1. R. K. ABICHANDANI, J.---The Income-tax Appellate Tribunal has referred the following eight questions for the opinion of this K Act, 1961: At the instance of the assessee-for both the assessment years 1974-15 and 1975-76: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right .In holding that the guarantee commission paid to ICICI is not revenue expenditure?
(2) Whether, on the facts and in the circumstance of the case, the Tribunal was right in ho ding that the 1/6th telephone expenses, and reimbursement of the medical. Expenses to the directors amounted to 'perquisite' within, the meaning of section 40A(5)/40(c) of the Act and, therefore, are not allowable?
(3) Whether, on the facts and, in the, circumstances of the case, the Tribunal was right in holding that the foreign tour expenses aggregating to Rs.58,314 and Rs.61,713 of the employees were not admissible as revenue expenditure?"
2. At the instance of the Commissioner of Income-tax for both the assessment years 1974-75 and 1975-76:--- "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in, law in coming to the conclusion that only 16th of the amount of the telephone expenses incurred by the assessee should be disallowed and that the entire expenses of insurance premium should be allowed having regard to the provisions of section 40A(5) read with section 40(c) of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case. The Tribunal was right in law in coming to the conclusion that in respect of its machinery division the assessee was entitled to development rebate at 25 per cent and not at 15 percent.?"
3. At the instance of the assessee-for the assessment year 1974-75 only: "(4) Whether, on the facts and in the circumstances of the case the Tribunal was right in ' holding that the legal expenses amounting to Rs.9,776 paid for resisting tote claim for higher compensation amounted to capital expenditure and hence not allowable?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Income-tax Officer was right in law in sending a revised draft order after one draft assessm ent order was sent and after appellant was heard by the Inspecting Assistant Commissioner of Income-tax under section 144B(4)?
(6) Whether, on the facts and in. The circumstances of the case, the Tribunal was right in holding that the loss of Rs.11,55,170 due to fluctuation in foreign exchange is capital expenditure and hence not allowable?"
4. The relevant assessm ent years are 1974-75 and 1975-76. The assessee company carries on business of manufacture of textiles, steel tubes, machineries, cylinders and chemicals. The textiles are manufactured by units Nos. l and 2 of Ambica Mills at Ahmedabad and unit No.3 at Baroda. The steel tubes are manufactured by the unit ---Ambica Tubes while cylinders are manufactured in the name of Ambica Cylinders. The assessee-company manufactures machineries in the name of Ambica Machinery while chemicals are manufactured in the name of Ambuja Chemicals. The first three questions are referred at the instance of the assessee for both the assessment years and the two question referred at the instance of the Commissioner are also for both the assessment years.
5. The last three questions are referred at the instance of the assessee for the assessment year 1974- 75.
6. Question No. 1: The assessee claimed allowance of Rs.1,33,611 for the assessment year 1974-75 and of Rs.1,48,036 for the assessm ent year 1975-76 being deferred ' payment of bank guarantee commission paid to the bank and Rs.3,49,128 paid as guarantee commission to ICICI in respect of the assessment year 1974-75 and Rs.1,36,582 similarly paid to the ICICI in respect of the assessment year 1975-76. The assessee had purchased machinery from foreign suppliers and for guaranteeing the payment, it had to pay commission to ICICI. On this question, the Tribunal applied the decision to this Court in CIT v. Vallabh Glass Works Ltd. (1982) 137 ITR 389 and held that this payment was not allowable, and reversed the order of the Commissioner of Income-tax (Appeals) restoring the order of the Income-tax Officer.
