Disposed

Dorr-Oliver(India) Ltd., C/O. Sharp and Tannon, Chartered Accountants, Bank of Baroda Building, Bom v. the Commissioner of Income-Tax, Bombay City Ii, Bombay.

Bombay HC20 Jan 2009ITR/105/1990

Case brief

AI extract

What is this about?

This court disposed of a reference from the Income-tax Appellate Tribunal regarding disallowances and deductions in an income tax case. The court answered specific questions on deductibility of fees, surtax, employee director disallowances, and terminal loss arising from a government-mandated book value sale of business assets.

What did the court decide?

Reference disposed with answers to questions in favor of revenue for questions 1, 2, 3, 5 regarding deductibility; in favor of assessee for questions 4, 6, 7 conceding deductibility under specific sec

Dorr-Oliver(India) Ltd., C/O. Sharp and Tannon, Chartered… — Income Tax | Bombay HC (2009)

¶1

 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
 ORDINARY ORIGINAL CIVIL JURISDICTION

¶2

 INCOME TAX REFERENCE NO.105 OF 1990

¶3

 In the matter of R.A.Nos.2583 & 2584(Bom)/1988
 (Arising out of ITA Nos.1881(Bom)/81 &
 3363(Bom)/1983)
 (Assessment Years : 1977-78 & 1978-79)
 Dorr-Oliver (India) Ltd., )
 C/o.Sharp & Tannon, Chartered )
 Accountants, Bank of Baroda Bldg.,)
 Bombay Samachar marg, Bombay. )..Applicant
 V/s.

¶4

 The Commissioner of Income-tax )
 Bombay City II, Bombay )..Respondent

¶5

 A N D

¶6

 R.A.Nos.2529, 2530 and 2532 (Bom)/1988
 (Arising out of ITA Nos.1181(Bom)/81 & 3363 & 3430/
 (Bom)/81
 (Assessment years : 1977-78 and 1978-79)

¶7

 The Commissioner of Income-tax )
 Bombay City II, Bombay )..Applicant

¶8

 Versus
 M/s.Dorr-Oliver (India) Ltd., )
 Bombay. )..Respondent.

¶9

 ----

¶10

 Mr.B.V.Zaveri for the applicant.

¶11

 Mr.Suresh Kumar for the respondent.

¶12

 ----
 Coram : F.I.Rebello & R.S.Mohite,JJ

¶13

 Date : 20.01.2009.

¶14

 Judgment :- ( Per : R.S.Mohite,J)

¶15

 1. The questions referred by the Income-tax
 Appellate Tribunal under Section 256(1) are as under

¶16

:-

¶17

 : 2 :

¶18

 (1) Whether, on the facts and in the circumstances
 of the case, the Income-Tax Appellate Tribunal erred
 in law in holding that the sum of Rs.8,80,518/-,
 Rs.3,31,144/- being part of the compensation and
 fees payable to M/s.Dorr-Oliver Inc. of U.S.A.
 under the agreement of 1st January, 1959 was not
 admissible as deduction in the computation of the
 assessee’s total income ?

¶19

 (2) Whether, on the facts and in the circumstances
 of the case the Tribunal ought to have held that the
 entire amount of Rs.19,21,847/- and Rs.7,22,526/-
 being the compensation and fees payable to
 Dorr-Oliver Inc. of U.S.A. was deductible in
 arriving at the assessee’s total income ?

¶20

 (3) Whether on the facts and in the circumstances of
 the case, the Income Tax Appellate Tribunal was
 right in law in holding that the assessee is not
 entitled to the surtax liability being allowed as a
 deduction in the computation of its income ?

¶21

 (4) Whether on the facts and in the circumstances of
 the case, the Tribunal was right in law in holding
 that the disallowances out of expenditure incurred
 on payment of salaries and provision of perquisites
 to employee directors should be made under the
 provisions of sec.40(c) of the I.T.Act and not under
 sec.40A(5) ?

¶22

 (5) Whether on the facts and in the circumstances of
 the case, the Tribunal was right in law in holding
 that the computation of disallowances under
 sec.40A(5) of the I.T.Act, in respect of employees
 who have retired during the year, the limit of
 Rs.5000/- per month is applicable for the salary
 paid during the period up to the date of retirement
 and separate overall limit of Rs.60,000/- is
 applicable in respect of retirement benefits ?

¶23

 (6) Whether on the facts and in the circumstances of
 the case, the Tribunal was right in law in holding
 that the disallowances out of expenditure incurred
 on payment of salaries and provision of perquisites
 to employee-directors should be made under the
 provisions of Sec.40(c) of the I.T.Act and not under
 these, of sec.40A (5) ?

