Income Tax Appellate Tribunal - Cochin
Travancore Titanium Products Ltd. vs Deputy Commissioner Of Income-Tax on 14 March, 1995
Equivalent citations: [1996]57ITD16(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee.
2. The assessee is a company owned by the Government of Kerala. The assessee paid service charges to the Government of Kerala in a sum of Rs. 5,75,15,000 computed at the rate of Rs. 5,000 per tons of Titanium Dioxide manufactured by it. The payment was in accordance with the demand raised in a Government Order. The Government demanded the payment in view of the services rendered by it to the assessee organisation. In particular, the Government has helped the assessee in taking major policy decisions, for which service Government officials, were utilised. Steady and constant supply of ilmenite which is a raw-material required by the assessee was ensured by the Government by appointing a Special Officer for the implementation of the mineral separation plant at Chavara and by co-ordinating the efforts of the assessee fortechnical upgradation and diversification in collaboration with Tioxide Group Ltd., U.K. The Government also assisted the assessee by intervening and settling the issues with the local people for laying sub-marine pipes for effluent disposal, and for sponsoring of the unit for the manufacture of products utilising the effluents collected from the company. Further, the Government assisted the assessee in settling labour disputes and in maintaining good industrial relations. It is in view of such services that the assessee was asked to pay service charges to the Government at varying rates per tonne of Titanium Dioxide in the past and such payments were not disallowed. However, for the impugned assessment year, the payment was disallowed as in the view of the Assessing Officer the services rendered by the Government are not special services, but are rendered in its capacity as the Government of the State for promotion of industrial development. He further held that the so-called services stated to have been rendered by the Government represented nothing but part of the normal day-to-day functioning and statutory responsibilities of the State Government and such services were rendered for other public sector industries as well and even for private sector companies from whom no such service charges were levied. It was his firm conviction that the Government order levying service charges was clearly the exercise of the Government powers as the owner of the assessee-company, the Government being the major shareholder, and, therefore, the Assessing Officer held that service charges cannot be allowed as an expenditure laid out wholly and exclusively for the purpose of the assessee's business. In this connection, he relied on the observations of the Supreme Court in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 to the effect that "the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business". The assessee appealed. The learned CIT (Appeals) noticed that the Government of Kerala was having 80.94% share in the company and the assessee has been paying service charges in the past as levied by the Government but he failed to notice that such payment was not disallowed in the preceding years. He went on to say that though the assessee had to pay service charges at the rate of Rs. 5,000 per tonne as per the Government order, it cannot be considered as a statutory levy as the levy was not on the basis of any Act passed by the Legislature nor on the basis of an ordinance issued by the Government. He was of the view that the Government order dated 21-6-1991 directing that the service charges collected should be credited to the Government revenues applied only with effect from the year 1991-92 onwards and not for the service charges payable during the previous year 1990-91, relevant to the assess-on ent year 1991-92. Thus, he rejected the contention of the assessee that the levy was either a statutory levy or in the nature of a statutory levy. Dwelling on the issue of commercial expediency, the learned CIT (Appeals) was of the view that the assessee had not furnished evidence to show under what circumstances the levy of service charges was made applicable to the assessee-company and that there was no exchange of correspondence between the Government and the assessee before the levy of service charges and that no formal discussion took place in the Board's meeting regarding the Government order and that the assessee has simply started paying service charges on the basis of the Government order. Since the Government is a major shareholder, the assessee is not bound to make the payment on the basis of the order of the Government. The mere fact that the Government had demanded and the assessee had paid service charges, will not clothe it with the nature of an expenditure wholly and exclusively laid out for the purpose of the business. Then he noticed the details of services listed by the Government in its letter No. 17238/H-3/94/ID dated 21-6-1994 and opined that the Government was only discharging its functions as a Government and there was nothing special meant for the assessee or in connection with its activities. The levy was not collected from all public undertakings but only from a few undertakings which were making profits. Thus, he upheld the disallowance. The assessee is in second appeal.
3. Sri K.R. Ramamani, the learned Counsel for the assessee vehemently assailed the orders of the authorities. The authorities have not brought on record any material to show that the Government has not rendered the services so as to eligible to demand payment from the assessee at the rate of Rs. 5,000 per tonne of Titanium Dioxide. Their only grievance is that the Government was bound to provide the facilities and others are also in enjoyment of such facilities. Such a view even if it. is held to be correct cannot disentitle the assessee from claiming deduction for the payment made by it in the course of its business and for the purpose of business and in business interest. The authorities erred in falling into legal cobwebs in testing the admissibility of the payment. According to them, it is not a statutory levy. According to them the payment was not made under any provision of the statute. It need not be. The order of the Government levying the payment has the force of a statute as it is a fiat issued by the executive wing of the State. If payments are not made as demanded by the Government the assessee could not have continued effectively its business as the relationship between the Government and the assessee would get embittered and estranged. Thus, the payment made under the orders of the State Government for services rendered should be viewed as a business expenditure or at least as having been laid out in business expediency. In this connection, he referred to Sampath Iyengar's Law of Income-tax (Eighth Edition) Volume 2, at page 2106, para 39.
