Commissioner of Income Tax Vs General Electric Co. of India Ltd.

Tarun Chatterjee, J.

A common question was referred by the Tribunal u/s 256(1) of the Income Tax Act, 1961, (hereinafter referred to as "the Act"), for our decision. The question formulated above is in the following manner.

"Whether, on the facts and in the circumstances of the case and on a proper interpretation of section 37(3A) read with sub-section (3B) and the Explanation (c) below sub-section (3B), the Tribunal was right in law in holding that the expenditure on metered taxies was not hit by the aforesaid section ?"

The assessment years with which we are concerned in these cases are 1985-86 and 1986-87. General Electric Company of India Ltd. is the assessee. While computing the income of the assessee, the Commissioner of Income Tax found that the assessee had incurred a sum of Rs. 1,48,584 by way of expenditure on public taxies (metered taxies) when the employees of the assessee were on tour. The Commissioner of Income Tax noticed that the expenditure had not been taken into account for the purpose of making disallowance u/s 37(3A) of the Act. He was of the view that inasmuch as the expenditure had not been included in the expenditure to be considered for disallowance u/s 37(3A), the assessment was erroneous and prejudicial to the interests of the revenue. He, therefore, directed the Income Tax Officer to include the aforesaid expenditure in that amount to be considered for disallowance u/s 37(3A) of the Act. On appeal, the Tribunal held that the expenditure on metered taxies was not hit by section 37(3A) of the Act. On the aforesaid findings, the Tribunal had referred the question formulated above for our opinion. In this case, the short question that arises for our consideration is whether the expenditure incurred on hiring metered taxies had to be disallowed u/s 37(3A) of the Act as it stood at the relevant point of time.

Mr. Mallick, appearing on behalf of the department, contended before us that the expenditure incurred by the assessee on metered taxies will fall under the provision of section 37(3A) of the Act read with section 37(3B) and Explanation (c) as the language of section 37(3B) would clearly indicate that the expenditure incurred by the assessee on metered taxies would fall under that section. In support of his contention, Mr. Mallick relied on the decision of the Karnataka High Court in the case of Karnataka State Financial Corporation Vs. Commissioner of Income Tax, . The submission of Mr. Mallick was hotly contested by Dr. Pal, appearing on behalf of the assessee. Dr. Pal submitted that the decision referred to by the learned senior advocate for the department, i.e., Karnataka State Financial Corporation v. CIT (supra), cannot be said to have any application in the present case as it would be evident from the facts of that decision that the expenditure incurred by the employer by way of conveyance allowance, would fall within the provisions of section 37(3A) of the Act. Dr. Pal submitted that in the present reference cases this was not the position. As noted hereinabove, Dr. Pal contended that the question that was raised in the aforesaid Karnataka High Court decision was whether the expenditure incurred by an employer by way of conveyance allowance would fall within the provision of section 37(3A) of the Act whereas in the present reference cases the question that would be decided is whether the expenditure incurred on metered taxies would fall within the purview of section 37(3A) read with section 37(3B) and Explanation (c) of the Act. According to Dr. Pal, the expenditure incurred on metered taxies comes within the purview of section 37(3A) read with section 37(3B) of the Act as the Explanation (c) indicates clearly that such an expenditure cannot fall within the purview of the aforesaid sections. In this connection, Dr. Pal relied on two Division Bench decisions of the Bombay High Court, the first of which has been in Commissioner of Income Tax Vs. Mahindra Ugine and Steel Co. Ltd., and the other in Commissioner of Income Tax Vs. Indian Hume Pipe Co. Ltd., . In order to show that the expenditure incurred on metered taxies would not fall within the disallowance u/s 37(3A) read with section 37(3B) of the Act, Dr. Pal had drawn our attention to the statute being (1983) 140 ITR 156, in which it has been stated that the expenditure on chartering aircraft or the hire charges for engaging private taxies and on payment of conveyance allowance to employees and directors will be taken into account for the purpose of this disallowance. Accordingly, Dr. Pal submitted that the question formulated above must be answered in favour of the assessee and against the revenue.

Having heard the learned advocates appearing for the parties and after considering their respective submissions as noted hereinabove, we are of the view that before we come to a conclusion on the question mentioned above we must take into consideration the relevant provisions of the Act with which we are concerned in this case. Chapter IV deals with computation of total income. Clause D of this Chapter deals with profits and gains of business or profession. Sections 30 to 36 of the Act deal with instances where assessees are entitled to deduction. Section 37 is a general provision. It says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Section 37(3A) of the Act as on 1-4-1984, runs as under :

"(3A) Notwithstanding anything contained in sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds Rs. 1,00,000, 20 per cent of such excess shall not be allowed as deduction in computing the income chargeable under the head ''Profits and gains of business or profession''."

