Income Tax Appellate Tribunal - Mumbai
Markwell Hose Industries Pvt. Ltd. vs Joint Commissioner Of Income Tax, ... on 30 January, 2004
Equivalent citations: (2005)98TTJ(MUM)403
ORDER
OF TRIBUNALPower of AO to grant reliefThe appellate-company sought for the remedy for availing the deductions as it had incurred expenses for the benefit of the workers. The Appellate Tribunal observed that the remedy lay under section 153(3) of the Act. According to section 153(3), the direction of Tribunal could be given effect by reassessing or recomputing the income of assessee. When a statutory authority had a power to do something then it had statutory corresponding duty to exercise such powers whenever circumstances warranting exercise of such powers existed.
Held: On the facts of the case, where the Tribunal had given a finding that the deduction on account of expenditure incurred on land for use by workers was to be allowed in the year(s) in which the plots were finally transferred to the workers, the AO had the power and, therefore, the inherent corresponding duty under section 153(3) to recompute the income of that subsequent year to give effect to the Tribunal s finding.
Income Tax Act, 1961 s.153(3) Income Tax Act, 1961 s.37(1) ORDER Pramod Kumar, Accountant Member
1. This is an appeal filed by the assessee and is directed against the order dated 28th June 2000 passed by the CIT(A) in the matter of assessment under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 1997-98.
2. In the first two grounds of appeal, assessee is, in substance, aggrieved of CIT(A)'s confirming the disallowance of Rs. 4,00,500 on account of staff welfare expenses and treating the same as capital expenses. These expenses pertain to the expenses incurred on purchase of land, which, the assessee claims, was purchased as trustee and custodian of individual workers who were ultimately given the land under the union settlement.
3. Briefly, the material facts. The assessee company is engaged in the business of manufacturing hydraulic rubber hose pipes for industrial appliances. The manufacturing unit of the assessee is located in District Medak in Andhra Pradesh. On 27th November 1995, the assessee company entered into a memorandum of settlement with its workers' union, namely Markwel Hose Industries Employees Union, and one of the terms of settlement, set out in paragraph 35 of the same, provided as follows :
"The management has agreed to provide 120 square yard plot of land for each permanent employee at free of cost at a place selected by the management. It is also agreed that the Land Gift Agreement will be conditioned at the discretion of management."
It was undisputedly in pursuance of this agreement that the company purchased land, and claimed the expenses of Rs. 4,05,000, incurred in connection with the same, as revenue deduction. In all fairness, however, the company attached a note with the statement of total income which stated as follows :
Staff welfare expenses include Rs. 4,05,000 being expenditure incurred towards cost of purchase of land. The same has been incurred to provide a plot of land to workers free of cost as per the terms of agreement dated 27.11.1995 entered with the workers union. Reliance is made on the ratio of judgment in the case of CIT v. TVS Sunderam Iyengar & Sons Pvt Ltd 95 ITR 428 (Madras).
In response to Assessing Officer's query, the assessee referred to the memorandum of settlement and stated, as noted at page 2 of the assessment order, that "it is true that the land agreement entered into describes the company as purchaser of the land but it was only mentioned for the sake of convenience since the sellers of land were not prepared to enter into a number of agreements with individual workers" and that "...the company has no interest of any nature in purchase of open land except to facilitate the purchase transaction on behalf of the workers". The Assessing Officer also took note of assessee's reliance on the judgment of CIT v. TVS Sunderam Iyengar & Sons Pvt Ltd 95 ITR 428 (Madras) which was since approved by the Hon'ble Supreme Court in the judgment reported in 186 ITR 276. He rejected the claim of the assessee by observing as follows :
"The sale agreement shows that the sale deed was made on 20/3/1997 between the assessee company and Shri K. Bikshapati of Pocharam Village. The settlement with the workmen also shows that the management had agreed to provide 120 sq yards plot of land for each of permanent workmen free of cost at a place selected by the management and it was also agreed that the land agreement would be conditioned at the discretion of the management. The land remains registered in the name of assessee company and it is the discretion of the management as to how the land is to be utilized by the workmen. The ownership of the land is with the company. Therefore, the land purchased by the assessee company is to be treated as capital asset in its hand and not as revenue expenditure incurred for the welfare of the workmen. The court decision cited by the assessee company is not applicable in the instant case as the facts are different."
