expenses should be taken at Rs.5,10,899/-minus Rs.1,09,815/- = Rs.4,01,984/- as againstRs.5,10,899/- adopted by the assessing authority inthe assessment order. But he rejected thecontention of the assessee that the daily allowancepaid to employees has to be meted out a separatetreatment as distinct from payments to hotels on theground that such daily allowances paid to theemployees were meant to take care of theirtraveling expenses on tour including boarding andlodging. Therefore he confirmed the assessingofficer’s treatment of “daily allowances” as falling inthe same category as “payments to hotels”. Aggrieved by the later portion of the order of CIT (Appeals), as mentioned above, the assessee filed ITA No.687/Hyd/91 to the Income TaxAppellate Tribunal, Hyderabad A Bench,Hyderabad. By order dated 13.10.1995, the saidappeal was dismissed holding that the CIT(Appeals)was right in treating such daily allowances paid tothe employees as similar to payment to hotels andthat even the travel policy manual filed before theTribunal supports the said conclusion. However, on an application under Section256(1) of the Act filed by the assessee, the Tribunalfelt that a referable question of law as set out abovearose out of its order and therefore made thereference. The said reference has been numberedas RC No.58 of 1997. Heard Sri Shravan Kumar, learned counselrepresenting Sri C. Kodanda Ram, learned SeniorCounsel appearing for the petitioner and Sri S.R.Ashok, learned Senior Standing Counsel for theRevenue. Sri Shravan Kumar, counsel for the petitionercontended that daily allowances paid by theassessee to its employees is distinct in characterfrom hotel expenses and such daily allowances alsoshould be disallowed in terms of section 37(3A) to(3D) of the Act; that such expenditure incurred bythe assessee is an expenditure incurred in respect of “business carried on by the assessee” andtherefore is liable to be disallowed under Section37(3A) to (3D) of the Act; and that the SupremeCourt in TRAVANCORE TITANIUM PRODUCT LTD, KOCHUVELI v. THE CIT, KERALA[[1]],while Heard Sri Shravan Kumar, learned counselrepresenting Sri C. Kodanda Ram, learned SeniorCounsel appearing for the petitioner and Sri S.R.Ashok, learned Senior Standing Counsel for theRevenue. Sri Shravan Kumar, counsel for the petitionercontended that daily allowances paid by theassessee to its employees is distinct in characterfrom hotel expenses and such daily allowances alsoshould be disallowed in terms of section 37(3A) to(3D) of the Act; that such expenditure incurred bythe assessee is an expenditure incurred in respect of “business carried on by the assessee” andtherefore is liable to be disallowed under Section37(3A) to (3D) of the Act; and that the SupremeCourt in TRAVANCORE TITANIUM PRODUCT LTD, KOCHUVELI v. THE CIT, KERALA[[1]],while considering section 10(2)(xv) of the Act has heldthat to be a permissible deduction, it is sufficient ifthere is a direct and intimate connection betweenthe expenditure and the business ; it must beincidental to the business and must be necessitatedor justified by commercial expediency; andtherefore the subject allowances should also havebeen treated separately from hotel expenses anddisallowed under section 37(3A) to (3D) of the Act. Sri S.R. Ashok, learned Senior Counselappearing supports the decision of the CIT(Appeals) and of the ITAT and contends that theyhave rightly treated daily allowances paid to theemployees as similar to hotel expenses. We have considered the respective submissions. The subject assessment year is 1985-86 corresponding to the previous year 1984-85. Witheffect from 1.4.1984, the Finance Act, 1983introduced sub sections (3A) to (3D) to Section 37of the Act[[2]]. Thus, at the relevant time, the provision read as follows: “ Section 37 : General: (1)Any expenditure (not being expenditureof the nature described in sections 30 to36 and section 80vv and not being in thenature of capital expenditure or personalexpenses of the assessee), laid out orexpended wholly and exclusively for thepurposes of the business or professionshall be allowed in computing the incomechargeable under the head “profits andgains of business or profession”.of the nature described in sections 30 to36 and section 80vv and not being in thenature of capital expenditure or personalexpenses of the assessee), laid out orexpended wholly and exclusively for thepurposes of the business or professionshall be allowed in computing the incomechargeable under the head “profits andgains of business or profession”. ….(2) “(3A) Notwithstanding anything contained insub-section(1), where the expenditure or, asthe case may be, the aggregate expenditureincurred by an assessee on any one or moreof the items specified in sub-section (3B)exceeds one hundred thousand rupees,twenty per cent of such excess shall not beallowed as deduction in computing the incomechargeable under the head “Profits and gainsof business or profession”. (3B) The expenditure referred to in sub-section (3A) is that incurred on –(i)advertisement, publicity and salespromotion; orsection (3A) is that incurred on –(i)advertisement, publicity and salespromotion; or (ii)running and maintenance of aircraft andmotor cars; ormotor cars; or (iii)payments made to hotels Explanation – For the purpose of sub-sections(3A) and (3B), - (a)the expenditure specified in clause (i) toclause (iii) of sub-section (3B) shall be theaggregate amount of expenditure incurredby the assessee as reduced by so much ofsuch expenditure as is not allowed underany other provision of this Act;clause (iii) of sub-section (3B) shall be theaggregate amount of expenditure incurredby the assessee as reduced by so much ofsuch expenditure as is not allowed underany other provision of this Act; (b)expenditure on advertisement, publicity andsales promotion shall not includeremuneration paid to employees of thesales promotion shall not includeremuneration paid to employees of the assessee engaged in one or more of thesaid activities;said activities; (c)expenditure on running and maintenance ofaircraft and motor cars shall include – (a)the expenditure