IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX REFERENCE NO.105 OF 1990 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. The Commissioner of Income-tax ) Bombay City II, Bombay )..Respondent A N D 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) The Commissioner of Income-tax ) Bombay City II, Bombay )..Applicant Versus M/s.Dorr-Oliver (India) Ltd., ) Bombay. )..Respondent. ---- Mr.B.V.Zaveri for the applicant. Mr.Suresh Kumar for the respondent. ---- Coram : F.I.Rebello & R.S.Mohite,JJ Date : 20.01.2009. Judgment :- ( Per : R.S.Mohite,J) 1. The questions referred by the Income-tax Appellate Tribunal under Section 256(1) are as under :- : 2 : (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 ? (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 ? (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 ? (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) ? (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 ? (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) ? (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.,? : 3 : 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. 3. Our answers to these questions are as under :- . 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. 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.CIT reported 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. 5. In so far as question no.4 is concerned, Counsel : 4 : 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). 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. 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). 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 : 5 : 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 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 : 6 : 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. 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. 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 : 7 : 32(1) (iii) of the Income Tax Act reads as under :- . 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- . (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 11. In the case of Pandit Lakshmikant Jha Vs.CIT reported in 75 ITR 790 (SC), the Supreme Court was 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 : 8 : the Supreme Court in the aforesaid judgment. We 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. 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. 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 : 9 : therefore, decided in the affirmative, against the revenue and in favour of the assessee. 14. In view of the answers as given, the reference stands disposed off with no order as to costs. (R.S.Mohite,J) (F.I.Rebello,J)