Income Tax Appellate Tribunal - Mumbai
Foseco India Ltd., Mumbai vs Assessee on 6 April, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" Bench, Mumbai
Before Shri R.K. Gupta, Judicial Member
and Shri B. Ramakotaiah, Accountant Member
ITA No. 4667/M/2005
(Assessment Year: 1999-2000)
M/s. Foseco India Limited ACIT, Range 2(1)
C/o Sharp & Tannan, Ravindra Annexe Vs. Aayakar Bhavan, M.K. Road
194, Chruchgate Reclamation Mumbai 400020
Mumbai 400020
PAN - AAACF 1049 H
Appellant Respondent
Appellant by: Shri H.P. Mahajani
Respondent by: Shri R.N. Jha
ORDER
Per B. Ramakotaiah, A.M.
In this case the order in ITA No. 4667/Mum/2005 was passed on 16th May 2008 and the issue in ground No. 3 was recalled by M.A. No. 762/Mum/2008 dated 06.04.2009. Accordingly the case was posted for considering ground No. 3 in assessee's appeal afresh.
2. Ground No. 3 is as under: -
"(3) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of VRS expenditure of Rs.4,10,90,573 relating to Jamshedpur Units and Rs.10,723,833 relating to Jammu Unit by considering it as closure of business activities. He ought not to have done so."
3. Briefly stated, the assessee has claimed VRS expenditure of Rs.5,66,33,237/- as revenue expenditure. The details of which are as under:-
i) Jamshedpur Unit Rs.4,10,90,573/-
ii) Jammu Unit Rs.1,07,23,833/-
iii) Headquarters Mumbai Rs. 48,18,831/-
4. This expenditure was claimed as defered revenue expenditure in the books of account whereas the assessee claimed the full amount under 2 ITA No. 4667/M/2005 M/s. Foseco India Limited section 37(1). The A.O. disallowed the same holding it as capital expenditure and the CIT(A), after considering the issue, confirmed the amount pertaining to Jammu and Jamshedpur Units whereas he allowed the amount on behalf of Head Office. It was assessee's contention that the entire amount is allowable as revenue expenditure.
5. The facts leading to the present issue are that during the earlier year the assessee has paid amounts towards expenses of Calcutta Unit, which was closed during this year whereas the assessee has paid amounts for Jamshedpur and Jammu Units during the year, which were in fact closed in the next year. It was Assessing Officer's contention that these units are independent businesses of the assessee and assessee has separately claimed deduction under section 80HH and so expenditure on closure of business unit is capital in nature and did not allow the expenditure. It was assessee's contention that the assessee has reorganised the business and has started a project 'New dawn' to fundamentally restructure the Foseco Company in India following the one -off structural changes in the market resulting from economic liberalisation commencing 1993. As the market has changed and competition increased, the company felt that restructuring was required and it was implemented by fully functional JD Edward (ERP) package. Four out of the five works of the company were planned to be closed and new manufacturing facilities also housing the management were constructed at Sanaswadi, Pune. Some of the project lines were restructured to be outsourced in line with fulfilling customer's demand On Time In Full (OTIF) as part of restructuring. The assessee made payments contract to various employees who opted for VRS and those who have not opted for VRS were relocated in other units. The business of the company was continuing and the expenditure was not related to discontinuance of business of the company but only for a part of the unit for operational reasons. The assessee's submission were that there was centralised control, management and interlacing activities between various units and closure of the units during the year at Jamshedpur and Jammu and Calcutta Unit in earlier year and Chinchwad in later year does not amount closure of business. It was further submitted that all the companies are manufacturing additives 3 ITA No. 4667/M/2005 M/s. Foseco India Limited and consumable products and resinous products which were manufactured at Chinchwad Unit are now being manufactured in Sanaswadi Unit and some of the products manufactured in Jamshedpur and Jammu were being outsourced now, but business activity continued to be the same. The assessee relied on the decision of the Hon'ble Supreme Court in the case of K. Ravindranathan Nair 247 ITR 178 and various other cases to submit that the expenditure claim is revenue in nature. The claim of the assessee is on the basis of the following judicial principles: -
"(a) In the case of Indian Cable Co. Ltd. Vs. The Workmen AIR 1972 (SC) 2195 the Hon'ble Supreme Court held that the payment of compensation to include the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency and was allowable u/s. 37(1) of the Act.