4. Sri C. Abraham, the learned senior departmental representative referred to the orders of the authorities and submitted that the Government was a major shareholder in the assessee-company and without any discussion the payment has been made and, therefore, the authorities were justified in coming to the conclusion that the payment was not warranted by dictates of commercial expediency.
5. Having regard to rival submissions, we delete the disallowance. It is not in dispute that the payment of Rs. 5,75,15,000 was made pursuant to an order passed by the Government of Kerala dated 7-12-1991. The order has spelt out the services rendered to the assessee enhancing the rate of service charges from Rs. 3,000 to Rs. 5,000 per tonne of Titanium Dioxide with effect from 1-4-1990 as per letter No. 47291/H3/91/ID dated 7-12-1991. The Dy. Commissioner of Income-tax (Assessment), Special Range, Trivendrum, had addressed a letter dated 22-12-1993 to the Secretary, Industries (H) Department, Government of Kerala, Secretariat, Trivendrum seeking clarifications regarding the levy of service charges on the assessee and KSIPTC. In response to this letter, the Secretary to Government, Industries (H) Department, Trivendrum, has replied by his letter dated 21-6-1994 as follows :--
From The Secretary to Government To The Deputy Commissioner of Income-tax (Assessment), Special Range, Kowdiar, Thiruvananthapuram.
Sir, Sub : - Levy of service charges on Titanium Dioxide Reg.
Ref : - (1) G.O. (MS) No. 48/89/ID dated 25-3-1988.
(2) G.O. (MS) No. 89/26/89/ID dated 2-2-1989.
(3) G.O. (MS) No. 2/90/ID dated 5-1-1990.
(4) Govt. letter No. 47291/H3/91/ID dated 7-12-1991.
(5) Your letter No. CO/6472 dated 22-12-1993.
I am directed to invite your attention to your letter fifth cited and to inform you as follows :
The State Government has been rendering various direct and support service to the Travancore Titanium Products Limited, in matters related to the business of the company. Major policy decisions of the company are taken by the Government, for which the services of Government officials are utilised. Mere specifically for ensuring steady and constant supply of Ilmenite, the main raw material required in the manufacture of Titanium Dioxide Pigment, to Travancore Titanium Products Limited. Government have appointed a Special Officer for the implementation of a Mineral Separation Plant at Chavara, Kollam. The State Government has also been co-ordinating the efforts of Travancore Titanium Products Limited, for technical upgradation and diversification in collaboration with the Tioxide Group Limited, U.K. Steps are being taken at the Government level to intervene and settle the issues with the local people for laying submarine pipes for effluent disposal. Government has also been rendering assistance in solving the pollution control problems being faced by Travancore Titanium Products Limited. With the efforts of the State Government a joint sector unit sponsored by the Kerala State Industrial Development Corporation is set up with Travancore Titanium Products, which is engaged in the manufacture of products utilising the effluents collected from the company. Government is helping in maintaining good industrial relations in Travancore Titanium Products by engaging Government officials for negotiations at the time of settlement of wages, bonus, incentives, etc. Major portion of the lands occupied by the Company is given on long-term lease by the Government. On consideration of the various aspects involved, Government as per Government order cited first above ordered that, Travancore Titanium Products Limited should pay by way of compensation for the services, rendered to the company, service charges at the rate of Rs. 1,000 per tonne of Titanium Dioxide produced with effect from 1-4-1987. Subsequently, vide Government Order cited second to fourth above enhanced the rate of service charges periodically, as the volume of services rendered to Travancore Titanium Products have also increased.