7. The question whether the guarantee commission paid by the assessee to the banker and the insurance company for ensuring deferred payment of purchase consideration of machinery was an admissible deduction under section 37 of the Income-tax Act, had come up for consideration before the Andhra Pradesh High Court in Addl. CIT v. Akkamba Textiles Ltd. (1979) 117 ITR 294 and the Court held that such expenditure constituted revenue expenditure and not capital expenditure and was, therefore, admissible as deduction from the income. This view came to be upheld by the Supreme Court in Addl. CIT v. Akkamba Textiles Ltd. (1997) 227 ITR 464, which was reiterated in the case of CIT v. Sivakami Mills Ltd. (1997) 227 ITR 465. In view of the said question having been concluded by the Supreme Court by holding that the guarantee commission paid in such cases was a revenue expenditure, question No. 1 referred at the instance of the assessee is answered in the negative; in favour of. The assessee and against the Revenue.
8. Question No.2 referred to at the instance of the assessee and question No. l referred to at the instance of the Commissioner: These questions relate to the benefits given to the directors by the company in the nature of medical expenses, telephone facility and insurance premium. These expenses were disallowed by the Income-tax Officer under section 40A(5), read with section 40(c) of the Act, but the Commissioner of Income-tax (Appeals) allowed them. The Tribunal taking into account the assessee's volume of business, considered the expenditure of one-sixth of the total amount for telephone facility, as expenditure incurred for the personal purposes of the directors and disallowed it to that extent holding that the balance should be allowed. The contention of the Revenue before us is that the entire expenditure on the telephone facility given to the directors should be treated as the benefit to the directors and computing in disallowance. There is no warrant for holding that the entire telephone facility was intended only for the personal purposes of the directors. The Tribunal, keeping in view the volume of the assessee's business, considered the expenditure upto one-sixth of the total amount for telephone expenses as for personal purposes of the directors and disallowed the same to that extent. That became a finding of fact and there is no error of law committed by the Tribunal in that regard.
9. As regards the medical expenses which were reimbursed to the directors by the assessee, the matter is squarely covered by the decision of this Court in Gujarat Steel Tubes Ltd. v. CIT (1994) 210 ITR 358, in which it was held that reimbursement of medical expenses incurred by the directors is a benefit to the director within the meaning of section 40(c)(i) of the said Act. Similar view has been taken by this Bench on March 11, 1998, in I.T.R. No.277 of 1987-Ambica Mills Ltd. v. CIT (1998) 231 ITR 583 in the assessee's own case in respect of the assessment year 1980-81 and it was held that the reimbursement of medical expenses to the director would fall in section 40(c)(i) of the Act and the decision of the Supreme Court in CIT v. Mafatlal Gangabhai & Co. (Pvt.) Ltd. (1996) 219 ITR 644, which was rendered in the context of payments made to the employees of the company under section 40A(5)(a)(ii) would not be applicable to such case. The Tribunal was, therefore, right in treating reimbursement of medical experC3es as not allowable.
10. As regards the insurance premium, the matter whether it was intended to be a benefit to the Director or not, would depend upon the nature of the policy, who had taken it out and whose obligation it is to pay the premiums. If the company had, by taking out such 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 and not the company. If such premiums are to be reimbursed to the Director which is the obligation of the Director himself to pay and not that of the company, qua the insurance company, then that would amount to a benefit to the Director. The Tribunal has applied the decision of the Delhi High Court in CIT v. Lala Shri Dhar (1972) 84 ITR 192 for allowing the entire expenditure of insurance premium on the footing that the facts of this case are similar in that regard. In Lala Shri Dhar's case (1972) 84 ITR 192 (Delhi), it was noted that the act of taking out of the insurance policy was not a voluntary act of the assessee himself and the decision to take the policy was taken by the company. It was the duty of the employer-company to pay the premium in respect of the insurance policy and there was nothing, on record to show that the assessee (in that case the Director) himself wanted to take the insurance. Learned counsel appearing for the Revenue wanted us to infer from a sentence in the assessment order that the amount of premium was paid to the Managing Directors and, therefore, it should be treated as an obligation which the Director was required to discharge, being reimbursed to him. The sentence on which reliance is placed reads as under: "In addition to the remuneration, house rent, medical expenses, travelling expenses for holiday resort, personal accident premium and provident fund contribution are paid by the company to these managing directors."