¶24

 (7) Whether on the facts and in the circumstances of
 the case, the Tribunal was right in law in holding
 that the assessee is entitled to terminal allowance
 of Rs.7,22,065/- under sec.32(1)(iii) on the take
 over of its business as a going concern by
 M/s.Hindustan Dorr-Oliver Ltd.,?

¶25

 : 3 :

¶26

 2. Of these questions, question nos.1, 2 & 3 are
 referred at the instance of the assessee whereas
 question nos.4, 5, 6 & 7 are referred at the
 instance of the department.

¶27

 3. Our answers to these questions are as under :-

¶28

 . As regards question nos.1 & 2 are concerned,
 Counsel appearing for the parties are agreeable that
 the questions have been answered by this Court in
 the case of M/s.Dorr Oliver India Ltd., Vs. CIT
 reported in 234 ITR 723 in respect of Assessment
 year 1975-76. In the circumstances, the aforesaid
 questions are answered in the negative and in favour
 of the revenue.

¶29

 4. As far as question no.3 is concerned, Counsel
 for the parties are agreeable that the aforesaid
 question has been answered by this Court in the case
 of Lubrizol India Ltd., V/s.CITreported in 187 ITR
 25 and also by the judgment of the Supreme Court in
 the case of Smith Kline & French (I) Ltd., Vs. CIT
 reported in 219 ITR 581. In view of the aforesaid
 decision of the Bombay High Court and the Supreme
 Court, the question is therefore answered in the
 affirmative and in favour of the revenue.

¶30

 5. In so far as question no.4 is concerned, Counsel

¶31

 : 4 :

¶32

 for the parties are agreeable that the question has
 been answered by this Court in the case of CIT
 V/s.Hico Products Pvt.Ltd., (I) reported in 201 ITR
 567 and approved by the Supreme Court in the case of
 CIT Vs.Continental Construction Ltd., reported in
 230 ITR 485. The question is therefore, answered in
 the affirmative and in favour of the assessee, to
 extent allowable under Section 40(c).

¶33

 6. In so far as question no.5 is concerned, Counsel
 for parties agree that the question is answered by
 the judgment of this Court in the case of CIT Vs.
Mercantile Bank Ltd., reported in 237 ITR 676 which
 judgment has been followed by this Court in the case
 of CIT Vs. Citibank N.A. reported in 264 ITR 18
(Bom). The question is therefore, answered in the
 negative and in favour of the revenue.

¶34

 7. As far as question no.6 is concerned, Counsel
 for the parties submit that the question is answered
 by this Court in the case of CIT Vs. Hico Products
Pvt.Ltd., (I)reported in 201 ITR 567. The question
 is therefore, answered in the affirmative and in
 favour of the assessee to the extent that
 disallowance is permissible under Section 40(c).

¶35

 8. In so far as question no.7 is concerned, it
 would be necessary to mention a few facts which are
 germane for the answering of the said question. In

¶36

 : 5 :

¶37

 this case the assessee Dorr Oliver India Ltd.,
 wanted to assign its business to Hindustan Dorr
 Oliver Ltd., as a going concern at the market value.
 Government of India however, by its letter dated
 30.11.1974 addressed to the assessee, informed the
 assessee to get the valuation of the asset done and
 the transaction effected as per the book value.
 Ultimately the assignment was effected by an
 agreement dated 1.10.1976 w.e.f. 20.2.1977. It was
 the case of the assessee that on the date of the
 assignment, the written down value of the asset of
 the assessee company was Rs.21,52,932/-. Since the
 amount which could actually be realised as per the
 direction of Government of India was only the book
 value, the amount actually realised was only the
 book value i.e. Rs.14,30,866/-. This resulted in a
 short realisation and loss of Rs.7,22,065/-. In the
 circumstances, the assessee claimed a deduction of
 the loss suffered under Section 32(1)(ii). The
 assessing officer held that since the business was
 taken over by Hindustan Dorr Oliver Ltd., as a going
 concern, the loss of the assessee could not be
 turned as terminal loss but was a capital loss. He
 relied upon the judgment in the case of Sarabhai
Chemicals Pvt. Ltd., Vs. CIT(1980) 126 ITR 1. He

¶38

 also held that since this was not a transfer in view
 of Section 47(iv), even such capital loss would not
 be deductible as there was no transfer of a capital
 asset. The assessee preferred an appeal and argued

¶39

 : 6 :

¶40

 that since a definite price was fixed in respect of
 the assets transferred, the loss sufferred by the
 assessee was a terminal loss admissible under
 Section 32(1)(iii). The CIT (Appeals) found that
 the price in respect of the business transferred was
 not a slump price. He found that the assessing
 officer was wrong in holding that a capital asset of
 the business had been transferred as a going concern
 and consequently he directed the assessing officer
 to allow the claim of the assessee after due
 verification.

