JUDGMENT
Abichandani, J.
1. The Tribunal, Ahmedabad, has referred the following eight questions for the opinion of this Court under section 256(1) of the Income-tax Act, 1961.
2. At the instance of the assessee – 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 holding that the guarantee commission paid to ICICI is not revenue expenditure ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding 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 our expenses aggregating to Rs. 58,314 and Rs. 61,713 of the employees were not admissible as revenue expenditure ?”
3. At the instance of the Commissioner 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 1/6th 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 per cent ?”
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 the 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 holding that the ITO was right in law in sending a revised draft order after one draft assessment order was sent and after appellant was heard by the IAC 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 assessment 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 unit Nos. I 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 questions referred at the instance of the Commissioner are also for both the assessment years. The last three questions are referred at the instance of the assessee for the assessment year 1974-75.
5. Question No. 1 :
2. The assessee claimed allowance of Rs. 1,33,611 for the assessment year, 1974-75 and Rs. 1,48,036 for the assessment 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 J974-75 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 of this Court in CIT v. Vallabh Glass Works Ltd [1982] 137 ITR 389 (Guj.) and held that this payment was not allowable, and reversed the order of the Commissioner (Appeals) restoring the order of the ITO.
6. 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 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 Hon’ble Supreme Court in Addl CIT v. Akkamba Textiles Ltd. [1997] 227 ITR 464 (SC), which was reiterated in the case of CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465/95 Taxman 93 (SC). 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, the question No. 1 referred at the instance of the assessee is answered in the negative in favour of the assessee and against the revenue.
7. Question No. 2 referred at the instance of the assessee and question No. I referred at the instance of the Commissioner :
3. The 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 ITO under section 40A(5), read with section 40(c) of the Act, but the Commissioner (Appeals) allowed them. The Tribunal, taking into account the assessees’ 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 a benefit to the directors and computed 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 the fact and there is no error of law committed by the Tribunal in that regard.
8. 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). Similar view has been taken by this Bench on 11-3-1998 in Ambika Mills Ltd v. CIT [1998] 99 Taxman 341, 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) and the decision of the Supreme Court in CIT v. Mafatlal Gangabhai & Co. (P.) Ltd [1996] 219 ITR 644 (SC) 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 expenses as not allowable.
9. 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 (supra), 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. The 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.”
10. It will not be appropriate to take out 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 has proceeded on the footing that the facts of the present case as regards the payment of insurance premium attract the decision of the Delhi High Court in Lala Shri Dhar’s case (supra), 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.
11. The question No. 2 referred at the instance of the assessee is, therefore, answered in the affirmative against the assessee and question No. 1 referred at the instance of the Commissioner is answered in the affirmative against the revenue.
12. Question No. 3 :
4. 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 per sons concerned was in connection with the setting up of a new joint venture project in collaboration with the foreign parties in Malaysia and Indonesia. The ITO 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 these 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 (Appeals) allowed these expenses. The Tribunal following the assessee’s own case in the assessment year 1972-73, allowed the revenue’s appeal by holding that these expenses ought to be disallowed.
13. In McGaw Ravindra Laboratories (India) Ltd v. CIT [1994] 210 ITR 1002 (Guj.), where the Court found that the manufacturing unit, which was to be established in Malaysia and for which its employees had gone to Malaysia, was going to be an independent unit and that it was not to be a continuation of the business of the assessee, it was held that the Tribunal rightly treated the expenses on foreign travel for exploring the possibility of establishing a joint venture as an expenditure of capital nature. Even in Shahibag Entrepreneurs (P.) Ltd. v. CIT [1994] 210 ITR 998 (Guj.), this Court while dealing with a similar question where the foreign tours were undertaken by the directors and the employees of the assessee-company for establishing its unit in foreign countries in collaboration with others and such units were not going to be a part and parcel of the existing unit of the assessee-company, held that the Tribunal correctly treated such expenditure as expenditure of capital nature. In the present case also the purpose of visit of the directors and employees to foreign countries was to set up new projects in collaboration with the Indonesian Government. Such expenses, cannot therefore, be treated as revenue expenditure and the Tribunal rightly held that the expenditure was of capital nature and was not revenue expenditure. The question No. 3 is, therefore, answered in the affirmative, against the assessee.