From a plain reading of section 37(3A) of the Act it is, therefore, clear that the items specified in sub-section (3B) of the Act, would not be allowed to be deducted in computing the income chargeable under the head ''Profits and gains of business or profession''. Now let us turn to section 37(3B) which runs as follows :

"(3B) The expenditure referred to in sub-section (3A) is that incurred on

(i) advertisement, publicity and sales promotion ; or

(ii) running and maintenance of aircraft and motor cars ; or

(iii) payments made to hotels."

In the present reference cases we are concerned with clause (ii) of section 37(3B) of the Act. There is an Explanation also given by the legislature for the purposes of sub-sections (3A) and (3B). We are only concerned in the present cases with the words used in sub-section (3B)(ii), i.e., "expenditure on running and maintenance of aircraft and motor cars" shall include

"(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire ;

(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also."

In our view, after considering the above relevant provisions of the Act on the question formulated above we are of the view that the expenditure incurred on metered taxies is inclusive of expenditure on running and maintenance of aircraft and motor cars. Section 37(3A) clearly says that where any expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds Rs. 1,00,000, 20 per cent of such excess shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession." We also noted hereinbefore that in the present reference cases we are concerned with running and maintenance of aircraft and motor cars which included expenditure on hire charges for engaging cars plying for hire. In our view, the expenditure incurred on metered taxies would not at all come within the purview of section 37(3A) read with sub-section (3B) of the Act. As noted hereinbefore section 37 deals with general deduction which should be allowed. Any expenditure which is not an expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee should be allowed in computing the income chargeable under the head "Profits and gains of business or profession." Therefore, from a plain reading of section 37(1) of the Act all business expenditure is allowable u/s 37 of the Act. But a restriction has been made by the legislature in section 37(3A) of the Act which clearly says that the expenditure incurred on hiring motor cars as well as for the employees while they are on duties shall not be allowed to be deducted from the head "Profits and gains of business or profession." Section 37(3B) clearly uses the word "running and maintenance of aircraft and motor cars" which shall include expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plying, for hire and conveyance allowance paid to the employees and the directors where the assessee is a company. Keeping this provision in mind let us consider whether the expenditure incurred on metered taxies can include the expenditure on running and maintenance of motor cars. In our view, Explanation (c) given in clause (ii) of section 37(3B) of the Act cannot be brought into action in a case of metered taxies because it is neither an expenditure incurred on hire charges for engaging cars plying for hire nor it was a conveyance allowance paid to employees. It is an expenditure incurred for travelling in a metered taxi which is totally a different concept altogether. In the case of CIT v. Mahindra Ugine and Steel Co. Ltd. (supra), a Division Bench of the Bombay High Court clearly held that in fact section 37(3B) refers to an expenditure incurred on running and maintenance of motor cars. While considering this aspect of the matter, the Bombay High Court in the aforesaid decision made the following observation :

"We do not find any merit in the above contention. The Explanation must be read along with section 37(3B) and, if so read, it is clear that conveyance paid to employees who were not owning cars but who were owning scooters or who were commuting by train or by bus cannot fall within section 37(3B). In fact, section 37(3B) refers to expenditure incurred on running and maintenance of motor cars. In this case, we are concerned with conveyance allowance paid to employees owning two wheelers or who were commuting by train or bus. Hence, we do not see any reason to interfere with the findings given by the Tribunal." (Emphasis, here italicised in print, supplied)

The view expressed by us is also supported by another decision of the Bombay High Court as referred to hereinbefore, i.e., CIT v. Indian Hume Pipe Company Ltd. (supra). Before we part with these two reference cases we may consider the decision cited by Mr. Mallick, appearing on behalf of the Commissioner of Income Tax. This is the decision in Karnataka State Financial Corporation v. CIT (supra). In our view, the facts of that case can be distinguished from the facts of the present case. In that decision the question was whether the conveyance allowance which was paid to the employees who owned two wheelers, could be included within the calculation for disallowance u/s 37(3A) of the Income Tax Act. In the present case we are not concerned with Explanation (c)(ii) of section 37(3B) of the Act which was under consideration before the Karnataka High Court. In the present case, we are concerned with Explanation (c)(ii) which deals with expenditure for hire charges of motor cars (metered taxies) plying for hire. Therefore, we do not find any reason to apply the principles laid down in the Karnataka High Court decision in the facts and circumstances of this case. Accordingly, we answer the question referred to us in favour of the assessee and against the department.

There will be no order as to costs.

Asit Kumar Bisi, J.I agree.