(b) Empire Jute Co. Ltd. vs. CIT (1981) (124 ITR 1)(SC). In this case it was held that there may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit may, nonetheless, be on revenue account.
(c) Sassoon J. David & Co. Pvt. Ltd. vs. The CIT - 118 ITR 261 (S.C.).
The Court held that it is too late in the day now, whatever may have been the position two decades ago to treat the expenditure incurred by a management in paying reasonable sum by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business expenditure.
(d) Assam Oil Co. Ltd. vs. CIT (154 it 647). Held: - That it was conclusively established that the assessee's business in which the disputed payments were made did not come to a close and that the assessee made such payments in order to effect economy and rationalisations of its personnel. No assets of enduring nature came into existence by reason of the payments though benefits accrued to the assessee thereunder, which would constitute not only for one year but in future years.
(e) George Oakes Ltd. vs. The CIT (1992) 197 ITR 288 (Madras) Held: - The payment was only to contain the loss, reorganize the branch by reducing the staff and to bring about a reduction in the wage bill and for business consideration and expediency.
(f) Machinery Manufacturing Corporation Ltd. vs. The CIT (198 ITR
559) Calcutta.
Held:- That payment of compensation was to induce workmen to retire prematurely. It is an expenditure incurred on grounds of commercial expediency to facilitate carrying one of the business.
4 ITA No. 4667/M/2005M/s. Foseco India Limited
(g) Bhor Industries Ltd. vs. CIT (128 Taxman 626) (Bombay) Held: VRS expenditure being a revenue expenditure incurred wholly and exclusively for the purpose of business must be allowed entirely in the year in which it is incurred and it cannot be spread over a number of years even though assessee has written off in its books over a period of years.
(h) Reliance was also placed on the following decisions: -
(i) Vikhroli Metal Fabrication Ltd. Ltd. Vs. DCIT 54 ITD 740
(ii) Bansidhar Pvt. Ltd. 127 ITR 65 (Gujarat)"
6. The CIT(A), however, has not accepted assessee's contention and after considering the reports submitted by the Board Directors held that the expenditure cannot be allowed by giving the following findings: -
"6.3. On careful consideration of the facts of the case and the documents produced, for the reasons discussed hereafter I am of the considered opinion that it is a case of closure of two business activities and, therefore, the expenditure cannot be allowed as deduction u/s. 37(1) of the Act. During the year, the assessee had closed down Jammu Unit and Jamshedpur Unit. Jammu Unit was established in the A.Y. 1984-85. This was a new undertaking which also claimed deduction u/s. 80HH and 80I from A.Y. 1985-86 to A.Y. 1994-95. Jamshedpur Unit was established in the A.Y. 1962-63. Both these units were independent units manufacturing difference items catering to different set of customers. This fact was clearly stated in the proposal dated 10.11.1997 presented to the Board of Directors wherein in para 2.3 it was stated the "The expansion of the manufacturing base occurred in 1964 with the establishment of a factory in Calcutta to supply products to the predominantly state run steel industry in Eastern India. Statutory Constraints on manufacturing capacity and concerns over the deteriorating industrial relations situated in West Bengal prompted further expansion into Jamshedpur, Bihar State, in 1974, again, mainly to service the local steel market with slurry foundry products. Further expansion occurred in 1983 and 1988 with new factories established in Jammu in the North of the country, in Pondicherry a union territory in south of India"
Thus the different units of the company were set up to meet the demands of the local customers of that area and all the units functioned independently and were not dependent upon each other for their manufacturing and sale.
6.4 In order to decide the allowability of expenditure it is necessary to see whether the closed units from part of the same business that continued to exist or whether the closed units amounted to separate venture. In this respect, the decision in the case of L.M. Chhabda & Sons vs. CIT 65 ITR 683 (SC) is relevant wherein, it has been held that whether different ventures carried on by the assessee form parts of the 5 ITA No. 4667/M/2005 M/s. Foseco India Limited same business must depend on the facts and circumstances of each case. It is for the assessee to establish that different ventures constitute parts of the same business. Only because an assessee is carrying on business ventures of the same character at different places, it is not necessary that ventures are part of the same business. In determining whether different ventures may be said to constitute the same business it has to be seen whether there was any interconnection, any interlacing, any interdependence, any unit embracing the venture and whether different ventures were so interlaced and so dovetailed into each other as to make them into the same business. These principles have to be applied before a legal inference can be drawn that different business ventures constitute one business.