11. It will not be appropriate to take out the reference to payment in respect of personal accident premium from this composite sentence, which 'related to various payments, and to infer therefrom that the obligation to pay the premium was that of the managing directors and that they were being only reimbursed. No such contention seems to have been canvassed before the lower authorities. When the Tribunal was proceeded on the footing that the facts of the present case as regards the payment of insurance premium attracts the decision of the Delhi High Court in Lala Shri Dhar (1972) 84 ITR 192, there is no reason to adopt any different factual basis as sought to be suggested by the Revenue. We, therefore, hold that the Tribunal was right in allowing the entire expenses of insurance premium: Question No.2 referred at the instance of the assessee is, therefore, answered in the affirmative against the assessee and question No. l referred at the instance of the Commissioner is answered in the affirmative against the Revenue.
12. Question No.3: This question relates to foreign tour expenses of the employees in respect of the two assessment years in question. The amount of Rs.58,314 relates to the assessment year 1974-75. The break-up of this amount is given in paragraph 13 of the assessment order. The purpose of visit of the persons concerned was in connection with setting up of a new joint venture project in collaboration with the foreign parties is Malaysia and Indonesia. . The Income-tax Officer disallowed these expenses by treating them as expenses not expended wholly and exclusively for the purpose of business of the assessee. Similarly, in respect of the assessment year 1975-76, he disallowed the aggregate expenses of Rs.61.713 on the ground that the foreign travel expenses were not for export purposes and they were for new projects not connected with the present business of the assessee. The Commissioner of Income-tax (Appeals) allowed these expenses. The Tribunal following the assessee's own case in the assessme nt year 1972-73, allowed the Revenue's appeal by holding that these expenses ought to be disallowed.
13. Question No .2 referred at the instance of the Revenue: As, inter alia, provided by section 33 of the Act, as in force at the relevant time, a deduction was to be allowed in respect of a new machinery installed in the previous year or first put to use in the immediate succeeding previous year, of a sum by way of development rebate where the machinery was installed for the purposes of business of construction, manufacture or production.
14. Of any one or more of the articles or things specified in the list in the Fifth Schedule, of 35 percent.
15. Of the actual cost of the machinery to the assessee, where it was installed before- April 1, 1970, and 25 percent. Of such cost where it is installed after March 31, 1970. The assessee had claimed the higher rate of 25 percent. Of the cost in respect of the additional machinery installed in its textile division and machinery division. So far as textile machinery is concerned, it would be covered by item No. 32 of the list of articles and things contained in the Fifth Schedule, which refers to textiles (including those dyed, printed or otherwise processed), made wholly or mainly of cotton, including cotton yarn, hosiery and rope.
16. The higher rate claimed in respect of the machinery division is admissible if it is industrial machinery added in the machinery division of the assessee. Under item 4 of the Fifth Schedule, there is reference to "Industrial machinery specified under the heading '8. Industrial machinery' sub--heading 'A- Major items of specialized equipment used in specific industries', of the First Schedule to the Industries (Development and Regulation) Act, 1951". In the First Schedule to that Act, textile machinery is enumerated at V item No. 1. In view of the provisions of section 33(l)(b)(B)(i)(b) read with Schedule V to the said Act, the Tribunal was justified in coming to the conclusion that in respect of machinery division also the assessee was entitled to development rebate at the higher rate of 25 percent. Question No.2 referred at the instance of the Commissioner is, therefore, answered in the affirmative, in favour of the assessee and against the Revenue.
17. Question No.4: The assessee-company claimed legal expenses aggregating Rs.9,776, which were incurred by it in respect of a litigation relating to the payment of additional compensation in respect of the land acquired by the company at Vatva. The owner of the land had filed a claim in- the High Court for payment of higher compensation and the expenditure claimed by the assessee-- company, related to payment of fees to lawyers in connection with opposing the said claim for higher compensation. The Income-tax Officer disallowed the claim. Holding that it related to the acquisition of a capital asset and cannot be treated as a revenue outgoing The Commissioner of Income-tax (Appeals), however, held -that it was a revenue expenditure since the land was already acquired and the expenditure on legal fees was incurred for opposing the claim for additional compensation. He therefore allowed the deduction. The Tribunal held that the higher compensation would have formed part of the cost of the capital asset which would undoubtedly have been a capital expenditure. The Tribunal, therefore, took the view that the legal expenses were part of the capital cost and could not be allowed as a revenue expenditure.
