INCOME TAX OFFICER v. VEENA BOARD & PAPER MILLS (P) LTD
[Citation -1986-LL-0228-5]

Citation 1986-LL-0228-5
Appellant Name INCOME TAX OFFICER
Respondent Name VEENA BOARD & PAPER MILLS (P) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 28/02/1986
Assessment Year 1982-83, 1983-84
Judgment View Judgment
Keyword Tags business activity • source of income • interest earned • interest income • monies borrowed • heavy chemical • interest paid • plant
Bot Summary: The contention raised by the Department is that the CIT(A) had erred in holding that the expenditure in the nature of Director s remuneration and travelling had constituted expenditure that was necessary to retain the status of the company and as such, such expenditure was to be allowed as a deduction while computing the total income of the company. The ITO had not given a deduction for the other expenses debited to the profit and loss account of the company on the ground that these expenses were not incurred for earning income by way of interest on the fixed deposits of the company with the banks. The Tribunal found that though the assessee company in the relevant years did not carry on any business, yet it had to exist as a company and satisfy certain requirements of company law and that it was sine qua non before the assessee-company could earn any income from any source that is, it should exist as a company. The CIT came to the conclusion that the expenditure on, inter alia, Director s remuneration and travelling was to be regarded as being necessary expenditure incurred by the company to retain its status as company. The contention of the Department is that the CIT(A) had erred in holding that the expenditure on Director s remuneration and travelling had constituted expenditure which was necessary to be incurred by the company for retaining its status as company. No reason has been advanced by the Department to say that the said expenditure on travelling and Director s remuneration was not to be regarded as expenditure being necessary for retaining the status of the company. The question which we have to decide is whether the expenditure incurred by the assessee on Director s remuneration and travelling is to be considered as being expenditure necessary for retaining the status of a company.


R. N. PURI, A.M.: Order Appeals filed by Department in respect of assessments of assessee for asst. yrs. 1982-83 and 1983-84 were, for sake of convenience, consolidated and heard together as similar points were involved in these appeals for two years. After considering rival submissions, these appeals are disposed of as under : 2. contention raised by Department is that CIT(A) had erred in holding that expenditure in nature of Director s remuneration and travelling had constituted expenditure that was necessary to retain status of company and as such, such expenditure was to be allowed as deduction while computing total income of company. assessee is company constituted for purpose of manufacture of board and paper. company is in process of putting up its factory. During year under consideration, only source of income of company was interest on deposits with banks. During previous year ended 31st March, 1982, relevant to asst. yr. 1982- 83, income by way of interest amount to Rs. 28,800. During accounting period ended 31st March, 1983 relevant to asst. yr. 1983-84 income by way of interest was for Rs. 30,565. During these years, assessee-company was engaged in construction of factory and no business activity was done. There were certain expenses debited to P & L A/c. ITO, while computing total income of company, did not give deduction for these expenses. ITO gave deduction only for expenditure of Rs. 1,000 on account of audit fee. Thus, total income of company for asst. yr. 1982-83 was computed by ITO at Rs. 27,800 and for asst. yr. 1983-84 at Rs. 29,565. ITO had not given deduction for other expenses debited to profit and loss account of company on ground that these expenses were not incurred for earning income by way of interest on fixed deposits of company with banks. On appeal, CIT (A) considered question as to what extent expenditure incurred by company was to be allowed as deduction. It had been held by Allahabad High Court in case of CIT vs. Rampuer Timber & Turnery Co. Ltd. (1981) 21 CTR (All) 76 : (1981) 129 58 (All) that "expenditure incurred for retaining status of company, namely, miscellaneous expenses, salary, local expenses, travelling expenses etc., would be expenditure incurred wholly and exclusively for purpose of making or earning income." In that case, assessee company which had carried on business of manufacture and sale of wooden bobbins discontinued same in year 1951, but stocks which remained, were sold as and when customers were available, and balance was carried forward from year to year. assessee had claimed deduction of expenses of Rs. 11,295 for asst. yr. 1969-70 and Rs. 10,613 for asst. yr. 1970-71. ITO disallowed entire expenses for both years on ground that during relevant years assessee did not carry on any business. Tribunal found that though assessee company in relevant years did not carry on any business, yet it had to exist as company and satisfy certain requirements of company law and that it was sine qua non before assessee-company could earn any income from any source that is, it should exist as company. Tribunal had held that expenditure incurred towards that end was to be allowed as deduction. High Court affirmed decision of Tribunal on this behalf. Keeping in view this decision of Allahabad High Court, CIT (A) examined question as to what extent expenditure incurred by assessee during two years was to be regarded as necessary expenditure for retaining status of company. CIT (A) came to conclusion that expenditure on, inter alia, Director s remuneration and travelling was to be regarded as being necessary expenditure incurred by company to retain its status as company. CIT (A) hence directed ITO to allow expenditure by way of Director s remuneration and travelling as deduction while arriving at total income of company. Such expenditure on travelling and Director s remuneration for two years was as under : Asst. yr. Travelling Director s remuneration 1982-83 Rs. 2,801 Rs. 6,000 1983-84 Rs. 4,073 Rs. 6,000 3. In appeals filed by Department before us, allowance of above mentioned expenditure is contested. contention of Department is that CIT(A) had erred in holding that expenditure on Director s remuneration and travelling had constituted expenditure which was necessary to be incurred by company for retaining its status as company. We find that CIT(A) has on this behalf followed his decision for proceeding assessment years viz. 1981-82. Department had not made any appeal against decision of CIT(A) in respect of that assessment year. Before us, no reason has been advanced by Department to say that said expenditure on travelling and Director s remuneration was not to be regarded as expenditure being necessary for retaining status of company. Departmental Representative had argued that ratio of decision in Calcutta High Court in case of CIT vs. New Central Jute Mills Co. Ltd. (1979) 118 ITR 1005 (Cal) will apply to facts of this case. question to be decided in that case was whether interest paid by assessee to Government on loan obtained from government was to be allowed as deduction against interest income from amount of loan which had been deposited by assessee with bank. For purposes of setting up heavy chemical plant, assessee had obtained from government loan of Rs. 1.45 crores. amounts received under loan had been kept in deposit with bank. assessee had earned sum of Rs. 1,75,471 as interest thereon. In same year, assessee paid to government sum of Rs. 9,54,588 as interest. It was held by High Court that interest paid by assessee to government had to be capitalised and added to cost of plant. It was held that interest paid to government was not allowable as deduction against interest earned from Bank. According to High Court, purposes of assessee in obtaining loan was to defray cost of chemical plant. Thus, it was considered by High Court that expenditure by way of payment could not be said to have been incurred solely and wholly for purpose of earning interest from bank. High Court hence came to conclusion that interest paid by assessee on monies borrowed from government was not allowable as deduction against interest earned from bank. question, we are considering in appeal before us, is different, hence this decision of Calcutta High Court on which Department has relied, will be of no help to us to decide issue before us. question which we have to decide is whether expenditure incurred by assessee on Director s remuneration and travelling is to be considered as being expenditure necessary for retaining status of company. Since no argument has been presented before us which may suggest that CIT(A) wrongly decided issue, we uphold decision of CIT(A). 4. Departmental appeals are hence dismissed. *** INCOME TAX OFFICER v. VEENA BOARD & PAPER MILLS (P) LTD.
Report Error