6.5 The court further observed that in the determination of the question the finding of facts are involved, because a variety of matters having bearing on the unit of the business have to be investigated, such as unity of control and management, conduct of the business through the same agency, the inter-relation of the business, the employment of the same staff to run the business, the nature of different transactions and finally the possibility of the one being closed without affecting the texture of the other and so forth. 6.6 In the present case all the units of the appellant company were functioning independently. All the activities of manufacture and sale were independent. The goods produced by one unit were not used by the other. The appellant prepared separate accounts for each unit. Thus for its functioning, one unit was not dependent on the other and closure of one unit would not have affected the functioning of the other.
6.7 The appellant argued that there is unit of control at the top in as much as annual budgets are approved by the had office, collections from debtors are pooled in the head office, there is centralised financial system and that all the units were under the control and management of the Managing Director and the Board of Directors. 6.8 However, the control and unit at the top only is not uncommon in a corporate organization. But merely on this basis, it cannot be said that there was interconnection, interlacing or inter dependence amongst units. The units were located at different places manned by different personnel, having independent infrastructures. There was no interdependence to the effect that the finished goods from one unit were never used as the raw material of the other. Hence, the concept of dovetailing between these units also remained absent. Finally the closure of the units had not in any manner affected the functioning of the existing units.
6.9 It is also seen that after the closure of units at Calcutta, Jammu and Jamshedpur the installed capacity and actual production was substantially reduced. This is evidenced from the following details:
6 ITA No. 4667/M/2005M/s. Foseco India Limited F.Y Licensed Installed Actual Production Production (Outside) (own) (Tonnes) 1997-98 36,687 42,961 32,059 Nil 1998-99 43,687 31,786 31,226 Nil 1999-00 42,724 23,810 14,120 11,918 2000-01 42,724 23,810 8,643 8,318 2001-02 42,724 24,380 9,771 6,613 Thus the assessee reduced the size of its business and not merely reduced the workforce to make the business more profitable.
6.10 It is also seen from the proposal submitted to the Board of Directors that range of products manufactured were substantially narrowed down and restricted to resins, coatings and precision sleeve for foundry and AFAX granular and power fluxes for steel. It is also seen that after the closure of units the assessee increased its trading activities. In the F.Y. 1997-98 the trading turnover was 3.27 crores which increased to Rs.17.27 crores in 1999-2000 and Rs.17.48 crores in 2000-01.
6.11 It is also seen that the assessee had completely closed down these units as the entire plant and machinery were scrapped and sold. The land which was a lease-hold land was returned to the State Government. Thus all the operations of these units were completely stopped. All the employees except a few engaged in sales, were given retirement compensation.
6.12 It is also pertinent to note that the approval of the Competent Authority does not any where indicate that it was primarily or at least also for the workmen employed in the factory that was going to be closed down shortly after the Scheme was over. In fact in the Scheme, the usual condition prescribed in clause (iv) of Rule 2BA of the Income Tax Rules that the vacancy caused by the voluntary retirement is not to be filled up was duly incorporated a condition that in effect is redundant for a unit that is to be closed down. Even otherwise, a Voluntary Retirement Scheme for the workmen of a proposed closed unit has a little meaning for there is hardly any voluntary option available to the eligible persons. Rather there is a virtual compulsion to seek the retirement.
6.13 The appellant relied on the decision in the case of K. Ravindranathan Nair (supra). However, in that case the decision was rendered in the back ground of the ITAT's finding that the various units were part of the same business. Further, in that case there was a labour problem leading to the closure of the unit while in the present case there has not been any such problem prior to the closure. Therefore, the issue whether different units for part of the same business is basically depends upon the facts of each case.
7 ITA No. 4667/M/2005M/s. Foseco India Limited 6.14 As discussed earlier, the compensation paid by the assessee in the previous year relevant to the A.Y. 1998-99 for closure of Calcutta Unit was held as not allowable by the CIT(A) on the ground that it related to the closed business. The facts regarding compensation paid for Jammu and Jamshedpur Units during the year under consideration are similar. For the reason discussed by the CIT(A) in the appellate order for the A.Y. 1998-99, the expenditure incurred in connection with closed business is not allowable.