specified in clause (i) toclause (iii) of sub-section (3B) shall be theaggregate amount of expenditure incurredby the assessee as reduced by so much ofsuch expenditure as is not allowed underany other provision of this Act;clause (iii) of sub-section (3B) shall be theaggregate amount of expenditure incurredby the assessee as reduced by so much ofsuch expenditure as is not allowed underany other provision of this Act; (b)expenditure on advertisement, publicity andsales promotion shall not includeremuneration paid to employees of thesales promotion shall not includeremuneration paid to employees of the assessee engaged in one or more of thesaid activities;said activities; (c)expenditure on running and maintenance ofaircraft and motor cars shall include – (i)expenditure incurred onchartering any aircraft andexpenditure on hire charges forengaging cars plied for hire;(ii)conveyance allowance paid toemployees and, where theassessee is a company,conveyance allowance paid to itsdirectors also. (3C) Nothing contained in sub-section(3A) shall apply in respect of expenditureincurred by an assessee, being adomestic company as defined in clause(2) of section 80B, or a person ( otherthan a company) who is resident in Indiain respect of expenditure incurred whollyand exclusively on – (i) advertisement, publicity andsales promotion outside India inrespect of the goods, services orfacilities which the assessee dealsin or provides in the course of hisbusiness; Running and maintenance ofmotor cars in any branch, office oragency maintained outside India forthe promotion of the sale outsideIndia of such goods, services orfacilities. (3D) No disallowance under sub-section(3A) shall be made – (i)in the case of an assesseeengaged in the business ofoperation of aircraft, in respect ofexpenditure incurred on runningand maintenance of such aircraft;(ii)in the case of an assessee engaged in the business of runningmotor cars on hire, in respect ofexpenditure incurred in running andmaintenance of such motor cars.” A reading of the above provision indicatesthat where the expenditure or as the case may be,the aggregate expenditure incurred by an assesseeon any one or more of the following, i.e. (i)advertisement, publicity, sales promotion (ii)running and maintenance of air craft and motor carsand (iii) payments made to hotels exceeds Rs.1,00,000/-, 20% of such excess shall not beallowed as deduction in computing the incomechargeable under the head “profits and gains ofbusiness or profession”. Sub Rule (1) of Rule 6 D of the Income TaxRules, 1962 deals with expenditure incurred by anassessee in connection with traveling by anemployee or any other person out side India. Weare not concerned with this here. But Sub Rule (2)deals with such expenditure incurred within India,which states as follows: “S.6-D (2): The allowance in respect ofexpenditure incurred by an assessee inconnection with traveling by an employee orany other person within India outside theheadquarters of such employee or otherperson for the purposes of the business orprofession of the assessee shall not exceed the aggregate of the amounts computed ashereunder : ( a) in respect of travel by rail,road, waterway or air, the expenditure actuallyincurred; (b) in respect of any otherexpenditure (including hotel expensesor allowances paid) in connection with suchtravel, an amount calculated at the followingrates for the period spent outside suchheadquarters; (i) in respect of an employeewhose salary is Rs.1,000 per month or moreRs.100 per day or part thereof; (ii) in respect ofany other employee Rs.50 per day or partthereof; (iii) in respect of any other person anamount calculated at the rates applicable inthe case of the highest paid employee of theassessee: Provided that, if the stay of suchor other outside hisemployee person headquarters is at Bombay, Calcutta or Delhi,the amount computed at the aforesaid rateshall be increased by a sum equal to fiftypercent of such amount: Provided that, if the stay of suchor other outside hisemployee person headquarters is at Bombay, Calcutta or Delhi,the amount computed at the aforesaid rateshall be increased by a sum equal to fiftypercent of such amount: Provided further that in a case wheresuch employee or other person on any day ofhis stay outside his headquarters, stays free ofcharge in a guest house maintained by theassessee, the amount under this clause shallbe calculated at one-third of the aforesaidrates and where the employee or such otherperson is provided lodging only free of charge,at one-half of the aforesaid rates.” Thus Rule 6-D (2) (b) of the rules clearlytreats “hotel expenses” and “allowances paid to theemployees” similarly and does not treat themdistinctly. Therefore, the contention of the assesseethat daily allowances paid to the employees under section 37(3A) to (3D) should be treated separatelyas distinct from payments to hotels, cannot beaccepted. Therefore, we answer the reference inquestion in the affirmative and hold that theTribunal was correct in treating the daily allowancepaid to employees of the assessee as having thesame character as hotel expenses for the purposeof disallowance under section 37(3A) to (3D) of theAct. As regards the contention of the assesseethat such daily allowance is an expenditure incurredin the year of account in respect of the businesscarried on by the assessee; that it being wholly andexclusively expended for the purpose of thebusiness and is incidental to the business; that ithas a direct and intimate connection with thebusiness and therefore should be disallowed undersection 37(3A) to (3D) of the Act is concerned, wehold that the said issue is not the subject matter ofthe reference to this Court, and as such, we declineto express any opinion on it. The reference is answered as above. JUSTICE GODA RAGHURAM JUSTICE M.S. RAMACHANDRA DATE: 31-12-2012KKSection computer THE HON’BLE SRI JUSTICE GODA RAGHURAMANDTHE HON’BLE SRI JUSTICE M.S. RAMACHANDRA RAO RC No.58 of 1997 31-12-2012 [1]AIR 1966 SC 1250 [2]Sub sections (3A) to (3D) of Section 37 were omitted by the FinanceAct, 1985 with effect from 1.4.1986.