Thus the Government has spelt out the services rendered by it to the assessee-company. There is no evidence on record to say that the Government has not rendered such services in the cause of the assessee. The authorities fell into a quixotic reasoning that as such services are to be rendered by a Government in its capacity as a Government (an assumption for which there is no basis legal or otherwise) and as other units in the State also derived benefits from such services, it cannot be said that the services were rendered exclusively in the cause of the assessee and thus disallowed the payment. In the process, the authorities have overlooked the facts that in the preceding years they have allowed the payment as business expenditure, though it was in different sums and under different rates per tonne of Titanium Dioxide. The business of the Government is, no doubt, to govern, but in order to govern it has to augment its resources and any Government, if committed to welfare programmes, has to provide infra-structure for industrial growth, good environment and labour welfare. In this process, it has to have resources to fall back upon and for that purpose in view, the Government can make levies in selected areas or from selected persons or generally in order to carry out its policies regarding industrial growth and welfare. Such collections can be by way of tax, duties or fees. Such collections can also be by way of service charges for specific services rendered. While the tax, duties and fees have to have legislative sanction, the levy of service charges or any other levies for specific services rendered can be made by executive fiats. Even if such levies are held to be ultra vires the powers of the executives, until it is so declared a levy is binding on the person on whom it is levied. The assessee was bound to make the payment as otherwise its business interest will suffer.
6. Justice S. Ranganathan in Sampath Iyengar's Law of Income-tax (Eighth Edition), Volume 2, page 2106 at para 39 observes as follows :
39. Payment made without testing the legal position in a Court of law.--It is settled law that the allowability of an expense does not depend upon legalistic considerations. Where a demand is made against an assessee for a certain payment and the assessee, after having considered the pros and cons, makes the payment bona fide, it is not for the Assessing Officer to state that the claim would not have succeeded in its entirety or even partly in a Court of law and that the validity of the claim should have been contested in a Court of law before making any payment. As explained above, expenditure which is allowable under the section is that which has been made on account of commercial expediency. Most often, serious claims are adjusted without the matters being allowed to go to a Court of law, or, in a case, where the matter has actually gone to a Court compromises are effected outside Court, and the action is allowed to be withdrawn or dismissed. Any arrangement for payment under such a compromise would be for the purpose of the assessee's business. In CEPT v. S.R.V.G. Press Co. [1961] 42 ITR 219 (SC), a case under the Excess Profits Tax Act the assessee had been assessed to sales-tax on the basis of provisional assessments completed from year to year. The rules under which the provisional assessments were completed were later held to be ultra vires, being inconsistent with the provisions of the Act; but all such provisional assessments were later revalidated by legislative action. It was urged on behalf of the revenue authorities that the rules relating to advance provisional assessment and levy of tax were inconsistent with the provisions of the Act and that therefore, before the assessee could be entitled to deduction he should have obtained a decision from a Court and not having done so, payments made could not be regarded as either reasonable or necessary. Rejecting this contention, the Supreme Court observed as follows :
... But the reasonableness or the necessity of payments ... must be eiscertained in the light of what may be regarded as commercially expedient and not on any legalistic considerations. It would not be expected of a businessman to start a litigation in respect of a tax which the Legislature of State was competent to levy on the ground that the method devised for computing the tax liability was ultra vires. The tax was duly assessed and paid and the reasonableness and necessity must be adjudged in the light of the circumstances then prevailing and not in the light of subsequent developments.
What, however, follows from the above discussion is that the fact that an assessee, in the first instance, disputes the validity of a claim or fails to dispute it would not prevent the assessee from claiming the ultimate payment as a proper business expense. Litigiousness cannot be said to be good businessmanship. In the undernoted case [Cannanore Spinning and Weaving Mills Ltd. v. CIT [1961] 42 ITR 528 (Ker.)] the board of directors of the assessee-company suspended and remove the managing agent from office. Some shareholders, presented a petition in the High Court challenging the legality of suspension and removal. Settlement was reached between the parties outside Court, under which a sum of rupees three lakhs was paid by the company. It was held that the payment was for the purpose of the business. It was pointed out that the payment in question was only for the termination of an arrangement which had become dangerous to the future well-being of the company and reflected a genuine and bona fide settlement. It was not actuated by generosity or any indirect or improper motive, and it was dictated solely by considerations of commercial expediency and benefit to the company.
It is seen that the quantum of service charges paid is reported to the Board of Directors periodically. At every Board meeting a statement showing payment in excess of Rs. 5,00,000 is also furnished to the Board of Directors which included the payment of service charges. Specific provision is made in the annual budget every year for service charges payable to the Government and this budget is got approved by the Board of Directors. The payment of service charges are also reported to the shareholders annually through the Directors' report under the head "Payment to Central/State Governments" and the approval is obtained at the annual general body meeting. In such circumstances it cannot be held that the payment was made without discussion. Even assuming that the assessee has paid the amount without manner or discussions and even assuming that the third parties who have not made the payment were benefited thereby through the Government, we hold that the expenditure cannot be disallowed in the light of the decision of the Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261. The Apex Court held--
The expression "wholly and exclusively" used in the Section 10(2)(xv) of the Income-tax Act, 1922, does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law.