6.15 However, the compensation of Rs.48,18,831/- paid for VRS of Head Quarter staff is in my opinion, allowable as revenue expenditure. It has been held by the Hon'ble Supreme Court in the case of Indian Cable Co. Ltd. Vs. Their workmen (1982) AIR SC 2195 that:
"The voluntary retirement scheme enable the younger workmen to continue in service while it offered a temptation for the older employees to retire from service. The voluntary retirement scheme has not been challenged as mala fide by the unions. We are in agreement with the view of the Tribunal that the payment of compensation to induce the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate the carrying on of the business and it was an expenditure allowable under section 37(1) of the Income-tax Act. It was not an expenditure of a capital nature. The Tribunal was justified in declining to add back this item of expenditure to the gross profits."
Reliance is also placed on the decision of the jurisdictional High Court in the case of CIT vs. Bhor Industries Ltd. wherein referring to the decisions of the Hon'ble Supreme Court in the case of CIT vs. Ashok Leyland Ltd. 86 ITR 549 and Empire Jute Co. Ltd. vs. CIT 124 ITR 1, it was held that "the VRS expenses were incurred by the Company to save on the expense. This expense was not referable to any income-yielding asset. It is well settled that, ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years. It is only in cases of special type of assets that the spread over is warranted. In the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), it has been held by the Supreme Court that there are cases where the test of enduring benefit may be break down.
The decisions rendered by the various High Courts in the following cases also support the assessees case: -
CIT Vs. Simpson & Co. Ltd. 230 ITR 749 (Mad) CIT Vs. George Oakes Ltd. 197 ITR 288 (Mad) Sassoon J. David & Co. P. Ltd. Vs. CIT 118 ITR 261 (SC) CIT vs. Assam Oil Co. Ltd. 154 ITR 647 (Cal) Ambala Cantt. Electric Supply Corporation Ltd. Vs. CIT 133 ITR 343 (P&H) Karvalves Ltd. Vs. CIT 197 ITR 95 (Kerala) The assessee is aggrieved.8 ITA No. 4667/M/2005
M/s. Foseco India Limited
7. Drawing our attention to various submissions made before the A.O. and the details filed in the paper book, the learned counsel submitted that these units were part of assessee's same business. It was his submission that the company was incorporated in 1958 and the Chinchwad and Calcutta units were setup in September 1962, Jamshedpur Unit in 1973, Jammu Unit in 1983 and Pondicherry Unit 1988. The company was manufacturing more than 400 products for the metallurgical industry and these products are in the nature of additives and consumables used in the metallurgical industry. It was submitted that the Jamshedpur unit which was setup in 1973 has some statutory constraints on manufacturing capacity and concerns over the deteriorating industrial relations in West Bengal and this unit was mostly serving the steel market with slurry foundry products. The Jammu Unit was set in 1983. It has some administrative problems in manufacturing and because of reorganisation the production activity was closed but same products were being obtained by outsourcing and assessee's business has increased consequent to restructuring. It was assessee's submission that there is unity of control, unity of management, commonality of funds, interdependence and interlacing of the activities and closure of part of the business cannot be considered as closure of the business. He relied on various decisions, which are as under: -
Sassoon J. David & Co. P. Ltd. Vs. CIT 118 ITR 261 (SC) Assam Oil Co. Ltd. 154 ITR 647 (Cal) George Oaks Ltd. 197 ITR 288 (Mad) Machinery Manufacturing Corporation Ltd. 198 ITR 550 (Cal) India Cable Company (AIR 1982 SC 219) Bhor Industries Ltd. 128 Taxman 626 (Bom) Medley Pharmaceuticals Ltd. 109 TTJ (Bom) Margarine and Refined Oils Co. 282 ITR 576 (Kar) MGF India Ltd. 272 ITR 191 (Del) Jayshree Tea and Industries Ltd. 272 ITR 193 (Cal) Ravindranathan Nair 247 ITR 178 (SC) PI Industries Ltd. 106 ITD 401 (Jodh)
8. The learned D.R., however, referred to the detailed order of the CIT(A) and submitted that these units are independently functioning and the Jamshedpur Unit has claimed 80HH as a separate business and accordingly the expenditure is capital in nature.