Aggrieved by the aforesaid disallowance, assessee carried the matter in appeal before the CIT(A). As evident from the statement of facts before the CIT(A), a copy of which was also placed before us, the assessee's submission, inter alia, was that it just acted as a custodian on behalf of the workers who were real owners of the property. It was also submitted that the assessee company had already filed a plan showing allocation of land to various workers and also the appropriate resolution in this behalf by the directors to prove that the company is only a custodian and not the owner. It was also submitted that in any event, the Assessing Officer ought not to have treated the purchase of land meant for its workers, in consequence of the agreement with the workers' union as a capital asset in its hand but as revenue expenditure incurred for the workmen. The CIT(A) was, however, not at all impressed with these arguments which he dismissed by observing as follows :
"...I have considered the above submissions and also perused the assessment order as well as the case cited supra. In this case, ownership of the land purchased is with the company and it is the discretion of the management as and how the land is to be utilized by the workmen. In the case relied upon by the AR and cited supra, the land was purchased in the name of the Government and for construction of houses for employers and the company was not the owner of the land but had only contributed a portion of construction cost on subsidized welfare scheme. Hence the facts of the present case are distinguishable from the cited by the AR. In the circumstances, I find myself in agreement with the views of the A.O. that the amount of Rs. 4,00.500 represents a capital expenditure and accordingly confirm the disallowance made by him...."
Aggrieved also by the order of the CIT(Appeals), the assessee is in second appeal before us.
4. We have conscientiously heard the rival contentions, carefully perused the orders of the authorities below and duly considered factual matrix of the case as also the applicable legal position.
5. One thing which is beyond dispute is that the sole and proximate reason of disallowance by the Assessing Officer is that as the company was unfettered owner of the relevant plot of land, which is admittedly a capital asset in nature, and the question of allowing the revenue deduction only arises in the year in which the related plot of land is transferred to the workers, and only to the extent the value of the land so transferred to the workers is concerned. It would thus follow that two fundamental questions are required to be adjudicated upon in this appeal - (a) first, whether the expenditure on making available free of cost the plots to factory workers constitutes an admissible expenditure, or not; and (b) if so, in which year - in the year of acquiring the plot, or in the year plot so acquired is transferred, and to the extent, transferred to the workers.
6. The answer to first question that we have posed for ourselves presents little difficulty. It cannot be in dispute that as long as an expenditure incurred by the assessee is justified on the grounds of commercial expediency and is not a capital expenditure, it constitutes an admissible deduction under Section 37(1). As the Assessing Officer himself has observed in the impugned assessment order, "The settlement with the workmen also shows that the management had agreed to provide 120 sq yards plot of land for each of permanent workmen free of cost at a place selected by the management and it was also agreed that the land agreement would be conditioned at the discretion of the management". The expenditure incurred on making the land available to the factory workers is warranted by the commercial expediency on the ground that it this was being done as per the settlement with workers, and an expenditure being incurred in furtherance with a union settlement cannot but be treated as commercially expedient. The expenditure in question does not constitute a capital expenditure inasmuch as the asset in question does not belong to the assessee, and on formally transferring the plots of land to the workers, the assessee loses all its interests and title in the land in question. The asset, if at all, is created for the purposes of beneficiary workers but then while deciding the deductibility under Section 37(1) what is to be seen is the nature of advantage in the hands of the assessee incurring the expenditure rather then the advantage in the hands of the beneficiaries of the expenditure. As the expenditure on giving plots of lands to the workers is admittedly incurred in pursuance to a union settlement, bonafides of which have not been called into question at any stage by the revenue, and giving the plots of land to the workers does not create any assets for the assessee company, the expenditure in question in principle constitutes admissible deduction under Section 37(1) of the Act.
7. That takes us to the second question that we had posed for ourselves i.e. in case the expenditure on giving free plots to the workers is to be held as an admissible deduction, in which year the deduction is to be allowed - the year in which the assessee acquires the plot of land which is to be given away to the workers, or the year in which the assessee actually transfers such plots to the workers. In case, of course, the year in which both of these activities take place is the same, the dispute about allowability of expenditure does not arise at all and the deduction is to be allowed in that year itself. In our considered view, there is no question of assessee being allowed the deduction in the year in which the plot of land is acquired by the assessee, unless the plot is also transferred to the workers that very year, for the simple reason that the deduction is on account of giving the plot to the workers free of cost, and unless that act of 'giving away the plot' takes place, the cause of action for deduction is not complete. The assessee may acquire a plot of land with the intent of sub dividing it amongst the workers but then there is nothing which prevents the assessee from putting it to any other use or may be just parting with the same. Until the time, the plot is actually given to the workers, it continues to be an asset of the assessee, undisputedly a capital asset, and at its unfettered ownership. Therefore, merely because an assessee acquires the plot with an intent to sub divide and transfer it to the workers, the expenditure incurred by the assessee on acquiring the plot, per se, does not constitute an admissible deduction and the deduction can only be allowed in the year in which the plot of land is actually sub divided and transferred to the workers.
8. In the light of the above discussions, we are of the considered view that while assessee's claim for deduction is allowable in principle, it can only be allowed in the year in which the assessee actually transfers the plots to the workers.
9. The assessee, as an alternate plea, contends that in case we come to the conclusion that the deduction is allowable in the year in which the plot is actually sub divided and transferred to the workers, we should give directions to the Assessing Officer to allow the same in the year in which the plot is actually sub divided and transferred to the workers.