¶41

 9. The department preferred an appeal before the
 Tribunal and the Tribunal held that the loss has to
 be allowed as a terminal loss under Section 32(1)
 (iii) because the consideration was relatable to the
 value of the asset transferred. Tribunal thus
 confirmed the decision of the CIT (Appeals). The
 department filed an application for reference and
 this question was thus referred.

¶42

 10. We find from the record that this is a case
 where there was a specific stipulation of the
 Government of India to effect the transfer at book
 value. The transfer thus took place at the book
 value which was lesser than the market price of the
 said asset. The question is whether the loss
 suffered is one admissible to a deduction under
 section 32(1) iii. The relevant part of Section

¶43

 : 7 :

¶44

 32(1) (iii) of the Income Tax Act reads as under :-

¶45

 . 32(1) In respect of depreciation of buildings,
 machinery, plant or furniture owned by the assessee
 and used for the purposes of the business or
 profession, the following deductions shall, subject
 to the provisions of section 34, be allowed-

¶46

 . (iii) in the case of any building, machinery,
 plant or furniture which is sold, discarded,
 demolished or destroyed in the previous year (other
 than the previous year in which it is first brought
 into use), the amount by which the moneys payable in
 respect of such building, machinery, plant or
 furniture, together with the amount of scrap value,
 if any, fall short of the written down value thereof

¶47

 11. In the case of Pandit Lakshmikant Jha Vs.CIT
reported in 75 ITR 790 (SC), the Supreme Court was

¶48

 contemplating a situation where the assessee had
 sold his business of publication of 2 newspapers as
 a going business alongwith the assets and
 liabilities of the company to another company in
 consideration of the allotment of fully paid up
 shares. The sale deed executed recited the value of
 the movables including plant and machinery of the
 business and the said value was in excess of the
 written down value. The Income tax authorities
 sought to treat the excess over the written down
 value as profits under the second proviso of section
 10(2)(vii) of the Income-tax Act 1922. We find from
 the order of the Tribunal that the Tribunal has
 relied upon this judgment in the case of Pandit
 Lakshmikant Jha Vs. CIT reported in 75 ITR 790, SC,
 (supra). The finding of the Tribunal is that the
 present case is covered by the ratio laid down by

¶49

 : 8 :

¶50

 the Supreme Court in the aforesaid judgment. We

¶51

 find that the facts of the present case are not
 similar to the facts in Pandit Laxmikant Jha’s case
 and it will be incorrect to say that the Supreme
 Court judgment covers the issue as raised in the
 present case. The question before the Apex Court
 considered the assessment of profit under Section
 10(2) (vi) 1972 ( section 41(2) of the Income-tax
 Act 1961. The question of terminal allowance under
 section 31(iii) was not considered by the Apex Court
 as the case before it was one of sale effected at a
 price higher than the written down value.

¶52

 12. Some arguments were made by the Counsel for
 revenue on the basis of sections 45 & 47 of the
 Income-tax Act. In our view, these sections are not
 attracted to the facts of the present case as there
 is no capital gain in the present case as the
 assessee has suffered a loss.

¶53

 13. In our view, the plain reading of section 32(1)
 (iii), inter alia permits a deduction of the
 difference between the lesser amount of sale price
 and the written down value of the building, plant &
 machinery which are sold. In the present case the
 receipt of a lesser amount was dictated by a
 condition of sale laid down by the Government of
 India. The deduction was therefore, permissible
 under Section 32(1) (iii). The question is

¶54

 : 9 :

¶55

 therefore, decided in the affirmative, against the

¶56

 revenue and in favour of the assessee.

¶57

 14. In view of the answers as given, the reference

¶58

 stands disposed off with no order as to costs.

¶59

 (R.S.Mohite,J) (F.I.Rebello,J)

Dorr-Oliver(India) Ltd., C/O. Sharp and Tannon, Chartered Accountants, Bank of Baroda Building, Bom v. the Commissioner of Income-Tax, Bombay City Ii, Bombay.

Case brief

What is this about?

What did the court decide?

Dorr-Oliver(India) Ltd., C/O. Sharp and Tannon, Chartered Accountants, Bank of Baroda Building, Bom v. the Commissioner of Income-Tax, Bombay City Ii, Bombay.

Case brief

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What did the court decide?

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