18. The provisions of the Land Acquisition Act, 1894, inter alia, provide for acquisition of land for a company. Compensation is to be awarded in respect of the land which is to be acquired under the Act, in the award made in accordance with these provisions. A reference can be sought by a person interested, to the Court, inter alia, in respect of the amount of compensation and the Court determines the amount taking into consideration the factors indicated in section 23 of the Act.
19. Section 50 of the Land Acquisition Act provides that where the provisions of that Act are put in force for the purpose of acquiring land at the cost of any fund controlled or managed by a local authority or of any company, the charges of or incidental to such acquisition shall be defrayed from or by such fund or company. As provided by subsection (2) of section 50, in any proceedings held before a Collector or Court in such cases, the company concerned may appear and adduce evidence for the purposes of determining the amount of compensation. Section 54 of the Act provides that ail appeal shall be in any proceedings under the Land Acquisition Act in a High Court, from the award of -the Court. The compensation which is payable by the company under the Act for the land acquired for it, is the cost incurred by the company for acquiring the land. The amount of compensation can be raised by the Court in A reference made of in a further appeal before the High Court. What is ultimately fixed would also be the cost of the acquisition of the estate.
20. Therefore, when there is a claim for higher compensation putt up for the land acquired by the owner before the High Court and the company which is entitled to appear in the proceeding and adduce evidence for the purpose of determining the amount of compensation as envisaged by the provisions of section 50(2) of the Land Acquisition Act appears to defend a claim for higher compensation and incurs expenditure by way of legal fees, the expenses so incurred cannot be termed- as expenditure incurred for maintenance of the capital asset. Such legal expenses have a direct bearing on the ultimate fixation of the compositions, which would be the cost of the acquisition of the land and therefore would be an expenditure laid out for the acquisition of the capital asset. The legal expenses for defending the cost of acquisition from going higher by virtue - of the demand of a higher compensation for the land under acquisition would stand on the tame footing as the legal expenses incurred in respect of the acquisition of a- new asset, and these are not in the nature of expenses incurred in the ordinary course of maintaining the asset of the company, such as defending its title. Where the litigation expenses are incurred, as in the present case, for the purpose of creating, curing or completing the assessee's title to the capital asset, then the expenses incurred must be considered as of capital nature. The compensation payable in regard to the acquisition of the land was clearly capital expenditure and, therefore, the litigation expenses incurred in relation to such a capital expenditure must also be treated capital expenditure. The Tribunal was, in our view, right in holding that the legal expenses incurred by the assessee for resisting the claim for higher compensation amounted to capital expenditure and hence were not allowable as revenue expenditure. Question No. 4 referred at the instance of the assessee is, therefore, answered in the affirmative against the assessee: Question No.5 This question relates to the power of the Income-tax Officer to revise a draft of the proposed order of assessm ent under section 144E of the said Act. . Under the said provision; reference is required to be made to the Inspecting Assistant Commissioner in certain cases and the assessment can be completed by the income-tax Officer after following the procedure prescribed therein in accordance with the directions given by the Inspecting Assistant Commissioner for the guidance of the Income-tax Officer to enable him to complete the assessment.