10. At the outset, we make it clear that this Tribunal does not have any powers to specifically give any directions for the year which is not in appeal before us. The only issue before us is whether the impugned disallowance was rightly made by the Assessing Officer in this year or not, and, therefore, it is not open to us to give specific direction to Assessing Officer to allow that deduction for the next year. That is not a ground of appeal before us. We may, in this regard, refer to the following observations of Hon'ble Gauhati High Court in the case of Jeypore Timber & Veneer Mills Private Limited (137 ITR 415):
"The provision of Section 254 of the Act is an enabling as well as disabling provision. A passing glance creates an impression that the Tribunal has been endowed with plenary power under Section 254 of the Act to pass any order as it thinks fit. However, it is not so, as it will appear in the expression "such orders thereon as it thinks fit", in Section 254. The word "thereon" in the expression is a serious constriction on the exercise of power by the Tribunal. It can decide only the points or grounds raised before it whereas the I.T. authorities can travel beyond the grounds and consider the entire assessment."
In this view of the matter, as far as the question of giving directions for the next year are concerned, we are not inclined to accept the plea of the assessee.
11. The remedy, however, lies elsewhere.
12. Section 153(3) of the Income Tax Act, 1961 provides that the provisions of Section 153(1) and (2) (i.e. the provisions laying down the time limit within which assessments, reassessment or recomputations can be done) shall not apply to, inter alia, the of assessments, reassessments and recomputations which may be completed at any time where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order, under Sections 250, 254, 260, 262, 263 or 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under this Act. Therefore, to the extent, an assessment, reassessment or recomputation is done to give effect to the 'finding or direction' contained in, inter alia, the Tribunal order, the same can be passed at any time. It is also settled in law that when a statutory authority has the powers to do something, then it has a corresponding duty to exercise such powers whenever circumstances warranting exercise of such powers exist. No doubt, as held by the Hon'ble Supreme Court in the case of Rajinder Nath v. CIT, 120 ITR 14, a finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case. The case before us clearly fulfils this test because the only reason that the disallowance has been confirmed this year is that it is allowable in the year in which plots are finally transferred to the workers - which admittedly is not the year before us, and, for that reason, allowability in the that year was the sole and proximate reason for disallowability in the current year. Therefore, on the facts of the present case, where the Tribunal has given a finding that the deduction on account of expenditure acquired on plot for use by workers is to be allowed in the year(s) in which the plots are finally transferred to the workers, the Assessing Officer has the power, and therefore the inherent corresponding duty, under Section 153(3) of the Act to recompute the income of that subsequent year to give effect to Tribunal's finding. It is open to the assessee to approach the Assessing Officer for that purpose, or, we may further add at the cost of stating the obvious, to approach the Commissioner, alongwith the requisite petition for condonation of delay, for revision under Section 264 of the Act.
13. For the reasons set out above, we uphold the disallowance in principle so far the year in appeal before us is concerned, and decline to interfere in the matter. The issue raised in the appeal is whether the expenditure in question is deductible in the year before us or not; we hold it is not deductible in the year before us. Whatever be the reasoning and finding in coming to this conclusion, that cannot broaden the scope of our adjudication so as to give an express direction for its allowability in some other year. The assessee shall, however, be at liberty to approach the Assessing Officer or the CIT, as he may be advised to do, in accordance with the above observations.
14. Subject to the above observations, ground Nos. 1 and 2 are dismissed.
15. In ground No. 3 and 4, the assessee is aggrieved that the CIT(A) erred in in confirming the inclusion of excise duty and sales tax in the 'total turnover' for the purpose of computing deduction under Section 80HHC.
16. We find that the aforesaid issue is also squarely covered, in favour of the assessee, by Hon'ble jurisdictional High Court in the case of CIT v. Sudershan Chemical Industries Ltd., 245 ITR 769. Accordingly, respectfully following the Hon'ble Bombay High Court, we accept assessee's plea and direct the Assessing Officer to exclude the element of excise duty and sales tax from 'total turnover' for the purpose of computing deduction under Section 80HHC of the Act.
17. Ground Nos. 3 and 4 are, therefore, allowed.
18. In ground Nos. 5 and 6, the assessee is aggrieved of CIT(A)'s confirming the disallowance of 1/10th of Motor Car Expenses and of Rs. 15,000 on account of personal use of phone by directors.
19. As far as these two disallowances are concerned, having heard the rival contentions, we find ourselves in considered agreement with the view taken by a co ordinate bench of this Tribunal in the case of DCIT v. Mira Industries, 87 ITD 475, r.p. at page 521) wherein, following the judgment of Hon'ble Gujarat High Court In the case of Sayaji Iron & Engg Co v. CIT, 253 ITR 749, it is held that "there can not be any personal expenses so far as the company is concerned", since "the company is an artificial person, and, therefore, expenses being personal in nature does not arise". Respectfully following the aforesaid views, we direct to the Assessing Officer to delete the impugned disallowances,
20. Ground No. 5 and 6, therefore, are allowed.
21. In the result, the appeal is partly allowed in the terms indicated above.