14. Question No. 2 referred at the instance of the revenue :
5. In the assessment year 1974-75, the assessee-company had claimed development rebate on addition to machinery under various heads and the ITO, so far as machinery division is concerned, disallowed the development rebate at 25 per cent, following earlier years’ order. As regards the development rebate at the higher rate of 25 per cent in respect of the additions to machinery in the textile division, the ITO held that the machinery installed by the company cannot be said to be for the purpose of business of production of textiles made fully or mainly of cotton because it was not denied by the assessee that in some of the textiles manufactured by the company the percentage of cotton content was less than 51 per cent. The ITO, therefore, allowed development rebate at the rate of 15 per cent which was claimed. Similar view was taken by the ITO in respect of the claim for the assessment year 1975-76. The Commissioner (Appeals) on the basis of the information available as regards the cotton consumption and terene consumption in respect of the assessment year 1974-75, accepted the claim of the assessee for the higher development rebate of 25 per cent on the additions to machinery in the textile division. In the order made in respect of the assessment year 1975-76, the Commissioner (Appeals) accepted the assessee’s claim that out of a total 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 ITO disallowed the claim holding that it related to the acquisition of a capital asset and cannot be treated as a revenue outgoing. The Commissioner (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.
15. 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. 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 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 sub-section (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 purpose of determining the amount of compensation. Section 54 of the Act provides that an appeal shall lie 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 or in a further appeal before the High Court. That what is ultimately fixed would also be the cost of the acquisition of the estate. Therefore, when there is a claim for higher compensation put up for the land acquired by the owner before the High Court and the company which is entitled to appear in the proceedings 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 compensation, which would be the cost of 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 same 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 tide to the capital, 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 as capital expenditure. The Tribunal was, in our view, right in holding that the legal expenses incurred by the assessee for resisting 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.
16. Question No. 5 : 7. This question relates to the power of the ITO to revise a draft of the proposed order of assessment under section 144B of the said Act. Under the said provision, reference is required to be made to IAC in certain cases and the assessment can be completed by the ITO after following the procedure prescribed therein in accordance with the directions given by the IAC for the guidance of the ITO to enable him to complete the assessment.
17. In the present case, in respect of the disallowance of loss caused due to fluctuation in the exchange rates, a contention was raised by the assessee before the Commissioner (Appeals) that the ITO had revised the draft order and given a fresh hearing under section 144B to the assessee for the same assessment year, which was not permissible under the law. The Commissioner (Appeals) upheld this contention holding that if this was permissible, then a series of such revised draft orders can be sent for one assessment year, which was not contemplated by the Act. It was held that the revised draft order and the proceedings in respect thereof under section 144B were, therefore, beyond the provisions of law and on that ground itself the addition was required to be deleted. The Tribunal, taking note of the fact that the assessee was given full opportunity of replying to the revised draft order and no prejudice was caused and that the revised draft order as well as the objections were duly forwarded to the IAC under sub-section (4) of section 144B, held that there was nothing wrong in the procedure followed by the ITO.
18. Section 144B is a procedural provision under which the ITO 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 the assessment in which the ITO 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 ITO 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 &aft order and when the assessee is given an opportunity to lodge his objections against the draft order as revised, there is no procedural illegality committed by the ITO. When the revised draft order and the objections received from the assessee against it are all forwarded to the IAC under sub-section (4) of section 144B, that would constitute a valid material for IAC for his consideration and issuance of directions, in respect of the matters covered by the objections, for the guidance of the ITO to enable him to complete the assessment. The proceedings do not in any way get vitiated just because the ITO before forwarding the matter to the IAC, revises his proposed order, especially when he follows 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 ITO under section 143(3), he remains free to exercise his powers to complete the assessment. The process of preparation of a proposed order of assessment does not create any right in favour of the assessee to prevent the ITO from revising such proposed order so long as the assessee is given an opportunity to raise objections against it and they are duly for-warded for consideration of the IAC under sub-section (4) of section 144B of the Act. In our view, therefore, the tribunal rightly held that there was nothing wrong in the ITO revising the draft order and again giving an opportunity to the assessee to give his objections before forwarding these under section 144B(4) of the Act to the IAC. The Tribunal rightly distinguished the decision of the Delhi High Court in Sudhir Sareen v. ITO [1981] 128 ITR 445/6 Taxman 247, in which it was held that the ITO can issue only one draft order of assessment and he has no power under section 144B to issue more than one draft order, on the ground that in that case the ITO had sent a second draft order enhancing the amount on the direction of the IAC. As held by the Delhi High Court, under section 144B there is no suo moto power in the IAC to call for the records. It was found that the second draft assessment order was the result of illegal directions given by the IAC. Sudhir Sareen’s case (supra), therefore, stands altogether on a different footing and cannot help the assessee. Question No. 5 is, therefore, answered in the affirmative against the assessee.
19. Question No. 6 :
8. 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 (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 thereof. Section 43A lays down special provisions consequential to changes in rate of exchange of currency. As held by this Bench in its decision, dated 5-3-1998 in CIT v. Windsor Foods Ltd. under section 43A(1), 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(i). 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 as provided by section 43A(1), 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 against the assessee.
20. The questions referred to us stand answered as above and the reference is disposed of, accordingly, with no order as to costs.