21. Section 144B is a procedural provisions under which the Income-tax .Officer forwards "in the first instance." a draft order to the assessee. At that time such draft order is only 'a draft of the proposed order of assessm ent in which the Income-tax Officer proposes to make variations in the income or loss returned, which is prejudicial to the assessee and the amount of variation exceeds the amount fixed by the Board: At that stage of the assessment proceedings taken under section 143(3) of the Act, nothing is final. Therefore, if the Income-tax Officer detects some error or omission in the proposed order and revises it at that earlier point of time forwarding the revised order to the assessee, it cannot be said that he has made two independent proposed orders. The proposed order as revised remains the only draft order and when the assessee is given an opportunity to lodge his objections against the draft order is revised, there is no procedural illegality committed by the Income-tax Officer. When the revised draft order and the objections received from the assessee against it are all forwarded to the Inspecting Assistant Commissioner under subsection
(4) of section 144B, that would constitute a valid material for the Inspecting Assistant Commissioner for his consideration and issuance of directions, in respect of the matters covered by the objections, for the guidance of the Income-tax Officer to enable him to complete the assessm ent. The proceedings do not, in any way, get vitiated just because the Income tax Officer before forwarding the matter to the Inspecting Assistant Commissioner, revised his proposed order especially when he followed again the procedure of sending it to the assessee to enable him to object against the revised proposed order. There is no prejudice whatsoever caused to the assessee who is enabled to raise his objections against the proposed order as revised, nor is any vested right of the assessee adversely affected thereby. Until the assessment is completed by the Income-tax Officer under section 143(3) of the Act, he remains free to exercise his powers to complete the assessm ent. The process of preparation of a proposed order of assessment does not create any right in favour of the assessee to prevent the Income-tax Officer from revising such proposed order so long the assessee is given an opportunity to raise objections against it and they are duly forwarded for consideration of the Inspecting Assistant Commissioner under subsection
(4) of section 1448 of the Act. In our view, therefore, the Tribunal rightly held that there was nothing wrong in the Income-tax Officer revising the draft order and again giving an opportunity to the assessee to give his objections before forwarding these under section 1448(4) of the Act to the Inspecting Assistant Commissioner. The Tribunal rightly distinguished the decision of the Delhi High Court in Sudhir Sareen v. ITO (1981) 128 1TR 445, in which it was held that the Income-tax Officer can issue only one A draft order of assessment and .He has no power under section 1448 to issue more than one draft order, on the ground that in that case the Income-tax Officer had sent a second draft order enhancing theamount on the direction of the Inspecting Assistant Commissioner.As held by the Delhi High Court, under section 144E there is no suo motto power in the Inspecting Assistant Commissioner to call for the records: It was found that the second draft assessment order was the result of illegal directions given by the Inspecting Assistant Commissioner. Sudhir Sareen's case (1981) 128 ITR 445 (Delhi), therefore, stands altogether on a different footing and cannot help the assessee Question No.5 is, therefore, answered in the affirmative and against the assessee.
22. Question No.6: This question relates to the claim of the assessee in respect of loss of Rs.11,55,170 due to fluctuation in foreign exchange as revenue expenditure. The Commissioner of Income-tax (Appeals) held that this loss was allowable as business expenditure. The Tribunal, however, considered this expenditure as Capital expenditure and, therefore, not allowable, holding that the assessee would be entitled to depreciation in respect of thereof. Section 43A of the Act lays down special provisions consequential to changes in rate of exchange of currency As held by this Bench in its decision dated March 5, 1998, in Income-tax Reference No.227 of 1985 (CIT v. Windsor Foods Ltd. (1999) 235 ITR 249) under section 43A(1) of the Act, where there is a fluctuation in the exchange rate which increases or reduces the liability to pay the cost of the asset after it is acquired from a foreign country, liability so increased or reduced during the previous year is to be added or deducted from the actual cost of the asset, as defined in section 43(1) of the Act. When the loss so caused due to change in the rate of exchange is to be added in the actual cost of the asset as defined in clause
(1) of section 43 of the Act as provided by section 43A(1) of the Act, such loss is obviously required to be considered as a capital expenditure and it cannot be allowed as a revenue expenditure, as rightly held by the Tribunal. Question No.6 is answered in the affirmative and against the assessee.
23. The questions referred to us stand answered as above and the reference is disposed of accordingly with no order as to costs.