CIT v. Chandulal Keshavalal & Co. [1960] 38 ITR 601 (SC) relied on.
The three tests laid down by the Supreme Court in Gordon Wood-roffe Leather Mfg. Co. v. CIT [1962] 44 ITR 551, viz. (i) that the payment should have been made as a matter of practice which affected the quantum of salary, (ii) that there was an expectation by the employee of getting a gratuity, and (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee, have to be read disjunctively.
In view of the clear cut pronouncements of the Apex Court we have no hesitation in setting aside the order of the learned CIT (Appeals) and directing the Assessing Officer to grant deduction of the impugned amount of Rs. 5,75,15,000 from its income for the assessment year under consideration.
7. The next dispute is about the disallowance of Rs. 6,72,429 under Section 43B of the Income-tax Act, 1961. According to item No. VI of the notes to the Profit and Loss Account the provident fund payable as on 31-3-1991 was Rs. 18,68,578. It was seen that the actual amount remitted in April 1991 was Rs. 18,50,003. Hence the Assessing Officer disallowed a sum of Rs. 18,575 under Section 43B of the I.T. Act rejecting the contention of the assessee that the amount recovered from the bills of the contractors in a sum of Rs. 18,575 was wrongly accounted for under this head. The learned CIT (Appeals) called for month wise details of payments to the Provident Fund account made during the year 1990-91. He found from these details that a sum of Rs. 6,72,429 being employer's contribution for the month of March 1991 was paid only on 13-4-1991. According to him, though this payment was made before the due date prescribed under the Employees Provident Fund Act and Rules, still it was not paid within the previous year. According to him, a reading of Section 43B and the second proviso thereto would indicate that for claiming deduction of the items mentioned in Clause (b) of Section 43B, the assessee will have to satisfy two conditions, viz-, (i) that it shall be allowed only in computing the income of the year in which the payment is made, and (ii) that even in the year of payment it shall be allowed only if it is paid within the prescribed due date. He gave two examples. First example : The employer's contribution to provident fund in the month of February 1991 is payable by the due date of 15-3-1991. If it is paid by the due date it is allowable as a deduction in computing the income of the assessee for the assessment year 1991-92. However, if it is paid on 25-3-1991 it will not be allowed as a deduction even though the payment has been made in the previous year as the conditions prescribed in the second proviso do not remain satisfied. Second example: Suppose for the payment of the contribution to provident fund for the month of March 1991 the due date is 15-4-1991. In this case if the assessee makes the payment on 15-4-1991 he would have satisfied the conditions laid down in the second proviso but would not have satisfied the primary condition of payment during the previous year as contained in the main part of the section. In this view of the matter, he disallowed the sum of Rs. 6,72,419 being the employer's contribution to provident fund for the month of March 1991, which was paid only on 13-12-1991. However, he held that the assessee is entitled to claim this amount as a deduction in respect of the assessment year 1992-93. The assessee is aggrieved.
8. Having regard to rival submissions, we modify the order of the learned CIT (Appeals). Provident fund contribution consists of two kinds : (i) contribution received from the employee and (ii) contribution to be made by the employer. Contribution received from the employee is treated as income of the employer at the first instance under Section 2(24)(x) of the I.T. Act, 1961. A deduction is allowed under Section 36(1)(va) of the I.T Act in respect of such contribution, if it is credited by the assessee to the employee's account in the relevant fund on or before the due date prescribed under the rules of the fund. Thus, even under Section 36(1)(va), in respect of contribution recovered from the employees on the last working day of the previous year, the assessee would be entitled to get deduction if he credits the amount within 15th of April as permitted by P.F. Rules. There is no condition that employee's contribution of the last month of the previous year should have been in the same previous year.
9. The provisions of Section 43B(b) read with the second proviso thereto is to the same effect in respect of employer's contribution to provident fund. The overriding provisions of Section 43B of the I.T. Act, so far as Clause (b) is concerned would cover only sums payable by the assessee as an employerby way of contribution to any provident fund or superannuation fund etc. The main clause is to the effect that such sum is to be allowed as a deduction from the income of the previous year in which it is paid. Second proviso which is as follows is in our opinion carves out an exception:--
Provided further that no deduction shall, in respect of any sum referred to in Clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below Clause (va) of Sub-section (1) of Section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date.
