The Commissioner Of Income-Tax, Patiala v. M/S. Punjab Tractors Ltd, Mohali

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH --- Income-tax Reference No. 211 of 1995Date of Decision: July 1, 2010 The Commissioner of Income-tax, Patiala Versus --- Petitioner M/s. Punjab Tractors Ltd, Mohali. --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL *** PRESENT: Ms. Urvashi Dugga, Advocatefor the petitioner. Mr. Pankaj Jain, Advocatefor the respondent. --- AJAY KUMAR MITTAL, J. The Income-tax Appellate Tribunal, Chandigarh Bench,Chandigarh (in short “the Tribunal”), at the instance of the Revenue,pursuant to the directions of this Court, issued vide order dated20.7.1993, in petition filed under Section 256(2) of the Income-taxAct, 1961 (for short “the Act”), has referred the following question oflaw for the opinion of this Court: “Whether, on the facts and in the circumstances of thecase, the ITAT was right in law in holding the expenditure involved in the cost of tractors gifted away to foreignGovernment, as allowable under Section 37(1) of theIncome-tax Act?” The dispute referred to herein pertains to the assessment year 1980-81. The assessee-respondent, while filing itsrevised return, excluded certain expenditure made on entertainmentand on account of gifts. The Assessing Officer disallowed theexpenditure of Rs. 1,51,570/- pertaining to tractors gifted to foreignGovernments, under Rule 6-B of the Income-tax Rules, 1962 (inshort “the Rules”). This expenditure was held to be disallowable bythe Assessing Officer as business expenditure as well as for purposeof weighted deduction under Section 35-B of the Act. Thedisallowance of the expenditure was upheld vide order dated16.8.1985 by the Commissioner of Income-tax (Appeals),Chandigarh. The assessee carried the matter before the Tribunal. The Tribunal also, vide order dated 25.4.1990, upheld the disallowance ofthe expenditure. Subsequently, the assessee moved a miscellaneouspetition. The Tribunal on re-consideration of the matter recalled itsorder dated 25.4.1990 and deleted the disallowance of theexpenditure vide order dated 26.6.1991, on the ground that thetractors sent by the assessee to foreign trade fairs weresubsequently given to the foreign Governments and to the delegatesof the foreign countries, as gifts. The cost of the tractors was Rs.1,45,970/- and a sum of Rs. 5,600/- was the freight and packingcharges etc. The Tribunal observed that it was uneconomical tobring back the tractors to India and, therefore, the expenditure incurred by way of gifts is liable to be treated as expenditure incurredfor the purpose of business. The Tribunal observing further that itwas not an expenditure on advertisement but incidental to thecarrying on the business held the said amount allowable underSection 37(1) of the Act. The point for consideration in this Reference, therefore,is, whether the cost of the tractors, which were gifted away to foreigngovernments, was an allowable deduction under Section 37(1) of theAct? Section 37(1) of the Act, at the relevant time, reads thus:“37. General -(1) Any expenditure (not beingexpenditure of the nature described in sections 30 to 36and Section 80VV, and not being in the nature of capitalexpenditure or personal expenses of the assessee), laidout or expended wholly and exclusively for the purposesof the business or profession shall be allowed incomputing the income chargeable under the head "Profitsand gains of business or profession.” [Explanation- For the removal of doubts, it is herebydeclared that any expenditure incurred by an assesseefor any purpose which is an offence or which is prohibitedby law shall not be deemed to have been incurred for thepurpose of business or profession and no deduction orallowance shall be made in respect of such expenditure.] A plain reading of the aforesaid provision clearly showsthat Section 37(1) of the Act is a residuary provision and it provides [Explanation- For the removal of doubts, it is herebydeclared that any expenditure incurred by an assesseefor any purpose which is an offence or which is prohibitedby law shall not be deemed to have been incurred for thepurpose of business or profession and no deduction orallowance shall be made in respect of such expenditure.] A plain reading of the aforesaid provision clearly showsthat Section 37(1) of the Act is a residuary provision and it provides deductions of all expenditure which is neither capital expenditure norpersonal expenses of the assessee but incurred wholly andexclusively for the purpose of business where such expenditure is notexpressly covered by any specific provision of the Act. In otherwords, the following conditions are required to be satisfied before anexpenditure is eligible to be allowed under this residuary provision:- (a)the expenditure must not fall under Sections 30 to 36and Section 80VV;and Section 80VV; (b)the expenditure must have been incurred wholly andexclusively for the purposes of the business of theassessee; exclusively for the purposes of the business of theassessee; (c) the expenditure must not be capital expenses; (d)the personal expenditure of the assessee is notallowable;allowable; Applying the aforesaid conditions to the present case, it cannot be said that gift of the tractors to foreign governments andexpenses on freight and packing etc. are not for business expediencyand would not fall under Section 37(1) of the act. The Tribunal, onre-consideration of the matter had in its order dated 26.6.1991recorded that since the tractors were sent abroad for participation inthe trade fairs for the purpose of demonstration in the fields andproving the worth thereof and all this resulted in procurement ofexport orders, the calling back of the tractors was not consideredproper and the same were left in the foreign countries. The Tribunalcommented that the tractors were entrusted to the Government, theexpenditure on the said tractors could not be said to be expenditureon advertisements. The Tribunal further observed in clear terms that the participation in foreign trade exhibitions and the decision for notcalling back the tractors due to the transactions being uneconomicalhas to be held for business expediency. On the basis of theseobservations, the Tribunal held that the claim made by the assesseein the context noticed above was allowable under Section 37(1) ofthe Act. In the facts and circumstances noticed above, this Courtalso records its concurrence to the view taken by the Tribunal.Accordingly, we answer the question referred to for the opinion of thisCourt against the Revenue and in favour of the assessee. TheReference stands disposed of accordingly. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) JUDGE