9 ITA No. 4667/M/2005M/s. Foseco India Limited
9. We have considered the issue. The assessee is in the business of manufacturing of various metallurgical products for a long period and various manufacturing units have been closed and other units have been continued. In fact the scrapping of machinery and closure of units happened in later year and assessee has continued servicing the clients by outsourcing the requirement of materials earlier manufactured. Not only that the assessee as part of restructuring has shifted some of the activities to the main unit at Pune. As seen from the facts of the case the assessee is in the business of manufacturing and supply of various metallurgical products to steel industry and in view of obsolescence of technology as well as development in new technology and further due to various industry-related problems had to close down its Calcutta Unit in earlier year and Jamshedpur and Jammu Units in this year. Eventhough the amounts have been paid in this year the actual closure of the Units have occurred in the later year, as per the submissions. Similar fact is also available for earlier year wherein the Calcutta Unit was claimed to be closed in AY 1998-99 but the actual closure of the Unit occurred during this assessment year. On that fact and further that the CIT(A) has not given proper opportunity to the assessee, the issue is restored back to the CIT(A) for giving a finding, which we were informed has not been given yet for AY 1998-99.
10. However, in this year the CIT(A) has given a finding on consideration of various factors that the units are independent businesses. He has allowed the Head Office expenses as revenue expenditure by relying on various principles established in this regard which are extracted in para 6.15 of his order. We are unable to understand how these principles are not applicable to the Jamshedpur and Jammu units. In fact the assessee's business is one single business eventhough for the propose of 80HH and other deductions available statutorily, theses units are considered as independent but these are forming part of the same business of the assessee and assessee's business has not closed down and it continued to be in the same in metallurgical products, both manufacturing and trading as it was before, but with increased turnover because of restructuring. As seen from the facts 10 ITA No. 4667/M/2005 M/s. Foseco India Limited on record the restructuring in fact is helping the assessee in modernising and increasing the business turnover and profits thereby. It cannot be stated that these two units are independent businesses separate from the main company and expenditure involved therein are for the purpose of closure of the business. The principles relied upon by the CIT(A) while allowing the expenditure of Head Office will equally apply to the other two units which are forming part of the same business activity of the assessee company. There is no denial of the fact that the assessee is continuing the manufacturing activities of the same products elsewhere and catering to the same clientele. The facts are similar to the facts considered by the Hon'ble Supreme Court in the case of K. Ravindranathan Nair vs. CIT 247 ITR 178 which the CIT(A) tried to distinguish in para 6.13. Whether it is a labour problem or a part of restructuring of the business due to various other factors, the fact is that assessee's business is spread over India in various units and out of these units the assessee has closed two units during the year. In view of this the expenditure paid to the employees of the erstwhile units for the purpose of voluntary retirement can only be considered as an expenditure incurred in the course of business. For the purpose of continuing its business, the assessee had to reduce the number of units and also relocate some of the business to Pune. Incidental expenses incurred in restructuring the business has to be considered as expenditure incurred in the course of conducing the business and allowable under section 37(1).
11. We do not see any reason to distinguish the expenditure involved in Headquarters and the expenditure involved in two units at Jamshedpur and Jammu. Since all the three expenditures incurred by the assessee being part of the same restructuring and assessee's business continued in later years with increased turnover and profit, we are of the view that on the same principles considered by the CIT(A) while allowing the Headquarters expenditure is also applicable to the other expenditure. Moreover, the facts are exactly similar to the decision considered by the Hon'ble Supreme Court in the case of K. Ravindranathan Nair vs. CIT 247 ITR 178. In view of this we are of the view that the assessee has correctly claimed the expenditure as 11 ITA No. 4667/M/2005 M/s. Foseco India Limited revenue and accordingly, the same is directed to be allowed. Assessee's ground is considered allowed.
12. In the result, appeal is decided accordingly.
Order pronounced in the open court on 26th March 2010.
Sd/- Sd/-
(R.K. Gupta) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 26th March 2010
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - II, Mumbai
4. The CIT- II, Mumbai City
5. The DR, "D" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.