If the proviso is read in the context in which it occurs and also read in the background for which the provisions of Section 43B were put on the statute, it would be clear that the proviso lessens the rigour of the main section by enabling the assessee to claim deduction, if the contributions stood actually paid in cash or by issue of a cheque before the due date as prescribed under the relevant rules of the Fund, and where such payment has been made otherwise than in cash, the sum has been realised within 15 days from the due date. In the case of the assessee it is only with reference to the employer's contributions relating to March 1991, the actual payment fell in the following month comprised in the succeeding previous year and that too before the due date prescribed under the Rules of the Provident Fund. It is common practice among the employers to deduct the contribution from the employee in the pay bill generally on the last day of the month. It is only after receipt of such contribution, the employer is bound to make his own contribution to the account of the employee. Both the contributions become payable under the rules in the succeeding month. If the contributions themselves are recovered on the last working day of the previous year, giving rise to matching liability to the employer to contribute, how is it possible to make the payment on the same day ? The law cannot be interpreted in such a manner as to put an impossible burden on the subject. Further the rules of provident fund themselves permit payment on or before 15th of the following month. A comparison of the second proviso as it stood before 1-4-1989 and the second proviso as it stood after 1-4-1989 would be revealing :
Before 1-4-1989 After 1-4-1989 Provided further that no dedu- Provided further that no dedu- ction shall, in respect of any ction shall, in respect of any sum referred to in Clause (b) sum referred to in Clause (b), be be allowed unless such sum has allowed unless such sum has actually been paid during the actually been paid in cash or by previous year on or before the issue of a cheque or draft or by due date as defined in the any other mode on or before the Explanation below Clause (va) of due date as defined in the Expla- Sub-section (1) of Section 36. nation below Clause (v) of Sub- Section (1) of Section 36 and where such payment has been made oth- erwise than in cash, the sum has been realised within fifteen days from the due date.
The words "during the previous year" have been omitted with effect from 1 -4-1989. This is a very significant omission. The omission of the words "during the previous year" in the second proviso to Section 43B after 1-4-1989 enabled the assessee to claim deduction in respect of employer's contributions of the last month of the previous year even if it is paid in the succeeding month, but before the due date. The learned CIT (Appeals) in our opinion should have given proper emphasis on the omission of the words "during the previous year" with effect from 1-4-1989. This having not been done he came to the conclusion that the payment must be not only within the due date, but also within the previous year. Such a pedantic interpretation is not called for in the scheme of the section as regards employer's contribution to provident fund. For this reason, we delete the disallowance.
10. The last point in the appeal is against the levy of interest under Section 234B of the I.T. Act. In this case, the assessee's return was furnished under Section 143(1)(a) on 31-12-1991 in which the income returned was accepted. Subsequently, the present assessment was passed under Section 143(3) on 11-3-1994. The assessee's contention is that the interest under Section 234B must be limited only up to the date of assessment under Section 143(1)(a) of the I.T. Act in its case. The learned CIT (Appeals) held that in all cases the returns will be processed under Section 143(1) and then only assessments will be token up for scrutiny and completed under Section 143(3) and, therefore, there is nothing wrong in levying interest to the date when the assessment is completed under Section 143(1) and also to the date when the regular assessment is completed under Section 143(3).
11. We have heard rival submissions. The levy of interest for default in payment of advance tax is governed by Section 234B. The interest is to be levied at the rate of 2% for every month or part of a month comprised in the period from the first day of April next following the financial year to the date of determination of the total income under Sub-section (1) of Section 143 or regular assessment on an amount equal to the assessed tax or on the amount by which the advance tax falls short of the assessed tax.
12. The words 'whichever is earlier' are not there in the statute. Further, under Section 143(3) which enables the Assessing Officer to complete what is known as the regular assessment, it has been provided in Sub-section (4) that any tax or interest paid by the assessee under Sub-section (1) of Section 143 should be deemed to have been paid towards such regular assessment. Therefore, the Assessing Officer is not precluded from levying interest at each stage from the commencement of the proceedings, that is, from the filing of the return to its completion either under Section 143(1) or under Section 143(3). There is no bar for completing the assessment under Section 143(3) even if it had been assessed under Section 143(1). Therefore, the Assessing Officer can levy interest up to the date of determination of the total income under Section 143(1) and in a case where he also subsequently completes the assessment under Section 143(3) he can levy interest under the provisions of Section 234B after giving credit for the interest already collected at the stage of filing of the return and also at the stage of assessment under Section 143(1). In the case before us, the quantum of interest has to be recalculated in view of our granting relief to the assessee and the Assessing Officer is directed to modify the quantum of interest, if any, leviable on the assessee.
13. In the result, the appeal of the assessee is partly allowed.